What Are Cost Segregation Categories & Costs?

If you've remodeled, purchased, or built a property, you can cash in on cost segregation. Find out what costs can be written off using this lucrative tax strategy.

WRITTEN & RESEARCHED BY
Erica Seppala
Editor & Senior Staff Writer

Last updated onUpdated August 18, 2024

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Key Takeaways

Cost segregation breaks down property into four categories: buildings and structures, personal property, land, and land improvements.
Items like furniture, decorative fixtures, and certain land improvements can be depreciated over shorter periods of 5-15 years, leading to significant tax savings.
Hiring a cost segregation company ensures correct classification and maximizes tax benefits while avoiding potential errors and IRS issues.

Interested in cost segregation, but unsure of what costs can be written off with a cost segregation study? This guide breaks it down for you.

In this post, we’ll look at the four categories of building components, how each category is affected by the accelerated depreciation of cost segregation, and examples of components you can write off following your cost seg study.

Table of Contents

What Costs Can Be Written Off With Cost Segregation?
The Four Categories Of Cost Segregation
Calculating Costs For Cost Segregation

What Costs Can Be Written Off With Cost Segregation?

If you’ve purchased, built, or remodeled a commercial or residential investment property, cost segregation can help you capture maximum tax savings through accelerated depreciation.

Cost segregation allows you to write off specific costs over five, seven, or 15 years, and this frontloaded depreciation can cut your tax bill significantly. Many costs can be written off through cost segregation — from furniture and office equipment to POS systems and drive-thru equipment — costs that we’ll explore in detail in the next section.

The Four Categories Of Cost Segregation

During a cost segregation study, buildings and their components will be assessed and categorized as buildings and structures, personal property, land, and land improvements. Here are the cost segregation categories, examples of the components that fall under each category, and how these categories are depreciated.

Cost Segregation For Buildings & Structures

Buildings and structures do not qualify for accelerated depreciation. Properties depreciate as follows:

Commercial: 39 years
Residential: 27.5 years

Specific structural components are also included in this category and do not qualify for accelerated depreciation through cost segregation.

What Qualifies As Building & Structures?

These are a few examples of what is considered a building, structure, or building component that is depreciated over 27.5 or 39 years:

Electrical systems: Includes all electrical components used for the operation or maintenance of the building or that are used to provide general building services (i.e., electrical outlets for general use)
Interior lighting: Includes all lighting fixtures and systems that operate as the primary source of lighting
Exterior lighting: All lighting that contributes to the operation and maintenance of the building
Floor coverings: Includes floor coverings affixed with screws, nails, or permanent adhesive (i.e., ceramic tile, marble, wood, etc.)
Wall coverings: Includes permanent wall coverings such as brick, ceramic tile, marble, etc.
Concrete foundations & footings of buildings: Does not include foundations and footings for poles, signs, and other land improvements
Interior & exterior doors: Also includes all hardware, including hinges, doorknobs, deadbolts, and locks
Bathroom accessories: Includes items in public bathrooms such as vanity cabinets, soap dispensers, toilet paper holders, etc.
General millwork: Includes door frames, window frames, mantels, stairways, etc.
Emergency power generators: Emergency power generators not related to building-related operations may qualify for accelerated depreciation.
Security equipment: Some exceptions may apply based on the type of business
Climate-controlled structures: Includes walk-in freezers, humidors, and cold storage warehouses
Signage related to the operation/maintenance of the building
Ceilings
Roofs
Floors
Windows
Fireplaces
Site utilities
HVAC systems
Energy management systems
Elevators
Escalators
Parking garages & ramps
Bathroom partitions
Decorative exterior facades
Fire protection & alarm systems
Swimming pools
Loading docks

Cost Segregation For Personal Property

Tangible personal property is defined by the IRS as “anything other than real property or intangible personal property which includes items such as patents, copyrights, stocks, and the goodwill value of a business.” Tangible property does not include structural components of the building or the building itself.

What’s the difference between tangible personal property and structural components? The U.S. Treasury defines structural components as property that “relates to the operation or maintenance of a building.” This includes walls, ceilings, floors, windows, doors, electrical wiring, stairs, etc. An experienced cost segregation company will be able to differentiate between structural components and personal property when performing your study.

Property that is classified as tangible personal property can be written off over five or seven years.

What Qualifies As Personal Property?

