Who Qualifies For Cost Segregation?

Taxpayers can use cost segregation to accelerate depreciation and lower federal tax liability. But who qualifies for cost segregation?

If you own commercial or investment property, you may be eligible to use this tax strategy. In this post, we’ll go over who qualifies for cost segregation, including the properties that do (and don’t) qualify, getting a feasibility analysis to determine if you qualify for cost seg, and the next steps if you do qualify.

Who Qualifies For Cost Segregation? The Quick Answer

Cost segregation is a tax strategy for taxpayers who own properties that are newly purchased, constructed, or remodeled. This strategy can be applied to property owned by individuals, corporations, trusts, or partnerships.

Cost segregation can be used to accelerate depreciation on commercial or investment real estate, whether it’s a single-family rental property, multi-dwelling units, or office buildings.

See if a cost seg study is a good idea for your business with our cost segregation savings calculator:

What Properties Qualify For Cost Segregation?

Certain commercial and investment properties qualify for cost segregation. These include:

• Newly acquired commercial and investment properties
• Newly constructed commercial and investment properties
• Commercial and investment properties that have been remodeled
• Commercial and investment properties that have been expanded

Ideally, a cost segregation study should be performed the same year the property is put into service or renovations are complete. However, you can still take advantage of the tax benefits if you perform a cost segregation study later by changing your accounting method with the IRS using IRS Form 3115.

Types Of Commercial Properties That Qualify For Cost Segregation

Numerous types of properties qualify for cost segregation. These include:

• Office buildings
• Retail shops
• Shopping centers
• Restaurants
• Grocery stores
• Golf courses
• Hotels
• Manufacturing facilities
• Car washes

These are just a few examples of properties that qualify for cost segregation. Other commercial and investment properties not found on this list may also benefit from this tax strategy.

Types Of Rental Properties That Qualify For Cost Segregation

If you own an investment rental property, it may qualify for cost segregation. This includes:

• Apartment buildings and condos
• Single-family rental homes
• Townhomes and duplexes

If you own a second home, it may qualify for cost segregation, provided it meets the following two conditions:

• The home must be in a rental pool when not in use
• You can’t use the home personally for more than two weeks each year

What Building Components Qualify For Cost Segregation?

Four categories of building components are considered during cost segregation: personal property, land improvements, buildings and structures, and land assets. The depreciation schedules for each are as follows:

What Properties Do Not Qualify For Cost Segregation?

Some properties do not qualify for cost segregation. Your primary residence does not qualify for cost segregation. Land is also excluded from cost segregation, although certain land improvements may qualify.

Unsure if your property qualifies? A feasibility analysis can help you determine this. We’ll discuss this more later in the post.

Am I A Good Candidate For Cost Segregation?

You should consider cost segregation if:

Cost segregation is not an effective strategy for every property owner. Here’s when cost segregation will not benefit you:

Speaking with a reputable cost segregation company and getting a feasibility analysis is the best way to determine if you’re a good candidate for cost segregation.

Determine Cost Segregation Eligibility With A Feasibility Analysis

A feasibility analysis is performed by a cost segregation company to determine if you’re eligible for cost segregation. During this analysis, it will be determined if you qualify, and you will generally be provided with estimated tax benefits as a result of having a cost segregation study performed.

The feasibility analysis is the first step in the cost segregation process. This service is typically provided at no cost. Following the analysis, you’ll be provided with more information before moving forward, including the fees to complete the study.

Next Steps If You Qualify For Cost Segregation

If you check all of the boxes to qualify for cost segregation, the next step is to schedule your feasibility analysis. Start your search with our picks for the top cost segregation companies, many of which offer a complimentary initial analysis to determine if cost segregation will benefit you.

Once your initial analysis is completed, you may opt to move forward with a cost segregation study. This process takes approximately 60 days, after which you will receive a comprehensive report. This report will include classifications of each building component, as well as modified depreciation schedules. This information can be used to complete your income tax return and reap the financial benefits that come with cost segregation.