1.What types of property qualify for cost segregation?
Commercial real estate (39-year property), residential rental property (27.5-year), and mixed-use property all qualify. The study reclassifies portions into 5-year property (carpeting, certain fixtures, specialized equipment), 7-year property (office furniture, certain land improvements), and 15-year property (landscaping, parking lots, sidewalks, fencing).
2.How much does a cost segregation study cost and is it worth it?
A professional cost segregation study typically costs $5,000–$15,000 for a $1M–$5M property, scaling upward for larger assets. For a $3M office building where 25% is reclassified, the first-year depreciation benefit at a 37% combined federal/state rate commonly exceeds $150,000, a 10x+ return on the study cost.
3.Does cost segregation trigger depreciation recapture when I sell?
Yes. §1245 recapture applies to personal property (5- and 7-year assets), taxed as ordinary income. §1250 unrecaptured gain applies to structural components, taxed at a maximum 25% federal rate. However, the time value of money, years or decades of compounding on deferred taxes, nearly always makes cost segregation advantageous even after accounting for eventual recapture. A 1031 exchange can indefinitely defer that recapture.
4.Can I apply cost segregation to property I already own?
Yes. Under Rev. Proc. 2002-9 and the §481(a) catch-up adjustment rules, you can perform a 'look-back' cost segregation study on property placed in service in prior years and claim the cumulative missed depreciation in a single tax year, without amending prior returns. This catch-up deduction can be substantial for long-held property.
5.How does cost segregation interact with the passive activity rules?
Unless you qualify as a Real Estate Professional under IRC §469(c)(7), cost segregation losses are passive and can only offset other passive income, not wages or business income. However, qualifying as a Real Estate Professional transforms those losses into non-passive deductions usable against all ordinary income, dramatically multiplying the strategy's value.