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2021 Tax Planning: Tax Benefits of Cost Segregation of Real Property

Updated: Mar 20, 2022

June 29, 2021

In general, a nonresidential real property is depreciated over 39 years and residential rental property is depreciated over 27.5 years. However, certain parts of the building can be depreciated over 5 years, 7 years, or 15 years, such as molding, millwork, and other decorative elements, carpeting, wall coverings, partitions, window treatments, counters, cabinets, shelving, special lighting, appliances and machinery, electrical wiring and plumbing that are not related to operation and maintenance of the building.

In addition, certain land improvements outside of a building can be depreciated over 15 years, such as landscaping, fences, sidewalks, curbs, parking lots, lighting, utilities, signs, swimming pools, tennis courts, and playgrounds.

A taxpayer may involve a specialist to conduct a cost segregation study to identify the parts of the building that can be depreciated over shorter periods of time. Ideally, a cost segregation study should be conducted before a building is placed in service (when the building is under construction or at the time of purchase). However, a cost segregation study can also be carried out after a building is placed in service. If the change in depreciation lives is made two years after the property is acquired or placed in service, an amended tax return or reporting of an accounting method change (Form 3115) is required. Reporting of an accounting method change to the IRS should include the change of basis, depreciable lives, and any adjustments made due to the shortened depreciation lives from the date placed in service to the year of the change in accounting method.


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