Cost Segregation

Cost segregation is an engineering study that splits a building's cost into parts with shorter tax lives, such as appliances, carpeting, fixtures and site work. Those parts can be depreciated over 5, 7 or 15 years instead of 27.5 or 39, which moves tax deductions earlier.

The study does not change NOI or the cap rate. It changes when the owner pays income tax. Larger deductions in the first years raise after-tax cash flow early in the hold, which matters most to investors with income the deductions can offset.

The benefit is a timing difference. Faster deductions mean a lower tax basis, and more of the gain at sale may be taxed as recapture. Whether a study pays for its cost depends on the property's size and the owner's tax position, so it is worth asking a tax professional before ordering one.