Cost Segregation Tax Savings: How Much Can You Save?
Cost segregation tax savings come from accelerating depreciation deductions into earlier years. By reclassifying building components into shorter recovery periods, property owners can reduce current taxable income and improve near term cash flow.
The savings amount depends on property characteristics, eligible components, marginal tax rate, and bonus depreciation availability. There is no universal savings percentage because each property and tax situation is different.
TL;DR – Key Takeaway
What Are Cost Segregation Tax Savings?
Cost segregation tax savings are the reduction in current year federal and state income tax resulting from accelerated depreciation deductions. Instead of depreciating the entire building over 27.5 or 39 years, cost segregation identifies components that qualify for 5, 7, or 15 year lives.
The core methodology involves engineering analysis, cost estimation, and allocation to appropriate tax classes. When components are reclassified, depreciation deductions increase in early years and decrease in later years.
Tax savings from cost segregation are primarily timing benefits. The total lifetime depreciation remains largely the same, but more deductions occur upfront. The value comes from the time value of money and the ability to reinvest cash sooner.
How Cost Segregation Tax Savings Are Calculated
Cost segregation tax savings are calculated by comparing depreciation deductions under standard depreciation versus cost segregation, then multiplying the difference by your marginal tax rate.
Basic calculation approach
- Determine total depreciable basis in the property.
- Identify the portion of basis that can be reclassified into shorter recovery periods.
- Calculate annual depreciation under standard method versus cost segregation method.
- Multiply the incremental depreciation by your marginal tax rate to estimate tax savings.
- Adjust for bonus depreciation if applicable based on placed in service year.
The calculation should account for federal and state taxes, passive activity limitations, and any other factors that affect your ability to use the deductions in the current year.
Typical Savings Ranges by Property Type
Tax savings from cost segregation vary significantly by property type because different buildings have different mixes of eligible components. Properties with extensive site work, specialized electrical, or interior build outs tend to generate higher savings.
Table 1: Property Type vs Typical Reclassified Basis vs Estimated First Year Savings Range
| Property Type | Typical Reclassified Basis | Estimated First Year Savings Range |
|---|---|---|
| Hotel or hospitality | 30% to 50% | High, driven by furniture, fixtures, and amenities |
| Industrial or manufacturing | 25% to 45% | High, specialized systems and site work contribute |
| Retail with parking | 20% to 40% | Medium to high, parking and tenant improvements matter |
| Office building | 15% to 30% | Medium, varies by build out quality and systems |
| Multifamily | 15% to 30% | Medium, amenities and common areas drive variation |
| Warehouse or logistics | 10% to 25% | Medium, site improvements and specialized equipment help |
These ranges are illustrative and not guarantees. Actual reclassification percentages depend on property specific facts and documentation quality.
Factors That Affect Savings Amount
Several factors influence how much you save through cost segregation. Understanding these factors helps set realistic expectations and informs when to pursue a study.
Key factors affecting cost segregation savings
- Depreciable basis: Higher basis creates more potential for reclassification and larger absolute savings.
- Eligible components: Properties with substantial personal property, land improvements, or specialized systems generate more savings.
- Marginal tax rate: Higher tax rates amplify the value of each dollar of accelerated deduction.
- Bonus depreciation rules: Availability of 100% bonus depreciation versus phased out percentages materially changes first year outcomes.
- Ability to use deductions: Passive activity limitations, income level, and tax position determine whether savings are realized immediately or carried forward.
- Study quality: Accurate engineering and defensible allocations reduce risk and support the claimed positions.
To model sensitivity, estimate savings under different scenarios: with and without bonus depreciation, at different tax rates, and with varying reclassification percentages.
Bonus Depreciation Impact on Savings
Bonus depreciation can significantly increase cost segregation tax savings by allowing immediate expensing of a large portion of reclassified assets. The impact depends on the placed in service year and applicable bonus percentage under current law.
When 100% bonus depreciation applies, all eligible personal property and certain land improvements can be deducted in year one. This front loads tax savings and maximizes near term cash flow benefit from the study.
As bonus depreciation phases down or sunsets, the first year savings decrease but the strategy can still provide value through accelerated MACRS schedules. Your CPA should model outcomes under current and projected future rules.
