Business Tax Strategy · Cost Segregation
What is a cost
segregation study?
An engineering report that takes a building apart on paper. When you buy a commercial building, the tax code assumes all of it is building and writes it off over 39 years. A cost segregation study identifies the parts that are really equipment, finishes, or site work, and puts those on 5, 7 and 15 year schedules instead. The result is a much larger deduction in the first years you own the property.
Quick answer
- A cost segregation study is an engineering report that splits the purchase price of a building into parts and assigns each part its own depreciation life.
- By default a commercial building is written off over 39 years and a residential rental over 27.5. A study moves the pieces that are not structure onto 5, 7 and 15 year schedules.
- Five year property is things like carpet, cabinetry, and specialty electrical. Fifteen year property is land improvements: parking, sidewalks, landscaping, fencing.
- Studies commonly reclassify twenty to forty percent of a building's cost, depending on the property type.
- Bonus depreciation lets much of the reclassified amount be deducted in the first year. The July 2025 law restored one hundred percent bonus depreciation for property acquired after January 19, 2025.
- It does not create a deduction. It moves deductions you already had into earlier years, where they are worth more.
The four buckets
5 year property
Carpet and removable flooring, cabinetry and millwork, decorative lighting, and electrical or plumbing that serves specific equipment rather than the building. Often the largest reclassified bucket in a restaurant, clinic, or retail space.
7 year property
Furniture, fixtures, and certain equipment that came with the building. A smaller bucket in most studies.
15 year property
Land improvements: parking lots, curbs, sidewalks, fencing, landscaping, site lighting, and storm drainage. Large on any property with a big lot.
39 or 27.5 year property
The structure: foundation, framing, roof, exterior walls, and the base building systems. This stays where it was. A study does not touch it.
What the study actually contains
An engineer reviews the plans, the closing statement, and the construction or renovation costs, and usually walks the property. Every component gets a value and a class life, with the reasoning documented. The output is a report your CPA can attach to the return and defend if it is ever questioned, which is why the IRS guide expects an engineering based method rather than a percentage pulled from a table.
Where the cash comes from
Bonus depreciation. Property with a life of twenty years or less qualifies for it, so the 5, 7 and 15 year buckets can be deducted almost entirely in the first year. The July 2025 law restored one hundred percent bonus depreciation for property acquired after January 19, 2025, which makes a study on a recent purchase worth far more than it was a year earlier. How large the deduction gets is on how much a cost segregation study saves, and whether it fits your situation is on when cost segregation is worth it.
Frequently asked questions
What is a cost segregation study?
An engineering based analysis that breaks a building's cost into components and assigns shorter depreciation lives to the ones that qualify, so more of the cost is deducted in the early years of ownership instead of over 39 or 27.5 years.
What is the cost segregation definition the IRS uses?
The IRS Cost Segregation Audit Techniques Guide describes it as identifying property that qualifies as tangible personal property or land improvements, separate from the building structure, and supporting that split with engineering and cost data.
What parts of a building can be reclassified?
Personal property like carpeting, cabinetry, decorative lighting, and dedicated electrical or plumbing serving equipment, onto 5 or 7 years. Land improvements like paving, curbs, landscaping and site lighting, onto 15 years. The structure itself stays at 39 or 27.5.
Who performs a cost segregation study?
A firm with engineering and construction cost expertise, usually working from plans, cost records and a site visit. Your CPA then applies the study on the return. The IRS expects an engineering based approach, not an estimate.
Does cost segregation create new deductions?
No. Every dollar was going to be depreciated eventually. The study changes when, moving deductions forward into years when you have income to offset and can use the cash.
Educational content only, not tax or legal advice. Dollar figures are the statutory amounts and are adjusted for inflation each year, and the rules depend on when a property was placed in service. Talk to a licensed CPA before you act on any of it.
Own a building and never had it studied?
Tell us the property type, the purchase price, and the year you bought it. We will tell you whether a study is likely to pay for itself before you spend anything on one. Start with the cost segregation overview, send us the details, or call +1 (586) 899-1003.
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