How Often Should You Conduct A Cost Segregation Study?

Cost segregation is an essential tax strategy that offers property owners an opportunity to save money on taxes. This strategy helps property owners based on the premise that not all aspects of a building should be subject to the same tax treatment. Rather, assets within a building have different depreciation schedules, and by segregating these assets, property owners can accelerate depreciation and reduce their tax liability. A cost segregation study is the first step in identifying the value of property assets, but how often should you conduct one? In this blog post, we’ll delve into the topic and help you understand the ideal frequency for conducting a cost segregation study.

When it comes to determining how often a cost segregation study should be done, several factors come into play. Generally, it is recommended that property owners obtain a cost segregation study every time they undergo significant renovations, purchase new property or make significant leasehold improvements. This is because these activities can significantly impact the value of the assets within the property, and it’s essential to capture them accurately for tax purposes.

Additionally, cost segregation studies are recommended for older properties, as older properties may have had assets that were previously undervalued in prior years. Since depreciation schedules cannot be changed retroactively, a cost segregation study can ensure that building owners have properly captured all the available tax breaks.

It is worth noting that the IRS has not set a specific time limit between cost segregation studies. As such, the frequency of these studies typically depends on the specific circumstances surrounding a property. However, as a general rule, experts recommend conducting a cost segregation study every five years to ensure that property owners are getting the most significant tax benefits possible.

Another key factor to consider is the cost of the study itself. While the potential tax savings from a cost segregation study can be substantial, the cost of the study is also a significant factor. As such, property owners need to consider the costs of the study against the potential tax savings to estimate whether it is financially viable or beneficial to undertake a cost segregation study.

Lastly, the nature of the business in which the property is used also comes into play. Businesses that have shorter life expectancies, such as restaurants, which typically go through renovations more frequently than other business types, should also conduct cost segregation studies more frequently.