Cost Segregation ROI by Property Value

Property value affects cost segregation ROI through the relationship between depreciable basis, study fee, and tax savings. As basis increases, the absolute dollar amount of tax savings tends to rise faster than study fees, which improves the ROI ratio.

Study fees typically include fixed costs for engineering, documentation, and reporting plus variable costs that scale with property complexity and value. Fixed costs mean smaller properties bear a higher fee as a percentage of value, which can compress ROI.

Larger properties benefit from economies of scale. The incremental cost to study a $10 million property versus a $5 million property is often less than double, while the potential tax savings can be proportionally larger.

Most cost segregation providers suggest a minimum depreciable basis threshold between $500,000 and $1,000,000 for the study to be economically viable. Below this range, study fees may represent too large a share of the benefit, resulting in low or negative ROI.

The minimum threshold depends on several factors including property type, reclassification percentage, bonus depreciation availability, and fee structure. Properties with high eligible components may justify studies at lower values, while generic buildings may require higher thresholds.

Factors that lower the minimum threshold

• High reclassification percentages due to extensive land improvements or specialized components.
• Availability of 100% bonus depreciation that front loads deductions into year one.
• Lower cost study options such as desktop studies or streamlined engineering.
• High marginal tax rates that amplify the value of each deduction dollar.

Small property cost segregation ROI is often challenged by fixed study costs that consume a larger percentage of the benefit. Properties with depreciable basis below $1 million require careful evaluation to ensure positive ROI.

For small properties to achieve acceptable ROI, one or more favorable conditions typically need to be present: high reclassification percentage, strong bonus depreciation rules, lower fee structures, or very high tax rates.

These estimates assume moderate reclassification percentages and 100% bonus depreciation. Without bonus, small property ROI can decrease significantly.

Properties with depreciable basis between $1 million and $10 million often represent the sweet spot for cost segregation ROI. Study fees are reasonable as a percentage of value, and the absolute savings can be substantial enough to justify the investment.

In this range, most property types with typical component mixes can achieve strong ROI multiples, especially when bonus depreciation is available and the owner can use the deductions immediately.

The medium property sweet spot benefits from manageable complexity and fee structures that balance thoroughness with cost efficiency. Providers are comfortable with this value range, which can lead to competitive pricing and better service.

Large property cost segregation ROI can remain strong above $10 million in basis because fees benefit from economies of scale while tax savings grow proportionally with reclassified amounts. Very large properties can achieve excellent ROI multiples if components support meaningful reclassification.

However, large properties also introduce complexity. More square footage, more building systems, and more detailed engineering can increase study scope and fee. ROI depends on whether the incremental savings justify the incremental cost.

These ROI multiples assume favorable property types, good component mixes, and full deduction utilization. Actual outcomes vary widely.

Fee structures vary by provider and property value tier. Understanding typical fee ranges helps set expectations and evaluate whether a quoted fee is reasonable for your property value.

General fee structure observations

• Fees typically range from 0.5% to 2% of depreciable basis, with smaller properties at the higher end.
• Fixed minimum fees often range from $5,000 to $10,000, which affects small property ROI.
• Larger properties benefit from lower fees as a percentage of basis due to economies of scale.
• Complex properties with extensive improvements may incur higher fees regardless of value.
• Desktop studies and streamlined options can reduce fees but may offer less defensibility.

Comparing ROI across value tiers illustrates how economies of scale and fee structures interact with property characteristics. The following examples are simplified for educational purposes.

Example ROI comparison

• $500,000 multifamily: $7,000 fee, $25,000 first year savings, 3.6x ROI.
• $2,000,000 office: $10,000 fee, $110,000 first year savings, 11x ROI.
• $5,000,000 retail: $15,000 fee, $250,000 first year savings, 16.7x ROI.
• $15,000,000 hotel: $30,000 fee, $900,000 first year savings, 30x ROI.

These examples assume favorable component mixes and 100% bonus depreciation. Without bonus or with limited components, ROI can be significantly lower.

High property value does not guarantee positive cost segregation ROI. If eligible components are minimal, bonus depreciation is unavailable, or the owner cannot use the deductions, even large properties can produce disappointing results.

Examples of scenarios where value does not drive ROI include shell warehouses with minimal improvements, land heavy acquisitions where building basis is small, and situations where passive activity limits prevent deduction usage.

To evaluate whether your property value supports a viable study, model the interplay of value, reclassification percentage, fee, and tax position. For structured guidance, see cost segregation cost versus savings analysis and break even frameworks.