When is a Cost Segregation Study Not Worth It?

[Julio Gonzalez]

Cost segregation is one way property owners can reduce their tax burdens. But there’s a lot to consider before you take the plunge. It all comes down to your specific property type and individual situation.

Here’s when cost segregation may not be ideal:

The Property is Near the End of Its Useful Life

Cost segregation tends to be the most beneficial when you can accelerate depreciation in the early years of ownership.

If your property is near the end of its useful life, there will be less value to depreciate, and cost segregation will be less impactful.

The Property Value Isn’t High Enough

A cost segregation study is an investment. That’s why it’s so important to measure the cost of the study against the potential tax savings it could generate first.

Smaller properties, particularly those under $500,000, may not generate enough of a return to justify the cost.

You Plan to Sell the Property in the Near Future

If you plan to sell the property within the next decade, you should consider depreciation recapture.

Although accelerated depreciation offers immediate tax savings, those savings could be partially “recaptured” as taxes when you sell the property (which reduces the overall advantage of cost segregation).

What You Can Do Instead (Alternative Strategies)

If cost segregation doesn’t turn out to be the best option for you, there are alternative tax strategies to consider.

1031 Exchange

A 1031 exchange allows you to defer capital gains taxes from the sale of an investment property by reinvesting the proceeds into a like-kind property. The exchange must be done within a specific timeframe, but it can be a viable alternative when cost segregation isn’t the strongest option and you plan to sell your property.

Bonus Depreciation

With bonus depreciation, you can deduct a large portion of a qualifying asset’s cost (assets with class lives of 20 years or less) in the first year you put it in service.

In 2025, bonus depreciation is set at 40%, so you can deduct 40% of the asset’s cost right away.

Strategic Improvements and Repairs

Careful timing and classifying expenditures as improvements or repairs can impact your deductions.

The results are sometimes less dramatic than those of cost segregation, but they can still offer immediate tax benefits.

Of course, when considering any of these strategies, it’s important to partner with a skilled tax strategist who can help you understand the pros and cons for your individual situation and property.

What has your experience been with cost segregation or any of these alternative strategies?