One of the services we provide at Scarpello Consulting is to educate and clarify complex tax regulations. In our practice, we often see inaccurate implementation of cost segregation studies when property is being leased to tax-exempt entities. Below is a highlight of some of the intricacies of how leasing to a tax-exempt entity can impact depreciation:

Leasing To A Non-Profit Makes The Property Tax-Exempt Use

Under Sec. 168(h), which falls under 168(g)(1)(B), the regulations dictate that when a property is leased to a non-profit, the property becomes tax-exempt use. This means if you complete a Cost Segregation Study there will be no bonus depreciation on the reclassed personal property and the resulting tax lives of the personal property will be lengthened to follow the ADS (Alternative Depreciation System) tax lives.  

When leasing property to a non-profit, you must use the ADS (Alternative Depreciation System) for personal property and land improvements. It is possible that you may also need to use ADS depreciation for the non-residential real estate if more than 35% of the property is leased to a tax-exempt entity and there is a disqualified lease. A disqualifying lease can occur when the lease term exceeds 20 years, including options to renew, or that doesn’t renew at a fair market rate on the renewal date.


Additionally, you must follow Sec. 168(g)(3)(A) which requires any tax-exempt use property subject to a lease to use a recovery period that is no less than 125% of the lease term. Again, this includes any options to renew. For example, if the lease term is 10 years, you must take straight-line depreciation over a 12.5-year recovery period for all personal property (5-, 7-, & 15-year assets). Following this rule is what usually determines whether a cost segregation study will make sense for a particular property.

If you ever have a Cost Segregation question, please do not hesitate to ask. Our tax and construction experts are here to help you get the most out of your properties.

Call Today: 877.410.5040


If you need a Cost Segregation study completed for the 2022 tax year, now is the time to file for an extension. Then, give Scarpello Consulting a call to reserve your team: 877.410.5040

About Scarpello Consulting

Scarpello Consulting provides clients with a variety of cost-savings measures based on tax incentives and regulation such as Cost Segregation Studies and §45L Reports. Through a sister company, Scarpello Group, the team can provide clients with turn-key data analytics. In the years to come, both teams strive to create the answers to unique business problems, focusing on identifying break-through cost-savings measures that allow businesses to operate more efficiently.