Cost Segregation

Cost segregation is an engineering-based study that breaks a building's cost into components with shorter tax lives, such as fixtures, carpeting and site improvements. Those pieces are written off on 5, 7 or 15 year schedules rather than the 27.5 years used for the building shell. The study changes taxes, not net operating income.

Without a study, the default house depreciates evenly at about $14,545 a year on its $400,000 building. If a study moved, say, $60,000 of that cost into 5 and 15 year classes, the early-year deductions would rise sharply and the later ones would fall.

NOI stays at $28,892 either way, because NOI is measured before depreciation. The benefit is in the timing of tax savings. Studies cost money, and faster deductions can mean more depreciation recapture on a sale, so they tend to make more sense on larger properties.