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Cost Segregation
A tax strategy that accelerates depreciation by reclassifying building components into shorter-lived asset categories.
Definition
Cost segregation is a tax engineering strategy where a specialized study identifies building components that can be depreciated over 5, 7, or 15 years instead of the standard 27.5 or 39 years. Items like flooring, cabinetry, appliances, landscaping, parking lots, and certain electrical and plumbing components qualify for accelerated schedules. A cost segregation study typically costs $5,000-$15,000 but can generate hundreds of thousands of dollars in first-year tax deductions, especially when combined with bonus depreciation. The strategy is most beneficial for properties worth $500,000 or more. It is one of the most powerful and underutilized tax planning tools in real estate.
How This Relates to DSCR Loans
Cost segregation does not affect DSCR qualification but dramatically improves after-tax returns on DSCR-financed properties, making the investment more profitable overall.
Related Terms
Bonus Depreciation
A tax provision allowing immediate deduction of a large percentage of qualifying asset costs in the first year.
Depreciation
A tax deduction that accounts for the wear and tear of a property over its useful life.
Passive Income
Income from rental properties or businesses in which the taxpayer does not materially participate.
Depreciation Recapture
The IRS requirement to pay taxes on accumulated depreciation deductions when a property is sold.
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