When selling an investment property, many owners ask:

“Should I do a cost segregation study before I sell?
And can I also use cost segregation on the new property I buy through a 1031 exchange?”

The short answer is: you may be able to benefit on both ends, but timing and strategy are key.

Let’s break it down.

Cost Segregation Before Selling

A cost segregation study reclassifies certain parts of your building into shorter depreciation lives — giving you larger deductions earlier, which means more cash flow during ownership.

But when you sell, the IRS requires you to recapture the accelerated depreciation at a 25% tax rate.
So the question becomes:
Does the upfront cash flow from the deductions outweigh the recapture tax later?

When it makes sense:
✅ You plan to hold the property for several more years.
✅ You’ve already owned the property for a while and want to “catch up” missed depreciation.
✅ You want to reduce taxable income in the years before selling.

If you’re selling very soon, the recapture may reduce the benefit — but every situation is unique.

Cost Segregation After a 1031 Exchange

When you sell and reinvest through a 1031 exchange, you defer capital gains tax by rolling your proceeds into a new property.

The good news?
Your replacement property starts a new depreciation schedule, making it eligible for a fresh cost segregation study.

That means you can:
✅ Accelerate depreciation on the new property.
✅ Use bonus depreciation or Section 179 if applicable.
✅ Offset other income or shelter cash flow from the new property.

This is a powerful way to defer taxes and create immediate tax benefits on the new investment.

Example Scenario

🔷 Sell a $5 million property, where you previously accelerated $500,000 of depreciation.
🔷 Do a 1031 exchange into a $7 million property.
🔷 Perform a cost segregation study on the new property, identifying $1 million of deductions in Year 1.
🔷 You’ve deferred capital gains and unlocked new deductions.

Key Takeaways

📌 Cost segregation can work both before and after a sale — but timing, recapture, and hold period matter.
📌 Always consult a tax advisor to analyze your specific situation.
📌 A 1031 exchange paired with cost segregation on the replacement property can maximize tax efficiency.

Ready to Explore Your Options?

If you’re planning to sell, exchange, or acquire commercial real estate, we can help you design a tax strategy that aligns with your goals.

📞 Contact us today to review your options and run the numbers before you sell.

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