Cost Segregation Estimator

Bonus depreciation supercharges cost segregation by allowing you to expense a percentage of short-lived asset classes (5, 7, and 15-year property) in the first year, on top of regular depreciation on the remaining basis.

The TCJA bonus depreciation phase-down schedule:

• 2022 and earlier — 100% bonus depreciation (full first-year expensing)
• 2023 — 80% bonus depreciation
• 2024 — 60% bonus depreciation
• 2025 — 40% bonus depreciation
• 2026 — 20% bonus depreciation
• 2027 and beyond — 0% (unless Congress extends it)

This phase-down is why cost segregation studies are especially urgent right now. Every year you wait, the bonus depreciation percentage drops by 20 percentage points. A property placed in service in 2024 at 60% bonus will generate significantly more year-1 deductions than the same property placed in service in 2026 at 20%.

Important: Bonus depreciation only applies to the personal property classes identified in the cost seg study (5, 7, and 15-year assets). The building/structural component always uses straight-line depreciation over 27.5 or 39 years, regardless of the bonus depreciation rate. Even at 0% bonus, cost segregation still provides value by moving assets to shorter recovery periods.

While cost segregation can benefit almost any commercial or rental property, certain property types consistently yield higher returns because a larger percentage of their cost can be reclassified into shorter-lived asset classes.

Property types ranked by typical cost seg benefit:

• Hotels and hospitality — 30–40% of cost typically reclassified. Furniture, fixtures, carpeting, specialty plumbing, and decorative elements create the highest allocations.
• Multifamily apartments — 25–35% reclassified. Each unit contains appliances, cabinets, flooring, and fixtures that qualify as personal property.
• Restaurants and retail — 25–35% reclassified. Built-out tenant improvements, specialty lighting, and decorative elements drive allocations.
• Office buildings — 20–30% reclassified. Flooring, ceiling systems, electrical, and mechanical components are common short-lived assets.
• Industrial and warehouses — 20–30% reclassified. Specialized electrical, site improvements, and equipment-related structures qualify.
• Residential rentals (SFR) — 20–30% reclassified. Appliances, landscaping, and fixtures, though smaller in absolute dollars.

As a general rule of thumb, a cost segregation study makes financial sense for properties valued at $500,000 or more (building value excluding land). Below that threshold, the $5,000–$15,000 study cost may not generate enough incremental savings to justify the expense, though this depends on your tax rate and the bonus depreciation percentage available.

Depreciation recapture is the IRS mechanism for clawing back some of the tax benefit when you sell a depreciated property. It is the most commonly misunderstood aspect of cost segregation, and understanding it is critical to evaluating whether a cost seg study truly saves you money or just defers taxes.

How recapture works:

• Section 1250 recapture (real property) — Depreciation on the building component is recaptured at a maximum rate of 25% when you sell. This applies to all depreciation taken on the structure, whether standard or accelerated.
• Section 1245 recapture (personal property) — Depreciation on the reclassified 5-, 7-, and 15-year property is recaptured at your ordinary income tax rate (up to 37%). This is the portion that cost segregation accelerates.

The real trade-off: Cost segregation does not permanently eliminate taxes — it shifts them forward in time. You get a large tax deduction now and pay recapture tax when you sell. The benefit comes from the time value of money: a dollar saved today is worth more than a dollar owed in 10 years.

Strategies to minimize recapture:

• 1031 exchange — Defer all gain and recapture by exchanging into a like-kind property. You can chain 1031 exchanges indefinitely.
• Hold until death — The stepped-up basis at death eliminates accumulated depreciation recapture entirely.
• Installment sale — Spread recapture income over multiple tax years to manage bracket impact.

Yes. A lookback cost segregation study allows you to catch up on missed accelerated depreciation for properties placed in service in prior years. You do not need to amend past tax returns — the IRS allows you to claim the catch-up deduction through a Form 3115 (Change in Accounting Method) filed with your current-year tax return.

