Cost segregation is a tax planning strategy used by commercial real estate owners and investors to accelerate depreciation deductions, defer tax, and improve cash flow. The strategy is essentially a way of reclassifying components and improvements of a commercial building from real property to personal property.

To calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset or property owned. Property, whether acquired or constructed, often consists of numerous asset types with different recovery periods. Property is typically separated into individual components or asset groups having the same recovery periods and placed-in-service dates to properly compute depreciation. When the actual cost of each individual component is available, this procedure is simple. When only lump-sum costs are available, however, cost estimating techniques may be required to "segregate" or "allocate" costs to individual components of property (e.g., land, land improvements, buildings, equipment, furniture and fixtures, etc.