What is cost segregation in commercial real estate?

Cost segregation is an engineering-based study that reclassifies portions of a commercial property from 39-year depreciation into shorter 5-, 7-, and 15-year asset categories. This accelerates depreciation deductions and typically front-loads 20–30% of the purchase price into the first year.

How does bonus depreciation work with cost segregation?

Bonus depreciation lets you deduct 100% of qualifying short-life assets (5-, 7-, and 15-year property) in the year of acquisition. Combined with a cost segregation study, it can shelter substantial taxable income in year one. The One Big Beautiful Bill (signed July 4, 2025) made 100% bonus depreciation permanent for property acquired and placed in service after January 19, 2025, reversing the earlier TCJA phase-down.

When does cost segregation make financial sense?

Cost segregation typically pays for itself when the property is worth $500K+ and the owner has substantial taxable income to shelter. Studies cost $5K–$15K and generate first-year deductions of $200K+ on a $1M property.

What is depreciation recapture and how does it affect cost segregation?

When you sell, accumulated depreciation is recaptured and taxed as ordinary income (up to 25% for real property). However, a 1031 exchange defers all recapture, and the time-value benefit of accelerated deductions usually outweighs the eventual recapture cost.

Can I use cost segregation on a property I already own?

Yes. A look-back study can be performed on properties owned for years, and the missed depreciation is captured via Form 3115 (Application for Change in Accounting Method) without needing to amend prior tax returns. This creates a single large catch-up deduction in the current year.

Investor Tools

Cost Segregation ROI Calculator

Estimate your first-year tax savings from accelerated depreciation on commercial real estate. Cost segregation studies reclassify building components into 5-year and 15-year depreciation schedules — which may deliver significant first-year tax savings depending on property-specific factors and tax situation.

Property Inputs

Purchase Price

Total acquisition cost including land — the land share is backed out below, since land never depreciates.

Land Percentage(typical 15-25%)

The land vs. improvement split on your county property appraiser's assessment is a common starting point.

Property Type

Assumes 15% to 5-year + 10% to 15-year property (25% of the building) — actual studies typically find 20–40%.

Acquisition Year

Federal bonus rate for the year placed in service — 100% is permanent for placements after Jan 19, 2025 (OBBB).

Marginal Tax Rate(federal + state combined)

Your combined marginal rate on the income these deductions offset — the higher the bracket, the more each dollar of deduction is worth.

Estimated First-Year Tax Savings

$144,205

$389,744 of accelerated year-1 deductions × 37% marginal rate. Net of an estimated $5,000 study fee: $139,205 (28.8× return on the study cost)

Reclassified basis

$400,000

25% of the building moves to 5- and 15-year schedules

Year-1 deduction

$430,769

10.5× the $41,026 straight-line baseline

Bonus depreciation

$400,000

100% of reclassified property, deducted immediately

Year 1 Deduction: Before vs. After

Straight-line only (39-year)$41,026

With cost segregation + bonus$430,769

Same property, same basis — the study only changes when you take the deductions.

Basis Allocation

Land (20% — not depreciable)$400,000

Building basis (80%)$1,600,000

5-Year Reclassification (15%)$240,000

15-Year Reclassification (10%)$160,000

Remaining Building (39-yr straight-line)$1,200,000

Year 1 Depreciation

Without Cost Segregation$41,026

With Cost Segregation$430,769

↳ Bonus on 5/15-yr property (100%)$400,000

↳ Straight-line on the rest$30,769

Accelerated Deduction$389,744

@ 37% marginal rate×

Estimated Tax Savings$144,205

How This Number Is Calculated

1.Start with the $2,000,000 purchase price and back out the 20% land allocation ($400,000) — land never depreciates. → $1,600,000 building basis
2.A study reclassifies 25% of the building into short-life property: $240,000 to 5-year + $160,000 to 15-year. → $400,000 reclassified
3.Reclassified property qualifies for bonus depreciation — 100% is deducted immediately in year one. → $400,000 bonus deduction
4.Add first-year straight-line depreciation on everything not covered by bonus ($30,769). → $430,769 total year-1 deduction
5.Compare against straight-line only: $1,600,000 ÷ 39 years = $41,026. → $389,744 accelerated
6.Multiply the accelerated deduction by your 37% marginal tax rate. → $144,205 estimated savings

