What cost segregation does
Commercial real estate is normally depreciated over 39 years. A cost segregation study reclassifies components of the property — cabinetry, millwork, specialty lighting, floor finishes, certain plumbing and electrical — into 5, 7, or 15-year categories. Those shorter schedules mean larger depreciation deductions in the early years of ownership, which can shelter a significant share of rental income from tax.
Why office condos are strong candidates
- Heavy interior buildout. Executive suites with custom millwork, kitchenettes, and finish-outs have a high percentage of components eligible for shorter lives.
- Accessible basis. At sub-$2M price points, the study cost is a small fraction of the potential first-year deductions.
- Pairs with a 1031 exchange. Exchanging into a property and then running a cost segregation study lets you defer gains and accelerate new depreciation at the same time. Read our 1031 exchange guide.
How the process works
- Engage a qualified cost segregation firm (engineer-based studies carry the most weight with the IRS).
- The firm reviews closing documents, construction details, and the physical property.
- You receive a report allocating basis across asset classes; your CPA applies the accelerated depreciation on your return.
Note that accelerated depreciation is generally recaptured at sale, so the strategy works best with a long-term hold or a plan to exchange again.
A current example: Suite 200 at 599 Tamiami Trail N
This 1,571 SF second-floor office condo features a full executive buildout — private offices, a conference room, a full kitchen, and custom finishes throughout. The tenant lease runs through 2029, producing $70,000 of net operating income that a cost segregation strategy can help shelter in the early years of ownership.