Financial Glossary
Cost Segregation Study
A cost segregation study is an engineering-based analysis that breaks a property's purchase or construction cost into components with shorter depreciation lives, such as fixtures, flooring, and land improvements, rather than depreciating the whole building over the standard long schedule. By accelerating depreciation on these components, owners can front-load deductions and reduce taxable income in the early years of ownership. The study documents each reclassification to support the position if questioned.
Problem & Application
Real-estate investors, STR hosts, and campground owners often leave significant tax savings on the table by depreciating an entire property on a single long schedule. A cost segregation study can unlock larger near-term deductions that improve cash flow, especially when paired with bonus depreciation rules. The analysis must be properly documented and applied to qualifying property, so it pays to coordinate the study with your overall tax strategy and current IRS guidance.
In Short
A cost segregation study can substantially accelerate depreciation deductions for property owners, but it should be executed carefully and integrated into broader tax planning.