Average Cost Segregation Savings by Property Type

Average cost segregation savings refer to the typical first year tax benefit achieved across similar property types when building components are reclassified into shorter depreciation lives. These savings represent the reduction in current year tax liability compared to standard depreciation.

Industry practitioners track average cost segregation savings by analyzing completed studies across thousands of properties. The data shows that certain property categories consistently produce higher reclassification percentages and stronger first year outcomes than others.

Understanding average savings helps investors evaluate whether cost segregation makes sense before commissioning a detailed engineering study. However, averages are not guarantees. Actual results depend on property specific facts, construction quality, and documentation.

Cost segregation savings by property type vary because different buildings have different component mixes. Properties with substantial personal property, land improvements, and specialized systems generate higher savings than simple structures with minimal improvements.

These categories reflect general patterns across the industry. Individual properties within each category can vary significantly based on construction quality, improvements, and location specific factors.

Typical cost segregation results are often expressed as the percentage of depreciable basis that gets reclassified into shorter recovery periods. This percentage drives the magnitude of first year tax benefit and helps investors estimate potential outcomes.

These ranges reflect industry observations from qualified studies. Actual percentages depend on construction method, site conditions, improvements, and how assets are documented and classified.

Expected cost segregation benefits in the first year depend on reclassification percentage, bonus depreciation availability, and marginal tax rate. The following estimates assume 100% bonus depreciation and a 37% combined tax rate for illustration purposes.

These examples are illustrative and assume full deduction utilization in year one. Actual outcomes vary based on tax position, bonus depreciation rules, and property specific characteristics.

Average cost segregation savings provide a useful baseline, but individual properties often deviate from benchmarks. Understanding what drives variation helps set realistic expectations and identify opportunities for above average results.

Factors that increase savings above average

• Extensive site improvements including parking, landscaping, and utilities.
• High quality interior build outs with specialized systems and finishes.
• Recently constructed or renovated properties with detailed cost records.
• Properties with substantial equipment, fixtures, or specialized infrastructure.
• Buildings designed for specific uses with custom systems and modifications.

Factors that reduce savings below average

• Simple construction with minimal improvements or specialized systems.
• High land value relative to building value reduces depreciable basis.
• Older properties with limited documentation and uncertain cost records.
• Shell buildings with no tenant improvements or interior build out.
• Properties where eligible components were previously separated and depreciated.

Cost segregation benchmarks serve as planning tools for estimating potential benefits before commissioning a full study. To use benchmarks effectively, match your property to the most similar category, apply conservative assumptions, and adjust for unique characteristics.

Steps to estimate using benchmarks

• Identify the property type category that best matches your building.
• Use the lower end of the reclassification range for conservative estimates.
• Multiply depreciable basis by estimated reclassification percentage.
• Apply bonus depreciation rules and MACRS schedules to calculate first year deduction.
• Multiply incremental deduction by your marginal tax rate to estimate savings.
• Compare estimated savings to expected study cost to assess feasibility.

For a deeper look at the underlying mathematics, see detailed cost segregation calculations and examples.

Cost segregation industry averages have important limitations that investors should understand before relying on them for decision making. Averages smooth out the wide variation that exists across individual properties and tax situations.

Key limitations

• Sample bias: Published averages may reflect properties where studies were completed, which may skew toward better candidates.
• Age of data: Industry averages based on older studies may not reflect current construction methods or tax law changes.
• Geographic variation: Construction costs, methods, and property types vary by region, but averages often ignore location.
• Quality differences: Averages do not distinguish between high quality engineering studies and less rigorous approaches.
• Tax position ignored: Industry averages show potential savings but do not account for whether taxpayers can actually use the deductions.

Use industry averages as a starting point for feasibility analysis, not as a substitute for property specific evaluation and professional tax advice.

Average cost segregation savings help determine when the expected benefit justifies the cost of a study. Generally, properties where estimated first year savings significantly exceed study cost are strong candidates, especially when owners can use the deductions immediately.

Favorable conditions for pursuing a study

• Depreciable basis above $500,000 to $1,000,000 depending on property type.
• Property type with average reclassification percentage above 20%.
• Owner has substantial taxable income and high marginal tax rate.
• Bonus depreciation available or strong MACRS deductions in early years.
• Property was recently acquired or completed with good documentation available.

To evaluate whether your property crosses the threshold, review how depreciation schedules affect long term outcomes and model the cash flow impact over your expected holding period.