A Cost Segregation Study is an IRS-recognized tax planning tool that allows property owners to accelerate depreciation deductions, reduce tax liability, and improve cash flow. By identifying and reclassifying building components into shorter depreciation categories (such as 5, 7, or 15 years instead of 27.5 or 39 years), a business can front-load depreciation expenses and enjoy substantial tax savings.
While any commercial property owner can potentially benefit, some industries gain more significant advantages than others due to the nature of their facilities, specialized equipment, and renovation activities. In this article, we’ll explore the top industries that benefit the most from a Cost Segregation Study and why it makes such a difference for them.
1. Hospitality and Hotels
Hotels, resorts, and hospitality businesses often have highly customized interiors and a wide range of non-structural assets—making them ideal candidates for a Cost Segregation Study.
Why they benefit:
- Hotels typically include items such as decorative lighting, specialized flooring, security systems, commercial kitchens, and landscaping.
- Renovations and brand upgrades are common, which creates additional opportunities for accelerated depreciation.
- Multiple property types (conference centers, pools, spas) mean a higher percentage of costs can be reclassified to shorter depreciation lives.
Example:
A mid-sized hotel might save hundreds of thousands of dollars in tax liability in the first few years after a Cost Segregation Study due to reclassifying guest room furniture, lobby finishes, and outdoor amenities.
2. Manufacturing and Industrial Facilities
Manufacturing plants and warehouses are filled with specialized equipment, utility systems, and customized layouts—all of which qualify for accelerated depreciation.
Why they benefit:
- Manufacturing facilities often have heavy-duty electrical systems, ventilation, and process-specific improvements.
- Large outdoor improvements like parking lots, loading docks, and security fencing qualify for shorter depreciation lives.
- Frequent plant upgrades and expansions create repeated opportunities for tax savings.
Example:
A manufacturing company that invests in specialized conveyor systems, climate-controlled storage, and high-voltage wiring could save significantly by classifying these components into 5, 7, or 15-year depreciation categories.
3. Retail and Shopping Centers
Retail stores, supermarkets, and shopping centers have a high proportion of assets that qualify for accelerated depreciation.
Why they benefit:
- Retail spaces often have elaborate lighting, shelving, signage, and decorative finishes.
- Common area improvements, landscaping, and parking lot upgrades qualify for shorter depreciation periods.
- Frequent remodeling to match brand standards creates recurring Cost Segregation opportunities.
Example:
A large retail chain could accelerate the depreciation of display fixtures, POS system wiring, and specialty lighting, resulting in immediate tax deductions that improve cash flow during expansion phases.
4. Healthcare and Medical Facilities
Hospitals, medical clinics, and dental offices require significant investment in specialized equipment and interior improvements.
Why they benefit:
- Medical facilities have high-value assets like X-ray rooms, medical gas systems, and custom cabinetry.
- Technology upgrades and patient comfort improvements qualify for shorter depreciation schedules.
- Ongoing renovations to meet regulatory standards provide additional opportunities for tax savings.
Example:
A dental clinic that installs new examination chairs, specialized lighting, and cabinetry could recover thousands in tax savings within the first year through a Cost Segregation Study.
5. Multi-Family Housing and Apartment Complexes
Apartment buildings and multi-family complexes often have significant site improvements and tenant amenities that qualify for accelerated depreciation.
Why they benefit:
- Assets like swimming pools, clubhouses, playgrounds, and landscaping can be depreciated faster.
- Interior improvements such as appliances, flooring, and lighting are eligible for shorter depreciation lives.
- Renovations between tenants create repeated tax-saving opportunities.
Example:
An apartment complex with 200 units could save hundreds of thousands of dollars by accelerating the depreciation of appliances, carpeting, and parking lot improvements.
6. Restaurants and Food Service
Restaurants have a high percentage of assets that qualify for accelerated depreciation due to their specialized build-outs and equipment needs.
Why they benefit:
- Commercial kitchen equipment, walk-in coolers, and exhaust systems qualify for shorter depreciation lives.
- Decorative finishes, custom seating, and signage are reclassifiable assets.
- Frequent remodels and brand updates create ongoing savings opportunities.
Example:
A franchise restaurant that renovates every few years can leverage a Cost Segregation Study each time to capture tax deductions quickly, freeing up cash for further expansion.
7. Office Buildings
Office buildings, whether owner-occupied or leased to tenants, contain numerous assets that qualify for accelerated depreciation.
Why they benefit:
- Office fit-outs include partitions, lighting, carpeting, and custom cabinetry—all eligible for shorter depreciation.
- Technology infrastructure like wiring and server rooms also qualifies.
- Tenant improvement allowances create Cost Segregation opportunities.
Example:
A law firm that customizes its leased office space with specialty lighting, conference room build-outs, and security systems could see substantial tax benefits.
8. Self-Storage Facilities
Self-storage is one of the fastest-growing real estate sectors, and it’s also a perfect fit for Cost Segregation Studies.
Why they benefit:
- Site improvements such as fencing, lighting, and security systems qualify for accelerated depreciation.
- Climate-controlled storage facilities have specialized HVAC systems and insulation that can be reclassified.
- Low operating costs combined with accelerated tax deductions improve ROI.
Example:
A 100,000 sq. ft. storage facility with upgraded lighting and climate control could save tens of thousands of dollars in taxes within the first year of ownership.
Maximizing Savings with a Cost Segregation Study
While the industries listed above see some of the most substantial benefits, any commercial property owner should consider a Cost Segregation Study if their property:
- Was purchased, constructed, or renovated after 1986.
- Has a cost basis of at least $500,000 (though smaller properties can still benefit).
- Contains non-structural improvements that can be depreciated over a shorter life.
CONCLUSION
A Cost Segregation Study is not just a tax strategy—it’s a way to unlock hidden value in your property. Industries like hospitality, manufacturing, healthcare, and retail have the most to gain because of their high proportion of qualifying assets. By accelerating depreciation, businesses can reduce current tax liability, increase cash flow, and reinvest those savings back into growth.
Whether you’re building a new facility, renovating an existing one, or purchasing a property, consulting with a qualified Cost Segregation expert can ensure you maximize your savings potential.