Cost Segregation Tax Savings and What Every Investment Property Owner Should Know About
Who Should Consider a Cost Segregation Study?
If you have purchased, constructed, or renovated an investment property, a cost segregation study may
just be the greatest ROI you can immediately receive. These engineering-based studies properly reclassify
the building components according to the IRS guidelines into shorter depreciable lives. This results in
reducing your taxable liability = CASH flow.
As a real estate investor or business owner, you’re constantly looking for ways to optimize your
investments—and cost segregation may be one of the most powerful, yet underutilized, tools at
your disposal.
Whether you’ve recently acquired a property, are planning renovations, or even if you’ve owned
the asset for years, a cost segregation study could open the door to significant tax savings and
improved cash flow.
Let’s walk through what cost segregation is, how it works, and why it might be a game-changer
for your financial strategy.
What Is an Engineered Cost Segregation Study?
At its core, a cost segregation is the process of identifying and reclassifying certain building
components for faster depreciation. Instead of depreciating your entire property over the
traditional 27.5 years (residential rental) or 39 years (commercial), you can accelerate the
depreciation of eligible components into 5, 7, or 15-year categories.
This isn’t a loophole—it’s an IRS-approved strategy grounded in tax law and engineering-based
analysis.
Cost Segregation Tax Savings: Why It Matters & The Key Benefits
Here’s what cost segregation could mean for you:
✅ Immediate Tax Savings
Accelerated depreciation means larger deductions sooner. This can significantly reduce your
taxable income—especially helpful in the early years of ownership.
✅ Increased Cash Flow
More deductions mean less tax. Less tax means more cash on hand. That’s capital you can
reinvest into more properties, upgrades, or simply keep for your business needs.
✅ Retroactive (“Catch-Up”) Depreciation
Didn’t know about cost segregation when you bought your property a few years ago? No
problem. You can claim all the missed depreciation in the current year—without amending
previous returns—thanks to IRS Form 3115.
✅ Bonus Depreciation Opportunities
The bonus depreciation rate is scheduled to continue to phase down to 20% in
2026 and 0% in 2027.
Cost Segregation Tax Savings: What Building Components Qualify?
What Building Components Qualify?
Here’s a quick breakdown of typical components and their reclassified depreciation lives:
Asset Type Class Life
Carpet, Vinyl Flooring 5 years
Decorative Lighting Fixtures 5 years
Cabinetry and Millwork 5 years
Window Treatments 5 years
Communications & Security Systems 5-7 years
Parking Lots & Asphalt 15 years
Landscaping and Fencing 15 years
Sidewalks, Curbs, Retaining Walls 15 years
HVAC (if dedicated to tenant space) 5-7 years
Electrical for Specialized Equipment 5-7 years
These are just a few examples. Each property is unique, which is why an engineering-based
study is essential to ensure accurate classification.
Cost Segregation Tax Savings: Real-World Examples & Case Studies
Let’s take a look at how this strategy plays out in the real world:
Case Study #1: Office Building – Tampa, FL
Purchase Price: $3.2 million
Year Placed in Service: 2023
Result: $720,000 in first-year depreciation (vs. $82,000 using standard 39-year straight-
line method)
Cash Flow Impact: Over $160,000 in tax savings within the first year
A significant portion of this came from parking lot improvements, interior lighting, and built-in
millwork.
Case Study #2: Boutique Hotel – Austin, TX
Renovation Cost: $2.5 million
Result: $620,000 in assets reclassified to 5 and 15-year lives
Bonus Depreciation Applied: 100%
Savings: $130,000 in immediate tax deferral
This client reinvested those savings into launching a second location.
Case Study #3: Multifamily Complex – Phoenix, AZ
Acquisition Cost: $5.5 million
Reclassified Assets: $1.1 million
Depreciation Accelerated: $990,000 in Year 1
Net Tax Savings: ~$200,000
Outdoor amenities like fencing, lighting, and recreational landscaping were key contributors.
Is Cost Segregation Right for You?
Cost segregation isn’t just for massive portfolios. If you own or are purchasing a commercial
building, a multifamily property, or even a large residential rental, you may qualify.
Generally, a property value of $500,000 or more is where you start seeing meaningful ROI from
a study.
And remember—this isn’t a DIY project. You’ll want a qualified team of tax professionals and
engineers who understand both the construction side and the tax code intricacies.
Final Thoughts
At the end of the day, cost segregation is about putting your capital to better use. Why leave
money on the table when you could be reinvesting it back into your business, growing your
portfolio, or building long-term wealth?
About the Author – Cindy Blumenfeld
In her 15+ years with ETS, she has helped clients generate 100s of millions of dollars in tax savings
for her clients. With a background in finance, she works alongside a unique team of experts
comprised of CPAs, architects & engineers, to provide various niche specialty studies, such as Cost
Segregation, R&D and 179D Energy Certifications.
Cindy Blumenfeld – Director – Engineered Tax Services
Call Cindy: 954-439-1671 Email to Cindy or Connect at Linked-in
Legal Disclaimer: The views, opinions, and recommendations expressed in this article are solely those of the author and do not necessarily reflect the views of Mortgage Consultants or its affiliates. This article is provided for general informational purposes only and does not constitute financial, legal, tax, or investment advice. Readers should seek guidance from qualified professionals based on their individual circumstances before making any decisions. Mortgage Consultants makes no guarantees as to the accuracy, completeness, or suitability of the information provided by guest contributors. Use of this content is at your own risk.
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