Cost Segregation Planning: Accelerating Depreciation Is Valuable Only When the Taxpayer Can Use It

Cost segregation accelerates depreciation by identifying building components with shorter recovery periods. The deduction can be valuable, but only if the taxpayer can use it and understands the future recapture, state and disposition consequences.

Start with a defensible study

A quality cost-segregation analysis identifies assets and supports classifications using engineering and tax principles. The tax practitioner should understand the scope, methodology and property facts rather than treating a percentage allocation as self-proving.

Accelerated depreciation must pass the loss limitations

Passive-activity rules, basis, at-risk limits and §461(l) may defer the deduction even when depreciation is correctly computed. Model the taxpayer’s ability to use the deduction before selling the strategy.

Bonus depreciation can change the timing

Shorter-life assets may be eligible for bonus depreciation under current law. Because bonus percentages can change by year and legislation, use current reference tables rather than hard-coded assumptions.

Recapture and disposition are part of the economics

A future sale can trigger §1245 or other recapture and may require component-level disposition analysis. A deduction accelerated today is not always a permanent tax saving.

Late studies require method-change analysis

A taxpayer may be able to implement a cost-segregation study after the placed-in-service year through accounting-method procedures rather than amending every prior return. Verify current Form 3115 and automatic-change authority.