For many real estate investors, cost segregation is seen as a tool reserved for those acquiring $100 million commercial properties. However, Brian Kiczula, a Real Estate Professional at CostSegRx, argues that this perception is outdated and leaves a significant segment of the market—investors in the $1 million to $15 million range—without access to valuable tax savings.
Cost segregation involves breaking down a property into its individual components, allowing for accelerated depreciation on short-life assets such as exterior improvements, fixtures, and specialized equipment. Instead of depreciating over 27.5 or 39 years, these assets can be depreciated over 5 or 15 years. With bonus depreciation currently at 100%, investors can potentially deduct the entire value of these assets in the first year, offsetting income and reducing tax liability.
The problem, according to Kiczula, is that many cost segregation firms have structured their pricing around large transactions and have not adjusted their fees for smaller properties. "Historically, cost-segregation studies were very expensive, and most cost-segregation firms in the United States cater towards larger investors – your clients that are buying the $100 million building," he explains. As a result, investors in smaller properties, such as Airbnb owners or purchasers of $5 million hotels, either overpay for studies or forgo them altogether, leaving tax benefits unclaimed.
The pricing disconnect has broader implications. When the cost of a study exceeds the tax savings it generates, CPAs often advise their clients against pursuing one. Over time, this advice becomes conventional wisdom, leading many to believe that cost segregation is not viable for smaller investments. Kiczula challenges this notion, stating, "Individuals can get studies that are affordable to make the return on investment beneficial for them."
Contrary to assumptions, smaller properties can be rich in short-life assets. Properties with resort-style pools, pickleball courts, and extensive exterior site improvements often yield substantial accelerated depreciation. Even single residential properties used as short-term rentals can benefit. RV parks and car washes are particularly asset-rich. However, Kiczula cautions that appearances can be deceiving; a large commercial building may have minimal qualifying assets if it is mostly basic warehouse space with inexpensive finishes.
CostSegRx has positioned itself to serve this underserved market by providing upfront estimates of benefit, allowing investors to evaluate the potential return before committing to a full study. "We want to make sure there’s a solid return on investment for our clients," Kiczula says. The firm uses an engineering-based methodology, distinguishing itself from rule-of-thumb calculators that rely on percentages without examining individual assets. These shortcuts, he argues, do not account for the actual condition and age of components and could be problematic under audit.
The key for smaller investors is whether the study's cost leaves enough room for tax savings to matter. Kiczula believes it can, provided the firm prices the engagement appropriately and avoids institutional rates. By making cost segregation accessible to a wider range of property owners, firms like CostSegRx are helping to level the playing field and ensure that all investors can take advantage of the tax benefits available to them.
