By Jessica Irving Marschall, CPA

March 2026

As tax season is in full swing, my clients and I have been thrilled by the Cost Segregation analyses for which they invested, resulting in significant tax reductions through allocation to shorter-year depreciation buckets. These reports are not cheap and should not be invested in for many simple properties, but for real estate investors, especially with a portfolio of high-value properties, the tax savings are significant.

If you own commercial or investment real estate, there has never been a better time to examine your depreciation strategy. The passage of the One Big Beautiful Bill Act (OBBBA) in July 2025 permanently restored 100% bonus depreciation, a development that dramatically amplifies the tax benefits of a tool that smart investors have relied on for decades: the cost segregation analysis.

Understanding what a cost segregation analysis is, what it costs, and why it is particularly powerful right now can mean the difference between leaving significant money on the table or putting it to work in your portfolio.

What Is a Cost Segregation Analysis?

A cost segregation analysis, also called a cost segregation study or “Cost Seg”, is an IRS-recognized tax strategy in which engineers and tax professionals systematically examine a commercial or investment property and reclassify its components into shorter depreciation periods for federal tax purposes.

Under standard tax treatment, real property is depreciated over a very long horizon: 27.5 years for residential rental property and 39 years for commercial real estate. A building purchased today would, under straight-line depreciation, generate a small, predictable deduction each year for nearly four decades, slowly chipping away at taxable income over a generation.

A cost segregation study changes this equation by identifying individual building components that qualify for much shorter depreciation schedules under the Modified Accelerated Cost Recovery System (MACRS). These fall into three primary categories:

Personal Property (5- or 7-year class life): Flooring, specialty lighting, cabinets, appliances, dedicated electrical outlets, and certain machinery.
Land Improvements (15-year class life): Fences, sidewalks, landscaping, parking lots, and waterways.
Qualified Improvement Property (15-year class life): Non-structural interior improvements to nonresidential buildings, such as upgraded drywall, interior doors, plumbing, electrical, flooring replacements, and interior partitions.

The building shell itself, the structure, roof (for nonresidential), and core systems, must still depreciate over 27.5 or 39 years. But on average, 20% to 40% of a commercial property’s total cost can be reclassified into shorter-lived categories, dramatically front-loading the depreciation benefit.

Importantly, the taxpayer is not creating new deductions, they are recovering the same deductions more quickly, taking advantage of the time value of money. A dollar of tax savings today is worth considerably more than a dollar of tax savings thirty-nine years from now.

How the Study Is Performed

A quality cost segregation study is an engineering-based process that typically involves:

Property inspection: A qualified engineer physically visits the property and reviews construction documents, blueprints, invoices, and appraisals.
Asset identification: Each component is identified separately from the building shell and land.
Cost allocation: The purchase price or construction cost is allocated to each identified asset.
Tax classification: Assets are placed into the appropriate MACRS recovery buckets, and a detailed, audit-defensible report is produced.

The IRS has published its own Cost Segregation Audit Techniques Guide, which sets out 13 principal elements defining a quality study. These standards require that the preparer demonstrate expertise in engineering, construction, tax law, and accounting, which is why a properly credentialed team is essential.

What Does a Cost Segregation Study Cost?

Professional fees for a cost segregation study generally range from $5,000 to $25,000 or more, with the wide variance explained by several key factors. Most commercial properties in the $1 million to $3 million value range will typically fall between $5,000 and $15,000.

Factors that influence cost include:

Property size and complexity: A straightforward warehouse costs less to analyze than a multi-story medical facility with specialized equipment.
Property value: Higher-value properties require more detailed analysis and cost allocation.
Geographic location: Studies in major metropolitan markets typically command higher fees.
Provider expertise: Teams with established engineering credentials and a track record of IRS audit defense typically charge more, but this investment can be invaluable if a return is reviewed.

The economics are compelling. For a $1 million commercial property, a study typically costs around $5,000 to $10,000, while commonly generating $40,000 to $60,000 in first-year tax savings, a return on investment of 4x to 12x in the first year alone. For a $3 million property, a $15,000 to $25,000 study might yield $120,000 to $180,000 in first-year tax savings. The general threshold for cost-effectiveness is properties with a depreciable basis of at least $500,000 to $1,000,000.

