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

FREE to View

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.

Want to save your results?

Create a free account to save strategies and track your progress.

Tax Benefit

Accelerate 20-40% of depreciation to year one

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

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.