If you own real estate or your business owns the building it operates in, you may have opportunities for significant tax savings. Cost segregation is a strategic tax planning technique that accelerates depreciation by identifying and reclassifying components of a building—such as electrical, plumbing, flooring, lighting, cabinetry, millwork, and certain HVAC systems—into shorter depreciation schedules.
Why does this matter? Because it can allow for larger upfront deductions, potentially lowering taxable income and improving cash flow.
Here’s a simple example: A business purchases a commercial building for $1 million. A cost segregation study identifies $350,000 that can be depreciated more quickly. This allows the owner to take a larger deduction earlier, freeing up capital for reinvestment.
This strategy may be especially beneficial for commercial and multifamily property owners, business owners who own their facilities, properly structured short-term rental owners, developers, manufacturers, and R&D-focused businesses.
Beyond tax savings, cost segregation can improve after-tax cash flow, strengthen return on investment, and enhance property valuation and financing metrics.
Timing can play an important role. Even if your property was placed in service years ago, you may still benefit. The IRS allows property owners to perform a cost segregation study retroactively and capture missed depreciation in the current year through an accounting method change—without amending prior tax returns.
Cost segregation can be a powerful strategy, but its effectiveness depends on proper analysis and implementation. Consider scheduling a brief strategy session to determine whether it applies to your properties and how it could help you get more out of your real estate investments.