Cost Segregation of Rental Property

Rental Property Cost Segregation

Available for Residential Rental Properties up to 6 units.

What is Cost Segregation and why should I do it for my rental property?

Cost Segregation is a commonly used strategic tax planning tool that allows building owners who have constructed, purchased, expanded or remodeled real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

A Cost Segregation report for residential investment property dissects the purchase price of the property that would otherwise be depreciated over 27.5 years for income tax purposes.

Accelerate Depreciation Deductions:

The primary goal of Cost Segregation is to identify all property-related costs that can be depreciated faster (typically over 5, 7 and 15 years).

Retirement and Partial Disposition deductions:

The secondary goal of Cost Segregation is to establish the depreciable tax value for each major building component that is likely to be replaced in the future. Examples include roof, windows, doors, bathroom fixtures, HVAC, etc. When a component is replaced, taxpayers need this information to claim a “retirement loss” or “partial disposition” deduction for its remaining depreciation.


Property Details:

  • 2 Story Residential Duplex.
  • Depreciable basis = $300,000.
  • Placed in Service two years ago.
  • Building Area: 2,000 SF
  • Lot Size: 4,000 SF

Immediate benefits from reclassification to shorter tax lives:

  • Additional deductions of $21,000 in the first year.
  • Additional deductions of $28,000 in the first 5 years.
  • Net present value of $7,500*

*Using a tax rate of 40% and 8% ROI. Does not include benefits from future partial disposition of building components.

What is needed to perform a cost-effective Cost Segregation Study?

General building information including, but not limited to the square footage, number of rooms, and location is needed as well as specific property features such as flooring, appliances, and parking spaces.

Why can’t my tax preparer do this for me without your software?

Most Cost Segregation studies are performed by experienced engineers who are familiar with building construction and extensive tax law related to depreciation and typically cost thousands of dollars. Tax preparers generally do not have the skill sets needed to conduct a study and the experience of our in-house tax and engineering team to ensure your report will maximize benefits and stand up to IRS audit scrutiny.

What do I receive from Palma Financial Services, Inc.?

You will receive the following:

  • Summary of tax benefits and additional deductions generated from Cost Segregation.
  • Detailed schedule of the building’s major costs organized by tax category (used to complete your tax return).
  • Excel export in depreciation schedule format.
  • Summary of all information input by the user.
  • For an additional fee – 481(a) adjustment calculation schedules (needed for properties acquired in prior tax years).

What if I get audited by the IRS?

A Cost Segregation report is only as good as the people standing behind its findings.

Palma Financial Services, Inc. employs one of the largest teams of Cost Segregation engineers in the US. However, in the event of an IRS audit, Palma Financial Services, Inc. will provide free audit support time at no additional charge for issues directly related to our report.

Our Dublin, CA CPA firm is here to help. Contact us today!

Contact Palma Financial Services, Inc.

Cost Segregation Explained
Cost Segregation Timing