Cost segregation, explained

What a cost segregation study is

When you buy or build a commercial building, the tax code treats it as one asset and depreciates it over 39 years. Residential rental property is depreciated over 27.5 years. Land is not depreciated at all.

A building is not one thing, though. It contains finishes, fixtures, equipment-related electrical and plumbing, and site work such as paving, fencing, drainage and landscaping, none of which will last 39 years and some of which the tax code assigns to shorter recovery periods. A cost segregation study is an engineering-based analysis that identifies those components, assigns a cost to each, and documents why each one belongs in a 5-, 7- or 15-year class rather than in the 39-year building. The owner then depreciates those components over the shorter periods, and, where the law allows it, applies bonus depreciation to them.

The effect is timing. Total depreciation over the life of the property does not change; more of it is taken in the early years and less later. Whether that trade is worth the cost of the study, and what it means when the property is sold, depends on your income, your hold period and your other tax attributes, which is why the decision belongs with your CPA.

Who prepares a study

Studies are prepared by engineers and cost professionals working with the owner’s tax advisor. The IRS publishes a Cost Segregation Audit Techniques Guide (Publication 5653, revised February 2025) for the examiners who review them. The guide is candid: it says there are no prescribed standards for preparing a study, that studies vary in methodology, depth and the preparer’s expertise, and it describes six approaches, from a detailed engineering analysis of actual construction costs to a rule of thumb. It also lists the elements of a quality study, beginning with preparation by someone with the expertise and experience to do it.

Two practical consequences follow. First, the study is only as defensible as the people who prepared it, so ask a prospective provider which of the six approaches they use, and what documentation they deliver. Second, the CPA applies the study to your return, handles the elections and limits described below, and answers for the position if it is examined. The engineer and the CPA are a pair; a study delivered without a CPA’s review is half a study.

Oceans Commercial and the Lifestyle Group team do not prepare, review or sell cost segregation studies, and we do not estimate what a study would save. We represent buyers and sellers of the real estate. The role we can play is described further down this page.

Federal law, dated

Where bonus depreciation stands

Public Law 119-21 was enacted on July 4, 2025. Its bonus-depreciation provision makes the 100% additional first-year deduction permanent for qualified property acquired after January 19, 2025. Treasury and the IRS issued interim guidance in Notice 2026-11 (announced January 14, 2026). Several points in that guidance and in the law bear directly on a building purchase:

• Acquisition date, not closing date, controls. Property under a written binding contract signed before January 20, 2025 is reported to count as acquired before that date, even if it closed later. If your contract straddles that line, the question is for your CPA.
• Earlier acquisitions stay on the old schedule. Property acquired before January 20, 2025 remains on the phase-down enacted in 2017; for such property placed in service in 2025, the rate is 40% (IRS Publication 946, 2025 edition).
• A one-time election. For the first tax year ending after January 19, 2025, a taxpayer may elect 40% instead of 100% (60% for long-production-period property and certain aircraft). Whether that election helps depends on your other income and attributes.
• What bonus applies to. MACRS property with a recovery period of 20 years or less, certain software, and qualified improvement property. It does not apply to the 39-year building shell, and it never applies to land.

Two related provisions in the same law

Qualified production property (§168(n)). The law also created an elective 100% deduction for certain nonresidential real property used as an integral part of manufacturing, production or refining. Construction generally must begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service after July 4, 2025 and before January 1, 2031. Office, administrative, lodging, parking, sales, research and software space is excluded. Interim guidance is in Notice 2026-16 (February 20, 2026), with proposed regulations to follow. This is the one case in which a building itself, rather than its components, may qualify for a first-year deduction, and it is relevant to industrial owners and build-to-suit users. The details are for your CPA.

Section 179 expensing. For tax years beginning after December 31, 2024, the expensing limit is $2.5 million, phasing out once qualifying purchases exceed $4 million, with both figures indexed after 2025 (IRS, “Working Families Tax Cuts — Businesses,” updated August 13, 2026). Section 179 has its own rules about what qualifies and who can use it.

None of the 2025 changes altered §1031 itself. An owner who exchanges into a building and then commissions a study is dealing with two sets of rules that interact, which is the subject of the next section.