Cost Segregation for Commercial Real Estate: Reclassifying Building Components for Faster Depreciation

A cost segregation study is an engineering-based analysis that identifies building components eligible for accelerated depreciation. Under the MACRS depreciation system, commercial buildings are depreciated over 39 years (27.5 years for residential rental property). But many components within a building (electrical systems serving specific equipment, specialized plumbing, decorative finishes, site improvements, parking lots, landscaping) qualify as personal property (5-year or 7-year) or land improvements (15-year) under IRC 168. With 100% bonus depreciation restored by the OBBBA for property acquired after January 19, 2025 (no scheduled end date), these reclassified components can be fully deducted in the year the building is placed in service. The study must be performed by a qualified professional (typically an engineer with tax expertise) and produces a detailed report that supports the reclassifications on audit.

How much does a cost segregation study save?

Section 179 or bonus for a dentist’s building components?

For the reclassified dental plumbing, electrical and cabinetry, bonus is usually simpler. It applies at 100% to property acquired after January 19, 2025, with no taxable-income cap of its own. Section 179 can’t exceed taxable income from your active businesses, and if the practice is an S corporation or partnership, its limits apply at the entity and again on your own return.

Bonus still has an outer edge. A loss it creates on an individual return runs into the excess business loss rule, which is $313,000 ($626,000 joint) for 2025 and a lower $256,000 ($512,000 joint) for 2026. Section 179 can come into play later, when you remodel treatment rooms. An interior improvement made after the building was first placed in service can be qualified improvement property, which you can take with bonus or elect to expense under Section 179.

What is real estate professional status and why does it matter for taxes?

Real estate professional status (REPS) under IRC 469(c)(7) removes the automatic passive label from rental real estate, so if you also materially participate, rental losses can offset ordinary income without the $25,000 active participation limitation. To qualify, you must spend more than 750 hours in real property trades or businesses in which you materially participate during the year AND more than half of your total working hours must be in those activities. Each rental property must be separately evaluated for material participation unless you elect to aggregate all rental activities. This status is particularly valuable for taxpayers with significant rental depreciation deductions that would otherwise be suspended as passive losses. Losses still have to clear the at-risk rules first, and very large ones can be capped by the excess business loss rule. The IRS closely scrutinizes REPS claims, so detailed time logs are essential.

Related guides:

• Cost Segregation Studies: How to Accelerate Real Estate Depreciation and Save Taxes

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.