Most reputable providers also offer a free preliminary analysis before you commit to a full study, allowing you to evaluate the likely return before incurring any cost.

The OBBBA Game-Changer: Why the Value Has Never Been Higher

Cost segregation has always been a powerful tool. But the passage of the One Big Beautiful Bill Act on July 4, 2025, supercharged it.

To understand why, it helps to understand what bonus depreciation is and what changed.

A Brief History of Bonus Depreciation

Bonus depreciation is an additional first-year deduction available on top of standard MACRS depreciation for qualifying property with a recovery period of 20 years or less, which is exactly the category that cost segregation targets. The Tax Cuts and Jobs Act (TCJA) of 2017 set the bonus depreciation rate at 100% through 2022, allowing taxpayers to immediately write off the full cost of eligible assets in the year placed in service. Beginning in 2023, that rate began to phase down: 80% in 2023, 60% in 2024, and 40% in the period from January 1 to January 19, 2025, heading toward full elimination in 2027.

The OBBBA reversed this phase-down entirely. Effective for qualifying property acquired and placed in service after January 19, 2025, 100% bonus depreciation is permanently restored, with no scheduled sunset.

The Combined Power: Cost Segregation + 100% Bonus Depreciation

Here is where the real impact lies. Cost segregation identifies and reclassifies building components into the 5-year, 7-year, and 15-year asset categories. Under the OBBBA, assets in those shorter-lived categories that were acquired and placed in service after January 19, 2025, are eligible for an immediate 100% deduction in the first year.

The practical result is dramatic. Consider a commercial dealership purchased for $23.1 million, in which a cost segregation study identifies 25% of assets as 5-year personal property and 12% as 15-year land improvements. Under the 40% bonus depreciation rate that applied prior to January 20, 2025, the first-year federal tax savings on those reclassified assets would have been approximately $1.375 million. With 100% bonus depreciation under the OBBBA, those same savings more than double, to approximately $2.9 million.

For a garden-apartment project purchased at $5 million, cost segregation combined with 100% bonus depreciation can generate first-year federal and state tax savings equivalent to nearly 80% of the investor’s down payment, with the federal benefit alone approaching 60%.

Baker Tilly notes that when paired with cost segregation studies, 100% bonus depreciation may also enhance equity pricing in commercial real estate transactions motivated by the Community Reinvestment Act, as the front-loading of tax losses can improve after-tax investor returns.

The permanence of 100% bonus depreciation also changes long-term planning in a meaningful way. Previously, investors rushed to complete projects before the rate declined further. Now, planning can proceed at the right pace for the deal, the 100% rate will be available for qualifying investments in future years as well.

Expanded Eligibility: A New Category of Qualifying Property

The OBBBA also introduces a temporary provision that extends 100% bonus depreciation to certain nonresidential real estate used in manufacturing, production, or refining, an asset class that was previously ineligible. To qualify, construction must begin after January 19, 2025, and before January 1, 2029, with the property placed in service before January 1, 2031. Careful cost segregation of building use and documentation will be essential to substantiate eligibility for these production facilities.

Section 179 Expansion: More Flexibility for Smaller Investments

The OBBBA also increases the Section 179 expensing limit from $1 million to $2.5 million, with a phaseout threshold raised to $4 million, both indexed for inflation going forward. Section 179 remains particularly useful for improvements not eligible for bonus depreciation, such as roofs and HVAC systems in nonresidential buildings that have already been placed in service. Together with the cost segregation framework, this creates additional flexibility to match depreciation elections to specific tax planning goals.

When Should You Commission a Study, and Who Should?

Cost segregation studies are most powerful at specific moments in the lifecycle of a property, though the opportunity is not limited to new acquisitions.

