If you own commercial or investment real estate, you may be leaving significant tax deductions on the table. Cost segregation can dramatically accelerate depreciation and reduce your current tax bill.
Here's how to evaluate whether a cost segregation study makes sense for your property.
What is Cost Segregation?
Standard depreciation spreads the cost of a building over 27.5 years (residential) or 39 years (commercial). That's a long time to wait for tax benefits.
Cost segregation is an engineering-based strategy that breaks down building components into different asset classes. Instead of depreciating everything over decades, a study identifies portions that can be written off over 5, 7, or 15 years.
What Gets Reclassified?
A cost segregation study examines every component of your building:
5-Year Property:
- Carpeting and vinyl flooring
- Decorative lighting
- Certain electrical outlets
- Signage
- Security systems
7-Year Property:
- Office furniture built into the space
- Specialty equipment
- Certain fixtures
15-Year Property:
- Parking lots and sidewalks
- Landscaping
- Fencing
- Outdoor lighting
- Site drainage
On average, 20% to 40% of building components can be reclassified into these shorter-lived categories.
The 2025 Game-Changer: 100% Bonus Depreciation Returns
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.
This means the components identified in your cost segregation study can be fully written off in the year the property is placed in service.
A Real Example
Consider a rental property purchased after January 19, 2025, with $500,000 allocated to the building structure:
Without Cost Segregation:
Standard depreciation: $17,425 in year one
With Cost Segregation (assuming 20% reclassification):
- Shorter-lived assets: $100,000 x 100% bonus = $100,000 deduction
- Remaining structure: $400,000 / 27.5 years = $14,545 deduction
- Total year one depreciation: $114,545
That's a 550% increase in first-year depreciation.
Who Should Consider a Study?
Cost segregation typically makes sense for:
- Commercial properties (office, retail, industrial)
- Apartment buildings and multifamily
- Hotels and hospitality
- Medical facilities
- Warehouses and distribution centers
- Properties with a depreciable basis of $1,000,000 or more
The larger the property and the more complex the build-out, the greater the potential benefit.
When to Do the Study
Ideal Timing: The year you acquire, construct, or substantially renovate the property.
Missed the Window? You can still benefit. A "look-back" study allows you to claim missed depreciation from prior years without amending previous tax returns. The IRS allows this through a change in accounting method.
Study Costs
A quality cost segregation study typically runs $5,000 to $15,000, depending on property size and complexity.
For a property where the study yields $100,000+ in accelerated deductions, the return on that investment is substantial.
Be wary of "desktop" studies done without a site visit. The IRS has challenged studies that lack engineering rigor.
The Bottom Line
For owners of commercial or investment property with significant depreciable basis, cost segregation has become even more attractive with the return of 100% bonus depreciation.
The upfront study cost is almost always dwarfed by the tax savings, especially for properties valued at $1 million or more.
