A cost segregation study breaks a building into its components so parts of it can be depreciated over 5, 7, or 15 years instead of 39. With 100% bonus depreciation made permanent for property acquired after January 19, 2025, those shorter-life components can be written off in year one. On a $2.00M retail building, that can turn a roughly $51K first-year deduction into more than $538K.
How Cost Segregation Works
When you buy a commercial property, the purchase price (minus land) is normally depreciated straight-line over 39 years. But a building is not one asset. It contains carpeting, dedicated electrical, signage, parking lots, landscaping, and site lighting, all of which the tax code treats as shorter-lived property. A cost segregation study, usually done by an engineering-based firm, identifies and values those components so they can be depreciated faster.
| Recovery period | Examples in a retail or net lease property | Bonus eligible? |
|---|---|---|
| 5-year | Carpet, specialty electrical and plumbing for equipment, decorative millwork, some signage | Yes |
| 7-year | Furniture, fixtures, and certain equipment | Yes |
| 15-year | Parking lot paving, curbs, sidewalks, landscaping, site lighting, fencing, drainage | Yes |
| 39-year | Structure, roof, walls, core HVAC, general building systems | No (standard straight-line) |
| Land | The dirt itself | Not depreciable |
What Changed in 2025 and Why It Matters Now
Under the 2017 tax law, bonus depreciation phased down from 100% to 80% in 2023, 60% in 2024, and 40% in 2025. The One Big Beautiful Bill Act, signed July 4, 2025, restored 100% bonus depreciation permanently for qualified property acquired after January 19, 2025. Used property qualifies as long as you did not previously use it, so an acquisition, not just new construction, can benefit. That makes cost segregation more valuable in 2026 than it has been in years.
The Catch: Depreciation Recapture
Accelerated deductions are not free money. When you sell, the 5, 7, and 15-year components you wrote off are recaptured under Section 1245 as ordinary income (up to 37%), and the building portion is taxed as unrecaptured Section 1250 gain at up to 25%. The 3.8% net investment income tax may apply on top. Cost segregation mostly shifts taxes into the future, which is valuable because of the time value of money, but you should plan the exit.
Is a Study Worth It for Your Property?
- Usually yes if the depreciable basis is above roughly $750K to $1M, you have taxable income or passive income to offset, and you plan to hold several years.
- Great fits: multi-tenant retail centers with large parking lots, restaurants, car washes, convenience stores, and medical office with heavy buildout.
- Weaker fits: ground leases (you do not own the building), properties you will sell within 1 to 2 years, and owners with no income the losses can offset due to passive activity rules.
- Missed it? You can often catch up on properties bought in prior years using a change in accounting method (Form 3115) without amending returns.
Frequently Asked Questions
Can I do cost segregation on a single-tenant triple net building?
Yes, if you own the building. The parking lot, site work, and tenant-specific improvements are often 20% to 30% of basis. On a ground lease, the tenant usually owns the improvements, so there is little to segregate.
Will cost segregation trigger an audit?
Studies are common and accepted. The IRS publishes an Audit Techniques Guide for them. Use a firm with engineering staff and a detailed report to stay defensible.
Do passive activity rules limit the benefit?
Often. Losses from rentals generally offset only passive income unless you qualify as a real estate professional. Unused losses carry forward and are released when you sell.
Bottom Line
Cost segregation plus permanent 100% bonus depreciation is one of the most powerful tools available to commercial property owners right now. Run the numbers with your CPA before closing, plan for recapture at exit, and pair it with a 1031 strategy to keep deferring.
Educational content only, not legal, tax, or investment advice. Figures in examples are illustrative. Tax law and IRS guidance change; this reflects rules as of September 2026. Confirm specifics with your attorney, CPA, and lender before acting.