During a cost segregation study, items that may be classified as personal property include:

Decorative light fixtures: Includes wall sconces, chandeliers, neon lighting, etc. that do not provide the primary source of lighting
Furniture: Includes beds, nightstands, armoires, etc.
Office furniture: Includes desks, conference tables, file cabinets, etc.
Flooring: Non-permanent floor coverings including sheet vinyl and vinyl composition tile that is not affixed with nails, screws, or permanent adhesive qualifies for accelerated depreciation.
Doors: While most doors/locks do not qualify for accelerated depreciation, lightweight, double-action doors designed to prevent accidents may qualify for accelerated depreciation.
Appliances: Includes ranges, stoves, laundry appliances, etc.
Portable refrigeration: Includes movable, non-permanent coolers, freezers, etc.
Kitchen equipment hookups: Includes water lines, gas lines, drain lines, ventilation, systems, etc. used for specific kitchen equipment
Plumbing hookups: Includes hookups connected directly to kitchen equipment and appliances
Special electrical connections: Connections that are used for specific equipment
Decorative millwork: Includes decorative crown molding and latticework
Wall coverings: Wallcoverings that won’t damage the walls when removed (such as wallpaper and vinyl) may qualify for accelerated depreciation.
Signage: Includes signs not related to the operation or maintenance of the building (i.e., themed signs, menu displays, directories, etc.)
Loading dock equipment: Includes conveyors, compactors, hoists, etc.
Retail fixtures: Includes deli cases, garment racks, shelving, mannequins, showcases, endcaps, etc.
Retail conveyor systems
Window treatments
Drive-thru equipment for restaurants
Kiosks for retail stores
Computers & peripherals
POS systems
Sound systems
Food storage & prep equipment
Kitchen HVAC systems
Fire protection equipment
Canopies & awnings
Temporary interior partitions

Cost Segregation For Land Assets

The Internal Revenue Code (IRC) defines land as follows: “Land includes water and air space superjacent to land and natural products and deposits that are unsevered from the land.”

Land is not depreciable. One-time land preparation costs (for services like demolition, grading, and excavation) are also non-depreciable costs. However, certain land improvements may qualify for depreciation.

Cost Segregation For Land Improvements

Certain land improvements for your commercial or investment property may qualify for accelerated depreciation. Qualified land improvements can be depreciated over 15 years using cost segregation.

What Qualifies As Land Improvements?

Grading & excavation: Accelerated depreciation may apply for grading and excavation related to the construction of parking lots, sidewalks, roadways, and other land improvements.
Site work: Site work not related to the operation of the building qualifies as land improvements, including:
- Fencing
- Landscaping
- Curbing
- Sidewalks
- Roads
- Sewers
Outdoor lighting: Includes freestanding or pole-mounted lighting
Foundations & footings: For light poles, signs, canopies, etc. Does not include foundations and footings for the setting of the building.
Parking lots
Poles for signage or flags
Pylons for signage
Fountains & waterfalls
Retaining walls

Calculating Costs For Cost Segregation

Classifying property can be a complex process, which is why it’s important to hire a cost segregation team to perform the correct cost segregation calculations. For example, only certain types of flooring and wall coverings qualify for accelerated depreciation.

There are also components specific to a building type that should be considered during the cost seg study (i.e., beverage equipment at a restaurant or guest room furniture in a rental property) that an expert can assess and include in the study.

While it certainly isn’t impossible to perform a cost segregation study yourself, we advise against doing this. Cost segregation companies use teams of CPAs, engineers, estimators, and other experts to make sure no component is overlooked and that all calculations are accurate. An incomplete study could mean you’re missing out on accelerated depreciation. An inaccurate study could result in an IRS audit followed by penalties and fees.

Start your search by understanding how to choose one of the best cost segregation companies. Then, make sure to do your research, compare cost segregation companies, and take advantage of a free feasibility analysis to get started.

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Erica Seppala

Editor & Senior Staff Writer at Merchant Maverick

Erica has been writing about small business finance and technology since 2008. She joined Merchant Maverick in 2018 and specializes in researching and reviewing business software, financial products, and other topics to help small businesses manage and grow their operations. Her expertise has been cited in MSN, Reader's Digest, Vox, U.S. News & World Report, and Real Simple. She is a Certified ProAdvisor for QuickBooks Online and QuickBooks Payroll, a graduate of Limestone University, and currently resides in Greenville, South Carolina.

View Erica Seppala's professional experience on LinkedIn.

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