For property owners looking to maximize tax savings, a cost segregation study can be a powerful tool. This IRS-approved strategy allows you to accelerate depreciation on certain property components, resulting in lower taxes and increased cash flow. However, cost segregation isn’t for every property type. So, what kinds of properties are ideal candidates for cost segregation? Let’s take a closer look.
1. Commercial Properties
Commercial properties are among the best candidates for cost segregation studies because they often have extensive interior and exterior components that qualify for accelerated depreciation.
Examples of commercial properties include:
- Office buildings
- Retail spaces (malls, shops, and stores)
- Warehouses and distribution centers
- Hotels and motels
- Medical facilities (hospitals, clinics)
These properties typically have a mix of assets—like lighting systems, flooring, specialized equipment, and fixtures—that can be depreciated over a shorter timeline than the 39-year standard. Cost segregation studies on these properties often yield significant tax savings due to the range and value of qualifying assets.
2. Residential Rental Properties
Residential rental properties, such as apartment buildings and multi-family complexes, are also ideal for cost segregation studies. For residential rental properties, the standard depreciation period is 27.5 years, but many components within these buildings can qualify for 5, 7, or 15-year depreciation schedules.
Eligible assets might include:
- Appliances (stoves, refrigerators, washers, dryers)
- Carpet and flooring
- Landscaping and outdoor amenities (pools, patios)
- Interior fixtures (cabinets, countertops, lighting)
By performing a cost segregation study, residential rental property owners can increase their cash flow by reducing their tax burden, a crucial advantage in a competitive real estate market.
3. Recently Purchased or Constructed Properties
If you’ve recently purchased or constructed a property, performing a cost segregation study as early as possible allows you to maximize tax benefits in the initial years of ownership.
Cost segregation can also apply to new builds, as certain aspects of construction, like HVAC systems, specialized lighting, and even certain structural components, may qualify for shorter depreciation. This allows new property owners to offset their initial investment more quickly.
4. Properties That Have Undergone Major Renovations or Improvements
Cost segregation is particularly beneficial for properties that have recently undergone renovations or improvements. Whether you’ve added new equipment, revamped interior spaces, or enhanced outdoor landscaping, these upgrades often contain elements that qualify for accelerated depreciation.
Common improvements that qualify include:
- New electrical or plumbing systems
- Upgraded interior finishes (walls, flooring)
- Enhanced landscaping or exterior features (fencing, pathways)
- Renovated lobbies, amenities, or tenant areas
This means that even if you’ve owned a property for years, a cost segregation study can still benefit you after renovations by applying shorter depreciation schedules to new additions.
5. Industrial Properties
Industrial properties, such as factories, manufacturing plants, and self-storage facilities, also make excellent candidates for cost segregation. These types of properties often contain highly specialized equipment, machinery, and infrastructure that wear out faster than the building itself and qualify for accelerated depreciation.
Key assets in industrial properties may include:
- Machinery and equipment
- Specialized ventilation or cooling systems
- Exterior structures like fencing, loading docks, or pavement
- Interior improvements and finishes
For industrial property owners, these savings on taxes can be reinvested into new equipment, facility improvements, or business growth.
6. Mixed-Use Properties
Mixed-use properties, which combine residential, retail, or office space, can also benefit from cost segregation. Because they feature a variety of different asset types, mixed-use properties often qualify for multiple depreciation schedules within a single building.
For instance, a mixed-use building might include:
- Residential apartments or condos
- Retail spaces or restaurants
- Office space or shared workspaces
Each part of the property may contain unique elements that can be depreciated on different timelines, allowing mixed-use property owners to significantly increase their tax savings.
Properties That May Not Benefit as Much from Cost Segregation
While cost segregation is an excellent strategy for many property owners, there are some situations where it may not provide significant benefits:
- Properties with Limited Qualifying Assets: Smaller buildings or properties with limited interior and exterior assets may not have enough qualifying components for a cost segregation study to be cost-effective.
- Short-Term Property Ownership: If you’re planning to sell the property in the near term, cost segregation may not yield the same long-term tax savings.
- Low-Value Properties: Properties valued below $200,000 typically don’t see enough benefit from a cost segregation study to justify the cost of conducting one.
The Bottom Line: Is Cost Segregation Right for Your Property?
Cost segregation can be an extremely valuable strategy for property owners with commercial, residential rental, newly constructed, or renovated properties. By accelerating depreciation, it offers significant tax savings and increased cash flow, allowing you to reinvest in your business and grow your portfolio.
If you own or manage one of these property types, it’s worth exploring a cost segregation study. Reach out to USTAGI today to learn how cost segregation can benefit your specific property type and help you maximize your tax savings.
