Cost Segregation Studies: Accelerating Depreciation on Commercial Real Estate

A cost segregation study is an engineering-based analysis that identifies and reclassifies personal property assets and land improvements that are typically grouped with the building for depreciation purposes. Instead of depreciating the entire building over 39 years (commercial) or 27.5 years (residential rental), a cost segregation study separates components into shorter recovery periods: 5-year, 7-year, and 15-year property. Combined with 100% bonus depreciation (restored under the OBBBA for property acquired after January 19, 2025, with no scheduled end date), a cost segregation study can produce massive first-year deductions.

How much does a cost segregation study save?

What if a cost seg deduction is bigger than your income?

Section 179 simply stops at your taxable income from active trades or businesses, wages included, and the rest carries forward. Bonus has no income cap of its own, so on components acquired after January 19, 2025 it takes the full 100% and can create a loss. What you can do with that loss is limited.

For an individual, business losses above the excess business loss threshold become an NOL carryforward. The threshold is $313,000 ($626,000 joint) for 2025 and drops to $256,000 ($512,000 joint) for 2026. An NOL can then offset only 80% of taxable income in a later year. If the building is a rental, the loss is passive by default and may not offset your other income at all. On its own, the $254,359 first-year deduction in the example above is below the 2026 single-filer threshold, but a larger study could go past it.

What is the difference between Section 179 and bonus depreciation?

Both allow accelerated cost recovery, but they work differently. Section 179 lets you deduct the full cost of qualifying assets in the year placed in service, up to an annual limit ($2,500,000 for 2025, $2,560,000 for 2026), but only against taxable income from active businesses, including wages (it cannot create a loss). Bonus depreciation (100% for property acquired after January 19, 2025, with no scheduled phase-down; 40% or 20% for earlier acquisitions placed in service in 2025 or 2026) applies to both new and used property with no dollar limit and can create a net operating loss. Section 179 requires an active election on the return. Bonus depreciation applies automatically unless you elect out. For most small businesses, Section 179 is preferred when income supports the deduction. Bonus depreciation is better when you want to generate or increase a loss for carryforward.

Related guides:

• Cost Segregation Study for Small Business Owners: Accelerating Building Depreciation

When does a cost segregation study pay for itself?

A cost segregation study typically pays for itself when the building’s purchase price or construction cost exceeds $1 million, though properties with heavy tenant improvements or specialized systems can benefit at lower values. The study reclassifies building components from 39-year (commercial) or 27.5-year (residential) property into 5, 7, or 15-year categories, accelerating depreciation deductions. Common reclassified items include carpeting and floor coverings (5-year), decorative lighting and millwork (7-year), site improvements like parking lots and landscaping (15-year), and specialized electrical and plumbing serving specific equipment. The tax savings from a cost segregation study depend on the bonus depreciation percentage in effect, your marginal tax rate, and the percentage of building costs that can be reclassified, which typically ranges from 15% to 40% of total building cost.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.