What does a cost segregation study actually do?

An engineering firm analyzes your property and reclassifies building components into shorter depreciation categories. HVAC, carpet, fixtures, parking lots, and landscaping get moved from 27.5/39-year property to 5, 7, or 15-year property - dramatically accelerating your depreciation deductions.

How much does a study cost?

Typically $5,000-$15,000 depending on property size and complexity. The tax savings usually outweigh the cost by 5-10x or more. For a $1M+ property, first-year deductions can be $200,000-$400,000.

Can I do this on a property I bought years ago?

Yes - you can do a "look-back" study on previously acquired properties. You file a Form 3115 (change of accounting method) to claim the catch-up depreciation in a single year. No need to amend prior returns.

Does this work with 100% bonus depreciation?

Yes, and combining the two is where the acceleration comes from. Components reclassified to 5 or 7-year property qualify for 100% bonus depreciation (restored by OBBBA). This means you can potentially deduct 20-40% of the building cost in year one.

What types of properties benefit most?

Commercial properties (offices, retail, restaurants, medical facilities) typically have more reclassifiable components than residential rentals. But even a residential rental worth $500K+ can generate meaningful first-year tax savings.

Real Estate

Cost Segregation Study

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advanced · $250K - $500K

A cost segregation study reclassifies building components (HVAC, flooring, fixtures) from 27.5/39 year property to 5, 7, or 15 year property.

Combined with bonus depreciation, deduct 20-40% of building cost in year one.

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Key takeaways

A study reclassifies building components (HVAC, flooring, fixtures) into 5-, 7-, or 15-year property, accelerating depreciation.
Combined with 100% bonus depreciation, it can front-load 20-40% of a building's cost into year one.
Studies typically cost $5,000-$15,000 and suit properties of about $500K or more.
A look-back study (via Form 3115) can capture missed depreciation on properties bought in prior years without amending returns.

Requirements

Commercial or rental property $500K+
New purchase or recent acquisition
Hire qualified cost segregation firm

How to Implement

1Purchase or construct commercial/rental property
2Hire engineering firm for cost segregation study ($5K-$15K)
3Reclassify components to shorter recovery periods
4Apply bonus depreciation to reclassified assets
5File amended returns for past properties if beneficial

The bottom line
Cost segregation pulls depreciation forward by reclassifying building components, magnified by bonus depreciation. The study cost usually makes sense only on larger properties.

Frequently Asked Questions

Minimum Investment

Properties $500K+ (study costs $5K-$15K)

Educational Only: This information is for educational purposes. Consult a qualified financial advisor or tax professional before implementing.

Last reviewed: April 2026

Related real estate strategies

1031 ExchangeSell investment property, defer all capital gains by buying replacement property.Rental Property DepreciationDeduct "paper loss" of 3.6% of building value each year - even if property appreciates.Real Estate Professional StatusQualify as RE professional to deduct rental losses against W-2 income.

Sources

Internal Revenue Service, Rev. Proc. 2025-32
2026 inflation-adjusted amounts (tax brackets, standard deduction, estate & gift, FSA, credits)
Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
Internal Revenue Service, Rev. Proc. 2025-19
2026 HSA and HDHP inflation-adjusted limits

Educational information only. Not financial, tax, or legal advice or a recommendation. Figures are drawn from the primary sources cited above; verify current amounts with the source before acting.