Cost segregation is the process of being aware of personal property assets which are grouped with real property assets and taking aside the personal assets in order to do the tax reporting process correctly. This particular process has the ability to covert a 1250 property, which is either a residential real property or a non-residential real property, into 1245 property, and that can lead to the acceleration of depreciation on some interior and exterior components of the property over the course of the next few years.

A widely used tool for accounting, cost segregation, real estate investors use it as a way to preserve capital and get significant tax benefits through, earlier mentioned, accelerated depreciation, asset reclassification, and write-down at the time of assets are being disposed of. However, there is a cloud of doubt that is on the minds of various real estate investors, that is, whether or not cost segregation will continue to benefit them ahead as well.

How does a cost segregation study work

It is better that a cost segregation study is completed by a professional, preferably someone who has experience in engineering, architecture, construction, and tax accounting so that he/she can provide a formal cost segregation analysis accurately.

The study would take out certain qualified items that are considered to be 1250 property, and those might include:

• Carpeting
• Millwork
• The electrical system
• Wallcoverings
• Partitions
• Special plumbing
• The ventilation system
• Storage tanks

The recovery period, which is the time period in which something can be depreciated, would also happen to be separated out for these items.


In cost segregation, real estate eligibility includes the buildings that have been bought, constructed, expanded or renovated since 1987. An engineering-based study is generally cost-effective for buildings renovated or bought at a cost greater than 750,000 dollars. This study is highly efficient for new buildings that are constructed recently, but moreover, it also uncovers retroactive tax deductions for older buildings which have the ability to generate significant short benefits due to “catch-up” depreciation.

Tax benefits of cost segregation

Cost segregation not only helps in providing lower taxes, but it also helps businesses in many more ways:

• This process helps to maximize tax savings by adjusting the timing of deductions
• By creating an audit trail.
• By playing catch-up: retroactivity.
• Additional tax benefits. Cost segregation has the ability to reveal opportunities to reduce liabilities related to real estate tax and identify some sales and use tax savings opportunities.

However, cost segregation real estate have a certain sense of risk involved if you hire professionals who lack adequate experience in engineering and construction background.

Author's Bio: 

Shashank is a Content writer with over 3 years of experience in professional writing.