Is Cost Segregation Only for Large Properties?
Cost segregation is not limited to large properties. While larger buildings often have more absolute dollar savings, smaller properties can benefit when the expected tax savings justify the study cost. The decision is driven by ROI, not a fixed size threshold.
Understanding whether cost segregation only large properties qualify helps owners of all property types evaluate the strategy. There is no formal cost segregation size requirement from the IRS, and practical minimums vary based on study cost and property characteristics.
TL;DR – Key Takeaway
Is Cost Segregation Only for Large Properties?
No, cost segregation is not only for large properties. The strategy can apply to any property with depreciable basis, regardless of size. What matters is whether the expected tax savings justify the cost of the study.
The misconception that cost seg big buildings only arises because larger properties often have higher absolute dollar savings. A ten million dollar building may produce more total deductions than a one million dollar building, but the smaller property can still achieve strong ROI if the study cost is proportional and the property has the right characteristics.
Cost segregation property size is less important than the mix of eligible components, the owner's tax position, and the cost of the study. Smaller properties with substantial site improvements, specialized systems, or recent renovations can benefit as much or more than larger properties with simple construction.
Minimum Property Size Considerations
There is no formal minimum size cost segregation requirement from the IRS. Any property that qualifies for depreciation can use cost segregation. The practical minimum depends on study cost and expected benefit.
Many cost segregation providers suggest a depreciable basis of at least 500 thousand to 1 million dollars as a rough guideline. This is not a rule but a threshold where the study cost is more likely to be justified by the tax savings. Below this range, the ROI may be lower unless the property has unusual characteristics.
The minimum size consideration also depends on the study provider's fees. Some providers charge flat fees, while others charge based on property size or complexity. A lower fee structure can make cost segregation viable for smaller properties.
Table 1: Depreciable Basis Range vs Typical Study Cost vs ROI Outlook
| Depreciable Basis Range | Typical Study Cost | ROI Outlook |
|---|---|---|
| Under $500K | $3K to $7K | Variable, may not justify cost |
| $500K to $1M | $5K to $10K | Often positive if eligible components significant |
| $1M to $3M | $7K to $15K | Strong for most property types |
| $3M to $10M | $10K to $25K | Very strong for typical commercial properties |
| Over $10M | $15K to $50K+ | Highly attractive in most cases |
Cost Segregation for Smaller Properties
Cost segregation for smaller properties can work well when the property has characteristics that increase the eligible component percentage. These characteristics include extensive site work, specialized systems, tenant improvements, or recent renovations.
Smaller properties that often benefit include small retail centers with substantial parking and landscaping, industrial facilities with specialized electrical or process systems, renovated buildings with new interior components, and properties with high finish quality or custom build outs.
The key for smaller properties is ensuring the study cost is proportional. Some providers offer streamlined studies or lower fees for smaller properties, which can improve ROI. Evaluate the expected benefit before commissioning the study.
When Smaller Properties Benefit Most
Smaller properties benefit most from cost segregation when specific conditions align. These conditions increase the eligible component percentage or reduce the effective study cost, improving ROI even at smaller scale.
Conditions that favor smaller property cost segregation
- Substantial site improvements such as parking, landscaping, or specialized paving relative to building cost.
- Specialized systems including process equipment, heavy electrical, or HVAC designed for specific tenant needs.
- Recent renovations or tenant improvements that added new basis to an existing building.
- High finish quality or custom build outs that create more personal property components than standard construction.
- Owner with high marginal tax rate and ability to use the deductions, maximizing the value of each dollar of tax savings.
When these conditions exist, even properties with depreciable basis below one million dollars can achieve strong cost segregation ROI.
Table 2: Property Characteristic vs Impact on Smaller Properties vs Benefit Level
| Property Characteristic | Impact on Smaller Properties | Benefit Level |
|---|---|---|
| Extensive site work | Increases eligible 15 year components | High |
| Specialized electrical or HVAC | More 5 or 7 year personal property | High |
| Recent renovation | New basis with shorter life components | Medium to high |
| Custom tenant improvements | Higher percentage of non structural items | Medium to high |
| Simple construction, minimal systems | Lower eligible component percentage | Low |
Cost Segregation Property Size Benchmarks
Cost segregation property size benchmarks are not official IRS rules but industry guidelines based on cost benefit analysis. These benchmarks help owners and advisors quickly assess whether a study is likely to be worthwhile.
