A cost segregation study can speed up depreciation on real estate you own for business or investment. By moving parts of a property into shorter recovery periods, owners can take larger deductions sooner. This guide explains what a cost segregation study is, who can benefit and how we help.
What is a cost segregation study?
A cost segregation study is an engineering-based analysis. It splits the cost of a building into its components. Normally, residential rentals are depreciated over 27.5 years, and commercial buildings over 39 years. However, some components qualify for 5-, 7- or 15-year recovery periods.
Common examples include:
- Personal property: carpeting, cabinetry, appliances and certain fixtures.
- Land improvements: parking lots, landscaping, fencing and sidewalks.
- Dedicated building systems: for example, electrical or plumbing that serves specific equipment rather than the building as a whole.
Who can benefit from a cost segregation study?
Many property owners can benefit, including:
- Commercial property owners with office, retail, industrial or warehouse buildings.
- Residential rental owners, from single-family rentals to apartment buildings.
- Investors who buy, build or renovate property.
The property must be used in a business or held to produce income. In general, a study makes the most sense for higher-value properties, where the tax savings outweigh the cost of the study.
How a cost segregation study saves taxes
Faster depreciation
Shorter recovery periods mean larger deductions in the early years of ownership. As a result, your taxable income and tax bill drop sooner.
Bonus depreciation
Components with a recovery period of 20 years or less may qualify for bonus depreciation. The 2025 tax law restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. So a study can create large first-year deductions.
Catch-up for past years
Did you buy or improve a property in a prior year? You can still do a study. Usually, you claim the missed depreciation in the current year with an accounting method change on Form 3115. That way, you don’t need to amend old returns.
A caution on losses
Larger depreciation may create a rental loss. However, passive loss rules may limit how much you can use right away. Real estate professional status or short-term rental rules can change that result.
How FTCG helps with a cost segregation study
We coordinate cost segregation studies through a trusted partner firm that specializes in engineering-based studies. Then our tax team puts the results to work. Specifically, we update your depreciation schedules, file Form 3115 when needed and plan around passive loss limits. Learn more on our cost segregation page. For IRS guidance, see the IRS Publication 946, How to Depreciate Property.
See if a cost segregation study fits your property
To discuss your property, call (415) 842-2940 or book a free 15-minute call.