If the Study Finds More — or Less

Engineering studies typically reclassify 20–40% of building value. Here is the year-1 impact across that range at your inputs:

% Reclassified	Accelerated Deduction	Tax Savings @ 37%
20%	$311,795	$115,364
25%your asset type	$389,744	$144,205
30%	$467,692	$173,046
40%	$623,590	$230,728

Estimate only — not tax advice. Year-1 figures assume a full year of depreciation (the IRS mid-month convention prorates your actual first year by closing month), typical reclassification percentages for the asset type, and bonus eligibility on all 5- and 15-year property. Accelerated depreciation defers tax rather than eliminating it — depreciation is recaptured at sale unless deferred through a 1031 exchange. Confirm your numbers with a qualified CPA and cost segregation engineer.

What Is Cost Segregation?

Cost segregation is an IRS-approved tax strategy that reclassifies components of a commercial property from the default 39-year (27.5-year for multifamily) straight-line depreciation schedule into accelerated 5-year and 15-year MACRS schedules. The result: massive first-year deductions that significantly reduce taxable income.

A licensed engineering firm conducts the study, typically identifying 20-40% of the building value as reclassifiable. For a $2M NNN property, that can mean $300K-$600K of accelerated deductions in year one. Pair this estimate with our deal analyzer to underwrite the full after-tax return before you buy.

5-Year Property

Personal property components that can be reclassified from the building:

• Decorative lighting, fixtures
• Removable carpeting & flooring
• Specialty electrical (process equipment)
• Specialty plumbing (commercial kitchens)
• Cabinetry, millwork
• Furniture & equipment

15-Year Property

Land improvements that can be depreciated over 15 years:

• Paving & parking lots
• Site lighting
• Landscaping & irrigation
• Signage
• Site drainage
• Fencing & walls

39-Year Property

Structural components remaining on the standard schedule:

• Foundation & structure
• Roof & walls
• HVAC (primary systems)
• Primary electrical
• Primary plumbing
• Elevators

Who Benefits Most From Cost Segregation?

•Real Estate Professionals (IRS definition) — can offset passive losses against active income
•High-income active investors with passive income from other properties
•Owners of $500K+ commercial properties (study ROI breaks even around this threshold)
•Recent buyers who can apply cost seg retroactively (catch-up depreciation)

2026 Bonus Depreciation: Back to 100%

The rules changed in 2025. The One Big Beautiful Bill (OBBB), signed into law July 4, 2025, made 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025 — reversing the Tax Cuts and Jobs Act phase-down that had been stepping the rate toward zero (it had reached 40% for early-2025 placements).

Property placed in service after Jan 19, 2025

100% bonus depreciation

With 100% bonus depreciation restored, a cost segregation study lets you write off the reclassified 5-, 7-, and 15-year property in full in year one. When you eventually sell, a 1031 exchange can defer the depreciation recapture those deductions create. The IRS issued Notice 2026-11 (January 2026) covering the permanent 100% deduction and transition rules — always confirm your specifics with a qualified CPA.

What the calculator assumes

• Reclassification percentages are typical-range assumptions by asset type — an actual engineering study (which typically finds 20–40% of building value) sets the real number.
• Year-1 figures assume a full year of depreciation; the IRS mid-month convention prorates your actual first year based on the month you close.
• The study fee is estimated within the typical $5K–$15K range.
• Tax savings shown are a deferral, not a permanent reduction — depreciation is recaptured at sale unless deferred through a 1031 exchange.

Disclaimer: This calculator provides estimates for educational purposes only. Actual cost segregation results depend on a detailed engineering study, property-specific components, and current tax law. Reclassification percentages shown are typical ranges and vary significantly by property. Not tax advice. Consult a qualified CPA and cost segregation specialist before making decisions based on these estimates. MaxLife Commercial does not provide tax or legal advice.

Tax Strategy

Cost Segregation Tax Savings

Planning a CRE Acquisition?

MaxLife Commercial sources commercial real estate across Florida with strong cost segregation potential. We work with qualified CPAs and cost seg specialists to help clients maximize tax benefits.

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