Frequently Asked Questions

Healthcare properties have unique aspects that often make them excellent candidates for cost segregation. These properties typically contain specialized electrical and plumbing systems installed specifically for medical equipment, medical gas systems throughout the facility, lead-lined walls in X-ray rooms, dedicated HVAC systems for clean rooms or surgical suites, and extensive millwork and cabinetry for operatories and laboratories.

As a result, medical and dental offices often achieve 25-35% reclassification rates, with equipment-heavy practices seeing even better results. Don't forget to consider Section 179 expensing for qualifying medical equipment purchased separately from the building.

State treatment of cost segregation and accelerated depreciation varies significantly across jurisdictions. Some states don't conform to federal depreciation rules and require separate depreciation schedules using different methods or recovery periods. Bonus depreciation rules particularly vary, with some states allowing full federal bonus depreciation, others allowing partial amounts, and some allowing none at all.

Many states have decoupling provisions that became effective at various points over the past decade. These differences require careful planning, including reviewing each state's specific rules where you have tax obligations, potentially needing state-specific considerations in your study, addressing multi-state allocation issues for properties or businesses operating in multiple states, and tracking the growing differences between federal and state tax basis. Professional guidance is often essential for multi-state property owners.

Yes, cost segregation applies to leasehold improvements with some special considerations. Leasehold improvements are depreciated over 39 years for nonresidential property, or over the lease term if it's shorter than the applicable recovery period. Qualified Improvement Property may qualify for bonus depreciation under current law, making it particularly attractive for cost segregation.

Tenant improvements can be studied regardless of who pays for them, and the fact that improvements will eventually revert to the landlord doesn't eliminate the current tax benefits for the tenant. For ground leases, improvements built on leased land qualify for cost segregation using the appropriate recovery periods regardless of the lease term. However, you should consider whether certain costs should be amortized over the lease term rather than depreciated.

Distinguishing between repairs and capital improvements is crucial for tax treatment and cost segregation eligibility. Capital improvements that qualify for cost segregation include betterments that improve the property beyond its original condition, restorations that return property to working order after it has fallen into disrepair, and adaptations that ready the property for a new or different use.

Examples include new HVAC systems, roof replacements, additions to the building, and comprehensive kitchen or bathroom remodels. In contrast, repairs that are deductible in the current year include routine maintenance activities, fixing existing components without upgrading them, painting, patching, minor replacements, and work that simply keeps the property in ordinary operating condition.

Several safe harbor elections can simplify these determinations, including the de minimis safe harbor allowing immediate expensing of items under $2,500 or $5,000 with an applicable financial statement, the routine maintenance safe harbor for qualifying maintenance activities, and the small taxpayer safe harbor for buildings with an unadjusted basis under $1 million.

The timeline depends on the type of study you choose:

Rapid Report: Once you’ve made the payment and completed the online questionnaire, the process usually takes about 5–10 business days. This includes time for our engineering team to review the information (about 3–5 days) and prepare your final report (around 2 days).

Fully Engineered Study: For a fully engineered analysis, the clock starts after you’ve submitted all the required documents and completed the virtual inspection. From there, the study typically takes about 15–20 business days (roughly 3–4 weeks) — including 10–15 days for the engineering work and 2–3 days to finalize and deliver your report.

If you need results sooner, we also offer a rush option with a 5-business-day turnaround, depending on availability during busier times of the year.

The recommended holding period to maximize benefits from a cost segregation study is 3-5 years minimum, with 5 or more years being ideal to avoid significant recapture issues. While 2 years is the absolute minimum for smaller properties, shorter holding periods reduce the overall benefit. When you sell a property after accelerated depreciation, recapture rules apply.

Accelerated depreciation taken on personal property is recaptured at ordinary income tax rates, while standard straight-line depreciation is recaptured at a maximum 25% rate. This recapture can be deferred through a 1031 exchange if you're acquiring a replacement property. Despite the recapture considerations, the benefits of accelerated depreciation typically outweigh the recapture tax if the property is held for at least 3 years, due to the time value of money and the deferral benefit.

Whether you need real estate professional status depends on your income sources and how you plan to use your depreciation benefits. To qualify as a real estate professional, you must spend at least 750 hours annually in real estate activities and more than half of your total working time must be in real estate. You also need to materially participate in your rental activities. Achieving this status allows you to offset W-2 income with rental losses, which can be extremely valuable.

However, there's an important alternative for those who can't meet these requirements. If you operate short-term rentals and materially participate with at least 100 hours annually, you can offset active income without achieving real estate professional status. For those who don't qualify under either scenario, passive losses can only offset passive income, though unused losses carry forward indefinitely and can be used in future years.

While audit rates for properly prepared cost segregation studies are extremely low, certain factors may increase IRS scrutiny. Red flags include excessive reclassification percentages that seem unreasonable for the property type, inconsistent treatment across similar properties in your portfolio, poor or missing documentation, use of non-qualified preparers, and overly aggressive land valuations.

Best practices to avoid audit issues include always using qualified professionals with engineering expertise, maintaining detailed documentation of all assumptions and methodologies, following the IRS Cost Segregation Audit Technique Guide, being consistent in your approach across properties, and keeping thorough engineering justification for all reclassifications.