Cost Segregation Study: What It Costs and When It's Worth It

Understand the real cost of a cost segregation study, what drives pricing, and how to tell if it makes financial sense for your business.

You've built a successful business, invested in commercial real estate, and now someone's telling you about this thing called a "cost segregation study" that could save you thousands on taxes. But here's the catch: It's going to cost you thousands upfront to find out if it's worth it.

Well, you’re not the only one feeling confused about whether this investment makes sense for your business.

At Patrick Accounting, we've helped dozens of business owners navigate this exact decision over the past 20 years. We've seen clients save six figures through strategic cost segregation studies, and we've also seen others waste money on studies that didn't provide enough value to justify the cost.

In this article, you'll get a clear breakdown of exactly what cost segregation studies cost, when they make financial sense for your business, and, most importantly, how to determine if yours is worth the investment. 

What Is a Cost Segregation Study? What Business Owners Need to Know

Before we dive into costs, let's make sure we're on the same page about what we're actually talking about.

A cost segregation study is essentially a detailed analysis that breaks down your commercial property into its individual components. Instead of depreciating your entire building over 39 years (the standard for commercial real estate), engineers and accountants work together to identify parts of your property that can be depreciated much faster.

Here's how it works: Your building includes things like parking lots, plumbing systems, HVAC equipment, flooring, landscaping, and specialized fixtures. Many of these components have shorter useful lives than the building itself. Some can be depreciated over 15 years, 7 years, or even 5 years instead of 39.

The real impact unfolds when these shorter-life assets qualify for bonus depreciation or Section 179 deductions. This means you could potentially deduct a significant portion of these costs in the first year instead of spreading them out over decades.

Think of it like this: Instead of getting a small tax deduction every year for 39 years, you're front-loading those deductions to get a much larger tax benefit now when you might need the cash flow most.

Typical Cost Ranges for a Cost Segregation Study

Now for the answer to the question you're really here for: What's this going to cost you?

Typical Price Ranges

Cost segregation studies generally range from $5,000 to $60,000, with most falling somewhere in the middle of that range. That's a pretty wide spread, so let's break down what drives the cost:

• Property size and complexity: A simple warehouse is going to cost less to analyze than a multi-story medical facility with specialized equipment.
• Property value: Higher-value properties typically require more detailed analysis.
• Geographic location: Studies in major metropolitan areas tend to be more expensive.
• Firm expertise: More experienced engineering and accounting teams typically charge premium rates.

Average Costs for Different Property Values

For a typical commercial building worth around $1 million, you're looking at approximately $10,000 for the study. This seems to be the sweet spot where the math starts making sense for most businesses.

Here's a rough framework:

• $500K-$1M property: $7,000-$12,000 study cost
• $1M-$3M property: $10,000-$20,000 study cost
• $3M-$10M property: $20,000-$40,000 study cost
• $10M+ property: $40,000-$60,000+ study cost

How Pricing Is Typically Structured

Most reputable cost segregation firms charge based on a percentage of the net present value of your tax savings. This pricing model actually works in your favor because it means the firm has skin in the game. Meaning, they only get paid well if they find significant savings for you.

This approach also helps ensure that you're not paying more for the study than you'll save in taxes, which would obviously defeat the purpose.

When a Cost Segregation Study Delivers the Highest ROI

Here's where we get into the real decision-making factors. The general rule of thumb is that your property should be worth at least $500,000 for a cost segregation study to make financial sense.

The ROI Calculation That Matters

For a $1 million commercial property, we typically see tax savings in the range of $40,000 to $60,000 from a well-executed cost segregation study. If the study costs $10,000, that's a 4x to 6x return on investment in the first year alone.

But let's look at a scenario where it might not make sense: If you're purchasing a $400,000 building and the study costs $8,000, you might only save $12,000 in taxes. While that's still a positive return, the smaller margin might not justify the time and complexity involved.

The Sweet Spot for Maximum Impact

The math gets really compelling as property values increase:

• $3 million building: Could generate $120,000-$180,000 in tax savings for a $25,000 study
• $10 million building: Could generate $300,000-$400,000 in tax savings for a $50,000 study

The larger the property value, the more dramatic the tax savings become, making the study cost a smaller percentage of the overall benefit.

What Property Types Should Consider Cost Segregation Studies?

Not all real estate investments are good candidates for cost segregation studies. Here are the types that typically benefit most:

Commercial Real Estate Owners

If you own your business property, whether it's an office building, retail space, warehouse, or manufacturing facility, and the property is worth more than $500,000, you should at least evaluate whether a cost segregation study makes sense.

Key point: You need to actually own the property, not lease it. If you're renting your business space, cost segregation won't help you.

