Cost segregation study

A cost segregation study is an engineering-based reclassification of a building's components from their default 27.5- or 39-year depreciation schedule into shorter 5-, 7-, or 15-year buckets. Combined with bonus depreciation, this can produce a large front-loaded deduction.

How it works

An engineering team walks the property (or reviews drawings + photographs for desktop studies) and categorizes components:

• 5-year property: carpet, decorative items, certain electrical, fixtures
• 7-year property: certain furnishings
• 15-year property: land improvements (parking lots, landscaping, sidewalks)
• 27.5- / 39-year property: structural shell

Typically 20-30% of a building's basis gets reclassified into shorter recovery.

Combining with bonus depreciation

Bonus depreciation allows immediate write-off of qualifying short-recovery property. The bonus percentage has phased down:

• 100% for 2017-2022
• 80% for 2023
• 60% for 2024
• 40% for 2025
• 20% for 2026
• 0% for 2027+ (unless legislation extends)

OBBBA may further modify this — check current law.

Who benefits

• Real estate investors with passive losses they can use (or who qualify as Real Estate Professionals)
• Business owners with their own commercial real estate
• Short-term rental owners materially participating (the STR loophole)

Study cost vs benefit

Studies range from $3K (smaller residential) to $15K+ (larger commercial). Generally worth it for properties with basis $200K+.