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Cost Segregation

Depreciation, moved forward on purpose.

A cost segregation study reclassifies parts of a building into shorter depreciation lives, pulling deductions into earlier years. It is a timing strategy, not free money. We evaluate whether the timing is worth it for your facts before anyone orders a study.

The Challenge

The study is easy to buy and easy to waste.

Cost segregation gets sold as a deduction with no downside. In practice the deduction has to be usable, the property has to be held long enough for the timing to pay off, and the study itself costs real money.

Plenty of owners buy a study, generate a large paper loss, and then discover the passive activity rules keep them from using most of it this year. The deduction is not lost, but the benefit they paid for arrives years later than they were told.

What a Study Actually Does

An engineering-based study separates a building into its components. Land improvements, fixtures, and certain personal property can carry shorter recovery periods than the building shell, which is depreciated over 27.5 or 39 years.

Nothing about the total deduction changes. What changes is when you claim it and, potentially, what you owe when you sell.

How It Works

Four steps, in this order.

The analysis comes before the engagement. We would rather tell you a study does not fit than coordinate one that never earns back its cost.

Confirm the property qualifies

Acquired, constructed, or renovated commercial or residential rental property. We review the basis, the placed-in-service date, prior depreciation, and any earlier improvements.

Test whether you can use the deduction

Passive activity rules, material participation, real estate professional status, short-term rental treatment, and your other income all decide whether accelerated depreciation offsets tax this year or waits.

Model the benefit against the cost

Projected tax effect by year, the cost of the study, the expected hold period, and recapture on sale, modeled inside your multi-year plan rather than as a standalone number.

Coordinate the study and the filing

If it fits, we coordinate with an independent engineering-based specialist and align the result with your return preparer, including a change in accounting method for a property already in service where appropriate.

Where it often fits

  • A recently acquired, built, or renovated rental property with meaningful basis in components and land improvements
  • An owner with sufficient passive income, or whose rental activity qualifies for nonpassive treatment under the applicable participation and other eligibility rules
  • A hold period long enough that early deductions are worth more than the recapture that follows
  • A year with income the deduction can offset, or a predictable high-income year ahead

Where it usually does not

  • Passive losses with no passive income and no expected near-term ability to use them
  • A property likely to be sold soon, where recapture arrives before the timing benefit is earned
  • A small basis where the cost of the study consumes most of the projected benefit
  • A personal-use property that is not eligible for business or rental depreciation
The Tradeoff

Accelerated today, recaptured later.

Cost segregation shifts deductions forward. It does not erase them, and the acceleration has a cost on the back end that belongs in the decision from the beginning.

Recapture on sale

Accelerated depreciation increases recapture exposure when the property is sold. A short hold can turn the early benefit into a larger bill later.

Usability limits

Passive activity rules can suspend losses until you have passive income or dispose of the property. The deduction waits; the study fee does not.

Cost of the study

A defensible engineering-based study is a real expense. It has to be weighed against the projected benefit, not assumed away.

Documentation standards

Settlement statements, construction invoices, and precise basis tracking are required. Weak documentation is what turns an aggressive study into an exposure.

Where This Sits

The study is one decision inside a larger one.

Cost segregation only matters once the property and the ownership structure are settled. Who owns the building, how the purchase is funded, and how long you intend to hold it all change whether a study is worth running at all.

Real Estate StrategyFunding the purchase

Who Does What

Numbers & Company runs the tax analysis: whether the deduction is usable, what it is worth by year, and how it fits your plan.

An independent specialist performs the engineering-based study itself. Your return preparer files the result. We coordinate the three so they reflect the same facts.

A Measured Approach

Numbers & Company provides tax planning and advisory services. We do not perform engineering-based cost segregation studies, and we do not guarantee deductions, savings, audit outcomes, or investment results.

Whether a study produces a usable benefit depends on your specific facts, including basis, placed-in-service date, participation, other income, and holding period. Cost segregation studies are performed by independent specialists, and every engagement requires your own legal, tax, and financial due diligence.

Should you run a study?

Bring the property, the basis, and the year. We will model whether accelerating depreciation is worth it before anyone spends money on a study.