Cost Segregation Study

Under United States tax laws and accounting rules, “cost segregation” is the process of identifying personal property assets that are grouped with real property assets and separating (or “segregating”) personal assets for tax reporting purposes. Real property eligible for cost segregation include buildings that have been purchased, constructed, expanded or remodeled since 1987.

This is how it works: A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.

Cost segregation identifies building costs that would typically be depreciated over a 27.5 or 39-year period and reclassifies them to permit a shorter, accelerated method of depreciation for certain building costs. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs. Costs for non-structural elements, such as wall covering, carpet, accent lighting, portions of the electrical system, and exterior site improvements such as sidewalks and landscaping, can often be depreciated over five, seven or 15 years, rather than over 27.5 or 39 years.

A cost segregation study is typically cost-effective for buildings purchased or remodeled at a cost greater than $500,000 and is most efficient for new buildings recently constructed, but it can also uncover retroactive tax deductions for older buildings which may generate significant short benefits due to "catch-up" depreciation.