In this guide
What is cost segregation?
Cost segregation is an engineering-based study that splits the cost of a building into its components and assigns each one the recovery period the tax rules give it. Without a study, most of a building's cost is depreciated over 39 years for commercial property or 27.5 years for residential rental property.
Many components do not belong in those long categories. Carpet, decorative lighting, dedicated electrical for equipment, cabinetry, parking lots, and landscaping can be depreciated over 5, 7, or 15 years instead. Moving them out of the building's schedule shifts deductions into the early years of ownership. How much moves depends on the property type and how it was built, and only a study shows the number for a specific building.
Which recovery periods does a cost segregation study use?
Every depreciable asset has a recovery period under the tax rules. A study sorts the building's costs into these groups:
| Recovery period | What usually lands there | Bonus depreciation |
|---|---|---|
| 5 years | Personal property in many business uses: carpet, removable floor coverings, decorative lighting, dedicated electrical and plumbing for equipment, and appliances in rental units | Eligible |
| 7 years | Furniture, fixtures, and equipment in office and similar uses | Eligible |
| 15 years | Land improvements such as paving, sidewalks, landscaping, fencing, and site lighting, plus qualified improvement property | Eligible |
| 27.5 years | Residential rental buildings | Not eligible |
| 39 years | Nonresidential buildings: structure, roof, walls, and the building's general HVAC, plumbing, and electrical | Not eligible |
Whether an item is 5 or 7-year property often depends on the business activity in the building, so the same fixture can land differently in a restaurant and an office. Land itself is never depreciated. Interior improvements an owner makes to a nonresidential building after it was first placed in service can be qualified improvement property, which is 15-year property. Enlargements, elevators and escalators, and the building's internal structural framework do not qualify.
Sources: 26 U.S.C. 168 · IRS: Cost Segregation Audit Techniques Guide (Pub. 5653)
How does bonus depreciation work with cost segregation?
Bonus depreciation lets a taxpayer deduct qualifying property with a recovery period of 20 years or less in the year it is placed in service. The One Big Beautiful Bill Act made it 100% permanently for qualified property acquired and placed in service after January 19, 2025, so the 5, 7, and 15-year components a study identifies can generally be deducted in full in the first year, unless the taxpayer elects out for that class of property for the year. For a purchased building, the acquisition date is generally the date a written binding contract to buy it was signed, not the closing date.
Property acquired before January 20, 2025 keeps the rate from the earlier phase-down, based on when it was placed in service. The 27.5 and 39-year building portion does not qualify for bonus depreciation. A separate 2025 provision allows an elective first-year deduction for certain buildings used in manufacturing and production, with its own rules and dates.
| Placed in service | Acquired, or construction began, before January 20, 2025 | Acquired after January 19, 2025 |
|---|---|---|
| 2018 to 2022 | 100% (if acquired after September 27, 2017) | Not applicable |
| 2023 | 80% | Not applicable |
| 2024 | 60% | Not applicable |
| January 1 to 19, 2025 | 40% | Not applicable |
| January 20 to December 31, 2025 | 40% | 100% (or elect 40%) |
| 2026 | 20% | 100% |
| 2027 and later | No bonus depreciation | 100% |
Property placed in service before 2018 followed earlier rules, including 100% for property acquired and placed in service after September 27, 2017. Some property with longer production periods gets one extra year at each step of the phase-down.
Property the owner constructs counts as acquired when physical work of a significant nature began, or, under a safe harbor, once more than 10% of its cost (not counting land and early planning) was paid or incurred. A building whose construction started before January 20, 2025 can have components at both rates, depending on when each was contracted for or built and on a component election under IRS rules. A study sorts this out.
The election to use 40% instead of 100% applies to the first tax year ending after January 19, 2025, so owners with fiscal years may see different dates.
Sources: 26 U.S.C. 168(k) · IRS Notice 2026-11 · IRS Rev. Proc. 2026-15, section 2.02 · IRS: Qualified production property guidance (Notice 2026-16)
Can I do a cost segregation study on a building I already own?
Yes. A study on a building already in service finds the depreciation that would have been taken if the components had been classified correctly from the start. The difference is generally claimed in the current year through an accounting method change on Form 3115, without amending prior returns. If the building was placed in service only in the prior year, amending that return is also an option.
The catch-up amount is a Section 481(a) adjustment. When it reduces taxable income, it is generally taken in full in the year of the change. Components acquired before January 20, 2025 use the bonus rate for the year the building was placed in service, unless the owner elected out of bonus depreciation for that class of property that year.
When a renovation removes a component such as a roof or HVAC system, a partial asset disposition election can deduct the removed component's remaining undepreciated cost in that year. The election is generally made on the original return for the year of the removal, filed by its due date including extensions. A study can establish the component's cost.
Sources: IRS: About Form 3115 · IRS Rev. Proc. 2025-23 (automatic changes) · IRS Rev. Proc. 2015-13 · Treas. Reg. 1.168(i)-8
How does 179D fit with cost segregation?
