A Cost Segregation Study can be one of the most effective ways for commercial property owners to reduce taxable income and improve cash flow. By identifying and reclassifying certain building components into shorter depreciation categories, you can accelerate deductions and keep more money in your business.
However, while many owners know a study can deliver substantial tax benefits, they are less certain about when to do it. The timing of a cost segregation study can directly impact the size and immediacy of your savings. In other words, even if you qualify for cost segregation, starting at the right time can be the difference between a good result and a great one.
Below, we explore the best times to conduct a cost segregation study and why each scenario might be ideal for your property or business.
Right After Purchasing a Commercial Property
The best time to consider a Cost Segregation Study is immediately after acquiring a commercial or income-producing property. When you perform the study in the same tax year as your purchase, you can claim accelerated depreciation benefits right away on your upcoming tax return.
By doing the study early, your accountant can adjust the property’s depreciation schedule from the beginning, allowing you to take the maximum allowable deductions without the need for catch-up calculations. This approach is particularly beneficial if you are also financing the property, as the extra cash flow from tax savings can help offset mortgage payments in the first few years of ownership.
Shortly After Building or Renovating
Cost segregation is not just for purchased properties. If you have recently constructed a new building or completed significant renovations, you may be eligible to reclassify certain construction or improvement costs into shorter depreciation schedules.
For example, lighting systems, flooring, cabinetry, or specialized HVAC units used for manufacturing may qualify for five-, seven-, or fifteen-year depreciation instead of the standard 27.5 or 39 years. Conducting the study shortly after completion means you can start recovering costs faster and enjoy a stronger return on your investment from the beginning.
When Significant Capital Improvements Are Made
If you have owned a property for a while but have recently made major upgrades, this can be an excellent opportunity to perform a Cost Segregation Study. Improvements such as remodeling interiors, upgrading electrical systems, adding specialized equipment, or installing landscaping features often have shorter depreciation lives than the building structure itself.
When these changes are documented and analyzed through a cost segregation study, you can accelerate depreciation for those specific elements, creating immediate tax savings. This can be especially helpful if the improvements were costly or financed through loans that require quick payback.
Before Filing the First Tax Return After Acquisition or Construction
Timing a study before your first tax return post-acquisition or post-construction allows you to maximize benefits without amending past returns. Your CPA can incorporate the study results directly into the current year’s depreciation schedule.
This approach avoids the complexity of retroactive adjustments and ensures you get the highest possible deduction starting in year one. It also provides clarity for long-term tax planning since your accelerated depreciation schedule will be in place from the start.
During a High-Income Year
Another strategic time for a Cost Segregation Study is during a year when your business expects higher-than-usual taxable income. By accelerating depreciation, you can reduce your tax liability for that year and keep more of your profits.
For example, if your company anticipates selling a business unit, experiencing a surge in sales, or receiving a large contract, it may be wise to complete a cost segregation study to offset that spike in taxable income. This proactive approach can create significant cash flow relief in years when you need it most.
When Bonus Depreciation Rules Are in Your Favor
Tax laws, including bonus depreciation rules, can make certain years more advantageous for cost segregation. In years when 100 percent bonus depreciation is available, property owners can immediately deduct the entire cost of qualifying assets in the first year.
A timely cost segregation study allows you to identify those qualifying assets and apply bonus depreciation right away. Keeping track of changing tax legislation with your CPA and cost segregation specialist ensures you do not miss out on these limited-time benefits.
Even Years After Purchase (Through a Look-Back Study)
While earlier is generally better, it is not too late to benefit from cost segregation if you have owned your property for several years. A “look-back” study allows you to apply cost segregation retroactively and claim catch-up depreciation through a one-time adjustment on your current tax return.
This process does not require you to amend prior years’ returns. Instead, the IRS allows you to file a Form 3115, which lets you adjust your depreciation schedule and take the entire missed amount as a single deduction in the present year. This can create a substantial one-time cash flow boost.
When Selling or Disposing of Assets
Timing a cost segregation study before selling a property can sometimes allow you to identify assets with shorter depreciation lives and plan for potential recapture tax. While this requires careful tax planning, understanding the breakdown of your property’s components can give you an advantage in structuring the sale and forecasting your after-tax proceeds.
How to Decide the Best Time for Your Property
Every property owner’s situation is unique, so the “best time” for a Cost Segregation Study depends on your goals, tax position, and property type. Here are a few questions to help guide your timing decision:
Have you purchased, built, or renovated recently?
Are you entering a year with higher-than-expected taxable income?
Are there favorable tax laws in place, such as bonus depreciation?
Could a look-back study help you recover missed deductions?
Working with an experienced cost segregation provider ensures you get accurate asset classification and maximize benefits, no matter the timing.
Conclusion
The ideal time to conduct a Cost Segregation Study is often right after you purchase, build, or renovate a commercial property. However, high-income years, favorable tax law periods, or even years after purchase can still offer excellent opportunities to accelerate depreciation and improve cash flow.
By aligning your study with your financial goals and tax strategy, you can turn a one-time analysis into a long-term advantage for your business.
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