The Truth About Free Cost Segregation Estimates

Real estate investors and property owners have a variety of effective tax-saving strategies at their fingertips, and one of the standout options is cost segregation. Many cost seg firms entice clients with a free initial offer, often referred to as an “Estimate of Benefits” or “Free Cost Segregation Proposal.”

While these estimates can be helpful for making initial decisions, they only scratch the surface. They don’t provide the detailed analysis, IRS-required documentation, or compliance necessary to actually claim accelerated depreciation on your tax return.

The main distinction between an Estimate of Benefits and a Full Cost Segregation Study lies in their level of detail, adherence to regulations, and readiness for audits. One serves as a planning tool, while the other is a comprehensive tax strategy.

Here’s a clear breakdown:

Estimate of Benefits (EOB)

Purpose:

Gives you a preliminary proposal looking at how much tax savings you could unlock with a full study.

What it includes:

• High-level projection of potential accelerated depreciation

• Estimated tax savings based on property type, purchase price, and general assumptions

• Used for decision-making before engaging in a full study

What it doesn’t include:

• Site visit or engineering analysis

• IRS-ready documentation

• Asset-by-asset breakdown of components

Think of it as:

A preview to see if a cost seg study is worth pursuing.

Full Cost Segregation Study

Purpose:

Provides a detailed, IRS-compliant report breaking out components of the property into different depreciation categories (5, 7, 15, 27.5, or 39-year assets).

What it includes:

• Engineering-based analysis or detailed cost estimation

• Site photos or architectural plans (if applicable)

• Line-item breakdown of building components

• IRS Form 3115 (Change in Accounting Method), if required

• Defensible documentation in case of audit

Think of it as:

The real deal — required to actually claim accelerated depreciation on your tax return.

Cost Segregation Estimate vs Cost Segregation Study

Feature	Estimate of Benefits	Full Cost Seg Study
Projected tax savings	✅	✅
Engineering virtual site visit	❌	✅
IRS audit-ready	❌	✅
Detailed component breakdown	❌	✅
Required to claim deductions	❌	✅
Cost	Free	Typically $3K–$10K+

The Bottom Line

While an Estimate of Benefits offers some useful initial insights to guide your decision-making, it’s the Full Cost Segregation Study that truly provides the in-depth analysis and documentation the IRS requires to back up those accelerated depreciation deductions on your tax return.

Savvy property investors usually kick things off with an Estimate of Benefits to gauge potential savings. Once they see the projected benefits are worth it, they move on to a certified engineered Cost Segregation Study. This smart strategy helps ensure you’re making well-informed choices about maximizing your property’s tax advantages while staying in line with IRS regulations.

By knowing what to expect from your cost segregation firm, you’ll be better equipped to navigate the process and enhance your real estate investment returns.