Cost Segregation Studies | aecre consulting

Overview

What Is Cost Segregation?

The IRS requires commercial buildings to depreciate over 39 years and residential rental properties over 27.5 years. A Cost Segregation study reclassifies components of those buildings into shorter recovery periods, creating substantially larger first-year deductions.

A typical study reclassifies 20 to 40% of a building's depreciable basis into shorter recovery categories.

Engineering-based analysis is applied to construction documents, cost records, and building components to identify which elements qualify for shorter recovery periods. Personal property with a 5 or 7-year life, land improvements with a 15-year life, and Qualified Improvement Property are reclassified out of the standard depreciation schedule according to IRS guidelines.

With 100% bonus depreciation permanently restored under the One Big Beautiful Bill Act for property placed in service after January 19, 2025, every reclassified asset in the 5, 7, and 15-year categories can be fully deducted in year one. Actual reclassification percentages depend on property type and construction quality.

5 yr

Personal Property

Carpeting, appliances, task lighting, decorative fixtures, specialized electrical, countertops, window treatments

7 yr

Personal Property (longer-lived)

Furniture, office fixtures, specialized cabinetry, equipment, movable partitions

15 yr

Land Improvements / QIP

Parking lots, landscaping, sidewalks, site utilities, fencing, exterior lighting, interior improvements to existing buildings

39 yr

Structural (remaining)

Structural frame, load-bearing walls, roof structure, standard HVAC, foundation, exterior shell

Maximize First-Year Deductions

How Do 179D and Cost Segregation Work Together?

179D reduces depreciable basis as a first-year deduction. Cost Segregation then reclassifies remaining components into shorter recovery periods. With 100% bonus depreciation permanently restored, reclassified assets are fully deductible in year one. The sequence is written into the tax code.

179D Energy Deduction

Reduce Depreciable Basis First

IRC §179D provides a first-year deduction for qualifying energy-efficient systems in commercial and residential rental buildings. Under §179D(e), the deduction reduces the property's depreciable basis. Cost Segregation then works against the adjusted basis, not the original cost.

Learn about the 179D deduction →

Cost Segregation Study

Reclassify the Remaining Basis

An engineering-based study reclassifies 20 to 40% of the remaining depreciable basis into 5, 7, and 15-year recovery categories. These shorter-life assets become eligible for accelerated depreciation in the year placed in service.

100% Bonus Depreciation

Fully Deduct Reclassified Assets in Year One

Under the One Big Beautiful Bill Act, 100% bonus depreciation is permanently restored for qualifying property with recovery periods of 20 years or fewer, placed in service after January 19, 2025. Every reclassified asset is fully deductible in year one. No phase-down, no waiting.

Worked Example

120,000 sq ft Private Office Building
New Construction, 2026

Total construction cost	$18,000,000
Less: land value	($2,700,000)
Depreciable basis	$15,300,000
179D deduction	($712,800)
Adjusted basis after 179D	$14,587,200
Reclassified to 5, 7, 15-year categories	$3,646,800
First-year bonus depreciation	$3,646,800
Combined first-year deductions	$4,359,600

Without 179D evaluation, Cost Segregation alone on this building would produce $3,825,000 in first-year deductions. Proper sequencing adds $534,600 to the combined result.

Estimate Your Benefit

179D + Cost Segregation First-Year Impact

Enter your building details to see an estimated combined first-year deduction. Select a building type to see typical reclassified components for that property.

Building square footage 100,000 sq ft

Total construction or acquisition cost $10,000,000

Land value percentage 15%

Land value

$1,500,000

Depreciable basis

$8,500,000

Building type

Property class

Cost Segregation only $2,125,000

With 179D evaluated first

179D deduction ($5.94/sq ft) $594,000

Adjusted basis after 179D $7,906,000

Reclassification (~25%) $1,976,500

First-year bonus depreciation $1,976,500

Combined first-year deductions $2,570,500

Benefit of evaluating 179D first +$445,500

Estimates for planning purposes only. 179D deductions require energy modeling and certification. Cost Segregation reclassification percentages vary by building and require an engineering-based study. Consult your tax advisor before making tax planning decisions.

