Cost Segregation Studies

It is an engineering-based analysis that identifies the parts of a building that qualify for shorter tax depreciation lives and reclassifies them off the standard 27.5 year residential or 39 year commercial schedule. Components like specialty electrical and plumbing, cabinetry, flooring, decorative lighting, and land improvements such as parking lots, sidewalks, and landscaping are moved to 5, 7, and 15 year lives. The result is much larger depreciation deductions in the early years of ownership.

It depends on the property, but engineered studies commonly reclassify 20 percent to 40 percent of a building depreciable basis into short-life assets, and multifamily and hospitality properties often land at the higher end. Because those short-life assets generally qualify for bonus depreciation, a large share of that reclassified amount can be deducted in the first year. The benefit is a deferral rather than a permanent write-off, so the real value is the time value of the tax you push into later years, which is why hold period and your ability to use the loss matter.

Yes, and this is one of the most valuable uses of the strategy. You do not have to amend old returns. We file an automatic accounting method change on Form 3115 and claim all of the depreciation you should have taken over prior years as a single Section 481(a) catch-up adjustment on your current return. For a building held several years, that catch-up can be a very large one-time deduction.

Yes, and the two work together. The One Big Beautiful Bill Act restored 100 percent bonus depreciation under Section 168(k) for qualified property acquired and placed in service after January 19, 2025. The 5, 7, and 15 year assets a study identifies generally have recovery periods under 20 years, so they qualify for bonus, which means the reclassified amount can often be written off in full in year one instead of over decades.

Recapture is the tax you pay at sale on depreciation you previously claimed. Cost segregation shifts some of your basis into Section 1245 personal property, whose recapture is taxed as ordinary income, rather than leaving it all as Section 1250 real property, whose unrecaptured gain is capped at a 25 percent rate. So a study can increase the portion taxed as ordinary income at sale, which is exactly why we model the exit in advance and why a 1031 exchange or a step-up in basis at death can preserve most of the benefit.

Not automatically, and this is the question that decides whether a study is worth it. Rental real estate losses are generally passive under Section 469, which means they offset passive income rather than your wages or business income unless an exception applies. The main exceptions are qualifying as a real estate professional and materially participating in the rental, meeting the active participation allowance, or running a short-term rental where you materially participate. We test which of these fits your situation before you rely on the deduction.

Often, yes, and it is one of the most powerful pairings with cost segregation. A rental where the average guest stay is seven days or less is not treated as a rental activity under the passive activity rules, so if you materially participate in it, the losses are non-passive and can offset active income such as W-2 wages. Combine that with a cost segregation study and bonus depreciation, and a single property can generate a large first-year deduction against your other income. The material participation requirement is real and fact-specific, so it has to be documented.

Almost any income-producing building qualifies: commercial, residential rental, multifamily, short-term rental, industrial, retail, medical, and hospitality, whether purchased, constructed, renovated, or expanded. There is no legal minimum, but as a practical matter a study makes the most sense when the depreciable basis, meaning the building and improvements excluding land, is above roughly 500,000 dollars, so the benefit comfortably exceeds the cost of the study.

We quote a flat fee based on the property type, size, and complexity, and we give you a free feasibility estimate of the first-year benefit before you commit. A study is generally worth it when the depreciable basis is large enough, you plan to hold the property for at least a few years, and you can actually use the deductions under the passive activity rules. When those conditions are not met, we will tell you a study does not pay off rather than sell you one.

A properly engineered study does not, and it is your best protection if the return is ever examined. The IRS publishes a Cost Segregation Audit Techniques Guide precisely because the strategy is legitimate and widely used, and it expects the reclassification to be supported by an engineering-based analysis. A rule-of-thumb split with no documentation is what draws adjustments. Our reports are built to the standard the guide describes.