Cost Segregation Report
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Cost Segregation Services

what is cost segregation
Exploring the Layers: A Detailed Breakdown of Lighting, HVAC, and Plumbing Systems in a Multi-Level Commercial Structure for Cost Segregation Purposes

What is Cost Segregation?

A cost segregation study is a strategic federal income tax tool that enhances near-term cash flow by accelerating depreciation deductions and deferring taxes. By identifying and reclassifying components of a building, cost segregation allows property owners to maximize tax savings in the early years of ownership.

Buildings depreciate over time, losing value due to wear and tear. However, a building is not just a single entity; it consists of various subcomponents (such as lighting fixtures, heating and air conditioning systems, and other elements) that also depreciate over time. Unlike the entire building, which is depreciated over a standard lifespan of either 27.5 years for residential properties or 39 years for commercial properties, these subcomponents have shorter depreciation lifespans of 5, 7, or 15 years. This allows for larger depreciation deductions, especially in the initial years of ownership.

With a cost segregation analysis, you can accelerate depreciation on these components, potentially writing off a significant portion of your building’s original purchase price in the first year. While the 100% bonus depreciation provision has sunset, bonus depreciation is still available at reduced percentages through 2027 (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027). This powerful tax strategy can significantly improve cash flow and provide a competitive edge in managing real estate investments.

Learn About The History of Cost Segregation

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How Much Money Could You Save?

A cost segregation study allows you to accelerate depreciation on many components of your property, unlocking substantial tax savings. For example, if your purchase price was $1 million, you could potentially accelerate $300,000–$400,000 in depreciation deductions. These accelerated deductions may also qualify for bonus depreciation, which is currently available at 40% in 2025(reducing to 20% in 2026 and 0% in 2027).

Here’s how it works: Let’s assume you’re classified as a real estate professional or have material participation in a commercial real estate investment, with a $100,000 salary. If you accelerate $300,000 in depreciation deductions in 2025, you could apply 40% bonus depreciation to $120,000 of that amount ($300,000 × 40%). This means you could deduct $120,000 immediately, with the remaining $180,000 depreciated over the applicable shorter lifespans (5, 7, or 15 years). By applying these deductions, you could significantly reduce your taxable income, improving your return on investment.

At Engineered Tax Services, we specialize in uncovering potential tax savings and increasing cash flow through cost segregation studies. Our team provides a detailed engineering report and works seamlessly with the IRS and your CPA firm to ensure minimal disruption to your business.

With over 30,000 cost segregation studies completed in the past 20 years, we’ve saved our clients millions of dollars in taxes. Let us help you maximize the financial benefits of your real estate investments.

 

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Engineered Insurance Services

As an added bonus to your Cost Segregation study with us, you’ll also gain access to Engineered Insurance Services. We offer streamlined, insurance solutions tailored specifically for real estate investors, all under one roof.

Save time and effort by getting both services in one place.

Learn more about Engineered Insurance Services here.

Do I Qualify For A
Cost Segregation Study?

The short answer would be, yes! 

If you’re a corporation, partnership, trust, or individual with real estate purchased or built within the past 15 years with tax liabilities you can benefit from a cost segregation study.

Because a cost seg study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27.5 or 39 years, both residential and non-residential commercial properties both qualify.

cost segregation services explained
Fig. 2 - Cost Segregation Services Process
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Demystifying Depreciation: A Visual Guide to Tax Savings

Understanding the concept of depreciation can be a game-changer for property owners when it comes to tax savings. This infographic breaks down the essentials of depreciation, from its definition in accounting to the various methods used to calculate it. By visually outlining how depreciation impacts taxable income, the infographic provides a clear and concise explanation of this important financial concept. It also compares scenarios with and without depreciation, highlighting the potential tax benefits. Whether you're new to property ownership or looking to optimize your tax strategy, this visual guide simplifies the complexities of depreciation and its role in taxation.

infographic about depreciation

Tax Team Article

How to Claim Bonus Depreciation Retroactively

Author: Julio Gonzalez, Founder and CEO of Engineered Tax Services

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julio gonzalez

How much Depreciation can be Accelerated for my Property Type?

The application of Cost Segregation can lead to varying degrees of accelerated depreciation, depending on the specific type of property. Each property type, be it residential, commercial, industrial, or special-purpose, has unique attributes that influence the potential for depreciation acceleration. The table below presents a range of percentages, indicating the potential for accelerated depreciation applicable to each property type.

Property Reclassification Table

Check out your property types below  with our reclassification table. See out how much depreciation can be accelerated for your investment property!

