Real estate isn’t just about location. It’s about timing – especially when it comes to taxes.
Most commercial property owners are sitting on untapped cash flow because they’re stuck depreciating their buildings over 27.5 or 39 years – the old way. That’s slow money. And in business, slow money means lost momentum.
Cost segregation flips the timeline. It lets you pull forward those deductions, freeing up real cash to reinvest in growth.
If you’re a high-income investor, developer, or business owner sitting on $500K+ of real estate basis, here’s how cost segregation can give you an immediate return while staying in the IRS’ good books.
What Is Cost Segregation?
Cost segregation is a tax strategy that accelerates depreciation on certain components of real estate.
Instead of depreciating the whole property over 27.5 or 39 years, a cost segregation study breaks down your building into parts:
- 5-year assets (e.g., appliances, carpet, decorative lighting)
- 7-year assets (e.g., furniture and fixtures)
- 15-year assets (e.g., parking lots, landscaping, site improvements)
These components are depreciated faster, meaning larger deductions earlier and lower taxable income now.
And it’s all 100% legal, backed by IRS audit technique guides and court precedent.
The Tax Code Breakdown: Section 1245 vs. 1250
The IRS separates property into different two buckets:
- Section 1250: Structural components of the building like foundation, walls, roof, and permanent systems. These depreciate over 27.5 years (residential) or 39 years (commercial).
- Section 1245: Personal property used in business or property components that are removable, decorative, or dedicated to a function. These depreciate over 5, 7, or 15 years.
Ask a CPA, and 9 times out of 10 they’ll throw the whole building into 1250 and call it a day. Why? They don’t know the tax code like a true tax specialist does.
But a detailed cost segregation study reclassifies eligible assets into 1245, legally accelerating deductions.
This is where most businesses leave money on the table.
Bonus Depreciation: Supercharge Your Deductions
Most 5, 7, and 15-year assets qualify for bonus depreciation.
In 2025, that means you can deduct 40% of their value in year one.
This bonus is phasing out, but here’s the current schedule:
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and beyond: 0%
Even without the bonus, standard MACRS depreciation schedules on 5, 7, and 15-year assets still beat 39-year straight-line depreciation by a mile.
Why Is Bonus Depreciation Phasing Out?
Bonus depreciation was expanded under the 2017 Tax Cuts and Jobs Act (IRS Section 168(k)) to give businesses a cash-flow advantage: 100% immediate write-offs for qualifying assets with a useful life of 20 years or less.
But Congress made that 100% rate temporary to keep the overall cost of the tax bill down on paper. It was written to automatically sunset over time, unless Congress steps in to extend it.
This was never meant to be permanent. It was a short-term stimulus to drive business investment, especially in capital-heavy industries like real estate, manufacturing, and tech.
If your real estate has qualifying improvements and you haven’t run a cost segregation study yet, your time is running out.
Real Numbers: How Much Can You Actually Save?
Let’s break it down. Suppose you buy a commercial property for $2 million (excluding land):
- A quality cost segregation study finds that 25% of the cost—$500,000—can be reclassified into short-life property.
- With 40% bonus depreciation in 2024, that’s a $300,000 deduction in year one.
Add another $50,000 to $70,000 in MACRS deductions over the next few years.
At a 35% tax rate, that’s $122,500 in immediate tax savings.
This isn’t theory. We do it all the time.
Who Should Use Cost Segregation?
Cost segregation isn’t just for big REITs. It makes sense for:
- Commercial property owners with over $500,000 in basis
- Multifamily investors
- Office, retail, industrial developers
- Medical or dental practice owners with real estate
- Owners of short-term rental properties (Airbnb, VRBO)
It also works extremely well for properties with recent renovations. You don’t need new construction to benefit.
When to Do a Study
There are two ideal windows:
1. Year of acquisition or construction
Maximize deductions from day one. You can apply bonus depreciation and enjoy immediate write-offs.
2. Any time after acquisition
Through a look-back study and Form 3115, you can claim “catch-up” depreciation this year—even for properties acquired 10+ years ago.
No need to amend past returns. The deduction hits in the current year.
Cost Segregation Step-by-Step Process
Here’s what a proper cost segregation engagement looks like:
1. Feasibility Analysis
A specialist determines if the study is worth it based on property type, value, and owner tax profile.
2. Documentation Collection
You’ll submit blueprints, closing statements, cost records, and asset lists.
3. Site Visit
A field engineer visits the property to verify, document, and photograph all components. And no, they can’t just Google Earth it from a coffee shop, someone must actually walk on the property.
4. Engineering Analysis
Assets are categorized and assigned MACRS life spans (5, 7, 15, 27.5, 39 years).
5. Final Report
You receive a detailed report that your CPA uses to update your depreciation schedule.
Case Study 1: Industrial Renovation
A manufacturing business spent $3 million renovating its facility.
- $2.2M in upgrades were eligible for 5-year or 15-year depreciation
- 60% bonus applied in year one
Total first-year depreciation: $1.3M+
Resulting tax savings: over $455,000
Case Study 2: Multifamily Acquisition (Look-Back)
An investor acquires an apartment complex for $10M in 2018. No study was done.
In 2024, they engage us for a look-back study:
- $2.5M reclassified into short-life assets
- Over $2M in “catch-up” depreciation taken in 2024 via Form 3115
Cash savings? $700K in one tax year.
Don’t Let Recapture Scare You
Yes, accelerated depreciation can be recaptured at sale. But there’s a strategic offset:
- Section 1250 (building): max 25% tax on depreciation recapture
- Section 1245 (personal property): taxed as ordinary income
However, most owners either 1031 into another property or hold long enough that the tax benefit still outweighs any recapture liability.
Holding the property 5+ years generally reduces recapture to a small fraction of the original benefit.
Recapture isn’t a villain, it’s just the IRS asking for a refund on the interest-free loan they didn’t know they gave you.
Common Misconceptions
“It’s only for new construction.”
Wrong. Acquisitions, renovations, and even properties held for years can all qualify.
“It increases my audit risk.”
Also false. A properly documented study, aligned with the IRS Audit Technique Guide, is 100% defensible.
“My CPA can just do it.”
Nope. This isn’t about plugging numbers into tax software. It requires engineering analysis, site visits, and deep familiarity with IRS asset classification rules.
What Makes a Quality Study?
Not all studies are created equal. Here’s what to look for:
- Detailed engineering-based cost breakdown
- Reconciliation back to original purchase/construction cost
- Full site inspection with photos
- Prepared by a team that includes both engineers and tax professionals
- Defensible under IRS audit
How Much Does It Cost?
Typical range: $5,000 to $15,000 depending on property size and complexity.
But that fee is often covered by the first year’s savings—and the ROI is often 10x or more.
Many providers (like us) offer feasibility reviews and only move forward if the savings justify the fee.
Final Thoughts: Use the Tax Code to Your Advantage
The tax code isn’t just about compliance. It’s a strategy manual. Cost segregation is one of the most powerful legal moves real estate owners can make.
If you’re sitting on a property and not using this strategy, you’re overpaying the IRS.
Every month you wait is money you could have reinvested.
Ready to Run the Numbers?
At Bennett Financials, we don’t play defense with your taxes. We create custom, advanced tax strategies that help you scale.
If your property is eligible, and you’re paying over six figures in tax, there is no reason to wait.
Book a call now and let’s see how much we can save you – legally.