Self-storage facilities are a booming asset class in commercial real estate, offering investors stable cash flow and high demand. However, many self-storage owners overlook a key tax strategy that can significantly improve their bottom line: cost segregation. By accelerating depreciation deductions, cost segregation allows self-storage owners to reduce taxable income and increase cash flow.
What is Cost Segregation?
Cost segregation is an IRS-approved tax strategy that reclassifies certain components of a commercial property into shorter depreciation schedules. Rather than depreciating an entire self-storage facility over 39 years (or 27.5 years for residential rental property), a cost segregation study identifies assets that can be depreciated over 5, 7, or 15 years. This front-loads depreciation expenses, resulting in substantial tax savings in the early years of ownership.
How Cost Segregation Applies to Self-Storage Properties
Self-storage facilities contain numerous assets that qualify for accelerated depreciation, including:
- Site improvements: Paved driveways, fencing, landscaping, outdoor lighting, and signage can be depreciated over 15 years instead of 39 years.
- Electrical and plumbing systems: Specialized electrical work, security systems, and climate control features may be reclassified to 5- or 7-year depreciation schedules.
- Interior components: Office fixtures, specialized storage systems, and certain building finishes can also qualify for shorter depreciation periods.
- Personal property: Equipment such as security cameras, gate access systems, and movable storage components can be depreciated in as little as 5 years.
Benefits for Self-Storage Owners
- Increased Cash Flow – By accelerating depreciation, self-storage owners can defer tax payments, keeping more money available for reinvestment and operational improvements.
- Reduced Taxable Income – Larger depreciation deductions lower taxable income, reducing overall tax liability.
- Maximized Return on Investment (ROI) – More upfront tax savings allow owners to reinvest in expansions, renovations, or acquisitions.
- Bonus Depreciation Opportunities – Under the current tax laws, self-storage owners may be able to take advantage of 100% bonus depreciation on qualifying assets, allowing for immediate expensing of certain costs.
- Improved Exit Strategy – A cost segregation study can benefit property owners when selling by optimizing depreciation recapture strategies.
When to Conduct a Cost Segregation Study
A cost segregation study is most beneficial when:
- A new self-storage facility is purchased, constructed, or renovated.
- An existing property has not yet undergone a study, even if owned for several years.
- A facility is undergoing significant improvements or expansions.
Partner with Experts to Maximize Savings
A professional cost segregation study, conducted by engineers and tax experts, ensures accurate asset reclassification and compliance with IRS regulations. By leveraging this tax strategy, self-storage owners can unlock thousands—if not millions—of dollars in tax savings while optimizing their long-term financial strategy.
If you own or are considering investing in self-storage properties, contact us at CSSI to determine how much you could save. Don’t leave money on the table—maximize your tax benefits today!