Valuation Advisory Cost Segregation Services

Why should a cost segregation study be performed?

Property owners who have recently acquired, constructed, renovated, or expanded real estate assets can use a cost segregation study to help recover their capital investments quickly, as opposed to slowly over the standard tax-life of real property. Results of a cost segregation can help a taxpayer in the following ways:

Maximize tax savings by adjusting the timing of deductions. Depreciation expenses are accelerated and tax payments may be lessened in the earlier stages of owning the property, when the tax life is shortened. By shortening the tax life and allowing these larger depreciation expenses, the taxpayer can free up cash flow for further investment opportunities or other business needs.

Cost segregation also helps document costs and provides an audit trail for the IRS. By performing a cost segregation study, assets can be properly documented at the earliest possible time to help support responses to IRS inquiries, thus providing an audit trail.

What properties are eligible for cost segregation studies?

Commercial and residential rental properties that have been acquired, constructed, renovated, or expanded may be eligible for a cost segregation study, depending on the property and the owner’s tax circumstances. Properties valued at more than $200,000 typically show a benefit from a study. The best time to perform a study is as soon as construction is complete, or shortly before or after a building is purchased. Owners of previously acquired or constructed properties can also benefit from “catch-up” depreciation, which may allow previously unclaimed depreciation to be captured in the year the study is completed, potentially improving first-year cash flow. Eligibility and filing requirements, including an accounting method change (IRS Form 3115), depend on the taxpayer’s circumstances, and owners should consult their tax advisors. Catch-up depreciation is typically most beneficial on a building that is less than 7 years old.

Retroactive cost segregation studies for existing properties to increase cash flow

Owners who did not complete a cost segregation study when acquiring, constructing, or renovating a property may still benefit from a retroactive study. A retroactive cost segregation study reviews previously capitalized building costs to identify assets that may qualify for shorter depreciation periods. Depending on the property’s tax history and applicable IRS requirements, eligible taxpayers may be able to claim previously unrecognized depreciation in the year the study is completed, which can improve cash flow without a new acquisition or construction project. Property owners should consult their tax advisors about eligibility, filing requirements, and potential benefits. Cost segregation can also reveal opportunities to reduce real estate (property) tax liabilities and identify certain sales and use tax savings opportunities.

Bonus depreciation allows taxpayers to deduct a specified percentage of depreciation in the year the qualifying property is placed in service. The adjusted basis of the qualifying property is reduced by the allowable amount of bonus depreciation before the remaining depreciation deductions are computed for the placed-in-service year and subsequent years.

Eligible Property

To qualify for bonus depreciation, property must be one of the following, and may be new or, in some cases, used if it meets IRS acquisition requirements:

• MACRS property with a recovery period of 20 years or less
• Depreciable computer software
• Water utility property
• Qualified Improvement Property

Certain acquisition requirements and placed in service dates must also be met in order to qualify for bonus depreciation and are discussed in more detail below.

The Tax Cuts and Jobs Act increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after 9/27/2017, and before 1/1/2023. Bonus Depreciation percentage is 80%, when placed in service between 1/1/2023 and 12/31/2023; 60%, when placed in service between 1/1/2024 and 12/31/2024; 40%, when placed in service between 1/1/2025 and 1/19/2025.

The One Big Beautiful Bill Act (OBBBA) returned the bonus depreciation percentage to 100% for qualified property acquired and placed in service after 1/19/2025.

Taxpayers may elect out of the additional first-year depreciation. State tax treatment of bonus depreciation may differ from federal treatment. Property owners should consult their tax advisors before relying on any projected tax savings.

What is a cost segregation study for commercial real estate?

A cost segregation study is an analysis that identifies and classifies building components and improvements for federal income tax depreciation purposes. By separating qualifying assets into shorter depreciation periods under MACRS, commercial property owners may accelerate depreciation deductions, reduce near-term tax liabilities, and improve cash flow.

What types of properties does Kidder Mathews perform cost segregation studies for?

Kidder Mathews performs cost segregation studies for multifamily and residential rental properties, short-term rentals, industrial and manufacturing facilities, distribution centers, office buildings and business centers, medical offices, retail properties, shopping centers and restaurants, hotels, resorts and gaming properties, golf courses, data centers, and other specialty-use properties. Acquired, constructed, renovated, and expanded properties may qualify, depending on their characteristics and the owner’s tax circumstances.

How does a cost segregation study help commercial property owners reduce taxes?

A cost segregation study identifies building components that may be depreciated over shorter recovery periods rather than the standard 27.5-year (residential rental) or 39-year (nonresidential) real property periods. Accelerating these deductions may reduce taxable income in earlier years of ownership, potentially improving cash flow and freeing up capital for investment or operations.

Can a cost segregation study be performed on a property I purchased years ago?

Often, yes. A retroactive cost segregation study reviews previously capitalized building costs to identify assets that may qualify for shorter depreciation periods. Depending on the property’s tax history and applicable IRS requirements, eligible taxpayers may be able to claim previously unrecognized depreciation in the year the study is completed through an accounting method change. Owners should consult their tax advisors about eligibility and filing requirements.

When is the best time to perform a cost segregation study?

The ideal time is generally as soon as construction, renovation, or expansion is complete, or shortly before or after a property is purchased. Early studies help establish accurate asset classifications and detailed documentation. Owners of existing properties may also benefit from a retroactive study.

How does bonus depreciation affect a cost segregation study?

Bonus depreciation allows eligible taxpayers to deduct a specified percentage of the cost of qualifying property in the year it is placed in service. A cost segregation study helps identify and document building components, such as personal property and land improvements, that may qualify. Under the One Big Beautiful Bill Act, the 100% rate is permanent for qualified property acquired and placed in service after January 19, 2025. Eligibility depends on acquisition and placed-in-service dates, asset classification, and the taxpayer’s circumstances, and state tax treatment may differ.

Who performs Kidder Mathews’ cost segregation studies?

Kidder Mathews’ cost segregation studies are performed by experienced professionals with engineering and construction backgrounds. They perform the entire study from start to finish, including the on-site inspection, and follow the methodology outlined in the IRS Cost Segregation Audit Techniques Guide. This approach helps establish detailed asset records and supporting documentation in the event of IRS review.

How do I contact the Kidder Mathews Cost Segregation team?

To discuss a cost segregation study for your property, contact Ryan Begley, Executive Vice President, Cost Segregation Manager, at 602.513.5157 or ryan.begley@kidder.com, or request a quote.

Who leads Kidder Mathews Valuation Advisory Services?

Randy Clemson, Executive Vice President of Kidder Mathews Valuation Advisory Services, leads the firm’s valuation advisory group companywide across the Western U.S. and can be reached at 602.513.5158 or randy.clemson@kidder.com.

Randy Clemson, Executive Vice President, Valuation Advisory Services
602.513.5158 | randy.clemson@kidder.com