Cost segregation is a valuable tax strategy that allows property owners to accelerate depreciation on their buildings, unlocking significant financial benefits. While often associated with commercial properties, cost segregation can be applied to a wide range of building types, each benefiting in unique ways. By breaking a property down into its various components and applying shorter depreciation schedules, owners can reduce taxable income and improve cash flow. In this article, we’ll explore how different building types—commercial, residential, medical, hospitality, and industrial—can all leverage cost segregation to maximize their tax savings.
Accelerate Depreciation of Commercial Buildings
For office buildings, retail spaces, and industrial properties, cost segregation can accelerate depreciation on components such as lighting, HVAC systems, and specialized flooring, which may qualify for a 5, 7, or 15-year depreciation schedule.
- Example: A $5 million office building might include $1.5 million in assets eligible for shorter depreciation periods. By applying cost segregation, the owner could potentially accelerate over $300,000 in depreciation during the first year, resulting in tax savings of approximately $105,000, assuming a 35% tax rate.
Accelerate Depreciation of Residential Rental Properties
While residential properties typically have a 27.5-year depreciation schedule, cost segregation can still offer substantial savings by identifying components that can be depreciated over a shorter term (5 or 15 years).
- Example: A $1.2 million multifamily property could have $250,000 in components eligible for 5- or 15-year depreciation. By using cost segregation, the owner could accelerate approximately $50,000 in depreciation, yielding tax savings of about $17,500 in the first year.
Accelerate Depreciation of Medical Facilities
Hospitals, clinics, and medical offices often have specialized infrastructure such as exam rooms, HVAC systems, and medical lighting, which can be depreciated over shorter periods.
- Example: A $3 million medical office building could have $600,000 in assets eligible for 5- or 15-year depreciation. Accelerating depreciation on these components could result in an additional $120,000 in depreciation in the first year, leading to tax savings of approximately $42,000, assuming a 35% tax rate
Accelerate Depreciation of Hotels and Resorts
Hotels and resorts often feature specialized furnishings, kitchen equipment, and landscaping elements that can be depreciated over 5, 7, or 15 years.
- Example: A $10 million hotel could have $2 million in eligible components for accelerated depreciation. This could lead to an additional $400,000 in depreciation in the first year, resulting in tax savings of around $140,000.
Accelerate Depreciation Warehouses and Manufacturing Facilities
Warehouses and manufacturing plants often include shelving, specialized lighting, and machinery that qualify for accelerated depreciation under a cost segregation study.
- Example: A $6 million warehouse with $1.2 million in eligible components for accelerated depreciation could generate an additional $240,000 in depreciation in the first year, resulting in tax savings of approximately $84,000.
Summary
No matter the property type, cost segregation can offer significant financial benefits. By identifying assets that qualify for shorter depreciation schedules, property owners can accelerate their depreciation deductions and reduce their tax burden. In many cases, this results in substantial tax savings in the first few years of ownership. Working with a cost segregation specialist can help property owners fully leverage this strategy to boost cash flow and improve their bottom line.
