Cost Segregation Doesn’t Create New Depreciation — It Changes When You Take It
A building doesn’t depreciate all at once, or at the same pace across every part of it — and cost segregation is the process of figuring out which pieces don’t have to wait the standard 27.5 or 39 years to be written off. It’s best understood not as a tax-saving strategy in itself, but as a timing tool.
Under standard MACRS rules, the IRS’s own Cost Segregation Audit Techniques Guide confirms that residential rental property depreciates on a straight-line basis over 27.5 years, and nonresidential (commercial) real property over 39 years. By default, the entire building is treated as one asset on that single, long schedule.
A cost segregation study is an engineering-based analysis that looks inside that single asset and identifies specific components — certain personal property, fixtures, and land improvements such as parking areas or landscaping — that qualify for shorter MACRS recovery periods, typically 5 or 7years for certain personal property and 15 years for land improvements, rather than riding along with the building’s 27.5- or 39-year schedule. It is a reclassification exercise, not a mechanism that creates new deductions on its own.
How much of a given property’s cost gets reclassified this way is a meaningful portion of the property’s cost basis, but it varies significantly by property type and construction, with no fixed or guaranteed percentage. The IRS itself cautions that cost segregation studies “vary widely” in methodology and results, with “no bright-line tests” for how a property’s costs should be allocated — which is why any specific figure should be treated as illustrative for a particular property, not a general rule.
This connects directly to OBBBA’s permanent 100% bonus depreciation: components identified
through a cost segregation study, because they carry recovery periods of 20 years or less, are
exactly the category eligible for that permanent rate. But cost segregation accelerates the timing of
deductions already available over a property’s life — it does not increase the total amount
depreciated.
What any individual investor actually sees also depends on more than the study itself. Because the
resulting deductions still flow through the fund’s structure, the outcome depends on that investor’s
own tax position, whether passive-activity-loss rules currently allow that investor to use the
resulting losses, and the fund’s own decision about whether and how to conduct and allocate a cost segregation study — none of which is automatic or guaranteed, and all of which is worth raising with
a personal tax advisor.
Longview Commercial does not provide tax, financial, or legal advice. This article is for general
informational purposes only. Please consult your own qualified tax, financial, or legal advisor before
making any investment decision.
“cost segregation accelerates the timing of deductions already available over a property’s life — it does not increase the total amount depreciated”