What is a cost segregation study and what tax benefit does it provide real estate investors?

A cost segregation study is performed by engineering and tax professionals who identify building components that qualify for shorter depreciation lives under MACRS. For example, carpet, certain plumbing fixtures, and specialized electrical systems may qualify as 5-year or 7-year property, while land improvements like parking lots and landscaping are 15-year property. Reclassifying even 20% to 30% of a building's value into these accelerated categories can generate substantially larger depreciation deductions in the first few years of ownership, significantly reducing taxable income. When combined with bonus depreciation, first-year deductions can be massive.