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COST SEGREGATION Studies

Turn your building into a cash-flow asset. An engineering-based cost segregation study moves eligible costs out of 27.5- or 39-year depreciation and into 5-, 7- and 15-year property, putting significant tax savings back into your business now rather than decades from now.

What is COST SEGREGATION?

When you buy, build or renovate a property, the IRS lets you recover its cost through depreciation. By default, the whole building is depreciated in a straight line over 39 years for commercial property or 27.5 years for residential rental property.

But a building is not one single asset. It contains carpeting, specialty electrical and plumbing, cabinetry, decorative lighting, signage, parking lots, landscaping, fencing and much more, and the tax code allows many of those components to be depreciated far faster.

A cost segregation study is a detailed engineering and tax analysis that identifies those components, assigns a supportable cost to each, and reclassifies them from real property (Section 1250) into personal property (Section 1245) and land improvements, with much shorter recovery periods.

Asset classTypical examplesRecovery period
Personal propertyCarpet and removable flooring, millwork and cabinetry, dedicated electrical and plumbing, decorative lighting, appliances, security systems, signage5 or 7 years
Land improvementsParking lots, paving, sidewalks, curbs, landscaping, site lighting, fencing, drainage, outdoor recreation areas15 years
Qualified improvement propertyEligible interior improvements to non-residential buildings made after the building was placed in service15 years
Residential rental buildingStructural components of apartment and single-family rental buildings27.5 years
Non-residential buildingStructural components of commercial buildings39 years

How it accelerates your deductions

Shorter recovery periods alone make a big difference, because 5-, 7- and 15-year property also uses accelerated depreciation methods rather than straight-line. Typically 20% to 40% of a building's depreciable cost can be reclassified, depending on the property type and how it is fitted out.

  • Immediate cash flow: larger deductions in the early years lower your tax bill when the money is most valuable.
  • Lower current tax liability: reduce federal and, in most states, state income tax.
  • Time value of money: a dollar of tax deferred today can be reinvested in property, staff or debt reduction.
  • Missed depreciation recovered: catch up on deductions from prior years without amending returns (see look-back studies below).
  • Better disposal planning: identified components can be written off when replaced during renovations, rather than depreciating assets that no longer exist.

Bonus depreciation is back at 100%

2025 legislation changed the game

The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. Every dollar a cost segregation study moves into 5-, 7- or 15-year property can potentially be deducted in full in the first year.

This makes cost segregation more valuable than it has been in years. The same legislation also increased the Section 179 expensing limit and introduced a new elective 100% deduction for certain newly constructed qualified production property used in manufacturing, production and refining, a significant opportunity for industrial owners. We will help you and your CPA model which combination of elections produces the best result for your situation.

Property acquired before January 20, 2025 is subject to the phase-down rules in force at the time (for example 80% for 2023 and 60% for 2024), but a study still accelerates depreciation through shorter recovery periods.

Illustrative example

Office building acquired for $2.5 million

Purchase price$2,500,000
Less land (not depreciable)($500,000)
Depreciable building basis$2,000,000
Reclassified to 5-, 7- and 15-year property (30%)$600,000
Year-one depreciation without a study≈ $51,000
Year-one depreciation with a study and 100% bonus≈ $636,000
Additional first-year deduction≈ $585,000
Potential federal tax deferred at a 37% rate≈ $216,000

Illustrative only. Assumes the property was acquired after January 19, 2025, the owner can use the deductions (for example, not limited by passive activity rules) and simplified first-year conventions. Actual results depend on the property, the study and your tax position.

Who benefits most?

Cost segregation is generally worthwhile for property with a depreciable basis of $1 million or more, and our sweet spot is acquisitions and developments above $2 million. It works for:

  • Building acquisitions
  • New construction and ground-up development
  • Renovations, expansions and tenant improvements
  • Properties bought in the last 15+ years with no study
  • Owners with significant taxable income to offset
  • Real estate professionals and active investors
  • Owner-occupied operating businesses
  • Partnerships and syndications

Property types with the greatest savings potential:

  • Office buildings
  • Shopping centers and retail
  • Restaurants
  • Hotels and hospitality
  • Multifamily apartments
  • Short-term rentals
  • Self-storage
  • Car washes and auto dealers
  • Warehouses and distribution
  • Manufacturing and industrial plants
  • Medical and dental facilities
  • Senior living

Look-back studies: claim depreciation you missed

Bought a property years ago without a study? You haven't missed out. A look-back study lets you claim all the accelerated depreciation you could have taken since the property was placed in service, in the current tax year.

This is done through an automatic change in accounting method (IRS Form 3115) with a one-time "catch-up" adjustment under Section 481(a). No amended returns are required, and IRS consent is automatic when the procedures are followed correctly. We provide the schedules your CPA needs to file it.

Our COST SEGREGATION process

Free feasibility review

We estimate your likely benefit from basic property information, at no cost.

Document collection

Closing statements, drawings, construction costs, appraisals and depreciation schedules.

Site inspection

Our engineers inspect, photograph and measure the property.

Engineering analysis

Detailed cost estimating and asset classification to IRS audit guidelines.

Report delivery

A detailed report with asset schedules, methodology and supporting documentation.

CPA coordination

We work with your CPA on filing, Form 3115 and ongoing support.

Our studies follow the principles in the IRS Cost Segregation Audit Techniques Guide, which identifies a detailed, engineering-based approach as the most reliable methodology.

Things to consider

  • Depreciation recapture: when you sell, gain attributable to Section 1245 property may be taxed as ordinary income. Planning (including 1031 exchanges) can manage this, and the time value of the deferral is often still substantial.
  • Passive activity rules: deductions from rental property may be limited unless you qualify as a real estate professional or materially participate (for example, in some short-term rentals).
  • State conformity: not every state follows federal bonus depreciation, so state savings can differ.
  • Timing: the best time for a study is the year the property is placed in service, but look-back studies remain available.

Frequently asked questions

How much does a COST SEGREGATION study cost?
Fees depend on the size and complexity of the property. We always provide a free feasibility estimate first, so you can see the projected tax benefit against the fee before you commit.
Will a COST SEGREGATION study trigger an audit?
No. A cost segregation study is a well-established, IRS-recognized practice. What matters is that the study is properly documented and engineering-based, which is exactly what we deliver.
How long does a study take?
Most studies are completed in four to eight weeks from receipt of documents, and we can accommodate tax-deadline timelines.
Can I do a study on a property I bought years ago?
Yes. A look-back study lets you catch up missed depreciation in the current year through Form 3115, without amending prior returns.
Does COST SEGREGATION work for residential rentals?
Yes. Multifamily, single-family rental portfolios and short-term rentals can all benefit. Whether you can use the deductions right away depends on the passive activity rules.
Do I need to change CPAs?
Not at all. We work alongside your existing CPA and provide everything they need to reflect the study on your return.

Find out what your property could save

Send us the basics — purchase price, date placed in service and property type — and we'll return a free feasibility estimate.

Request a Free Feasibility Review