Cost segregation is a cash flow improvement strategy that accelerates depreciation deductions to reduce or eliminate Federal and State income taxes. Although not commonly understood or used, cost segregation can be a valuable tax strategy for any taxpayer that owns, constructs, renovates or acquires real estate.
Cost segregation studies are an engineering-based approach to identifying assets within a building that can be reclassified into a much shorter depreciation class than the building itself. Doing so allows for accelerated depreciation of those reclassified assets resulting in higher cash flows.
To qualify, the property’s owner must be a taxable entity, the property must either be new construction or have been purchased or substantially renovated after 1986 and the property must be defined as property for a commercial investment purpose.