First Year vs Lifetime Savings
First year savings are typically the most dramatic because bonus depreciation and short recovery periods concentrate deductions early. Lifetime savings are less about total dollars and more about timing and reinvestment opportunity.
Over a full hold period, the total depreciation claimed is similar whether you use cost segregation or standard depreciation. The difference is when you claim it. Earlier deductions reduce current taxes and free up cash for reinvestment or debt service.
Long term outcomes depend on holding period, disposition strategy, recapture rules, and tax rate changes over time. A shorter hold may capture most of the benefit, while a longer hold spreads the advantage over more years.
Savings Examples by Scenario
Concrete examples help illustrate the range of potential savings. The following scenarios are simplified and for educational purposes only.
Table 2: Example Scenario vs Depreciable Basis vs Reclassified Amount vs First Year Tax Savings
| Example Scenario | Depreciable Basis | Reclassified Amount | First Year Tax Savings (est.) |
|---|---|---|---|
| Small multifamily, 100% bonus | $1,000,000 | $200,000 (20%) | $74,000 at 37% rate |
| Medium office, 100% bonus | $3,000,000 | $750,000 (25%) | $277,500 at 37% rate |
| Large hotel, 100% bonus | $10,000,000 | $4,000,000 (40%) | $1,480,000 at 37% rate |
| Warehouse, no bonus | $2,000,000 | $400,000 (20%) | $50,000 to $80,000 range |
These examples assume eligible reclassified amounts, high marginal tax rates, and the ability to use all deductions in year one. Actual outcomes vary and should be confirmed with a qualified study and tax advisor.
How to Estimate Your Savings
To estimate your cost segregation tax savings before commissioning a study, gather key inputs and apply reasonable assumptions based on property type and tax position.
Steps to estimate savings
- Determine your total depreciable basis in the property, excluding land.
- Estimate the percentage likely to be reclassified based on property type benchmarks.
- Calculate incremental first year depreciation using bonus depreciation rules or MACRS schedules.
- Multiply incremental depreciation by your combined federal and state marginal tax rate.
- Adjust for passive activity limits or other restrictions that may delay utilization.
For a more detailed evaluation of whether savings justify the cost, see how savings scale with property value. A formal study provides documented support and more precise allocations than rough estimates.
Frequently Asked Questions
How much can I save with cost segregation?
Cost segregation tax savings vary based on depreciable basis, eligible components, marginal tax rate, and bonus depreciation rules. There is no one size fits all amount. Typical savings range from moderate to substantial depending on property characteristics and tax position.
What percentage of my building value can be saved through cost segregation?
Cost segregation does not save a percentage of building value. It accelerates depreciation deductions that were already available. The savings amount depends on how much basis is reclassified, your tax rate, and the timing of when you can use the deductions.
Are cost segregation tax savings guaranteed?
No, cost segregation tax savings are not guaranteed. Actual savings depend on property composition, accurate classification, your ability to use deductions, and compliance with tax rules. Results vary and should be modeled with your CPA.
When do I realize the tax savings from cost segregation?
Tax savings from cost segregation typically appear in the tax year the property is placed in service or when a change in accounting method is filed. The timing of savings depends on how the study is implemented and your tax filing schedule.
Can I calculate cost segregation savings without a study?
You can estimate cost segregation savings using industry benchmarks and assumptions, but a formal study provides documented allocations and defensible support. Rough estimates can help evaluate feasibility before committing to a full study.
How does bonus depreciation affect cost segregation tax savings?
Bonus depreciation can increase cost segregation tax savings by allowing a larger portion of reclassified assets to be deducted in the first year. The applicable bonus percentage depends on placed in service date and current law.
What is the tax savings rate from cost segregation?
The tax savings rate is typically your marginal tax rate applied to the accelerated deductions. If your marginal rate is 37%, every dollar of accelerated deduction produces roughly 37 cents of current tax savings, before considering timing and reinvestment effects.
Do cost segregation tax savings reduce my lifetime deductions?
Cost segregation tax savings do not reduce lifetime deductions in most cases. The strategy accelerates deductions into earlier years rather than creating new deductions. Total depreciation over the full holding period remains similar, but timing changes.
How do I maximize cost segregation savings?
Maximize cost segregation savings by using a qualified study provider, ensuring accurate component identification, timing the study to align with bonus depreciation rules, and confirming you can use the deductions based on your tax profile.