Property Type Depreciation Acceleration
Apartment Building 20-40%
Assisted Living Facility 22-45%
Auto-Car Dealership 29-35%
Bank 30-45%
Car Washes 75-100%
Gas Stations 50-100%
Conference Center 25-35%
Fitness Center 22-45%
Golf Course 28-60%
Grocery Store 20-45%
Hospital 25-45%
Leasehold Improvements 20-40%
Manufacturing 18-40%
Medical Office/Clinic 20-40%
Mixed Use 22-35%
Mobile Home Parks 20-40%
Office Building 20-40%
Research Facility 20-30%
Hotel & Resorts 22-45%
Restaurant 25-45%
Retail Strip Mall 20-40%
Self Storage Facilities 18-90%
Theme Park 30-68%
Vacation Rentals 25-45%
Warehouse 20-30%

Engineered Documentation Approaches

The cost seg specialists take the data compiled to produce a comprehensive report for the cost segregation study. To date, the IRS does not have a standard or required procedure in compiling a cost segregation study. The more detailed and accurate a study is, the faster the IRS service provider can review it so that the taxpayer may receive his or her deductions.

The IRS guide on cost segregation numerates certain methodologies that are often utilized by specialists including the detailed cost approach, the detailed cost estimate approach, the survey approach, the residual estimation approach, and the sampling approach.

The detailed cost approach compiles costs from construction and accounting records to build a report. Since this method relies on true documentation and little estimates, it is typically the most time consuming but the accurate method.

The detailed cost estimate approach is generally used for new construction. Much like the detailed cost approach, the detailed cost estimate approach will also need a compiled list of documents. However, when a record is not found the specialist will do an estimate of the cost of the component to report. In order to find these estimates, the specialist must find the cost from a reliable source and have the source referenced in the study. For this reason, it is important that the client provides all requested invoices in order to not have to depend on an estimate of a component.

For the survey approach, the specialist performs a site inspection and has all the components of the property listed. Then the cost segregation specialist will reach out to the contractor or subcontractors in written form and ask for the prices of each item. Depending on how long ago the work was done, this will dictate how reliable the data of costs will be for each component.

The residual estimation approach is a method that determines the cost of short-lived assets, such as on a 5 or 7-year property. Then these costs are added together and then subtracted from the total project cost, while the remaining price is assigned to the building itself or other long-lived assets.

The sampling approach helps costs and resources of the study to be greatly reduced. However, sometimes the accuracy of this approach is more likely to be flawed. This method is applied by performing a cost segregation study on a sample of a large portfolio of properties. Based on those results, a standard model is developed for each facility type. The prices are then taken from the model and repositioned on a percentage basis. If you are a firm with many properties, this approach may work well for you.

Tax Team Article

Should You Do a Cost Segregation Study Before or After a Rehab?

Author: Kim Lochridge, Executive Vice President, ETS

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Kim lochridge

Pros and Cons of Cost Segregation

Pros Cons
  • Accelerated depreciation deductions
  • Increased immediate cash flow
  • Possibility of retroactive tax savings
  • Creation of detailed asset analysis
  • Potential for partial disposition deductions
  • High cost of conducting the study
  • Increased risk of IRS audit
  • Potential for recapture of accelerated depreciation
  • Complex study process

Concerned about potential issues associated with conducting a cost segregation study? Click here to learn more about common cost segregation concerns and their solutions.

When and How Often Should I Do A Study?

Because cost segregation sets a baseline for the original purchase, it’s easier for us and the IRS to set that baseline by performing the study before the rehab, with an engineer documenting the reclassification, before the improvements are made. It’s harder to document your rehab costs after you’ve renovated.

After the rehab, you’ll have receipts and invoices that tell us the exact cost of the new items. With your cost seg report pre-rehab and receipts/invoices to justify the cost of anything new and details on what was replaced, you’ll have everything you need to apply bonus depreciation/partial disposition elections/repair rules. If you go ahead with the improvements, you can revert back to the original cost seg studies and calculate your partial asset disposition.

If you go ahead with your cost seg study, we will:

  • classify or reclassify each building component into the appropriate tax life as prescribed by IRS guidelines and identify
  • allocate indirect costs to each asset, and
  • complete a written report with the asset details supporting the reclassifications and completion of the necessary tax form(s).
In other words, after you commission your study, you can leave the driving to us. We’ll handle all the details and work with you to get the most advantageous tax break. We’re experts at cost segregation; we’ve completed over 30,000 studies in the last 20 years.

Our clients save an average of $200,000 by commissioning a cost seg study with us. You may be able to recoup more. Please contact us and see how much in tax savings we could possibly deliver to your door.

