Current Issues in Cost Segregation

Tax Professionals Resource
August 31, 2012 — 1,416 views  
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Different types of property are subject to varying levels of taxation and fit into several categories for accounting purposes. Because of this, it is important for individuals and businesses to understand what they own, how it is classified and what type of taxes must be paid for it.

The process of sorting out this complicated information is a called cost segregation, which can have a large impact on how much someone owes - or is exempt from owing - in taxes. To know how to deal with this, it is important for property owners to stay abreast of contemporary issues in cost segregation.


The whole point of cost segregation is to understand how different property types are taxed. Therefore, it is crucial that individuals have a good grasp on the different categories of personal assets.

In general, property is segmented into four sections - personal property, land improvements, land and buildings. The last of these, due to the extreme variability of residential and professional structures, should be subdivided into more groups, such as doors, walls, floors, etc.


One of the most important things to understand about property taxation is the principle of depreciation. As the length of ownership of a piece of property increases its value typically decreases. However, following the information from the previous section, it is important to understand how different types of property depreciate. For land and personal property, this is fairly straightforward - time can wear on real estate and, therefore, incrementally devalue it.

However, not all property depreciates at the same rate. Plumbing and electrical systems, for example, typically lose value at a faster rate. Because of this, it is important for property owners to periodically hire a professional for a cost segregation analysis to inform them of the most fruitful ways to divide their holdings into different categories. By applying some property to an accelerated depreciation tax bracket, it is possible for an individual to receive thousands of dollars in tax benefits.

Time frame

One common mistake made in cost segregation is waiting too long to start the process. Ideally, an analysis should be done during the construction phase to better separate the different types of property and utilities as they are being installed. This can help keep all property straight and ensure that everything is properly placed in its respective tax bracket.

Tax Professionals Resource