Cost Segregation: The Highest-ROI Tax Strategy in CRE
An IRS-sanctioned study that converts ordinary depreciation into accelerated depreciation — often returning 8–10x on the study fee in year one.
How It Works
A qualified engineer walks the property and reclassifies basis components by useful life. Carpet, electrical, decorative finishes → 5 or 7-year property. Site improvements (parking, fencing, landscaping) → 15-year property. The remaining building shell stays at 39-year. Any asset with ≤20-year recovery is eligible for bonus depreciation in year one.
The Math Example
$5MM building, $1MM (20%) reclassified, 40% bonus depreciation = $400K year-1 acceleration. At 37% marginal federal rate = ~$148K of cash tax savings. Study fee: ~$15K. ROI: 9–10x.
The Recapture Catch
Accelerated depreciation is recaptured at ordinary rates on sale (up to 37%) — not the 25% Section 1250 rate. The net benefit is timing, not permanent. But timing in CRE compounds: the tax savings fund the next acquisition, which generates more savings.
Bonus Depreciation Phase-Down
- 2022: 100%
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0% (unless extended)
Estimate Your Cost Seg Savings
Input purchase price, bracket, and reclass % — see your year-1 tax savings and study fee ROI.
Open Cost Seg Calculator →Frequently Asked Questions
What is cost segregation?
Cost segregation is an IRS-sanctioned engineering study that reclassifies portions of a commercial building from 39-year straight-line depreciation into 5-year, 7-year, and 15-year recovery categories. Personal-property components (carpeting, decorative fixtures) go to 5–7yr; site improvements (parking, landscaping, lighting) go to 15yr.
How much can cost segregation save on taxes?
On a $5MM building with $1MM (20%) reclassified to short-recovery property, year-1 bonus depreciation can generate ~$400K of accelerated deduction. At a 37% federal marginal rate, that's ~$148K of cash tax savings — versus a typical $15K study fee. ROI is commonly 8–10x.
Is cost segregation legal?
Yes — explicitly endorsed by the IRS in the Audit Technique Guide for Cost Segregation. The requirement is an engineering-based study by a qualified provider, not a back-of-envelope estimate.
What is the catch?
Accelerated depreciation is recaptured at ordinary income rates on sale (up to 37%), not the 25% Section 1250 rate. Net benefit is timing — but timing in CRE is extraordinarily valuable because the tax savings fund the next deal.