Cost Segregation Study
An engineering-based analysis that reclassifies portions of a building into shorter-life property categories to accelerate depreciation deductions in the early years of ownership.
Detailed Explanation
A cost segregation study identifies building components that qualify as 5-year, 7-year, or 15-year property (carpet, fixtures, landscaping, certain electrical and plumbing) instead of being lumped with the 27.5-year (residential) or 39-year (commercial) building shell. Combined with Section 168(k) bonus depreciation, restored to 100% under OBBBA for qualifying assets placed in service after January 19, 2025, this can produce six- and seven-figure first-year deductions for substantial properties. Recapture on disposition is at ordinary income rates for Section 1245 property.
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Learn about Tax Planning & StrategyRelated Terms
Depreciation
The deduction of the cost of a tangible business asset over its useful life, reflecting wear, tear, or obsolescence.
Section 168(k) Bonus Depreciation
A federal tax provision allowing first-year deduction of a percentage of the cost of qualifying business property, restored to 100 percent under OBBBA for assets placed in service after January 19, 2025.
Depreciation Recapture
The portion of gain on sale of depreciated property that is taxed at higher rates rather than long-term capital gain rates, recovering previously claimed depreciation deductions.
Real Estate Professional Status (REPS)
A federal tax status under IRC Section 469(c)(7) that, when properly qualified, allows rental real estate losses to offset ordinary income with no passive activity loss limitation.
Like-Kind Exchange (Section 1031)
A tax-deferred exchange of investment or business real property for similar property under IRC Section 1031, deferring capital gains recognition.
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