Anonymized Planning Example

Property typeClass A office

LocationTexas

Depreciable basis$8,000,000

Year placed in service2024

Cost seg finding28% reclassified (5, 7, 15-yr)

Without 100% bonus~$205,000 first year

First-year deduction with 100% bonus~$2,240,000

Deduction acceleration~$2,035,000

Anonymized planning example. Actual results vary by property and require an engineering-based study.

Qualification

Does Your Property Qualify?

Cost Segregation applies to a broad range of property types. Whether the benefit produces usable deductions depends on both the property itself and your specific tax situation. Both questions matter before commissioning a study.

Your Property

Commercial buildings (39-year): office, retail, warehouse, hotel, medical, restaurant, industrial
Residential rental properties (27.5-year): multifamily, apartment complexes
Buildings purchased, constructed, or substantially renovated
Tenant improvements above $250,000
Properties placed in service in prior years: eligible for look-back studies via Form 3115, no amended returns required
Recommended minimum: $750,000+ commercial, $200,000+ residential rental

Common qualifying property types

Office

Hotel

Medical

Retail

Warehouse

Multifamily

Restaurant

Self Storage

Your Tax Situation

Real Estate Professional Status (REPS) Maximum benefit

Losses offset all income including W-2 and business income. Requires 750+ hours annually in real estate as primary profession. Spouse qualification counts. This is the maximum benefit scenario for high-income investors.

Active Participation (without REPS) Passive

Losses are passive and offset passive income from other rentals or investments. Up to $25,000 may offset active income below $100,000 AGI, phasing out at $150,000. Excess losses carry forward and release upon property sale.

Short-Term Rental Exception STR

Properties with average rental period of seven days or fewer are not passive under IRC §469 with material participation. Losses offset active income without REPS qualification. Relevant for hotel, hospitality, and vacation rental investors.

Your tax advisor can confirm which scenario applies to your situation.

Already Own the Property?

A look-back study captures all missed accelerated depreciation from prior years. The catch-up adjustment is claimed in the current tax year through IRS Form 3115 as an automatic change in accounting method under Section 481(a). No amended returns required. Properties placed in service within the previous 15 to 20 years are typically eligible. Renovations that replace existing components such as roofing, HVAC, or flooring may also allow the remaining book value of retired assets to be written off as a loss in the year of disposal under IRS tangible property regulations.

See if you qualify

Our Process

How Does a Cost Segregation Study Work?

From initial assessment through CPA integration, we evaluate your full building incentive eligibility and deliver the study process end to end. 179D eligibility is evaluated first on every engagement.

Building Assessment

We evaluate your property for all available building tax incentives, beginning with 179D eligibility. Understanding the 179D deduction first ensures the Cost Segregation study is scoped against the correct adjusted basis.

Documentation Review

We collect construction documents, blueprints, cost breakdowns, and purchase records. For renovations, we identify improvements eligible for accelerated recovery and components eligible for partial asset disposition.

Engineering Analysis

An engineering-based review identifies assets eligible for reclassification into 5, 7, and 15-year categories. Construction documents are analyzed at the component level following IRS Cost Segregation Audit Techniques Guide methodology.

Site Inspection

A virtual or on-site inspection confirms component classifications and documents asset details against construction records. This step ensures the study reflects the property as built, not just as designed.

Report Delivery

You receive a comprehensive Cost Segregation report with detailed asset classifications, depreciation schedules, and all documentation required for IRS substantiation, structured to meet ATG standards and support audit defense.

CPA Integration

We work directly with your CPA to implement revised depreciation schedules and file Form 3115 for look-back adjustments. If 179D is part of your strategy, both deliverables are provided so your CPA receives a complete, unified package.

Frequently Asked Questions

Cost Segregation Frequently Asked Questions

Questions we hear from building owners and CPAs evaluating Cost Segregation and the 179D deduction together.

