Cost Segregation Calculator Formula

Understand the math behind the cost segregation calculator. Each variable explained with a worked example.

Use the Cost Segregation Calculator

Formulas Used

First-Year Tax Savings

first_year_tax_savings = year1_benefit * marginal_tax_rate / 100

First-Year Extra Depreciation

first_year_extra_depr = year1_benefit

Total Reclassified Amount

total_reclassified = amt_5 + amt_7 + amt_15

% of Building Reclassified

pct_reclassified = pct_5_year + pct_7_year + pct_15_year

ROI on Study Cost

roi_on_study = study_cost > 0 ? (year1_benefit * marginal_tax_rate / 100 - study_cost) / study_cost * 100 : 0

Study Fee

study_fee = study_cost

Variables

VariableDescriptionDefault
building_costBuilding Cost (depreciable basis)(USD)1000000
pct_5_year% Reclassified to 5-Year Property(%)15
pct_7_year% Reclassified to 7-Year Property(%)5
pct_15_year% Reclassified to 15-Year Property(%)10
marginal_tax_rateMarginal Tax Rate(%)35
study_costCost Segregation Study Fee(USD)15000
amt_5Derived value= building_cost * pct_5_year / 100calculated
amt_7Derived value= building_cost * pct_7_year / 100calculated
amt_15Derived value= building_cost * pct_15_year / 100calculated
remaining_39Derived value= building_cost - amt_5 - amt_7 - amt_15calculated
year1_accelDerived value= amt_5 * 0.20 + amt_7 * 0.1429 + amt_15 * 0.05calculated
year1_standardDerived value= building_cost / 39calculated
year1_benefitDerived value= (year1_accel + remaining_39 / 39) - year1_standardcalculated

How It Works

Cost Segregation Studies

Cost segregation accelerates depreciation by reclassifying building components from the standard 27.5 or 39-year schedule to 5, 7, or 15-year property.

Standard vs. Accelerated Recovery

  • 39-year property: Building structure (commercial)
  • 27.5-year property: Residential rental structure
  • 15-year property: Land improvements (parking lots, landscaping, fences)
  • 7-year property: Certain fixtures and equipment
  • 5-year property: Carpeting, appliances, decorative lighting

    • Bonus Depreciation

    With bonus depreciation (phasing down from 100%), reclassified property can be fully deducted in year one, dramatically increasing first-year tax benefits.

    Typical Results

    A cost segregation study typically reclassifies 20-40% of building cost, generating significant upfront tax savings.

    Worked Example

    A $1,000,000 commercial building. 15% reclassified to 5-year, 5% to 7-year, 10% to 15-year. 35% tax rate. $15,000 study cost.

    building_cost = 1000000pct_5_year = 15pct_7_year = 5pct_15_year = 10marginal_tax_rate = 35study_cost = 15000
    1. 015-year property: $1,000,000 x 15% = $150,000 (year 1: $150,000 x 20% = $30,000)
    2. 027-year property: $1,000,000 x 5% = $50,000 (year 1: $50,000 x 14.29% = $7,145)
    3. 0315-year property: $1,000,000 x 10% = $100,000 (year 1: $100,000 x 5% = $5,000)
    4. 04Remaining 39-year: $700,000 (year 1: $700,000 / 39 = $17,949)
    5. 05Accelerated year 1 total: $30,000 + $7,145 + $5,000 + $17,949 = $60,094
    6. 06Standard year 1: $1,000,000 / 39 = $25,641
    7. 07Extra first-year depreciation: $60,094 - $25,641 = $34,453
    8. 08Tax savings: $34,453 x 35% = $12,059

    Ready to run the numbers?

    Open Cost Segregation Calculator