Cost Segregation Sample Calculations & Examples
Cost segregation calculations translate engineering based component allocations into tax benefits by applying appropriate depreciation schedules and rates. Understanding the underlying math helps investors evaluate potential savings, verify study results, and model different scenarios.
This guide walks through cost segregation math examples step by step, showing how reclassification percentages, depreciation rates, and tax rates combine to produce first year savings. The examples use realistic assumptions and demonstrate both simple and complex calculation approaches.
TL;DR – Key Takeaway
Basic Cost Segregation Formula
The basic cost segregation formula compares depreciation deductions under cost segregation to deductions under standard depreciation, then translates the difference into tax savings using your marginal rate.
Simplified formula components
- Total Depreciable Basis: Purchase price minus land value, or construction cost for new property.
- Reclassified Amount: Portion of basis allocated to 5, 7, or 15 year property through engineering analysis.
- Incremental Depreciation: Additional first year deduction from cost segregation versus standard method.
- Marginal Tax Rate: Combined federal and state tax rate applied to incremental deduction.
- First Year Savings: Incremental depreciation multiplied by marginal tax rate.
A basic cost segregation formula for first year savings with bonus depreciation is: (Reclassified Basis × Bonus Percentage) × Tax Rate. Without bonus depreciation, the calculation uses MACRS rates for each asset class and requires more detailed year by year computation.
Step by Step Calculation Walkthrough
Understanding cost segregation calculations requires breaking the process into discrete steps. The following walkthrough demonstrates how to move from property characteristics to estimated tax savings.
Step 1: Determine total depreciable basis
Start with acquisition cost or construction cost, then subtract land value. Only the building and improvements are depreciable. Use appraisals, purchase allocations, or county assessments to separate land and building.
Step 2: Estimate reclassification percentage
Based on property type and characteristics, estimate the percentage of basis likely to be reclassified into shorter lives. Use industry benchmarks as a starting point and adjust for property specific factors like improvements and systems.
Step 3: Calculate reclassified amount
Multiply total depreciable basis by estimated reclassification percentage to determine the dollar amount moving into 5, 7, or 15 year categories. This is the basis for accelerated depreciation.
Step 4: Apply depreciation rates or bonus depreciation
If bonus depreciation applies, multiply reclassified amount by the applicable bonus percentage for immediate deduction. If no bonus applies, use first year MACRS rates for each asset class to calculate year one deductions.
Step 5: Compare to standard depreciation
Calculate what depreciation would have been under standard method using 27.5 or 39 year life. The difference between cost segregation depreciation and standard depreciation is the incremental deduction.
Step 6: Multiply by tax rate to get savings
Apply your combined federal and state marginal tax rate to the incremental deduction. The result is your estimated first year tax savings from cost segregation.
Simple Example: Office Building
This simple example demonstrates cost segregation math for a typical office building with 100% bonus depreciation available.
Table 1: Office Building Cost Segregation Sample Numbers
| Input or Calculation | Value | Notes |
|---|---|---|
| Purchase price | $3,500,000 | Total acquisition cost |
| Land value | $500,000 | Not depreciable |
| Depreciable basis | $3,000,000 | Purchase price minus land |
| Reclassification percentage | 25% | Typical for office property |
| Reclassified amount | $750,000 | $3M × 25% |
| Bonus depreciation percentage | 100% | Full expensing available |
| Year 1 bonus deduction | $750,000 | $750K × 100% |
| Standard building depreciation | $76,923 | $3M ÷ 39 years |
| Incremental depreciation | $673,077 | $750K bonus minus standard |
| Marginal tax rate | 37% | Combined federal and state |
| First year tax savings | $249,039 | $673,077 × 37% |
This example shows how a $3 million office building can produce approximately $249,000 in first year tax savings through cost segregation when bonus depreciation is available and the owner has a 37% marginal rate.
Detailed Example: Multifamily Property
This detailed example breaks cost segregation calculations into multiple asset classes to show how different components depreciate at different rates.
Table 2: Multifamily Property Detailed Allocation
| Asset Category | Recovery Period | Allocated Basis | Year 1 Deduction (with bonus) |
|---|---|---|---|
| Building shell and structure | 27.5 years | $1,600,000 | $58,182 |
| Appliances and equipment | 5 years | $100,000 | $100,000 (bonus) |
| Cabinets and fixtures | 5 years | $80,000 | $80,000 (bonus) |
| Specialty electrical | 7 years | $60,000 | $60,000 (bonus) |
| Parking lot and site paving | 15 years | $120,000 | $120,000 (bonus) |
| Landscaping and fencing | 15 years | $40,000 | $40,000 (bonus) |
| Total | - | $2,000,000 | $458,182 |
Without cost segregation, year one depreciation on this $2 million multifamily property would be approximately $72,727 ($2M ÷ 27.5 years). With cost segregation and bonus depreciation, year one depreciation increases to $458,182. The incremental deduction is $385,455.
At a 35% combined tax rate, this produces first year tax savings of approximately $134,909 ($385,455 × 35%). This detailed allocation shows how multiple component categories combine to generate the overall benefit.
Cost Segregation Calculations With Bonus Depreciation
Bonus depreciation significantly simplifies cost segregation calculations by allowing immediate expensing of eligible property. When 100% bonus applies, the first year deduction equals the full reclassified amount.
Bonus depreciation calculation approach
- Identify total basis allocated to 5, 7, and 15 year property through engineering analysis.
