Real Estate Investment Mini Portal

How does all this black magic work? With a cost segregation report, all the bricks are figuratively torn down and put into different piles. Some piles are eligible for instant depreciation (unlike the hominy grits in My Cousin Vinny), one pile might be a 5-year pile and the remaining pile might revert to the 27.5- or 39.0-year typical rental or business use depreciation.

Technically and with full-on geek-speak, cost segregation separates property elements that are “dedicated, decorative or removable” from those that are “necessary and ordinary for operation and maintenance of the building.” These piles are called asset classes and they are maintained separately within your property’s depreciation schedule.

There is a depreciable property value of about $500,000 where things change. Below that value, the statistical reliability and therefore predictability is very good, and most cost segregation reports can rely on basic property vitals such as address, age, price, square footage, etc. Conversely, if your property is above $500,000ish, then a “full” cost segregation report is needed where a specialist with an appraiser’s mind analyzes every component of the property and essentially does the brick and pile thing mentioned above. Appliances, floor coverings, window treatments, among several weird things are considered 5-year property. Decks, driveways and landscaping are considered 15-year property.

In other words, you are identifying certain elements of the property that are eligible to be depreciated using a shorter period of time.

Are there pitfalls and problems? Yes.