Process
How cost segregation works
A building is not one asset for tax purposes. A cost segregation study finds the parts of a property that can be depreciated faster than the building itself.
The basics
What a study actually does
Under the federal depreciation system (MACRS), a residential rental building is generally recovered over 27.5 years and a nonresidential building over 39 years. If the whole purchase or construction cost is treated as “the building,” all of it is deducted slowly.
Some of that cost is often not building at all. Equipment, certain fixtures, and finishes that serve the business rather than the building may be personal property, usually recovered over 5 or 7 years. Paving, landscaping, and site utilities may be land improvements, usually recovered over 15 years. A study identifies those components, assigns a cost to each, and documents why it belongs in its class.
Not everything inside a building qualifies. Walls, floors, ceilings, windows, central heating and air-conditioning, plumbing, wiring, and similar structural components are generally treated as part of the building. Where a specific item falls depends on its function and the facts, which is why the documentation matters.
Timing
Why faster depreciation matters now
Moving cost into shorter recovery periods shifts deductions into earlier years. Many shorter-lived components can also qualify for bonus depreciation. Under current federal law, the bonus rate is 100% for qualifying property acquired after January 19, 2025; property acquired under a binding contract before that date follows the older phase-down rates.
Faster deductions are not free money. When a property is sold, depreciation taken on personal property is generally recaptured as ordinary income, so the decision belongs in your overall tax plan. Your CPA should model the effect for your situation.
When
When a study is usually done
- After a purchase. The price is allocated among land, building, and shorter-lived components.
- After new construction. Contractor costs are traced to the components they paid for.
- After a renovation. New work is classified, and components that were removed may be eligible to be written off.
- For a building placed in service in an earlier year. The missed depreciation is generally claimed in the current year through a change in accounting method on Form 3115, rather than by amending past returns.
With CostSeg SI
How a CostSeg SI study moves from intake to delivery
Timing depends on the property and on how complete the documents are.
- 01
Share property information
Send the address, property type, purchase or construction date, and whatever drawings, closing statements, ledgers, and invoices you have.
- 02
Technology-led analysis
The Super Intelligence workflow organizes the documents, identifies components, and prepares cost and classification inputs.
- 03
Professional review
A qualified reviewer checks classifications, estimates, and documentation before anything is finalized.
- 04
Delivery to your adviser
You receive an asset schedule and supporting report for your CPA to use when preparing returns.
Quality
What makes a study hold up
The IRS publishes a Cost Segregation Audit Techniques Guide for its examiners. It describes several study approaches, from detailed engineering based on actual cost records to rules of thumb, and lists the elements examiners look for in a quality study, such as the preparer’s expertise, use of original records, a site inspection, and a clear explanation of each classification.
CostSeg SI’s workflow is built around that kind of evidence trail: each component links back to the document or estimate it came from. The Knowledge Hub covers these topics in more depth.
Helpful to have ready: the closing statement or construction contract, drawings, contractor pay applications or invoices, the depreciation schedule your CPA uses now, and your CPA’s contact details.
References
Sources
- 126 U.S.C. §168 — Accelerated cost recovery system (MACRS)(opens in a new tab)
Recovery periods, including 27.5-year residential rental and 39-year nonresidential real property, and bonus depreciation in §168(k).
- 2Treas. Reg. §1.48-1 — Tangible personal property and structural components(opens in a new tab)
Defines structural components of a building, which are generally treated as part of the building.
- 3
- 4
- 5Treas. Reg. §1.168(i)-8 — Dispositions of MACRS property(opens in a new tab)
Includes the partial disposition election for a portion of an asset.
- 6
- 7IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Guidance written for IRS examiners. The guide states it is not an official pronouncement of law.