Before You Start

This guide assumes you have a foundational understanding of depreciation methods for real estate and access to property cost basis information.

Overview

30 min
Estimated Time
Advanced
Difficulty
Annual
Impact

What You’ll Learn

  • What a Cost Segregation Study is and its benefits
  • How to identify eligible commercial real estate assets
  • The process of conducting a cost segregation study
  • Accounting for the results and maximizing tax savings

1. Preparation Steps

Before initiating a study, gather the following for your property:

Required Documentation

  • Property acquisition costs and settlement statements
  • Building blueprints or floor plans
  • Renovation or improvement costs, if any
  • Previous depreciation schedules

Key Information

  • Property type (e.g., office, retail, industrial)
  • Date the property was placed in service
  • Intent for property use (e.g., owner-occupied, rental)

2. Choosing Your Approach

You have two main paths to consider for conducting a cost segregation study.

Method A: DIY / In-House Calculation

This involves performing the study using internal resources or less specialized software.

Pros:
  • Lower upfront cost.
  • Retains control of the process.
  • Good for very simple properties.
Cons:
  • High risk of IRS challenge.
  • Requires extensive tax and engineering knowledge.
  • May miss significant savings opportunities.

Method B: Engaging a Specialist Firm

These are dedicated firms with engineers and tax professionals specializing in cost segregation.

Expert Tip: We strongly recommend using a qualified, independent cost segregation specialist firm. Their expertise ensures IRS compliance, maximizes reclassified assets, and often pays for itself many times over in tax savings.

3. Step-by-Step: The Study Process

Here is the high-level workflow for a comprehensive cost segregation study.

Here is a sample code block showing a typical asset reclassification entry.

{
  "asset_id": "P-7890-fixture",
  "description": "Decorative lighting fixtures",
  "original_basis": 12500.00,
  "original_life": "39 Year Real Property",
  "reclassified_life": "5 Year Personal Property",
  "date_placed_in_service": "2023-01-15"
}

4. Accounting for Study Results

  1. 1

    Receive the Cost Segregation Report

    The specialist firm will provide a detailed report outlining the reclassified assets and their assigned depreciation lives.

  2. 2

    Update Fixed Asset Records

    Adjust your fixed asset register to reflect the newly classified assets and their shorter depreciation periods.

  3. 3

    File Form 3115 for Change in Accounting Method

    For properties placed in service in prior years, you’ll generally file Form 3115 to catch up on missed depreciation using a Section 481(a) adjustment.

Crucial Point: Section 481(a) Adjustment

A cost segregation study on a previously depreciated property creates a Section 481(a) adjustment, allowing you to claim all missed depreciation from prior years in the current tax year.

5. Reviewing Your Impact

Post-Study Review Checklist

  • Confirm increased depreciation deduction on tax return
  • Verify proper Form 3115 filing (if applicable)
  • Document supporting work papers for audit readiness
  • Calculate immediate and long-term tax savings

Need Help?

Get Support

Considering a cost segregation study for your properties? Our team can help you understand the benefits and guide you through the process.

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