Frequently Asked Questions
Browse answers about cost segregation, real estate tax strategies, and depreciation.
Find what you need, fast.
Cost segregation and bonus depreciation are two distinct tax concepts that work together to accelerate real estate deductions.
Cost segregation is an engineering-based study that identifies building components qualifying for shorter depreciation recovery periods. The study reclassifies assets from 27.5-year or 39-year property into 5-year, 7-year, or 15-year categories.
Bonus depreciation is the tax provision allowing first-year deductions on qualifying property. Currently, 100% bonus depreciation applies to property acquired after January 19, 2025.
How they combine:
Without cost segregation, an investor depreciates their entire building slowly. A $1 million commercial building (excluding land value) would generate approximately $25,641 in annual depreciation over 39 years.
With cost segregation, assume $250,000 is reclassified into bonus-eligible categories. The investor now deducts $250,000 in Year 1, plus regular depreciation on the remaining $750,000.
The difference in first-year deductions: $250,000 versus $25,641.
Cost segregation identifies the opportunity. Bonus depreciation delivers the accelerated tax benefit.
In real estate, bonus depreciation is the mechanism that transforms cost segregation findings into immediate tax savings.
Here is how the process works:
Step 1: Acquire or improve property. The investor purchases a building or completes qualifying improvements.
Step 2: Complete a cost segregation study. Engineers and tax professionals analyze the property to identify components with shorter recovery periods. This typically involves reviewing construction documents, analyzing costs, and conducting a site visit to verify asset classifications.
Step 3: Apply bonus depreciation. Qualifying 5-year, 7-year, and 15-year assets receive the applicable bonus depreciation percentage. For property acquired after January 19, 2025, this is 100%.
Step 4: Claim the deduction. The total bonus depreciation is reported on the investor's tax return. For properties placed in service in prior years, Form 3115 is used to claim catch-up depreciation without amending previous returns.
The investor benefit: Cash that would have flowed to the IRS over decades is retained in Year 1. This capital can be reinvested, used to acquire additional properties, or applied to debt reduction.
The IRS defines "qualified property" in IRC § 168(k)(2)(A). The definition requires taxpayers to separately identify each asset to determine eligibility. You cannot assume an entire project qualifies simply because some components do.
This is why cost segregation matters. Without a detailed study, investors typically depreciate their entire building over 27.5 or 39 years. They miss the opportunity to reclassify 15% to 40% of building costs into shorter-life categories that qualify for bonus depreciation.
Example: An investor purchases a $2 million apartment building. Without cost segregation, the entire building (minus land value) depreciates over 27.5 years. With a cost segregation study, $400,000 is reclassified as 5-year and 15-year property. At 100% bonus depreciation, the investor deducts $400,000 in Year 1.
At a 37% tax rate, that represents $148,000 in immediate tax savings.
Property qualifies when it meets three tests:
1. Recovery Period Test The property must have a MACRS recovery period of 20 years or less. This automatically excludes building structures but includes most components identified through cost segregation.
2. Acquisition Date Test For 100% bonus depreciation under the Big Beautiful Bill, the property must be acquired after January 19, 2025. For property acquired earlier, the applicable phase-down rate applies based on when the property was placed in service.
3. Placed-in-Service Test The property must be placed in service during the tax year for which the deduction is claimed. Property under construction does not qualify until it is ready and available for its intended use.
Understanding the difference: Acquisition date vs. placed-in-service date
These two dates serve different purposes and should not be confused:
Acquisition date: Determines which bonus depreciation rate applies. For 100% bonus depreciation under the Big Beautiful Bill, property must be acquired after January 19, 2025. Acquisition generally occurs when a binding written contract is signed.
Placed-in-service date: Determines when you claim the deduction. Property is placed in service when it is ready and available for its intended use. This is the tax year in which depreciation begins.
Why this matters:
Property could be acquired after January 19, 2025, but not placed in service until 2026. The 100% rate applies (based on acquisition date), but the deduction is claimed in 2026 (based on placed-in-service date).
Example: An investor signs a purchase contract on March 1, 2025, for a property under construction. The property is completed and placed in service on February 15, 2026. The investor qualifies for 100% bonus depreciation (acquired after January 19, 2025) but claims the deduction on their 2026 tax return (year placed in service).
A professional cost segregation study is essential to properly identify and document qualifying property. The study involves detailed analysis, often including a site visit, to ensure assets are correctly classified and meet IRS requirements.
- Buildings themselves (27.5-year residential or 39-year commercial property)
- Land (land is not depreciable)
- Property required to use the Alternative Depreciation System (ADS) in most cases
- Property used predominantly outside the United States
Understanding land value is important because land must be separated from the building cost before depreciation calculations begin. Land is never depreciable, regardless of bonus rules.
Common qualifying assets include:
Personal Property (5-year and 7-year):
5-year property:
- Computers and peripherals
- Office equipment (copiers, printers)
- Vehicles
- Appliances
- Carpeting and flooring
- Window treatments
- Decorative lighting
- Security systems
7-year property:
- Office furniture (desks, chairs, filing cabinets)
- Fixtures not inherently permanent
- Agricultural machinery and equipment
- Motorsports entertainment complex property
- Certain manufacturing equipment
- Property without a specific class life
Land Improvements (15-year):
- Parking lots and driveways
- Sidewalks and curbing
- Landscaping
- Fencing
- Signage
- Outdoor lighting
- Retaining walls
Qualified Improvement Property (15-year):
- Interior renovations to nonresidential buildings
- Upgraded finishes
- Interior walls (non-structural)
- Ceilings and lighting systems
To qualify for bonus depreciation, property must meet specific IRS requirements. The core criteria include:
- MACRS property with a recovery period of 20 years or less. This includes 5-year, 7-year, and 15-year property commonly identified in cost segregation studies.
- Computer software as defined and depreciated under IRC § 167(f)(1).
- Water utility property as defined in IRC § 168(e)(5).
- Qualified improvement property (QIP). Interior improvements to nonresidential buildings now qualify as 15-year property.
- Specified plants. Trees and vines bearing fruits or nuts qualify if the taxpayer elects to apply bonus depreciation in the year of planting.
For property acquired after September 27, 2017, the original use requirement was relaxed. Used property now qualifies as long as:
- The taxpayer did not previously use the property
- The property was not acquired from a related party
- The property was not acquired in certain tax-free transactions
This change opened bonus depreciation to a much larger pool of real estate investments.