Rough benchmarks by property type
- Multifamily: Depreciable basis of 1 million or more often justifies study cost due to common area amenities and site work.
- Retail: Properties with significant parking and site improvements may benefit at 750 thousand or above.
- Industrial: Specialized systems can justify studies at 500 thousand to 1 million depending on complexity.
- Office: Build out quality matters. High finish properties may justify studies at 1 million, while basic properties may need 2 million or more.
- Hospitality: FF&E and amenities make cost segregation attractive at 1 million or above.
These benchmarks are starting points. Property specific factors can shift the threshold up or down significantly.
ROI vs Size Analysis
The relationship between cost segregation scale and ROI is not linear. Larger properties tend to have higher absolute savings, but smaller properties can have higher ROI percentages if the eligible component mix is favorable and study cost is controlled.
For example, a 500 thousand dollar property with 200 thousand in eligible components may produce 15 thousand to 25 thousand in first year tax savings. If the study cost is 5 thousand, the ROI is 3 to 5 times the cost. A 10 million dollar property may produce 200 thousand in savings with a 20 thousand study cost, also yielding strong ROI.
The key is not to focus on absolute size but on the ratio of expected tax savings to study cost. Smaller properties with high eligible percentages can compete with larger properties on ROI.
Cost Segregation Scale and Study Cost
Cost segregation scale affects study cost because larger properties require more time for site visits, component analysis, and documentation. However, some of the study cost is fixed, which means smaller properties pay a higher percentage of basis in fees.
This fixed cost component is why very small properties may struggle to achieve positive ROI unless they have exceptional characteristics. As property size increases, the fee as a percentage of basis decreases, improving the cost benefit ratio.
Some providers offer tiered pricing or streamlined studies for smaller properties to address this issue. If you own a smaller property, ask about pricing options and whether a simplified study might be appropriate.
Evaluating Whether Your Property Qualifies
To evaluate whether your property qualifies for cost segregation regardless of size, consider the following factors. These factors help predict whether the study will produce enough benefit to justify the cost.
Evaluation framework
- Depreciable basis: Higher basis generally supports better ROI, but not the only factor.
- Property type and characteristics: Properties with site work, specialized systems, or renovations are stronger candidates.
- Owner tax position: Can you use the deductions? Higher marginal rates increase benefit.
- Study cost estimate: Get a quote and compare to expected savings.
- Expected eligible component percentage: Higher percentages improve ROI at all size levels.
Work with your CPA to estimate the potential benefit before commissioning a study. Many providers offer free preliminary assessments to help you decide.
Frequently Asked Questions
Is cost segregation only for large properties?
No, cost segregation is not only for large properties. Smaller properties can benefit if the expected tax savings exceed the study cost. The key is ROI, not size alone.
What is the minimum property size for cost segregation?
There is no formal minimum size cost segregation requirement. Practical minimums depend on study cost and expected benefit. Many providers suggest properties with depreciable basis above 500 thousand to 1 million dollars.
Can small buildings use cost segregation?
Yes, small buildings can use cost segregation if the ROI justifies the cost. Properties like small retail, industrial facilities, or renovated buildings may qualify even if square footage is modest.
Does cost seg big buildings only make sense?
No, cost seg is not limited to big buildings. While larger properties often have higher absolute savings, smaller properties with the right characteristics can achieve strong ROI.
How does property size affect cost segregation benefits?
Larger properties typically have more depreciable basis, which can lead to higher absolute tax savings. However, smaller properties with specialized systems or improvements can also benefit significantly.
What drives cost segregation for smaller properties?
For smaller properties, drivers include high basis relative to size, substantial site improvements, specialized systems, and recent renovations. These factors can increase eligible components.
Are there cost segregation scale requirements from the IRS?
The IRS does not impose cost segregation scale requirements. Any property that qualifies for depreciation can use cost segregation if the study is properly prepared and documented.
Can a single tenant building benefit from cost segregation?
Yes, single tenant buildings can benefit regardless of size. Tenant improvements, site work, and specialized systems can provide meaningful reclassification opportunities.