Resources
When Cost Segregation Pays, and When It Doesn’t
How to tell whether a study is worth buying, and what it costs you when you sell.
Depreciation & Cost Segregation
CR
Written by Chris Rudolph
Principal, Bastion & Thorne
Published by Bastion & Thorne Media Group, LLC, which does not provide tax, legal, accounting, or investment advice or client services. General information only; it may not reflect your facts or current law. Services are provided only by Bastion Tax, LLC under a signed engagement letter.
Cost segregation is one of the most heavily marketed services in real estate tax. Sometimes it’s worth every dollar. Sometimes it’s a bill for deductions you can’t use. Here’s how to tell the difference.
What a study reclassifies
By default, a commercial building is depreciated evenly over 39 years and a residential rental over 27.5 years. A cost segregation study, often performed by an engineering firm, identifies parts of the property that may qualify for shorter lives: certain fixtures and finishes (5 or 7 years) and land improvements like paving and landscaping (15 years). Classification depends on the facts.
Shorter lives move deductions earlier. Under current federal law, qualifying property with a recovery period of 20 years or less, acquired after January 19, 2025, generally qualifies for 100% bonus depreciation, so a large share can be deducted in the first year. Property acquired under a binding contract signed before January 20, 2025 follows the earlier phase-down. Many states don’t follow federal bonus depreciation, and California doesn’t, so your state return will look different. A tax advisor should model both.
When the math works
A larger depreciable basis. The study fee is roughly fixed. The benefit grows with the building.
A longer hold. The deductions have time to do their work before a sale.
Income the losses can actually offset. Rental losses are generally passive, so they offset passive income. If you qualify as a real estate professional and materially participate in your rentals, the losses are treated as nonpassive and can offset wages and business income. That’s often where a study pays the most.
A recent purchase, build, or major renovation. A study can also cover property bought in earlier years and pick up the missed depreciation in the current year through an accounting method change, without amending old returns.
When it might not
The losses will be suspended. Deductions you can’t use for years are worth less.
You plan to sell soon. If you sell at a gain, depreciation on personal property components is generally recaptured as ordinary income.
You plan to exchange. Since 2018, only real property qualifies for a 1031 exchange, so accelerated personal property can create taxable recapture inside an exchange. That counts against a study, but it doesn’t rule one out. Owners with significant income to offset sometimes accept the tradeoff, or plan a new study on the replacement property to help offset the recapture, depending on the facts. It’s a factor to model, not a reason to skip.
The building is small, or mostly shell. There may not be enough to reclassify.
What to look for in a study provider
An engineering-based study with a site visit
Methodology that lines up with the IRS Cost Segregation Audit Techniques Guide, a nonbinding IRS reference
A fee that isn’t tied to the size of the deductions found
A commitment to support the study if it’s examined
how we help
Working with us
We help you decide whether a study is worth commissioning by modeling the federal and state benefit against your income, hold period, and exit plans, including a future exchange. If you move forward, we review the provider’s proposal and the finished study, then carry it through your fixed asset schedules and returns.
When you reach out, select Depreciation & Cost Segregation on the form.
free resource
Real Estate Tax Readiness Assessment
Twenty-four questions that show where your facts, documents, and decision points are prepared, incomplete, or unknown before the next transaction.
