Real estate investors often leave significant cash on the table by depreciating their properties the standard way—spreading deductions across 27.5 or 39 years when they could be claiming them now. With 100% bonus depreciation reinstated under recent legislation, the opportunity to accelerate those deductions has never been more valuable.
Cost segregation paired with bonus depreciation is a tax strategy that reclassifies building components into shorter depreciation categories, allowing property owners to write off a substantial portion of their investment in year one. This article covers how the strategy works, who benefits most, and what you need to know about timing, costs, and compliance to put it into action.
Why 100 Percent Bonus Depreciation Returns in 2026
Cost segregation combined with bonus depreciation allows real estate investors to front-load depreciation deductions, which reduces taxable income and improves immediate cash flow. The strategy works by identifying building components—things like lighting, flooring, and landscaping—that qualify for shorter depreciation periods. When paired with 100% bonus depreciation, investors can write off these reclassified assets entirely in the first year rather than spreading deductions across decades.
The OBBBA Legislative Change Explained
The One Big Beautiful Bill Act (OBBBA) reversed what had been a scheduled phase-down of bonus depreciation rates. Before this legislation passed, bonus depreciation was dropping by 20% each year and heading toward elimination. Property owners can now claim the full 100% deduction on qualified assets again, which makes accelerated depreciation strategies significantly more valuable than they were in 2024.
Bonus Depreciation Rates From 2024 Through 2027
The transition timeline matters for planning purposes. Here’s how the rates have shifted:
| Tax Year | Bonus Depreciation Rate |
|---|---|
| 2023 | 80% |
| 2024 | 60% |
| Early 2025 | 40% |
| Late 2025+ | 100% (reinstated) |
| 2026 | 100% |
What the Reinstatement Means for Property Owners
The practical impact is straightforward. You can now accelerate significantly more depreciation in the first year of ownership, which directly translates to a lower tax bill and improved immediate cash flow. That freed-up capital can fund your next acquisition, cover operating expenses, or reduce debt.
What Is a Cost Segregation Study
A cost segregation study is an engineering-based analysis that reclassifies building components into shorter depreciation categories for tax purposes. Instead of depreciating an entire building over 27.5 years (residential) or 39 years (commercial), the study identifies components that qualify for 5, 7, or 15-year depreciation schedules.
The process involves a detailed review of construction documents, blueprints, and often an on-site inspection. Engineers and tax professionals work together to identify and categorize every eligible asset, then produce a comprehensive report that provides the documentation to support accelerated depreciation deductions on your tax return.
What Is Bonus Depreciation
Bonus depreciation is a tax provision that allows you to immediately expense a specified percentage of qualified property’s cost in the year it’s placed in service. Unlike regular depreciation, which spreads deductions across many years, bonus depreciation provides a substantial upfront write-off.
When the rate is 100%, you can deduct the entire cost of eligible assets in year one rather than waiting decades to realize the full tax benefit.
How Cost Segregation and Bonus Depreciation Work Together
Cost segregation and bonus depreciation create a multiplier effect when combined. Cost segregation identifies which property components qualify for shorter depreciation lives, and bonus depreciation allows those reclassified components to be written off immediately.
Here’s how the process typically unfolds:
- Step 1: A cost segregation study reclassifies assets from long-life categories (27.5 or 39-year) to short-life categories (5, 7, or 15-year)
- Step 2: Bonus depreciation is applied to the reclassified short-life assets, enabling an immediate large deduction
- Step 3: The combined effect creates substantial first-year tax deductions that would otherwise be spread over decades
How Cost Segregation Analysis Categorizes Building Components
A cost segregation analysis recognizes that buildings contain many components with different useful lives under IRS rules. The study separates building components into distinct categories based on their recovery periods.
Five-Year Property
This category includes carpeting, appliances, decorative fixtures, and certain specialized electrical components. Items in this category typically have shorter functional lives and can be depreciated quickly.
Seven-Year Property
Furniture, equipment, and certain types of machinery fall into this category. Office furniture in a commercial building or appliances in a rental property often qualify for seven-year depreciation.
Fifteen-Year Land Improvements
Exterior improvements to the land qualify for 15-year depreciation. Parking lots, sidewalks, landscaping, fencing, and outdoor lighting all fall into this category—items that are often overlooked but can represent significant value.
Standard Real Property Recovery Periods
Structural components like the foundation, walls, roof, and main HVAC systems remain on their longer depreciation schedules. The cost segregation study effectively “pulls out” the shorter-life assets, leaving only the structural shell to be depreciated over the standard 27.5 or 39-year period.
Who Benefits Most From Real Estate Cost Segregation
While many property owners can benefit from cost segregation, certain situations produce the most significant advantages.
Commercial Property Owners
Owners of office buildings, retail centers, and industrial facilities often find cost segregation studies highly worthwhile. Commercial properties typically contain substantial reclassifiable components relative to their total value.
Residential Rental Investors
Investors in multi-family properties and short-term rentals can unlock substantial tax savings, especially after significant improvements. Even single-family rentals with a high enough cost basis can produce meaningful benefits.
