What is a cost segregation study?

An engineering-based analysis that reclassifies components of a real-estate purchase from 39-year (or 27.5-year residential) to shorter depreciation lives — typically 5-, 7-, and 15-year. Lighting, plumbing fixtures, parking lots, landscaping, and specialty equipment often qualify.

When does cost segregation make sense?

Best suited for commercial property over $750K-$1M, where the present value of accelerated deductions outweighs the $5K-$15K study cost. Also valuable for property already owned — Form 3115 lets you catch up on missed depreciation in the year of the study.

How does this interact with bonus depreciation?

Bonus depreciation lets you deduct a percentage of qualifying 5- and 15-year property in year one. The rate is phasing down: 100% (2017-2022), 80% (2023), 60% (2024), 40% (2025), 20% (2026), 0% (2027+ absent legislation). Cost seg supercharges bonus depreciation while it lasts.

Are losses immediately usable?

Not always. Passive activity loss rules under §469 limit how much rental real estate loss can offset other income for most owners. The §469(c)(7) real-estate-professional status unlocks full deduction. Active participation gets a limited $25K allowance phased out above $100K-$150K AGI.

Free Calculator

Cost Segregation Calculator

Estimate the first-year tax savings from reclassifying portions of a real-estate purchase into 5-, 15-, and 39-year depreciation classes — with current-year bonus depreciation applied.

Your situation

Cost segregation reclassifies building components into shorter depreciation classes — pulling deductions forward.

Total property purchase price$2,000,000

Land value (not depreciable)$400,000

Property type

Marginal tax rate (federal + state combined)37%

Year-1 tax savings

$45,068

from accelerated depreciation, before subtracting study cost

Depreciable basis (building only)$1,600,000

5-year property reclassified$240,000

15-year property reclassified$160,000

39-year property remaining$1,200,000

Year-1 depreciation w/ cost seg$142,318

Year-1 depreciation w/o cost seg$20,513

Year-1 acceleration$121,805

Estimated study cost-$12,000

Net first-year benefit$33,068

Read this carefully

Cost segregation is a timing benefit — total depreciation is the same, just front-loaded. Bonus depreciation rate phases down each year (20% in 2026). Passive activity loss rules may defer deductions for non-real-estate-professional owners. Talk to a partner.

Coordinate with 1031 and passive loss planning

The biggest real-estate tax wins come from stacking strategies: 1031 exchange to defer the prior gain, cost segregation to accelerate the new property's deductions, and real-estate-professional status (or PAL planning) to make sure the deductions land where you want them.

See 1031 Exchange Calculator Talk to a partner