Property Overview
This case study focuses on a vacation rental property acquired in May 2023 for $1,123,653 (excluding land). The cost segregation study was applied to the 2023 tax year, with a 37% tax rate and an 8% present value rate of return.
The property benefited from 80% bonus depreciation, allowing the owner to accelerate deductions and reduce taxable income. By reallocating property components into shorter depreciation periods, the study helped maximize financial benefits and improve cash flow.
| Property Type | Short-Term Rental |
| Purchase price(less land) | $1,123,653 |
| Building sqft | – |
| Entire site sqft | – |
| Data acquired | May 2023 |
| Tax year study applied | 2023 |
| Tax rate | 37.0% |
| Present value rate of return | 8% |
| Bonus depreciation | 80% |
Building Allocation After Study
Cost Segregation Study Benefits
Through a cost segregation study, the vacation rental property achieved a first-year tax savings of $59,666, with a cumulative net present value (NPV) benefit of $43,065. When reinvested, these savings equate to a future value of $866,261.
The study reclassified building assets into accelerated depreciation categories, with $168,548 allocated to 5-year property, $29,215 to 15-year property, and $925,890 to 27.5-year property. These strategic reclassifications allowed the property owner to take advantage of front-loaded deductions, enhancing long-term profitability.
Financial Benefits Achieved
| Immediate Tax Savings | $59,666 |
| NPV Over 10 Years | – |
| NPV Over Remaining Life of Property | $43,065 |
| Future Value of Invested Savings | $866,261 |
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Frequently Asked Questions
What is the benefit of a cost segregation study?
A Cost Segregation study reduces a building owner’s income taxes up to $100,000 for every $1 mill in building costs. The tax savings are anywhere from 3-10% of the building cost.
What is a cost segregation study?
A cost segregation study is an engineering-based analysis that reclassifies commercial real estate components and improvements between real and personal property. This reclassification accelerates the depreciable lives from 27.5- or 39-years to 5-, 7-, or 15-years.
What real estate components can typically be accelerated through a cost segregation study?
A cost segregation study can typically accelerate depreciation on many building components, including:
- Electrical installations (e.g., dedicated computer power, special lighting)
- Plumbing systems (e.g., kitchen plumbing, bathroom fixtures)
- HVAC components
- Flooring (e.g., carpet, vinyl, tile)
- Window treatments
- Cabinetry and countertops
- Decorative finishes and millwork
- Security systems
- Fire protection systems
- Parking lot paving and lighting
- Landscaping and site improvements
- Certain building exterior components
Does my property qualify for a cost segregation study?
Your property likely qualifies if:
- It’s a commercial building or building improvements with a remaining depreciable basis
- The building or improvement cost basis is at least $200,000
- You anticipate holding the property for at least three years
When should a cost segregation study be done?
A study can be completed in the year the building or improvements are placed in service. However, it can also be done on properties acquired or constructed since 1986 without amending prior years’ tax returns.
How long does a cost segregation study take?
A cost segregation study typically takes approximately three to six weeks from the time we receive all the appropriate documentation.
What information is needed to complete a cost segregation study?
Generally, we request:
- A current tax depreciation schedule
- Building cost information
- Blueprints or architectural drawings and renovation plans, if applicable
- Access to the property for an on-site inspection and walk-through
How much can I save with a cost segregation study?
Savings vary, but within the first five years of building ownership, owners could save up to $100,000 for every $1 million in building costs.
Will a cost segregation study trigger an audit?
No, a properly conducted cost segregation study has never triggered an audit. In fact, if you are audited for any reason and the study comes into question, CSSI will defend the audit at no cost.
Can a cost segregation study be done on buildings not yet constructed?
While a full study can’t be done on unconstructed buildings, CSSI can provide estimates on tax savings from your construction budgets. A full study will be delivered when construction is complete.
