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Join For FreeCost segregation is a great way for property owners to lower tax liability, but not everyone qualifies. Here's what you need to know about qualifying for cost segregation before investing in a cost seg study.
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.
Table of Contents
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:
Certain commercial and investment properties qualify for cost segregation. These include:
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.
Numerous types of properties qualify for cost segregation. These include:
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.
If you own an investment rental property, it may qualify for cost segregation. This includes:
If you own a second home, it may qualify for cost segregation, provided it meets the following two conditions:
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:
Component Type | Depreciation Schedule |
---|---|
Personal Property | 5 to 7 years |
Land Improvements | 15 years |
Buildings & Structures | 27.5 years (Residential) 39 years (Commercial) |
Land Assets | Does not depreciate |
Personal property includes assets like appliances, machinery, certain types of flooring, lighting fixtures, cabinets, and countertops.
Land improvements include things like landscaping, bollards, and drainage pipes.
During a cost segregation study, these various components will be identified and classified, allowing you to update your depreciation schedule accordingly.
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.
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.
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.
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.
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