What Is a Cost Segregation Study? How It Works, Costs, and Savings

This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.

What is a cost segregation study?

When you buy a rental or commercial building, the IRS normally makes you depreciate it slowly. A home you rent out is spread over 27.5 years. A commercial building is spread over 39 years.

But a building isn't one thing. It's hundreds of parts. Carpet wears out in a few years. A parking lot lasts longer than carpet but not as long as the roof. The tax code recognizes this and gives shorter lives to many of these parts:

• 5-year property: carpet, appliances, cabinets, decorative lighting, some electrical and plumbing tied to equipment
• 7-year property: certain furniture and fixtures in commercial settings
• 15-year property: land improvements like parking lots, sidewalks, fencing, landscaping, and outdoor lighting

A cost segregation study is the report that identifies these parts and puts a dollar value on each one. Your tax preparer then uses the report to depreciate those parts faster.

Why does it matter now?

The 5-, 7-, and 15-year parts qualify for bonus depreciation. Under the One Big Beautiful Bill Act, signed July 4, 2025, bonus depreciation is back to 100% permanently for property acquired after January 19, 2025. That means you can deduct the full cost of those short-life parts in year one.

Before that law, bonus depreciation was shrinking each year. Now the full benefit is back, which makes studies more valuable than they've been in years.

How does a study work, step by step?

1. Feasibility check. A provider looks at your purchase price, property type, and tax situation to estimate the benefit. Many do this for free.
2. Document gathering. You share the closing statement, appraisal, plans, or construction cost records.
3. Site visit or virtual tour. An engineer or specialist inspects the property and photographs components.
4. Cost allocation. The team assigns costs to each component and sorts them into 5-, 7-, 15-, and 27.5- or 39-year groups.
5. Final report. You get a written report with the methods used, a breakdown of assets, and supporting detail.
6. Tax filing. Your CPA uses the report on your return. If the property was bought in an earlier year, they usually file Form 3115 to catch up the missed depreciation.

Who should get a cost segregation study?

A study tends to make the most sense when:

• The building (not counting land) is worth roughly $300,000 or more. Smaller properties can still benefit, but the fee eats more of the savings.
• You plan to hold the property for at least a few years.
• You can actually use the deductions. Rental losses are often "passive" and can only offset passive income unless you qualify as a real estate professional, or you run a short-term rental you materially participate in.
• You bought, built, or renovated recently, or you never did a study on a property you've owned for years.

What does a typical result look like?

Most studies move about 15% to 40% of a building's cost into shorter lives. Here's a simple example:

• Purchase price: $1,000,000 (land worth $200,000)
• Building value: $800,000
• Study moves 25% ($200,000) into 5- and 15-year property
• With 100% bonus depreciation, about $200,000 can be deducted in year one, on top of regular depreciation on the rest

At a 35% tax rate, that's roughly $70,000 in taxes pushed into the future. For a full walkthrough, see our cost segregation study example.

What are the downsides?

• Depreciation recapture. When you sell, some of those deductions can be taxed back. Planning for this matters.
• Upfront cost. Studies usually run a few thousand dollars or more.
• Passive loss limits. Big deductions don't help much if you can't use them this year.
• Quality matters. The IRS has a detailed audit guide for these studies. A cheap, thin report is easier to challenge.

Frequently asked questions

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This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.