Cost Segregation Terminology Glossary

Property classes

§1245 property: depreciable personal property and certain other property; gain on sale is generally recaptured as ordinary income to the extent of depreciation. §1250 property: depreciable real property, such as buildings and their structural components, that is not §1245 property.

Structural component: a part of a building listed in Treas. Reg. §1.48-1(e)(2), such as walls, floors, central HVAC, plumbing, wiring, and elevators. Tangible personal property: tangible property other than land and improvements to land such as buildings and inherently permanent structures, including their structural components.

Land improvement: an improvement to land that is not a building, such as paving, sidewalks, fences, and landscaping (asset class 00.3). Qualified improvement property (QIP): certain interior improvements to a nonresidential building made after it was first placed in service; 15-year property. Land: the ground itself; not depreciable.

Depreciation terms

MACRS: the Modified Accelerated Cost Recovery System under §168. GDS / ADS: the General and Alternative Depreciation Systems; ADS uses straight line over longer periods. Class life: the period assigned to an asset class in Rev. Proc. 87-56; it determines the MACRS recovery period.

Convention: the rule for how much of the first year counts — half-year, mid-quarter, or mid-month. Half-year treats personal property as placed in service at mid-year. Mid-month treats buildings as placed in service at the midpoint of the month. Mid-quarter applies when more than 40% of the year’s personal-property basis is placed in the last three months.

Bonus depreciation: the additional first-year allowance under §168(k). Placed in service: the date property is ready and available for its specific use. Depreciable basis: generally cost under §1012, minus land, adjusted for improvements and depreciation allowed or allowable. Section 179: an election to expense qualifying property up to an annual dollar limit.

Study terms

Take-off: measuring quantities of components from drawings or inspection. RCNLD: replacement cost new less depreciation; an estimate of what improvements would cost today, reduced for age and obsolescence. Reconciliation: showing that allocated costs add back to total cost or basis.

Whiteco factors: the six questions from Whiteco Industries v. Commissioner used to test whether property is inherently permanent. Functional allocation: dividing a system, such as electrical distribution, between building use and equipment use based on design load. The audit guide treats that method as accepted for primary and secondary electrical distribution; it does not extend it to plumbing or HVAC as an IRS-accepted method.

§481(a) adjustment: the cumulative catch-up amount when an accounting method changes. Form 3115: the application used to request that change. Look-back study: a study of property already placed in service, usually implemented as a method change rather than by amending each prior return.

Audit-guide terms

Detailed engineering approach from actual cost records: the guide’s most methodical method, generally available for new construction. Detailed engineering cost-estimate approach: the same steps using cited contractor or published unit costs, common on acquisitions.

Residual estimation: pricing only short-lived assets and assigning the rest to the building. Rule-of-thumb approach: little documentation and fixed percentages; examiners are told to view it with caution. Quality study / quality report: the guide’s thirteen study elements and nine report elements. None of those lists is a required statute format.

Publication 5653, Cost Segregation Audit Techniques Guide (rev. 2-2025): examiner guidance. It is not law, cannot be cited as authority, and predates the July 2025 legislation. “IRS-approved study” is not a term this library uses.

Recovery-period shorthand

5-year: class life more than 4 and less than 10, plus certain statutory items; often class 57.0 personal property in retail and services, and appliances, carpet, and furniture in residential rentals per Publication 527. 7-year: class life 10 to under 16, plus personal property with no class life; office furniture is class 00.11.

15-year: class life 20 to under 25, plus QIP and qualifying retail motor fuels outlets; land improvements are class 00.3. 27.5-year: residential rental property that meets the 80% dwelling-unit test. 39-year: nonresidential real property.

Those periods are not automatic for every similar-looking item. Activity class, attachment, and function can move the same product into a different class. Do not treat a matrix row as a rule for every building.

How to use this glossary

Read the linked articles for the full rule, the source, and the limits. If a definition here and a statute sentence differ, the statute controls.

Related glossaries in the resources group cover MACRS terms and engineering terms in more list form. This page is the fundamentals version: enough language to read a report, with the caveats a reviewer will expect.