What is a Cost Segregation study?

A Cost Segregation study is an engineering-based analysis that reclassifies building components from the standard 27.5 or 39-year depreciation schedule into shorter recovery categories of 5, 7, and 15 years. With 100% bonus depreciation permanently restored under the One Big Beautiful Bill Act for qualifying property placed in service after January 19, 2025, reclassified assets are fully deductible in the year the property is placed in service. A typical study identifies 20 to 40% of a building's depreciable basis as eligible for accelerated recovery. The IRS Cost Segregation Audit Techniques Guide establishes the standards examiners use to evaluate study quality; engineering-based analysis following ATG methodology produces documentation built for audit defense.

Should I do 179D or Cost Segregation first?

179D should be evaluated first. Under IRC §179D(e), the 179D deduction reduces the building's depreciable basis by the full deduction amount. Cost Segregation then reclassifies remaining components from the adjusted basis into shorter recovery categories. Running a Cost Segregation study without first evaluating 179D means reclassifying basis that could have been deducted outright. The sequence affects the total combined first-year benefit and is written into the tax code.

Who qualifies for a Cost Segregation study?

Any taxpayer who owns depreciable real property qualifies: commercial buildings (39-year), residential rental properties (27.5-year), and mixed-use properties. The property can be newly constructed, purchased, or renovated. Properties placed in service in prior years are eligible through a look-back study. Most professionals recommend a minimum of $200,000 for residential or $750,000 for commercial to ensure the study cost is justified by the tax benefit. Some companies also qualify for R&D tax credits alongside building incentives, particularly in manufacturing, engineering, and technology sectors.

What happens to accelerated depreciation when I sell the property?

Assets reclassified into 5, 7, and 15-year categories are subject to Section 1245 depreciation recapture at ordinary income rates upon sale. Structural components remaining on 39-year schedules are subject to Section 1250 recapture, currently capped at 25%. The time value of accelerated deductions in year one typically outweighs the recapture differential at sale, particularly over longer holding periods. For investors using 1031 like-kind exchanges, depreciation recapture is deferred to the extent gain is not recognized in the exchange.

Can I do a Cost Segregation study on a property I already own?

Yes. A look-back study captures all missed accelerated depreciation from prior years. The adjustment is claimed in the current tax year through IRS Form 3115 as an automatic change in accounting method under Section 481(a). No amended returns required. The entire catch-up deduction flows through the current year return. Properties placed in service within the previous 15 to 20 years are typically eligible.

How does bonus depreciation work with Cost Segregation in 2025 and 2026?

Bonus depreciation under IRC §168(k) allows qualifying short-life assets to be deducted in the year placed in service. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for property with recovery periods of 20 years or fewer, placed in service after January 19, 2025. Every 5, 7, and 15-year asset identified in a Cost Segregation study is fully deductible in year one. The prior phase-down schedule (80% in 2023, 60% in 2024, 40% for early 2025) has been permanently eliminated. This makes 2025 and 2026 among the most favorable years in recent history to commission a Cost Segregation study.

How does Cost Segregation interact with Qualified Improvement Property?

Qualified Improvement Property (QIP) covers improvements made to the interior of a nonresidential building after the building is placed in service. QIP is 15-year property eligible for 100% bonus depreciation. A Cost Segregation study can identify components within a renovation that qualify for even shorter recovery periods of 5 or 7 years, providing more accelerated treatment than QIP's 15-year classification. For renovation projects that also involve HVAC, lighting, or envelope improvements, 179D should be evaluated alongside both QIP and Cost Segregation to determine the optimal classification strategy. Your tax advisor can help determine the approach that produces the best total outcome for your specific project.

How long does a Cost Segregation study take?

Most studies are completed within 30 to 60 days depending on property complexity and documentation availability. The timeline begins once construction documents and cost records are received. Studies involving look-back adjustments on existing properties typically fall within the same timeframe.

Cost Segregation: Convert Decades of Depreciation Into First-Year Deductions