One significant tax benefit of owning residential rentalproperty or non-residential commercial or investment property is depreciation—adeduction you get without spending any additional money.

But regular depreciation for real property is slow.Residential rental property is depreciated over 27.5 years and non-residentialproperty over 39 years, providing a relatively small deduction each year.

Fortunately, there is a way you can speed up yourdepreciation deductions—especially during the first year or years you own theproperty: cost segregation.

“Cost segregation” is the technical term for separatelydepreciating the elements of property that are not real property. These areelements other than land, buildings, and building components. They include

·      improvements made to the land, such aslandscaping, swimming pools, paved parking areas, and fences; and

·      personal property items inside a building thatare not building components—for example, refrigerators, stoves, dishwashers,and carpeting in residential rentals.

Using cost segregation does not increase a property owner’stotal depreciation deductions, but it does accelerate them over the first fewyears because personal property has a five- or seven-year depreciation periodand land improvements a 15-year period.

In addition, by using bonus depreciation and/or Section179 expensing, owners can deduct all or most of the cost of personal propertyand land improvements the first year they own the property—providing apotentially enormous first-year deduction.

A cost segregation study must be conducted to identifywhich building elements are personal property and land improvements and then todetermine their depreciable basis. Studies can be conducted by engineers ordone more cheaply with other methods that the IRS views as less reliable.

Cost segregation may not be advisable for every propertyowner—for example, where it results in a loss that can’t be deducted due to thepassive loss rules, or where the owner intends to sell the property within afew years and has to recapture as ordinary income the cost-segregateddepreciation deductions.

The best time to perform a cost segregation study is thesame year you buy, build, or remodel your real property. But you can wait untila future year—perhaps when you have enough rental or other passive income touse the speeded-up depreciation deductions.

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