Cost segregation is a strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

In practical terms, cost segregation works by identifying property assets that can be reclassified from standard 39-year depreciable life (non-residential real estate) or 27.5-year depreciable life (residential real estate) to more favorable depreciation categories such as 5, 7, or 15 years. These categories may include non-structural elements, like certain types of flooring, wall coverings, lighting, or portions of the electrical system dedicated to equipment, and exterior land improvements like sidewalks or landscaping.

By conducting a cost segregation study, companies can take advantage of accelerated depreciation deductions. This process involves a detailed analysis of construction costs and the application of specific methodologies for identifying qualifying assets. The result is that a significant portion of the costs can be depreciated at a faster rate, providing substantial present value savings.

However, it's important to note that while cost segregation can offer substantial tax benefits, it's a complex process that often requires the expertise of tax professionals or consultants who specialize in this area. They need to have a thorough understanding of tax laws, as well as construction and valuation methodologies, to accurately identify assets that qualify for accelerated depreciation.