Cost Segregation Study

A cost segregation study is an engineering-based analysis that reclassifies components of a building from long-lived real property into shorter-lived personal property and land improvement categories, accelerating depreciation deductions and improving present-value cash flow.

Absent a study, a commercial building is depreciated over 39 years and residential rental property over 27.5 years, straight-line. A study identifies components that properly belong in 5-, 7-, or 15-year classes — carpeting and specialty flooring, decorative lighting, dedicated electrical for equipment, process piping, security and communication systems, cabinetry and millwork, land improvements such as paving, landscaping, and site utilities. Typical reclassification for a commercial property runs from 20 to 40 percent of total cost, varying widely by property type; restaurants, hotels, and manufacturing facilities generally segregate far more than office buildings or warehouses.

The value proposition is amplified by bonus depreciation, since assets with recovery periods of 20 years or less are eligible. The One Big Beautiful Bill Act permanently restored 100 percent bonus depreciation for qualifying property acquired after January 19, 2025, reversing the phase-down that had reduced the rate to 40 percent for 2025 acquisitions. Reclassified components therefore become immediately deductible rather than recovered over five to fifteen years.

Studies can be applied to prior acquisitions without amending returns, by filing Form 3115 to change accounting method and claiming the cumulative catch-up as a section 481(a) adjustment in the current year.

Practitioners should model the offsetting considerations rather than presenting the deduction in isolation: depreciation recapture on sale at ordinary rates for section 1245 property, interaction with the passive activity and excess business loss limitations, and state conformity, since a number of states decouple from federal bonus depreciation entirely.