Everything you need to know about Cost Segregation
A cost segregation study can be a powerful way to maximize depreciation deductions and minimize the tax burden for commercial property owners who acquire or develop real estate. And with the recent permanent return of 100% bonus depreciation, this strategy has become even more compelling. Yet real estate owners, investors, and their tax advisors often overlook cost segregation studies simply because they're not familiar with how they work or what the result is. Below, we've answered a few frequently asked questions about cost segregation studies, how they work, and the tax benefits they provide, updated to reflect the latest changes under the One Big Beautiful Bill Act (OBBBA) and recent IRS guidance.
What Is a Cost Segregation Study?
A cost segregation study is an engineering-driven process that breaks down a building into its component parts, reclassifies qualifying components into shorter depreciation lives, and allows property owners to benefit from significantly accelerated depreciation timelines.
For income tax purposes, property owners and real estate investors generally depreciate residential rental property over 27.5 years and commercial property over 39 years. But a residence, office building, warehouse, or any other real property is never just the structure alone. It also includes several other elements, such as plumbing fixtures, carpeting, sidewalks, fencing, and many more. If you were to purchase these assets by themselves, you could depreciate them over five, seven, or 15 years. But they are usually bought as part of a building acquisition or development and written off over the same long useful life as the building shell: 27.5 or 39 years.
Cost segregation is the holy grail of real estate tax strategy
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IRS-compliant
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Cost segregation is the holy grail of real estate tax strategy
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Giant ROI
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Cost segregation is the holy grail of real estate tax strategy
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Massive deductions
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Cost segregation is the holy grail of real estate tax strategy 🏆 IRS-compliant 🏆 Cost segregation is the holy grail of real estate tax strategy 🏆 Giant ROI 🏆 Cost segregation is the holy grail of real estate tax strategy 🏆 Massive deductions 🏆
Segregating costs matters because of the dramatic financial benefits it can provide. While the study has an up-front cost, the tax savings from accelerating depreciation deductions can result in significantly increased cash flow. Often right in the first year.
The key driver right now is bonus depreciation. Under the Tax Cuts and Jobs Act, 100% bonus depreciation had been phasing down: 60% in 2024, and it was scheduled to drop to 40% in 2025 and 20% in 2026 before sunsetting completely in 2027. However, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently reinstated 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This means that many of the shorter-lived assets identified in a cost segregation study can now be fully expensed in the year they are placed in service. The IRS issued interim guidance in Notice 2026-11 confirming how these rules apply in practice, including special elections that offer additional planning flexibility.
The result is a powerful time-value-of-money benefit. However, if you don't plan to hold the property for the long term, the benefits of a cost segregation study may be limited, because accelerated depreciation can be recaptured upon sale.
Who Performs Cost Segregation Studies?
Performing this analysis on your own isn't feasible. It requires a multidisciplinary team, typically a group of tax advisors and engineers working together to decide which components of a building should go into each depreciation category and to allocate the correct costs to each.
USTAGI is one of the professional service providers that property owners can engage to perform these exact engineering-based, IRS-compliant studies to unlock significant tax savings and improve cash flow. If you want to learn more about us, feel free to read our FAQs or contact us.
We are USTAGI.
Our name stands for the US Tax Advisors Group, Inc., a firm that specializes in performing cost segregation studies for real estate investors.
How Does Cost Segregation Work?
The goal of a cost segregation study is to identify all property-related costs that can be depreciated over 5, 7, and 15 years and now, thanks to OBBBA, to write off the full cost of those qualifying assets immediately using 100% bonus depreciation.
To accomplish this, your advisory team reviews available property records, inspections, cost details, and blueprints, and may also perform a physical inspection of the property.
For newly constructed or renovated properties, OBBBA introduced a component election (detailed in IRS Notice 2026-11) that allows taxpayers to claim 100% bonus depreciation on specific parts of a self-constructed project as soon as those parts are placed in service, even if the overall project isn't yet complete. This is a powerful tool for phased developments and multi-year projects.
Even if a property does not qualify for 100% bonus depreciation (for example, if it was placed in service under a pre-January 20, 2025 binding contract and is subject to the 40% transition rate), the accelerated depreciation on the 5-, 7-, and 15-year property still generates significant savings: thousands of dollars in the first year compared to no study at all.
When Is the Best Time to Get a Cost Segregation Study?
The best time to conduct a cost segregation study is in the year the building is acquired, constructed, or remodeled. However, thanks to the IRS's "look-back" provisions, a study can be performed on a property you have owned for years. You can claim the resulting write-offs in the current year by filing Form 3115 (Change in Accounting Method), without the need to amend prior-year tax returns.
With the permanent reinstatement of 100% bonus depreciation and new planning tools like the component election and the transition-year option (which allows some taxpayers to elect a lower 40% rate if it better suits their tax planning), the financial case for a cost segregation study has never been stronger.
Learn More about Cost Segregation Services
If you're interested in finding out whether a cost segregation study is right for your property, the first step is connecting with an advisor who can assess your situation in light of the latest tax rules. Contact USTAGI today to start the conversation.
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