At acquisition or construction: The optimal time. A study performed in the year a property is purchased, built, or completed allows maximum first-year acceleration.
After significant renovations: Major interior remodels, new landscaping, upgraded systems, or construction additions can all support a study even for a long-held property.
For properties already in service: If a cost segregation study was not performed at the time of purchase, a look-back study using IRS Form 3115 (Change of Accounting Method) allows the owner to claim all missed depreciation in the current tax year, without amending prior returns. This catch-up deduction can be significant for buildings acquired within the last 15 years.
For long-term holds: Investors planning to hold properties for five or more years typically see the greatest total benefit from accelerating deductions early.

Owners of rental, commercial, or investment property with a depreciable basis of $1 million or more are the most common beneficiaries. But the benefits often extend beyond individual owners. Real estate funds, syndicators, and family offices can leverage cost segregation to improve portfolio-wide returns and demonstrate proactive tax planning to investors, a meaningful differentiator in a competitive capital-raising environment.

Key Considerations and Cautions

While the case for cost segregation has never been stronger, several important planning considerations apply.

Depreciation Recapture

When property on which bonus depreciation has been claimed is sold, the IRS recaptures the accelerated portion of the deduction as ordinary income, taxed at rates up to 25% rather than the preferential capital gains rate. This recapture should be carefully modeled before proceeding, particularly for properties with a planned disposition horizon within the next one to three years. For longer holds or 1031 exchange strategies, the recapture concern typically diminishes significantly.

Excess Business Loss (EBL) Limitations

The OBBBA made the Excess Business Loss limitation under Section 461(l) permanent beginning in 2025. This provision limits the ability of non-corporate taxpayers, including most individual real estate investors, to offset non-business income with business losses beyond a threshold amount (approximately $626,000 for married couples in 2025). Even investors who qualify as real estate professionals should work closely with their advisors to model the interaction between cost segregation losses, ordinary income, and capital gains before executing a study.

Transition-Year Considerations

Properties on which construction began, or binding contracts were signed, before January 20, 2025, may be governed by the 40% bonus rate that applied prior to enactment, unless a component election or other election is available. Careful documentation of acquisition dates, contract execution, and when significant construction began will be essential to substantiate the applicable rate. Baker Tilly and other advisors have cautioned that taxpayers should retain original purchase and sale agreements, contractor billing records, and any evidence of when significant physical work began for any project straddling the OBBBA effective date.

Electing Out of Bonus Depreciation

Bonus depreciation is automatic for qualifying property unless the taxpayer affirmatively elects out by asset class. For some owners, particularly those anticipating a much higher tax bracket in future years, or those planning a near-term sale, preserving depreciation deductions for later can be the superior strategy. A qualified tax advisor can model both paths and tailor the approach to your specific situation.

The Bottom Line

The One Big Beautiful Bill Act did not change the mechanics of cost segregation, but it dramatically increased the value of doing one. With 100% bonus depreciation now permanently in place for qualifying property, the reclassified short-lived assets identified in a cost segregation study can be fully expensed in the year placed in service, rather than spread over decades. The result is a meaningful, immediate reduction in federal tax liability and a corresponding improvement in cash flow.

For owners of commercial and investment real estate, especially those who acquired or improved property after January 19, 2025, this is the moment to act. And for those who have owned properties for years without commissioning a study, a look-back analysis may unlock substantial deductions that have been quietly waiting to be claimed.

The study pays for itself. The question is not whether a cost segregation analysis is worth considering, it is whether you can afford not to.

Sources

MGO CPA, Why Cost Segregation Just Became More Valuable for Your Real Estate

Boyer & Ritter LLC, There’s Never Been a Better Time: Cost Segregation Studies Under the New OBBBA

Carr, Riggs & Ingram (CRI), How the One Big Beautiful Bill Act Supercharges Cost Segregation Studies

Baker Tilly, Cost Segregation Services

Baker Tilly, Tax Law Reinstates 100% Bonus Depreciation

Baker Tilly, Interim Guidance Issued to Implement OBBBA Bonus Depreciation Amendments

KBKG, OBBB Tax Bill Makes 100% Bonus Depreciation Permanent

R.E. Cost Seg, Cost Segregation Pricing and OBBBA Impact

Patrick Accounting, Cost Segregation Study: What It Costs and When It’s Worth It

CBIZ, Cost Segregation & Bonus Depreciation Benefits Under the OBBBA