Reviews & Testimonials

Krowne Certified Public Accountants
We work with Kimberly Lochridge and her expertise and work-product is top notch. They are our #1 resource for Cost Segregation Studies for all of our clients.
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Bonavista Holdings, Inc.
Our firm engaged Engineered Tax Services to perform a cost segregation study on our behalf. I received a favorable result that exceeded all of my expectations.
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Rachlin, LLP
I wanted to thank you for the cost segregation and energy tax work you have done for several of the firm's clients. The results have been very favorable and have resulted in significant tax benefits. You have a very talented team, and I look forward to working with you more in the future.
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How Do I Get Started?

How do you get started with a cost segregation study? It’s very simple: call us, and we’ll handle the rest! Engineered Tax Services will be happy to provide you with a free Cost Segregation feasibility study based on basic building information.

Schedule Today

Frequently Asked Questions

A cost segregation study surveys your building’s subcomponents, like lighting fixtures, heating and air conditioning systems, and other components that deteriorate over time. It assigns five- or 15-year lifespans to these subcomponents. Then the study assesses how much in taxes you can write off because of your financial loss from these aging subcomponents.

It should cost between $3,000-$12,000. However, the capital outlay is more than worth it, considering you can save hundreds of thousands, if not millions, in taxes by commissioning a study. The ROI is amazing.

Anytime—as long as you commission your cost segregation study before a construction rehab. Because cost segregation sets a baseline for the original purchase, it’s easier for us and the IRS to set that baseline by performing the study before the rehab, with an engineer documenting the reclassification, before the improvements are made. It’s harder to document your rehab costs after you’ve renovated.

Definitely! The 2017 Tax Cuts and Jobs Act allows for an immediate deduction for the full costs in the first year.  If you own a property with a class life of 27 years, you might be eligible for a sizeable bonus depreciation in year one by reallocating some of your building’s assets to a five- or 15-year lifespan.

No. Only an experienced team of licensed engineers and accountants are qualified to analyze a building’s depreciating subcomponents (such as lighting fixtures, heating and air conditioning systems, and other components that deteriorate over time). That’s the only way you can increase your near-term cash flow by deferring taxes.

You could end up paying more taxes than if your cost segregation study was performed incorrectly.  That’s why it’s important to hire an experienced team of licensed engineers and accountants (like Engineered Tax Services) who are qualified to analyze a building’s depreciating subcomponents (such as lighting fixtures, heating and air conditioning systems, and other components that deteriorate over time). We’re experts at cost segregation.

The bonus depreciation sunset occurred on December 31, 2022. However, the provision was extended through 2027 by the Consolidated Appropriations Act, 2021.

Here are the allowed bonus depreciation percentages for 2023 and the coming years as it stands now:

Year Bonus Depreciation Amount
2023 80%
2024 60%
2025 40%
2026 20%
2027 0%

Locations: We Serve Our Clients Nationwide

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eBook: Property owners guide to Cost Segregation

Learn how you can significantly increase your tax savings with a Cost Segregation analysis.

Webinars: About Cost Segregation

  1. Cost Segregation Benefits for Real Estate Investors
  2. Why an “Engineering” Cost Segregation Approach Creates Additional Tax Benefits for Building Owners and Real Estate Developers
⇛ View All Available Tax Webinars ⇚

Social Media: Have You Seen Us?

@engineered_advisory What buildings qualify for Cost Segregation? One of the top questions we get about #costsegregation #cpa #accounting #accountinglife ♬ original sound - Engineered Tax Services

Podcasts: Recent

Tax Optimization for Real Estate Investors: Understanding Cost Segregation - Part 1

Cost Segregation | Part 1 with Kim Lochridge on the Joshua Kahr Podcast

Cost Segregation | Part 2 with Kim Lochridge on the Joshua Kahr Podcast

Maximize Real Estate & Investment Tax Savings - The Fundication Show

Teaching Tax Flow | The Podcast - #62 Understanding The Cost Segregation Study with Heidi Henderson

Tools: Dispostion Calculator

Calculate a disposition deduction for fixed assets removed, demolished, retired or no longer in service.

Try our Calculator

Tele-Engineering

Tele-Engineering™ – a virtual approach to cost segregation – offers the same high level of detail and support as in-person visits, while eliminating costs and social safety issues. Learn more

Case Studies: Cost Segregation

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Articles: Cost Segregation

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Unlocking Tax Benefits for Solar Installations: How Cost Segregation Can Help

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Unlocking Value in Multifamily Investments: A Knoxville Apartment Case Study

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