Cost segregation (or sometimes just ‘Cost Seg’) is a strategy to defer taxes. It does that by frontloading the depreciation deduction for real estate in the early years of ownership.

How does the Cost Segregation Study do that?

The cost seg study breaks the different components of the real estate asset into classifications and recovery periods based on IRS standards. By following this method, the results are shorter tax lives rather than the normal 27.5 years of useful life of depreciation for residential rental property (or 39 years for nonresidential real property).

What are some Potential Problems of a Cost Segregation Study?

Most of it comes down to depreciation recapture. Depreciation recapture is triggered when a rental property is sold. The IRS uses the process to collect taxes on the gain from your rental property to recover the tax benefits you might have received by using depreciation.

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