What is Cost Segregation?
Cost Segregation is an IRS-guided process that enables property owners to capture significant tax benefits and increase cash flow by accelerating the depreciation of buildings and building component costs. Typically, buildings are assumed to be Section 1250 Real Property with a recovery period of 39 years (commercial properties) or 27.5 years (multifamily residential properties). However, many building costs can be re-allocated to their proper asset classifications with recovery periods of 5, 7, and 15 years. These shorter-life classifications also have the added benefit of accelerated depreciation, effectively front-end loading the depreciation. For many property owners the result of this re-allocation of assets can be significant savings at a comparatively minimal cost.
Example: Consider an owner who buys or constructs a building at a cost (excluding land) of $5,000,000. If a Cost Segregation can re-allocate $1,000,000 of assets to 7 year property and $750,000 to 15 year property (not uncommon), aggregate depreciation deductions over the initial three years would increase from about $325,000 to $945,000.
Washington State Sales Tax Incentives
Our Cost Segregation reports also enable industrial building owners and tenants to take full advantage of state tax incentives available for new manufacturing, high-tech, and large distribution facilities. We guide our clients through complicated incentives programs, such as the DOR Large Warehouse Incentive, and we are in regular contact with the DOR staff.
Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) established a bonus depreciation opportunity for owners to take a large deduction in a single year. New assets with class lives of less than 20 years are eligible for this “bonus.” A Cost Segregation Study will identify and re-classify assets that qualify for this significant tax saving boost. In 2024, the bonus rate is 60%, and it will decline by 20%, annually though 2026.
Cost Segregation FAQ's
Make sure the expert signing your study is a Certified Cost Segregation Professional (CCSP) through the American Society of Cost Segregation Professionals (ASCSP). If you wouldn’t trust an uncertified accountant to file your taxes, you shouldn’t trust an uncertified cost segregation provider with your building depreciation.
Owners of commercial or residential rental properties who plan to hold their assets for at least a few years can benefit. Typical candidates include investors in offices, retail centers, industrial buildings, multi-family housing, hotels, and even certain single-family rentals. It’s also advantageous for property owners who have made substantial renovations or who have constructed new buildings.
Depreciation is a non-cash expense that lowers taxable income. By “front-loading” depreciation deductions in the earlier years of ownership, property owners can free up cash for reinvestment or other business needs—often enhancing overall returns on their real estate investment.
Our qualified professional examines the property’s details, such as construction blueprints and cost records. They then assign each building component to the proper depreciation category (for example, 5-year, 7-year, or 15-year property instead of the typical 39-year for commercial real estate or 27.5-year for residential rentals). A report is then prepared outlining these classifications and the resulting tax benefits.
You can conduct a cost segregation study at almost any point after purchasing or renovating a property. However, the earlier you complete it, the sooner you can take advantage of the accelerated deductions. In many cases, you can also apply a study retroactively through a “catch-up” depreciation adjustment, but speak to a tax professional to confirm eligibility.
The exact savings vary based on several factors, including the building’s type, age, and cost, as well as how many short-life assets are identified. Some property owners see tens or even hundreds of thousands of dollars in accelerated deductions over the life of the asset.
When conducted by qualified professionals using proven methodologies, cost segregation is no more likely to trigger an IRS audit than any other valid tax deduction. The IRS acknowledges and provides guidance on the practice, but it’s crucial to rely on reputable providers to ensure your classifications are well-documented and defensible if questions ever arise.
CostSeg Northwest is a Seattle-based firm that has offered detailed Cost Segregation Studies to property owners and their accountants since 1994. We take a streamlined approach:
- For new construction, we collaborate with contractors to itemize actual costs whenever possible.
- For existing buildings requiring cost estimation, we prepare comprehensive, engineering-based reports.
Our specialists typically work directly with your tax accountant, so there’s no need for extra engineers or estimators that could drive up your costs. We deliver thorough, accurate, and irrefutable reports, providing support for:
- New Buildings
- Existing Buildings
- Purchased Buildings
- Tenant Improvements
We also help clients leverage Washington State Department of Revenue Tax Incentives available for new manufacturing, high-tech, and large distribution buildings. Contact us to see how cost segregation might benefit you.
CostSeg Northwest has been providing IRS-guided Cost Segregation Studies since 1994, serving a wide range of industries and property types. Because we’re not a large national firm, we offer both cost-effectiveness and local accountability, working seamlessly with your accountant every step of the way. We also keep our studies aligned with IRS guidelines—never over-engineering or pushing the limits—ensuring a balanced approach that appeals to property owners large and small. If an audit happens, you can trust our decades of experience to stand behind every detail of your study.
Ready to see how cost segregation can maximize your cash flow and minimize your tax burden?
At CostSeg Northwest, we’ve delivered IRS-guided Cost Segregation Studies since 1994, serving a wide range of industries and property types. We meticulously follow IRS guidelines, never over-engineering or pushing boundaries, to ensure a balanced approach that benefits owners of all sizes. And if an audit occurs, our decades of experience mean we stand behind every detail of your study.
Contact us today and let’s explore how cost segregation can elevate your real estate investment.