Definition
A cost segregation study is an engineering-based analysis that breaks a building's cost into components and reassigns them to shorter depreciation schedules, accelerating deductions.
How It Works
Instead of depreciating a whole property over 27.5 years (residential) or 39 years (commercial), a study identifies parts that qualify for 5, 7, or 15-year lives, such as fixtures, flooring, specialized wiring, and land improvements. Because 100% bonus depreciation is available for most qualifying business property acquired and placed in service after January 19, 2025, eligible shorter-life components may be deducted immediately in the first year.
Example
On a $2 million commercial building, a study might reclassify $400,000 of components into shorter lives, producing a large first-year deduction instead of spreading that amount thinly across 39 years.
When It Works Best
It is generally cost-effective on properties above roughly $500,000 in basis, and most valuable for owners who have enough taxable income to actually use the accelerated deductions.
Who It Applies To
Owners of commercial, rental, and investment real estate, including multifamily, short-term rentals, retail, industrial, and medical office.
Watch-Outs
Accelerated depreciation lowers the property's basis, which increases depreciation recapture when the property is sold, so part of the benefit is a deferral rather than a permanent saving. Passive activity rules can also limit who is able to use the deductions against other income. Studies can be applied to properties bought in prior years through a catch-up adjustment without amending past returns.
