Cost Segregation Studies and Your Loan
Cost segregation studies allocate purchase price across components with different tax lives — accelerating depreciation deductions in early years. They are a powerful tax tool for real estate investors but interact with lending in ways worth understanding.
How Cost Segregation Works
A cost segregation study, performed by a qualified engineer or specialty firm, identifies components of a commercial property (carpeting, electrical, plumbing fixtures, parking lots, landscaping) that depreciate over shorter periods than the building itself. The result: significantly more depreciation in the early years of ownership.
Cash Flow Implications
Cost segregation reduces taxable income, which reduces taxes paid, which increases after-tax cash flow. For high-tax-bracket investors, the effect can be substantial in the early years of a hold.
Impact on Lender Underwriting
Lenders generally underwrite to cash flow before depreciation (NOI, EBITDA). So cost segregation does not directly help loan qualification on a refinance — the underwritten income is the same. But the increased after-tax cash flow improves the investor's overall financial position.
Recapture on Sale
Accelerated depreciation is recaptured when the property is sold, typically taxed at higher rates than long-term capital gains. The benefit of cost segregation is largely a deferral, not a permanent reduction. The deferral is still valuable, especially when combined with a 1031 exchange.
Educational content only — not advice. KQT Advisors, LLC is a commercial loan broker; we are not a lender, attorney, accountant, financial advisor, or fiduciary. We do not originate loans or make lending decisions. The information in this article is provided strictly for general informational and educational purposes and reflects our understanding at the time of writing. It is not — and must not be construed as — financial, tax, legal, accounting, investment, or any other professional advice, and creates no advisor-client relationship. Loan programs, rates, terms, eligibility requirements, fees, and approval criteria are set by individual lenders, the SBA, and other parties and are subject to change at any time without notice. Examples are illustrative only and not guarantees of outcome. Nothing here is a commitment to lend, an offer of credit, or a representation that any specific structure will be available to or appropriate for any borrower. Always consult your own qualified financial, tax, and legal advisors before acting on any information in this article. To the maximum extent permitted by law, KQT Advisors, LLC and its principals, employees, agents, and affiliates disclaim all liability for any direct, indirect, consequential, or incidental loss or damage arising out of any use of, reliance on, or inability to use the information in this article.