← Back to Tax Planning

Cost Segregation

A tax strategy that accelerates depreciation deductions on commercial real estate by reclassifying building components into shorter depreciation categories, generating significant upfront tax savings.

Strategy Source: Billionaire Wealth Strategies Verified: 2026-04-07

Definition

Cost segregation is an engineering-based tax study that identifies building components eligible for accelerated depreciation. Instead of depreciating an entire commercial property over 27.5 years (residential) or 39 years (commercial), specific components are reclassified into 5-year, 7-year, or 15-year categories, generating significantly larger deductions in the early years of ownership.

How It Works

A cost segregation study examines every component of a building: electrical systems, plumbing, flooring, landscaping, parking lots, and specialized equipment. Components that serve the building's function (structural walls, roof) remain on the standard schedule. Components that are personal property or land improvements are reclassified to shorter lives.

Combined with bonus depreciation provisions under Section 168, reclassified components can often be fully deducted in the first year of acquisition. For a $5 million commercial building, a cost segregation study might reclassify 20-30% of the cost into accelerated categories, generating $1-1.5 million in first-year deductions.

When Entrepreneurs Use This

Commercial real estate purchases: Any building acquisition over $1 million generally justifies the study cost
New construction: Cost segregation applied during construction is more precise and often yields higher reclassification percentages
Renovations and improvements: Tenant improvements and building upgrades can be studied for accelerated treatment
Portfolio optimization: Retroactive ("look-back") studies can be applied to buildings acquired in prior years

Dew Wealth Perspective

Cost segregation is most powerful when combined with QREP status, which allows real estate losses (including accelerated depreciation) to offset ordinary income. The Linchpin Partner coordinates the engineering study, ensures QREP qualification, and integrates the resulting deductions into the broader DEAPR tax strategy.

Frequently Asked Questions

Is a cost segregation study worth it for smaller properties?

Generally yes for properties valued at $1 million or more. The study typically costs $5,000-$15,000 and produces deductions many times that amount.

Can I apply this to a property I already own?

Yes. A look-back study captures all previously missed accelerated depreciation in a single year through a change in accounting method (Form 3115).

Disclosure

Certain portions of this publication may contain a discussion of potential benefits and results as of a specific prior date. Due to various factors, including changing market conditions and regulations, such discussion may no longer be reflective of current potential benefits and/or results. Please remember that past performance may not be indicative of future results. Different types of investments and strategies involve varying degrees of risk, and there can be no assurance that any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Dew Wealth or any of its advisory representatives), or any non-investment-related services, will be suitable for your portfolio or individual situation, or prove successful.

The potential savings and benefits discussed represent typical results based on the experience of existing clients. Individual results can and will vary based upon a variety of factors, such as the client's investment and financial circumstances, tax bracket, current insurance policy terms and insurance needs, and overall objectives. Neither the scope nor nature of the firm's services should be construed as guarantees of a particular outcome. Dew Wealth Management, LLC ("Dew Wealth"), an SEC-registered investment adviser located in Scottsdale, Arizona, provides the Fractional Family Office services described herein. Registration is not an endorsement of the firm by securities regulators, nor is it an indication that the adviser has attained a particular level of skill or ability.

The content herein is intended to serve as informational material only and is intended exclusively for the use of the person named herein. If you are not the intended recipient, please refrain from further dissemination and return or destroy all copies of this material in your possession. This content is not representative of any particular client experience or outcome and is instead intended to provide general information regarding the potential time and money savings that could be experienced, based on various assumptions, inputs, and data sources. Among other things, the results of the calculators are derived from your inputs, and consequently, errors or omissions in entering your data into the calculator could result in materially inaccurate outputs. Dew Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party and included or relied upon herein and takes no responsibility for same. Client experiences and outcomes can and will vary from those reflected herein, and these informational outcomes should not be construed as a direct or indirect guarantee of similar future results.

Not all services will be necessary or appropriate for all clients, and the potential value and benefit of the adviser's services will vary based upon a variety of factors, such as the client's investment and financial circumstances, tax bracket, current insurance policy terms and insurance needs, and overall objectives. Clients are free to accept or reject any recommendations provided by the firm and may choose to implement accepted recommendations with the professional(s) of the client's choosing. The effectiveness and potential success of the adviser's services can depend on a variety of factors, including but not limited to the manner and timing of implementation, coordination with the client and the client's other engaged professionals, and market conditions.

Dew Wealth Management, LLC ("Dew Wealth") is neither a law firm nor an accounting firm and does not provide legal or tax advice. Website visitors and clients should consult an attorney or tax professional regarding their specific legal or tax situation. Dew Wealth is not an insurance agency, but certain Dew Wealth representatives maintain insurance licenses in their individual capacities to allow for consultation on insurance needs and products. Neither Dew Wealth nor any individual insurance agent associated with Dew Wealth receives commission-based compensation for insurance sales. Past performance does not guarantee future results. All investing comes with risk, including the risk of loss.

By accessing, using, or receiving this Document, the Recipient acknowledges and agrees to be bound by the terms and conditions outlined at DewWealth.com/IP.