Quick guide · 3 min read
Cost segregation
A building is normally depreciated over 27.5 years (residential) or 39 years (commercial). A cost segregation study separates parts like appliances, fixtures, flooring and landscaping into 5, 7 and 15-year property, which can be written off much faster.
- Who it fits
- Owners of rental or business property worth several hundred thousand dollars or more.
- Figures
- 2026 tax year
The key rule
With 100% bonus depreciation restored for property acquired after January 19, 2025, the short-life parts identified in a study can often be deducted in the first year.
How it works
A study typically reclassifies part of the building's cost into:
- 5-year property: appliances, carpet, furniture, some electrical and specialty fixtures.
- 7-year property: office furniture and some equipment in commercial buildings.
- 15-year property: land improvements such as driveways, fencing, landscaping, pools and outdoor lighting.
For many properties, 20% to 30% of the building cost moves into these shorter lives.
4 steps
Estimate the benefit
Studies cost a few thousand dollars and usually pay off on properties above roughly $500,000. We estimate the first-year deduction before you commit.
Order the study
An engineering firm reviews the property and produces a report allocating the cost.
Check whether you can use the loss
Rental losses are usually passive. They offset wages only if you qualify for the short-term rental rules or real estate professional status.
Apply it on your return
We use the report for the year the property is placed in service, or catch up past depreciation with a change in accounting method for older properties.
Example
A short-term rental
You buy a $1,000,000 vacation rental, with $200,000 allocated to land. A study moves $200,000 of the building into 5- and 15-year property. With bonus depreciation, most of that $200,000 can be deducted in year one, instead of about $29,000 a year spread over decades.
Common mistakes
- Depreciation taken now is recaptured when you sell, unless you exchange into another property.
- Ordering a study on a property whose losses you cannot use against your other income.
Key dates
- Placed-in-service date
- The first year the deduction can be taken.
Questions we hear
Can I do a study on a property I bought years ago?
Yes. The missed depreciation can usually be caught up in one year with a change in accounting method, without amending past returns.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.