Real Estate Professionals With Material Participation
If you qualify as a “real estate professional” under IRS rules, you can use passive losses from rental activities to offset ordinary income like W-2 wages. The large depreciation deductions from cost segregation become even more valuable because they can reduce taxes on your active income.
Business Owners Who Own Their Operating Facilities
If you own the building your business operates from, a cost segregation study can generate deductions to offset your active business income. This directly improves your company’s bottom line and frees up cash for growth.
Financial Impact of Cost Segregation on Cash Flow
The core benefit of cost segregation is its direct impact on cash flow. By accelerating depreciation deductions, you reduce your current income tax liability, which frees up cash that can be deployed elsewhere.
Example Cost Segregation Study Results
In a typical study, a commercial property’s assets might be reclassified as follows:
- Personal property (5 and 7-year life): fixtures, equipment, specialized systems
- Land improvements (15-year life): paving, landscaping, site lighting
- Remaining building components (39-year life): structural frame, roof, standard HVAC
A commercial building might have 20-30% of its value reclassified into shorter-life categories, creating substantial accelerated deductions in the first year.
First-Year Tax Savings Calculation
Your exact savings depend on several factors: the property’s value, the percentage of assets reclassified, the current bonus depreciation rate, and your marginal tax bracket. A higher percentage of reclassified assets combined with a higher tax bracket produces greater first-year savings.
Long-Term Cash Flow Improvement
The time value of money makes accelerated deductions valuable. A dollar saved in taxes today is worth more than a dollar saved years from now because it can be immediately reinvested. This front-loading of tax benefits provides capital that can fuel growth and expand your investment portfolio.
When to Complete a Cost Segregation Study
Timing matters when maximizing benefits from cost segregation.
At Acquisition or Construction Completion
The ideal time to perform a study is in the year the property is acquired or construction is completed. This captures the full benefit from the moment the property is “placed in service.”
After Significant Renovations or Tenant Improvements
Major capital improvements create a new depreciable basis. Performing a study after renovation projects allows you to segregate the new components and accelerate their depreciation.
Before High-Income Tax Years
If you anticipate a year with unusually high income, strategically timing a cost segregation study beforehand can offset that income and minimize your tax burden during peak earning years.
Lookback Studies for Properties You Already Own
You don’t have to perform a study in the first year of ownership to benefit. A “lookback” study can be performed on properties acquired in prior years, which allows you to claim all the “missed” depreciation as a one-time catch-up deduction. This adjustment—called a 481(a) adjustment—doesn’t require amending prior tax returns.
Who Can Perform a Cost Segregation Study
Using a qualified provider ensures compliance and credibility with the IRS.
Engineering-Based Specialty Firms
Engineering-based firms are considered the gold standard for cost segregation studies. They employ engineers and construction experts who conduct detailed site inspections, which is the methodology the IRS prefers.
CPA Firms With Cost Segregation Divisions
Some larger accounting firms have dedicated in-house teams or maintain partnerships with engineering firms to offer cost segregation services to their clients.
How to Evaluate and Select a Provider
When choosing a provider, consider the following criteria:
- Experience: Look for firms with expertise in your specific property type
- Methodology: Confirm they use a detailed, engineering-based approach with site visits
- Audit support: Ensure they’ll stand behind their work if questions arise
- References: Ask for case studies to verify their results
What a Cost Segregation Study Costs and Typical ROI
Study costs vary based on property size, type, and complexity—typically ranging from a few thousand dollars to $15,000 or more for larger properties. However, a quality study usually generates returns many times its cost in the first year alone, making it a high-value investment for eligible property owners.
Depreciation Recapture and Other Risks to Consider
While powerful, cost segregation has long-term implications worth understanding before moving forward.
Understanding Recapture at Sale
When you sell a property, the accelerated depreciation you’ve claimed is “recaptured” and taxed—potentially at a higher rate than long-term capital gains. This affects your net profit from a sale and factors into decisions about holding periods.
IRS Compliance and Audit Considerations
Audit risk for a properly documented cost segregation study is low. High-quality studies performed by reputable, engineering-based firms have strong support in IRS guidelines and tax court precedent.
IRS Guidelines for Cost Segregation Compliance
The IRS has provided clear guidance on acceptable methodologies in its Cost Segregation Audit Techniques Guide. To be well-supported, a study requires:
- Detailed engineering analysis: Based on thorough blueprint review and physical site visits
- Component-level documentation: Each reclassified asset individually identified and costed
- Proper asset class assignment: All components correctly assigned according to IRS definitions
How Strategic CFO Guidance Turns Tax Savings Into Growth Capital
Generating tax savings is only the first step. The real value comes from deploying that freed-up cash strategically. A firm like Bennett Financials acts as a navigator, helping founders and investors use the capital unlocked by cost segregation to fuel growth rather than simply saving on taxes. The goal isn’t paying less—it’s using tax planning as fuel to build long-term value.
Talk to an expert to discuss how cost segregation and bonus depreciation could apply to your specific situation.
