Cost Segregation: Discovering Tax Savings

05/31/2005 |

Ernst & Young reports on the benefits of accelerating depreciation


Mark O’Connell and Eric Johnston of Ernst & Young’s Los Angeles office have some advice for property managers looking to reap the benefits of tax savings that result from cost segregation. In an article from the California Real Estate Journal and a report on Ernst & Young’s website (, O’Connell and Johnston discuss the costly - and common - mistake of depreciating a building’s entire cost as real property. Some of what you’re depreciating may, in fact, be considered personal property under the Internal Revenue Code. “Personal property typically qualifies for a depreciable life of 5 or 7 years rather than the 39 or 27-and-a-half years assigned to real property. Using a shorter depreciable life can considerably increase the depreciation benefits associated with income property, thus saving money on income taxes,” the authors explain.

While O’Connell and Johnston point out that the difficulty of distinguishing between what qualifies as real property and personal property, the benefits or reclassifying certain items (a process called cost segregation) can be extremely beneficial. The article explains: “For every 1 million dollars’ worth of property reclassified from 39-year to 5-year property, the present value of tax savings is approximately $181,000 (using 35-percent tax rate and 8-percent discount rate).”

To get a better understanding of the benefits and process of cost segregation, read the complete report titled “Cost Segregation Helps Unlock the Tax Savings Hidden in Your Building,” by Mark O’Connell and Eric Johnston, on the Ernst & Young website ($file/CostSegArticle9-02.pdf).

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