A cost segregation study involves a detailed analysis of a building’s components and associated costs.

This analysis distinguishes between personal property, which can be depreciated over shorter periods (3, 5, 7, or 15 years), and real property, typically depreciated over 39 years (for commercial properties) or 27.5 years (for residential rental properties). 

Items that fall into the 3-15 year "buckets" are also available for Bonus Depreciation which allows you to write off even more!  The acceleration ranges from 100% to 60% (2024) and is based on the year you placed the property in service. 

Personal property might include items such as fixtures, plumbing, electrical systems for specialized equipment, and landscaping.

WITHOUT a cost seg study, you would be required to depreciate your full property value over 27.5 or 39 years.  When you purchase a property, the closing statement will never tell you the breakdown between all of the components of the property.  The onus is on YOU to figure this out. 

1. Increased Cash Flow: By accelerating depreciation deductions, property owners MAY significantly reduce their taxable income in the early years of ownership, leading to increased cash flow. However, as we will explore in the next part of the series, this depends on the type of property AND your status as real estate investor.
   
   
2. Tax Deferral: Cost segregation provides a form of tax deferral, allowing you to defer taxes and use the savings for other investments or operational needs.  Technically you could defer the taxes forever using a 1031 exchange down the road.
   
   
3. Ability to use Partial Asset Dispositions: A cost seg study also allows you a future benefit in which you can write off the full value of component parts (say a large HVAC system) in future years IF you know the FMV of the property when purchased.

1. This only works on large properties - WRONG!  In some cases, we have performed studies for clients with $200k properties.
   
   
2. You pay all the tax back later - WRONG! Depreciation recapture will be addressed in the future part of the series but you do NOT pay all the tax back, there is still an arbitrage if done properly.
   
   
3. I did not do this when I bought it, so I can't - WRONG!  You can perform a cost seg study at ANY time!  In fact, the law may benefit you as you look to the year of acquisition to determine the accelerated/bonus depreciation amount.  
   
   
4. Everyone should do it! - WRONG!  As we will discuss next time, facts and circumstances matter here.  There are certainly cases where you should 100% NOT pursue this.

Now that we understand the basics of a Cost Seg study, we will more into more depth and specifics in the next installment!