Cost Segregation Study

A cost segregation study breaks a building's cost into components, such as fixtures, appliances and land improvements, that can be depreciated faster than the building shell. It does not change cash flow or cash on cash return, but it can shift tax deductions into earlier years.

A residential building is normally depreciated over 27.5 years. Items reclassified into 5, 7 or 15-year categories produce larger deductions sooner. Depending on current bonus depreciation rules, the first-year deduction can be much larger than straight-line would allow.

The benefit is timing, not a permanent saving, because faster depreciation lowers the basis and raises recapture at sale. Studies cost money, which usually makes them more practical on larger properties. They change the after-tax picture while the pre-tax cash on cash return stays exactly the same.

Further reading: Cost Segregation Study on Wikipedia.