What is Cost Segregation?
When you buy a building, the IRS typically says you must depreciate it over 27.5 years (residential) or 39 years (commercial). However, a building is not just a shell; it contains carpeting, specialty lighting, appliances, HVAC systems, and landscaping.
**Cost Segregation** is an engineering-based study that "segregates" these components from the building structure, reclassifying them into shorter MACRS recovery periods like 5, 7, or 15 years.
The Financial Impact
By moving an asset from a 39-year life to a 5-year life, you are essentially "bringing forward" your tax deductions from the future into the present. This significantly increases your cash flow in the early years of ownership, which can be reinvested into more property.
Cost Segregation Categories
- 5 and 7-Year Property (Personal Property): Includes carpeting, decorative lighting, appliances, cabinetry, and specialty air handling for server rooms.
- 15-Year Property (Land Improvements): Includes driveways, parking lots, landscaping, fences, and outdoor lighting.
- 27.5 or 39-Year Property (Building Core): The "bones" of the building, such as the roof, walls, windows, and standard plumbing.
The 100% Bonus Depreciation Multiplier
Under the **OBBBA (2025)**, any 5, 7, or 15-year assets identified through a cost segregation study are eligible for **100% Bonus Depreciation**.
The Math:
If a study identifies $200,000 of 5-year assets in a new commercial building, you can deduct the **entire $200,000 in Year 1** instead of taking a $5,128 deduction ($200k / 39) every year for nearly four decades.
Is a Study Worth the Cost?
Cost segregation studies typically cost between $5,000 and $15,000, depending on the size of the property. A general rule of thumb is that if your property purchase price (excluding land) is over $500,000, the tax savings from a study will far outweigh the cost of the study itself.
Conclusion
Cost segregation is no longer just for massive office towers. With the restoration of 100% bonus depreciation, even small single-family rental owners can benefit from "unofficial" or "DIY" cost segregation techniques—though a professional study is always required to survive an IRS audit.
Estimate Your Savings
Use our Rental Property Calculator to see how land separation and reclassification impact your bottom line.
Go to Rental Property Calculator →MyDepreciation Editorial Team
Tax & Accounting Experts
Last reviewed: March 2026
Our editorial team includes tax professionals and financial analysts who review every calculator and guide for accuracy. All content is cross-referenced with IRS Publication 946 and current tax legislation.