If you’re a property owner — particularly one in real estate or owning a short-term rental business — improving your cash flow is a top priority.
One of the smartest and most underutilized ways to boost cash flow is through a cost segregation study (cost seg study).
While it’s a strategy primarily used for tax benefits, a cost segregation study can provide an immediate boost to your cash flow by accelerating your depreciation deductions, which in turn can reduce your tax burden.
If you’re looking to improve your cash flow while saving thousands in taxes, this strategy could be a game-changer. Here’s everything you need to know.
🤔 What is a Cost Seg Study?
A cost segregation study is a tax strategy that breaks down a property’s components into shorter depreciation categories. Instead of depreciating the entire property over the typical 27.5 years (for residential properties), the study identifies certain components that can be depreciated over 5, 7, or 15 years.
This means you can accelerate depreciation deductions on parts of your property, such as:
- Appliances
- Flooring
- Lighting
- Landscaping
- Furniture
- And more
By shifting some of the property’s depreciation to faster timeframes, you can significantly reduce your taxable income in the early years of owning a property.
💥 How Does a Cost Seg Study Improve Cash Flow?
Here’s the key:
By accelerating depreciation, you’re lowering your tax liability in the early years of ownership. Instead of waiting decades to depreciate the full cost of your property, a cost segregation study allows you to depreciate parts of your property in just a few years — which directly lowers your taxable income.
Why does this matter?
Lower taxable income = lower taxes = more money in your pocket.
The more you can deduct in the first few years, the more cash you’ll have available for other uses — whether that’s reinvesting in new properties, paying down debt, or improving your current property.
💡 Real-Life Example
Imagine this scenario:
You’ve just purchased a $1,000,000 commercial building or short-term rental property. Without a cost segregation study, you would typically depreciate the property over 27.5 years (for residential) or 39 years (for commercial).
Let’s say a cost segregation study identifies that $200,000 of your property can be depreciated over 5 to 15 years. Thanks to bonus depreciation (available through 2026), you can take a 100% deduction on that $200,000 immediately.
In your first year of ownership, you could save a significant amount on taxes — which translates to more cash in your pocket. For a high-income earner, these savings can easily be in the tens of thousands of dollars.
That’s cash flow you can use right now.
⚡ The Benefits of Accelerated Depreciation for Cash Flow
Using a cost segregation study to accelerate depreciation offers several key benefits for your business:
- Tax Reduction: By accelerating deductions, you reduce your tax burden, allowing you to keep more of your income.
- Faster ROI: You’ll see a return on your investment more quickly by improving your cash flow early on.
- Capital for Expansion: More cash flow means you can use that money to reinvest in additional properties, grow your business, or improve your existing assets.
- Debt Repayment: The tax savings can also be directed toward paying down any high-interest loans or mortgages.
- Improved Financial Flexibility: Lowering your taxes and increasing your cash flow gives you more financial breathing room — especially important for businesses that have seasonal income or tight margins.
📉 When Should You Consider a Cost Seg Study?
A cost segregation study makes the most sense for property owners who are:
- Investing in new properties or commercial buildings.
- Seeking ways to reduce their tax liability and improve cash flow.
- Owning short-term rental properties, where the active participation rules can allow for even greater depreciation benefits.
- Looking for upfront tax savings and not planning to sell the property within the next few years.
You can also benefit from cost segregation if you’ve owned your property for a while but haven’t yet conducted a study. If your property qualifies, you can apply a cost seg study retroactively for prior years, potentially unlocking significant tax deductions for the past few years as well.
🧠 Key Considerations Before Getting a Cost Seg Study
Before jumping in, keep these factors in mind:
- Cost of the Study: A cost segregation study typically involves an engineering or accounting firm. While it’s an investment, it’s often well worth the money when you see how much you can save.
- Long-Term Ownership: If you plan to sell your property within a few years, consider the recapture rules. While the depreciation deductions provide immediate tax relief, selling your property could lead to some of those deductions being “recaptured” and taxed.
- Tax Impact: Make sure to consult with a tax professional to understand the long-term impact of your depreciation deductions, especially when it comes to the recapture rules upon sale.
- Bonus Depreciation Phasing Out: Bonus depreciation (100%) is available until 2026, but it will begin phasing out in 2023. The benefit starts at 80% in 2023, 60% in 2024, and so on. Act sooner rather than later if you want to maximize deductions.
✅ Is Cost Segmentation Right for You?
If you own income-producing real estate or a short-term rental property, a cost segregation study could be an excellent tool to improve your cash flow by saving on taxes. While the upfront costs of the study might seem high, the long-term benefits far outweigh the initial investment.
At Integrated Financial Solutions, we help property owners and business investors use strategies like cost segregation to maximize cash flow, reduce tax burdens, and grow their wealth.
Ready to see how a cost seg study could impact your cash flow?
Contact us today to learn more.
