Cost Segregation for Business Real Estate

An engineering-based analysis reviews construction documents, blueprints and the property itself, classifying components by their function and applicable recovery period: building shell, land improvements, and personal-property-like components with shorter lives.

A change in method of accounting, typically reported on the appropriate IRS form, may allow the owner to catch up on prior-year depreciation. Because law and methods change, the study is applied under current rules.

New construction, purchased buildings and renovated facilities are the common candidates, including manufacturing plants, dental and medical office buildings, and owner-occupied real estate. The benefit depends on the property's basis, its placed-in-service date and how much of the cost is reclassifiable.

Cost segregation is most valuable when the ownership structure and tax picture make depreciation meaningful, which most business-owned real estate does.

The study is most straightforward when a building is placed in service, because the classification can be set up day one. For existing buildings, a study can still be performed and prior-year catch-up may apply, subject to the rules for changes in accounting method.

For manufacturers and dentists alike, cost segregation is usually one part of a broader tax plan, reviewed alongside entity structure and purchase timing.