- Apply applicable bonus percentage based on placed in service date and current law.
- The product is your first year bonus deduction on reclassified assets.
- Remaining basis after bonus is depreciated using regular MACRS schedules.
- Compare total cost segregation depreciation to standard building depreciation.
For properties placed in service when 100% bonus depreciation applies, cost segregation math examples become straightforward. The challenge is proper component identification and allocation, not complex depreciation calculations.
Cost Segregation Math Without Bonus Depreciation
Without bonus depreciation, cost segregation computation requires applying MACRS rates for each asset class. First year deductions are lower, but the strategy still provides meaningful acceleration compared to standard depreciation.
Table 3: MACRS First Year Depreciation Rates by Asset Class
| Recovery Period | Depreciation Method | First Year Rate (half year) | Example Asset Types |
|---|---|---|---|
| 5 year | 200% declining balance | 20.00% | Appliances, carpets, specialty finishes |
| 7 year | 200% declining balance | 14.29% | Furniture, fixtures, equipment |
| 15 year | 150% declining balance | 5.00% | Land improvements, site work |
| 27.5 year (residential) | Straight line | 3.64% | Residential rental building |
| 39 year (nonresidential) | Straight line | 2.56% | Commercial building |
Using these rates, a $500,000 allocation to 5 year property produces $100,000 in first year depreciation (20%), while the same amount in a 39 year building produces only $12,800 (2.56%). The $87,200 difference represents incremental depreciation that translates to tax savings.
Multi Year Savings Projection
While first year savings receive the most attention, understanding the multi year depreciation pattern helps evaluate long term value and set expectations. Cost segregation accelerates deductions into early years, which means later years show lower depreciation than standard method.
Table 4: Five Year Depreciation Comparison
| Year | Standard Depreciation | Cost Segregation | Incremental Benefit |
|---|---|---|---|
| Year 1 | $76,923 | $750,000 | $673,077 |
| Year 2 | $76,923 | $57,692 | ($19,231) |
| Year 3 | $76,923 | $57,692 | ($19,231) |
| Year 4 | $76,923 | $57,692 | ($19,231) |
| Year 5 | $76,923 | $57,692 | ($19,231) |
| Cumulative | $384,615 | $980,768 | $596,153 |
This projection shows the timing benefit clearly. Year one acceleration is substantial, with moderately lower deductions in subsequent years. The cumulative benefit over five years remains strong. For complete economic analysis, review how these patterns affect long term depreciation schedules.
Verification and Reasonableness Checks
After completing cost segregation calculations, apply reasonableness checks to verify the results make sense. Outlier results may indicate errors in allocation, depreciation rates, or assumptions.
Key verification checks
- Reclassification percentage: Compare to industry benchmarks for similar property types. Results far above typical ranges warrant scrutiny.
- Total basis reconciliation: Sum of all asset class allocations should equal total depreciable basis. Verify no double counting or omissions.
- Depreciation rates: Confirm MACRS rates match IRS tables and conventions (half year, mid quarter) are applied correctly.
- Tax savings versus study cost: First year savings should significantly exceed study fee for economically viable projects.
- Component classifications: Review that asset allocations align with IRS guidance and audit court precedent.
For perspective on whether your results fall within expected ranges, see typical building segregation percentages by property type.
Frequently Asked Questions
How do I calculate cost segregation savings?
Calculate cost segregation savings by determining incremental depreciation under cost segregation versus standard depreciation, then multiplying the difference by your marginal tax rate. Detailed calculations require component level allocations and proper depreciation schedules.
What is the cost segregation formula for estimating benefits?
A simplified cost segregation formula is: (Reclassified Basis × Applicable Depreciation Rate) × Marginal Tax Rate = First Year Tax Savings. Actual computations involve multiple asset classes, bonus depreciation rules, and MACRS schedules.
Can I do cost segregation math myself without a study?
You can estimate rough cost segregation math using industry benchmarks and simplified assumptions, but a formal study requires engineering analysis, detailed cost allocation, and proper documentation. Estimates help evaluate feasibility before commissioning a study.
What are realistic cost segregation sample numbers for planning?
Realistic cost segregation sample numbers vary by property type, but a $3 million office building might reclassify $750,000 into shorter lives, producing $200,000 to $300,000 in first year savings depending on bonus depreciation and tax rate.
How accurate are cost segregation calculations without site inspection?
Cost segregation calculations without site inspection are estimates only and may deviate significantly from actual results. Qualified studies require physical inspection, detailed cost records, and engineering analysis to support defensible allocations.
What depreciation rates apply in cost segregation computation?
Cost segregation computation uses MACRS depreciation rates for 5, 7, and 15 year property, plus bonus depreciation when applicable. The specific rates depend on asset class, placed in service date, and whether half year or mid quarter convention applies.
Do cost segregation math examples account for recapture?
Most cost segregation math examples focus on first year benefits and do not model long term recapture implications. Complete analysis should consider disposition scenarios, recapture rules, and holding period to evaluate full economic impact.
How do I verify cost segregation calculations from a provider?
Verify cost segregation calculations by reviewing the allocation methodology, checking that asset classifications align with IRS guidance, confirming depreciation rates are correct, and having your CPA review the results before implementation.
What inputs are needed for accurate cost segregation sample numbers?
Accurate cost segregation sample numbers require total depreciable basis, property type, construction details, improvement costs, placed in service date, available documentation, and your tax rate. More detailed inputs produce more reliable estimates.