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.
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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
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.
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.
Buildings and structures do not qualify for accelerated depreciation. Properties depreciate as follows:
Specific structural components are also included in this category and do not qualify for accelerated depreciation through cost segregation.
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.
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.
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.
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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