For the right property, a cost segregation study can put hundreds of thousands of dollars of tax savings back into your pocket this year. For the wrong one, it's an unnecessary expense. Here's how to tell the difference.
Cost segregation is usually worth it when all three of these are true:
If those boxes are ticked, the tax deferred in year one typically far exceeds the cost of the study, especially since 2025 legislation made 100% bonus depreciation permanent.
By default, the IRS makes you depreciate a commercial building over 39 years (or 27.5 years for residential rental property), in equal slices. But a building isn't one asset. It includes carpeting, cabinetry, dedicated electrical and plumbing, decorative lighting, parking lots, landscaping and much more, and many of those components qualify for 5-, 7- or 15-year recovery periods.
An engineering-based cost segregation study identifies those components, assigns each a supportable cost, and reclassifies them. Typically 20% to 40% of a building's depreciable cost moves into shorter lives, depending on the property type.
The One Big Beautiful Bill Act, signed on July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. That means every dollar a study moves into 5-, 7- or 15-year property can potentially be deducted in full in the first year, rather than spread over years.
Property acquired earlier is subject to the bonus rate in effect when it was acquired and placed in service (for example 80% in 2023 and 60% in 2024), but a study still accelerates depreciation through the shorter recovery periods.
Illustrative only. Assumes acquisition after January 19, 2025, simplified first-year conventions, and that the owner can use the deductions. Your results depend on your property and tax position.
A look-back study lets you claim the depreciation you could have taken since the property was placed in service, all in the current year, through an automatic change in accounting method (IRS Form 3115) with a Section 481(a) catch-up adjustment. No amended returns are needed.
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This article is general information, not tax, legal or accounting advice. Tax rules change and outcomes depend on your specific facts; speak with a qualified tax professional before acting.
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