Section 179D is a separate deduction for energy-efficient interior lighting, HVAC and hot water, and building envelope work. Under Section 179D(e), the basis of the property that earns the 179D deduction is reduced by the amount of the deduction, so depreciation on those components starts from the reduced basis. Looking at both together, rather than one after the other, applies that basis reduction correctly so the same dollars are not deducted twice, and shows the combined first-year result.
179D applies only to qualifying work whose construction began on or before June 30, 2026. For newer and recently renovated commercial buildings, we check 179D on every cost segregation engagement.
Source: 26 U.S.C. 179D
Who benefits most from cost segregation?
A study moves depreciation deductions into earlier years. Whether those deductions lower this year's tax depends on the owner's tax situation, so the property and the owner both matter.
- Businesses that occupy their building. When a business owns the building and uses it in its own operations, depreciation is generally a deduction against that business's income. For owners of pass-through businesses, how much they can use also depends on their participation, basis, at-risk amounts, and other limits. If the building is held in a separate entity and leased to the operating business, the rental rules can apply instead.
- Rental owners. Rental losses are generally passive under the passive activity loss rules, so they offset passive income, and unused losses carry forward. Individuals who actively participate may deduct up to $25,000 of rental real estate losses against other income, phasing out as modified adjusted gross income rises from $100,000 to $150,000, with lower limits for married couples filing separately. Losses carried forward are generally released when the owner sells the entire interest in a fully taxable sale.
- Real estate professionals. Owners who qualify as real estate professionals and materially participate in their rentals can treat rental losses, including accelerated depreciation, as nonpassive. Qualifying generally takes more than 750 hours, and more than half of the owner's working hours, in real estate businesses in which the owner materially participates.
- Short-term rental owners. A rental with an average guest stay of seven days or less, or 30 days or less with significant personal services, is generally not treated as a rental activity under the passive loss rules. If the owner materially participates, its losses can offset other income. These properties are generally depreciated over 39 years rather than 27.5. The tax code does not treat units used on a transient basis as dwelling units, and a related regulation treats stays normally under 30 days as transient.
Sources: 26 U.S.C. 469 · Treas. Reg. 1.469-1T · IRS Publication 925
What happens to accelerated depreciation when the building is sold?
Depreciation recapture applies when the property is sold in a taxable transaction. Gain on 5 and 7-year personal property is taxed as ordinary income up to the depreciation taken on it. Land improvements and qualified improvement property are generally real property, and bonus or other depreciation on them above the straight-line amount is generally recaptured as ordinary income, up to the gain. For individuals, gain up to the remaining depreciation taken on the building and other real property is taxed at a maximum rate of 25%.
Recapture does not erase the benefit. The deductions can lower tax in the years the property is held, and paying tax later rather than sooner has value. A like-kind exchange can defer gain, but since 2018 exchanges are limited to real property. Components a study classifies as 5 and 7-year property can trigger ordinary income recapture in an exchange even when the rest of the gain is deferred, unless the replacement property includes enough similar property. A study's figures are worth modeling against the expected hold period and exit plan with your CPA.
Sources: 26 U.S.C. 1245 · 26 U.S.C. 1250 · 26 U.S.C. 1(h) · 26 U.S.C. 1031 · IRS Tax Topic 409
How does a cost segregation study work?
A study is built around the elements the IRS lists for a quality cost segregation study in its Cost Segregation Audit Techniques Guide, from documents to a component-level report.
- 01
Property review
We look at the property, its cost, when it was placed in service, and whether 179D applies to any of the work.
- 02
Documents
We gather construction drawings, cost records, purchase documents, and renovation records.
- 03
Engineering analysis and inspection
Our engineers classify costs component by component and confirm them against the building as built.
- 04
Report and CPA support
You get the report and depreciation schedules, and we work with your CPA on the return, including Form 3115 when a catch-up applies.
Common questions about cost segregation
Does cost segregation work for residential rental property?
Yes. A house or apartment rented to long-term tenants is residential rental property, depreciated over 27.5 years, and a study can move components such as appliances, carpet, and site work into 5 and 15-year categories. A rental where stays are normally under 30 days generally does not count as a dwelling unit, so it is generally depreciated over 39 years as nonresidential property. Whether the deductions reduce current tax depends on the passive loss rules and the owner's situation.
Can land be depreciated?
No. Land is never depreciated. Land improvements such as paving, sidewalks, and landscaping are separate and are generally 15-year property, which is one reason a study separates them from the land and the building.
Do I need to amend prior returns to catch up depreciation?
Generally no. The missed depreciation is generally claimed in the current year through an accounting method change on Form 3115. If the building was placed in service only in the prior year, amending that return is also an option. Your CPA confirms the right approach for each return.
How long does a cost segregation study take?
Most of our studies take 30 to 60 days once construction documents and cost records are in hand, depending on the property and the records available.
Where to go next
- Talk to usBook a Discovery CallThirty minutes. We will tell you whether a study makes sense for your property and how 179D fits in.
- Free toolCost Seg EstimatorEstimate first-year deductions with and without 179D for your building.
- GuideThe 179D Energy Deduction GuideRates by year, prevailing wage, and the June 30, 2026 construction start cutoff.