Real estate investors are paying thousands for 'cost segregation studies,' a tax strategy to increase cash flow. Here's how they work and who can benefit.

"Owning rental property comes with significant tax advantages. So significant that, when used strategically, they can help investors scale solely through tax savings. Jill Green, a full-time physician who invests in real estate with her husband on the side, has used tax savings to grow her portfolio by roughly one property per year. One of the strategies behind her growth: cost segregation studies, which allow her and other real estate investors to accelerate depreciation."

"Depreciation allows investors to deduct the cost of a building over its IRS-defined useful life: 27.5 years for residential properties and 39 years for commercial properties. To calculate annual depreciation, owners divide the building's value (excluding land) by the applicable timeline. For example, if you buy a $1 million commercial building, standard depreciation allows you to deduct 1/39 of its value each year. A cost segregation study changes that math."

Cost segregation studies accelerate depreciation by breaking a property into components eligible for shorter IRS recovery periods, such as five, seven, or 15 years. Engineers analyze internal and external elements like flooring, electrical, plumbing, and HVAC to reclassify portions of a building from the standard 27.5- or 39-year schedules. Accelerated depreciation increases near-term deductions, reducing taxable income and improving cash flow. Studies typically cost a few thousand dollars and provide outsized benefits for certain investors depending on purchase price, property type, and tax situations, making them worthwhile in many but not all cases.

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