What Is Cost Segregation?
Cost segregation is an IRS-sanctioned engineering study that reclassifies portions of a commercial building's basis from 39-year straight-line depreciation into 5-year, 7-year, and 15-year property categories. Site improvements (parking, landscaping, lighting) go to 15-year. Personal property components (carpeting, decorative fixtures, certain electrical) go to 5 or 7-year.
Why It Matters: Bonus Depreciation
Any asset with a recovery period of 20 years or less is eligible for bonus depreciation — meaning a large percentage can be expensed in year one. After the Tax Cuts & Jobs Act, bonus depreciation was 100% through 2022 and phases down: 80% (2023), 60% (2024), 40% (2025), 20% (2026), 0% (2027) — unless extended.
The Math That Matters
A $5MM building with $1MM ($1MM = 20% of cost) reclassified to short-recovery property generates ~$400K of year-1 bonus depreciation at 40%. At a 37% federal bracket, that's ~$148K of cash tax savings — vs a $15K study fee. ROI: 9–10x.
The Catch: Recapture
Accelerated depreciation is recaptured at ordinary income rates (up to 37%) on sale — not the 25% Section 1250 rate. Net benefit is timing, not permanent. But timing in CRE is extraordinarily valuable: the tax savings fund the next deal, which compounds.
Pair this with the Capital Gains Tax Calculator, the 1031 Boot, and the IRR + EM to model the full tax-adjusted return.