Real estate offers great diversification potential in an investment portfolio.

Aside from being a source of passive income, real estate investing also comes with considerable tax benefits. Did you know that you can minimize your tax liabilities through cost segregation? Below, we define cost segregation and explain how it can benefit real estate investors like you.


At its heart, cost segregation is a tax strategy. It allows real estate investors to reclassify their real estate holdings to accelerate depreciation.

The process effectively reclassifies all of your commercial and residential holdings. Once this occurs, you can realize depreciation benefits at a higher and faster rate.

But, what is depreciation? Essentially, it’s an accounting method that allows you to allocate the cost of an asset over its expected useful life. Typically, commercial and residential properties depreciate over 39 and 27.5 years respectively. However, cost segregation allows you to reclassify these properties and depreciate them over a period of five, seven, or 15 years.

Therefore, cost segregation can be an effective tool for reducing your tax burdens. The strategy must be implemented with great care, however, to avoid any IRS underpayment penalties tied to improper classifications.


To start reclassifying your assets, you need to carry out a cost segregation study or analysis on your real estate assets. Since an engineering-based analysis holds more weight in court, it’s best to look for a professional with engineering experience.

The individual will also need to have experience in other fields such as architecture, construction, and tax accounting to provide a comprehensive and formal cost-segregation analysis. 

As mentioned, a non-residential property (1250 property) is subject to a 39-year straight line in depreciation. Meanwhile, residential 1245 properties are subject to a 27.5-year depreciation. With cost segregation, you can depreciate over five, seven, or 15 years.

Items that are segregated or separated in a cost segregation analysis include electrical systems, carpeting, wall covers, partitions, millworks, and phone systems. Reclassifying these components as either personal property or improvements to the land (depreciable over five, seven, or 15 years respectively) leads to potential tax savings for you.

A cost segregation analysis will set you back $10,000 to $20,000, however. This means that it is most profitable for large-scale commercial real estate investors and rental property owners. When something can be depreciated, a recovery period is a massive factor in determining the benefits of segregation.

So, when should you commence cost segregation? An ideal time is immediately after the purchase, remodel, or construction of a property. If you can do so within a year, you stand to gain a lot more in terms of a tax advantage.


Many people know that the 2017 Tax Cut and Jobs Act decreases marginal tax rates for individual tax brackets.

But, did you know that the law also allows 100% bonus depreciation on qualifying properties or assets acquired after September 27, 2017? Prior to 2017, the bonus depreciation limitation was 50% of the qualifying asset.

The new law also allows for Qualified Leasehold Improvement Properties to qualify for bonus depreciation. Cost segregation effectively reduces the expenses associated with real estate holdings, increases your cash flow, and maximizes your investment returns.

In terms of cost segregation, there are significant advantages for manufacturing and medical office facilities. To get more industry-specific guidance, refer to the IRS page for cost segregation.


The IRS has outlined several approaches for carrying out cost segregation. As mentioned earlier, however, the best method is one that’s engineering-based. Partnering with an experienced tax firm can help you carry out an IRS-compliant cost segregation process. 

When it comes to tax credit partnerships, Incentax is your go-to firm. Our tax credit experts employ a proven, client-centric process to identify and maximize all available state and federal tax credits for your business. Contact us today to discuss whether cost segregation is the right option for your business.