Property acquisition
A recently purchased commercial property or property that produces income, with an allocated building basis.
Cost segregation services
See the building component by component.
A cost segregation analysis examines the facts behind acquired, constructed, or improved property and organizes qualifying costs into the appropriate depreciation categories, with documentation built for review.
Short answer
What does cost segregation do?
It studies building-related costs and identifies components that may have tax recovery periods different from the building itself. The potential benefit is accelerated depreciation timing, not a new deduction created from nothing.
When owners consider a study
Four common trigger points.
A quick fit review should consider the property, date placed in service, prior depreciation, tax ownership, project records, and the owner’s tax profile.
New construction
A completed project with contracts, drawings, change orders, and detailed construction costs.
Major renovation
Tenant improvements, expansions, remodels, or work on building systems placed in service.
Historical review
An older property with remaining depreciable basis and records that support a review of prior periods.
Study process
From property records to a usable tax schedule.
The analysis should connect asset classifications to the property, the project cost, and the supporting documentation. Final tax treatment is coordinated with the return preparer.
- 1Fit and tax profile
Confirm ownership, dates placed in service, basis, prior depreciation, and intended filing treatment.
- 2Document collection
Gather closing records, contracts, invoices, drawings, fixed asset schedules, and renovation history.
- 3Property analysis
Review site work, structure, systems, finishes, equipment, and specialized property by fact and function.
- 4Classification & reconciliation
Tie analyzed costs to total project or purchase basis and document the classification support.
- 5Tax adviser handoff
Provide schedules and support for depreciation updates and any required filing method.
Documents that strengthen a study
Good analysis starts with good records.
- 01Closing statement and purchase price allocation
- 02Construction contract, budget, and change orders
- 03Architectural, electrical, and mechanical drawings
- 04Vendor invoices and project cost detail
- 05Fixed asset and depreciation schedules
- 06Dates placed in service and renovation history
Official technical references
Grounded in IRS materials.
The IRS says its Cost Segregation Audit Techniques Guide helps examiners evaluate studies and can also help taxpayers and practitioners prepare them. The guide itself states that it is not an official pronouncement of law.
Cost segregation FAQ
Important questions before a study.
What is a cost segregation study?+
A cost segregation study analyzes building costs and classifies qualifying components into the appropriate tax depreciation categories. It is a timing analysis based on the property facts and supporting records.
Which properties may be evaluated?+
Owners commonly evaluate acquired, constructed, renovated, or expanded property that produces income. The date placed in service, tax ownership, cost, prior depreciation, and remaining benefit determine whether a review is appropriate.
Does every study produce the same tax result?+
No. The property, documentation, asset classifications, tax profile, and current law determine the result. A study should not promise a standard percentage or guaranteed savings.
Can an older property be reviewed?+
Potentially. A tax professional should evaluate the depreciation history and whether a method change, amended return, or another treatment is appropriate. IRS Publication 946 explains that certain changes in depreciation method generally require Form 3115.