Cost segregation is an IRS-approved tax strategy that reclassifies portions of a building's depreciable basis from the default 27.5-year (residential) or 39-year (commercial) recovery period into 5-, 7-, and 15-year recovery periods. Done as part of a cost segregation study, this front-loads depreciation deductions into the early years of ownership. Combined with 100% bonus depreciation (permanent under OBBBA, July 2025), the reclassified portion is fully deductible in Year 1.
Why it matters
Without a cost segregation study, you depreciate the entire building structure straight-line over 27.5 or 39 years. With a study, components like appliances, flooring, cabinetry, fencing, paving, and landscaping move into shorter buckets — and 100% bonus depreciation means those buckets are fully deductible Year 1.
Typical reclassification by property type
- Single-family rental: 16-22% of basis
- Short-term rental: 20-28% (denser personal property)
- Multifamily 2-4: 22-26%
- Office: 25-32%
- Retail / restaurant: 26-32% (specialty fit-outs)
- Industrial: 16-24%
Do you need a study?
Cost segregation is most valuable when (a) you can use the accelerated loss this year (REPS, material participation, or active income offset), (b) the property basis is high enough that the reclassified bucket dwarfs the study fee, and (c) you're not planning to sell within 12 months. Use the calculator on every page to test your specific property.