Cost Segregation Studies: How to Accelerate Depreciation on Commercial Real Estate

Standard depreciation on a commercial building is painfully slow: 39 years for nonresidential real property, 27.5 years for residential rental property, all using the straight-line method. A cost segregation study changes the math dramatically by identifying building components that qualify for shorter recovery periods (5, 7, or 15 years) and bonus depreciation (100% first-year deduction under the One Big Beautiful Bill Act’s restoration, with no scheduled end date, for property acquired after January 19, 2025). The study is an engineering-based analysis, typically performed by a specialized firm with engineers and tax professionals, that reviews the building’s construction and separates its components into the correct asset classes under IRC 168. Components commonly reclassified include carpeting, decorative lighting, specialized electrical and plumbing systems, security systems, signage, landscaping, parking lots, sidewalks, and certain HVAC components. The IRS has endorsed cost segregation studies through its Cost Segregation Audit Techniques Guide, and the Tax Court has upheld them when properly performed.

How much does a cost segregation study save?

Can you take less than 100% bonus on a 2025 cost seg study?

Yes, in two ways. For your first tax year ending after January 19, 2025, you can elect 40% bonus instead of 100%. Or you can elect out of bonus entirely for a class of property and then use Section 179 to pick which assets, and how much of each one’s cost, to expense.

The class election is blunt. It covers every asset in that class placed in service that year, and you can revoke it only with IRS consent. Section 179 is precise but narrow on a building: beyond section 1245 property it only reaches qualified improvement property, roofs, HVAC, fire protection and alarm systems, and security systems, and it can’t exceed your business income. Whatever you choose, Section 179 comes off first, bonus applies to what’s left, and regular MACRS picks up the rest. A building acquired before January 20, 2025 starts lower anyway, at 40% if placed in service in 2025 and 20% if placed in service in 2026.

Which MACRS methods apply after a cost segregation study?

It depends on the class. The 39-year structure uses straight line with the mid-month convention. Reclassified 5- and 7-year components use 200% declining balance, 15-year land improvements use 150% declining balance, and qualified improvement property is 15-year straight line. Bonus applies first to all of the shorter classes unless you elect out by class.

If you do elect out, the half-year table gives a first-year rate of 20.00% for 5-year property, 14.29% for 7-year property and 5.00% for 15-year land improvements. Those rates assume the half-year convention. If more than 40% of the year’s depreciable basis, not counting real property, goes into service in the last three months, mid-quarter applies and the rates change. The reclassification itself is covered in Cost Segregation for Commercial Real Estate.

• Cost Segregation for Commercial Real Estate: Reclassifying Building Components for Faster 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.