Cost segregation act explained!

Sep 08, 2023

Cost segregation is a tax planning strategy that can help commercial property owners accelerate their depreciation deductions and reduce their tax liability. It involves identifying and reclassifying components of a building's construction or acquisition costs to shorter recovery periods for tax purposes.

Under the Cost Segregation Act, property owners can separate the costs of different building components, such as electrical systems, plumbing, and landscaping, and assign them to shorter depreciation periods. This allows for faster depreciation deductions, which can result in significant tax savings for property owners.

How does cost segregation work?

Cost segregation is based on the principle that not all components of a building have the same useful life for tax purposes. While the building itself is typically depreciated over 27.5 or 39 years, certain components, such as carpeting, lighting fixtures, and specialized equipment, may have a shorter depreciation period.

By conducting a cost segregation study, a qualified professional can determine the appropriate classification and depreciation period for each component of a building. This study typically involves a detailed analysis of construction or acquisition costs, as well as a review of architectural and engineering plans.

Once the study is complete, property owners can reclassify the costs of qualifying components and begin taking accelerated depreciation deductions. This can result in significant tax savings in the early years of ownership.

Benefits of cost segregation

There are several benefits to utilizing cost segregation for commercial property owners:

  • Tax savings: By accelerating depreciation deductions, property owners can reduce their tax liability, freeing up cash flow for other investments or expenses.
  • Improved cash flow: Faster depreciation deductions mean more immediate tax savings, which can help improve cash flow for property owners.
  • Increased return on investment: By maximizing tax deductions, property owners can enhance their return on investment and potentially increase the value of their property.

Who can benefit from cost segregation?

Cost segregation is most beneficial for commercial property owners who have recently acquired or constructed a building, as well as those who have made significant renovations or improvements. It can also be advantageous for property owners who are looking to reduce their tax liability and improve cash flow.

It's important to note that cost segregation studies should be conducted by qualified professionals who have expertise in both tax law and engineering or construction. This ensures that the study is accurate and compliant with IRS regulations.


Cost segregation is a valuable tax planning strategy for commercial property owners. By reclassifying building components and accelerating depreciation deductions, property owners can reduce their tax liability and improve cash flow. However, it's important to work with qualified professionals to ensure that the cost segregation study is accurate and compliant with IRS regulations.