A Cost Segregation Study (CSS) is a tax strategy used to accelerate depreciation on real estate assets, reducing tax liability and increasing cash flow. Here’s a step-by-step process to conduct a Cost segregation Study:

Step 1: Determine Eligibility

Before starting, confirm whether the property qualifies for cost segregation. Ideal candidates include:

  • Recently purchased, constructed, or renovated properties.
  • Properties with significant non-structural components (e.g., office buildings, hotels, warehouses, apartments).

Step 2: Hire a Cost Segregation Specialist

A professional, such as a Certified Cost Segregation Engineer or a CPA specializing in tax depreciation, ensures accuracy and compliance with IRS guidelines.

Step 3: Gather Necessary Documentation

To conduct a thorough analysis, collect:

  • Purchase agreements & closing statements
  • Construction costs and invoices
  • Architectural and engineering drawings
  • Depreciation schedules (if applicable)

Step 4: Perform a Site Visit

A physical inspection of the property helps identify:

  • Structural vs. non-structural components
  • Assets eligible for accelerated depreciation (e.g., flooring, wiring, HVAC systems)

Step 5: Categorize Assets for Depreciation

Assets are reclassified based on IRS MACRS (Modified Accelerated Cost Recovery System):

  • 5-year property (e.g., carpeting, fixtures)
  • 7-year property (e.g., office furniture)
  • 15-year property (e.g., land improvements like sidewalks)
  • 39-year property (e.g., structural elements)

Step 6: Calculate Depreciation Benefits

The cost segregation specialist applies IRS depreciation methods to determine:

  • Accelerated depreciation schedules
  • Potential tax deductions

Step 7: Prepare the Cost Segregation Report

The final report includes:

  • Breakdown of asset classifications
  • Depreciation schedules
  • Supporting documentation for IRS compliance

Step 8: Implement Tax Savings Strategy

Work with a tax advisor to:

  • Adjust current and future tax returns
  • Claim any missed depreciation benefits using Form 3115 (Change in Accounting Method)

Step 9: Maintain Proper Documentation

Retain records for future IRS audits, ensuring compliance and supporting your depreciation claims.