Short-Term Rental Property Investors

This is becoming a huge opportunity area. If you're actively managing short-term rental properties (like Airbnb or VRBO), and you own properties worth several hundred thousand dollars or more, cost segregation studies can provide substantial tax benefits.

We're seeing clients with beachfront rental properties worth $2-$3 million generate over $100,000 in first-year tax savings through strategic cost segregation.

Multi-Million Dollar Property Purchases

Obviously, the bigger the property investment, the more sense these studies make. If you're purchasing properties in the $5-$10 million range or higher, a cost segregation study should be almost automatic as part of your tax planning strategy.

Tax Savings You Can Expect by Property Value

Let's get specific about what kind of tax savings we're talking about.

Typical Savings Ranges

Based on our experience with clients, here's what you can realistically expect:

• $1 million property: $40,000-$60,000 in first-year tax savings
• $2 million property: $80,000-$120,000 in first-year tax savings
• $5 million property: $200,000-$300,000 in first-year tax savings
• $10 million property: $300,000-$500,000 in first-year tax savings

How the Accelerated Depreciation Works

The study identifies components of your building that can be depreciated over shorter periods:

• 39-year property: Walls, roof, foundation (the building structure)
• 15-year property: Land improvements like parking lots, sidewalks, landscaping
• 7-year property: Office furniture, equipment, some fixtures
• 5-year property: Computers, vehicles, some specialized equipment

The key is that shorter-life property may qualify for bonus depreciation or Section 179 deductions, allowing you to deduct 100% of those costs in the first year instead of spreading them over multiple years.

The Cash Flow Impact

But this isn't just about reducing taxes. It's about improving your cash flow when you need it most. Instead of small deductions over 39 years, you're getting a large tax benefit in year one, which can be reinvested in your business or used to pay down debt.

When Cost Segregation Studies DON'T Make Sense

Sometimes, these studies are a waste of money. Not every property owner should do a cost segregation study.

Smaller Property Investments

If your property is worth less than $400,000-$500,000, the math probably doesn't work. The study costs will eat up too much of your potential tax savings to make it worthwhile.

For example, if you buy a $300,000 building and spend $7,000 on a study that saves you $10,000 in taxes, you're only netting $3,000 in benefit. While that's still positive, it might not be worth the complexity and effort involved.

Properties You Don't Own

This should be obvious, but if you lease your business space, cost segregation won't help you at all. You need to actually own the property to take depreciation deductions.

When Your Tax Situation Doesn't Benefit

If your business isn't profitable enough to benefit from large depreciation deductions, or if you're in a very low tax bracket, the savings might not justify the cost of the study.

How to Evaluate If Your Business Should Invest in a Cost Seg Study

Here's a simple framework to help you decide:

The Quick Math Test

1. Is your property worth more than $500,000?
   If not, probably not worth it.
2. Do you own the property in an entity that can benefit from depreciation?
   If not, it won't help.
3. Is your business profitable enough to benefit from large depreciation deductions?
   If not, the savings won't materialize.
4. Can you reasonably expect tax savings of at least 3-4 times the study cost?
   If not, look for other tax strategies.

Questions to Ask Potential Cost Seg Providers

• What's your typical range of tax savings for properties similar to mine?
• How do you structure your fees?
• Can you provide references from similar clients?
• What's included in your study, and what ongoing support do you provide?
• How do you handle IRS challenges to your cost segregation positions?

The Professional Consultation

Before you commit to a cost segregation study, have a conversation with your accounting team. They can help you evaluate whether the timing makes sense for your specific tax situation and business goals.

Sometimes, it makes sense to do the study immediately after purchasing a property. Other times, it might be better to wait until you have a particularly profitable year where you need more deductions.

Deciding if a Cost Seg Study is Right for Your Business

As you can see, cost segregation studies can deliver significant tax savings, but they’re not the right move for every business or every property.

The key is understanding when the investment makes sense and when it doesn't.

• If your commercial property is worth more than $500,000
• If your business is profitable enough to use accelerated depreciation
• And if improving cash flow is a priority…

…a cost segregation study could save you tens of thousands of dollars in taxes.

But remember, tax planning isn't just about a single tactic. The best tax savings come from a comprehensive strategy that considers your entire financial picture, not just one line item.

If you're still weighing the pros and cons, here are two ways to help you decide what’s next:

1. Read: "Who We Work With at Patrick Accounting (and Who We Dont)" to see what types of business owners benefit most from working with us.

2. Talk with our team: Schedule a call, to see if we’re the right fit to help you evaluate whether a cost segregation study belongs in your tax strategy.

At Patrick Accounting, we help business owners like you make smart tax and accounting decisions every day. We don't just file your taxes once a year. We work with you throughout the year to identify opportunities, plan strategies, and make sure you're not leaving money on the table.