How the lookback study works:

• Section 481(a) adjustment — The difference between the depreciation you took (straight-line) and what you should have taken (cost seg) is calculated as a cumulative catch-up amount.
• Full deduction in year of change — The entire catch-up amount is deducted on your current-year tax return. This can create a massive one-time deduction.
• No amended returns required — This is an automatic accounting method change (no IRS approval needed for the first change).

Lookback studies are particularly valuable for properties purchased between 2017 and 2022 when 100% bonus depreciation was available. Even though the property was placed in service years ago, you can still claim bonus depreciation on the reclassified asset classes as if the cost seg study had been done at the time of purchase.

Best candidates for lookback studies: Properties owned for 1–10 years that were depreciated using straight-line only. The longer you have owned the property without cost seg, the larger the potential catch-up deduction.

Cost segregation studies typically range from $5,000 to $15,000 for most commercial and rental properties. The exact cost depends on several factors:

• Property size and complexity — A simple single-family rental might cost $3,000–$5,000, while a large hotel or mixed-use development could run $15,000–$25,000.
• Study type — A full engineering-based study (site visit, detailed component analysis) costs more than a desktop study (based on blueprints and cost estimates) but holds up better under audit.
• Number of properties — Firms often offer volume discounts for portfolios of similar properties.

The ROI test is simple: Does the incremental year-1 tax savings (cost seg minus standard depreciation, times your tax rate) exceed the study cost? For most properties valued above $500,000, the answer is a clear yes. A $1M commercial property at 60% bonus depreciation and a 35% marginal tax rate can easily generate $40,000–$80,000 in additional year-1 tax savings against an $8,000 study cost — a 5x to 10x first-year return.

The study cost itself is a deductible business expense in the year it is incurred, further improving the effective ROI. Some firms also offer contingency-based pricing, meaning you only pay if the study identifies sufficient savings.

Cost segregation studies should be performed by a qualified team that includes both engineering and tax expertise. The IRS Cost Segregation Audit Techniques Guide specifically recommends studies conducted by firms with engineering credentials.

Qualified providers include:

• Specialty cost segregation firms — Dedicated companies that focus exclusively on cost seg studies. They typically employ licensed engineers and CPAs.
• National CPA firms — Many Big 4 and mid-size accounting firms have dedicated cost seg practices.
• Engineering firms with tax divisions — Construction and engineering firms that partner with tax professionals.

The typical process:

• Step 1: Preliminary analysis — The firm reviews purchase price, property type, and tax situation to estimate potential savings (similar to what this calculator does).
• Step 2: Site inspection — An engineer visits the property to identify and classify building components.
• Step 3: Cost allocation — Using engineering estimates and construction cost data, each component is assigned to the appropriate depreciation class.
• Step 4: Report delivery — A detailed report is produced documenting the methodology, allocations, and supporting calculations. This report is kept on file in case of audit.

The entire process typically takes 4–8 weeks from engagement to final report delivery. The report should be completed before you file your tax return for the year the property was placed in service (or the year of the lookback accounting method change).

Cost segregation is a well-established, IRS-recognized tax strategy — not a loophole or gray area. The IRS published its own Cost Segregation Audit Techniques Guide in 2004 (updated periodically), which provides detailed guidance for both taxpayers and auditors. When done properly, cost segregation has very low audit risk.

Common audit triggers to avoid:

• Overly aggressive allocations — Reclassifying 50%+ of a standard office building into short-lived classes is a red flag. Reasonable allocations typically range from 20–35% for most property types.
• Unqualified study providers — Studies performed without engineering analysis (pure rule-of-thumb estimates) are the most common audit targets.
• Missing documentation — The study report should include detailed component-level analysis, cost methodology, and supporting calculations.
• Classifying structural components as personal property — HVAC systems, electrical wiring in walls, and plumbing within walls are generally structural and cannot be reclassified (with some exceptions for specialized/dedicated systems).

Best practices for audit protection:

• Use a firm with licensed engineers and CPAs on staff
• Insist on a site visit (not just a desktop study for high-value properties)
• Keep the full study report and all supporting documentation
• Ensure the study follows the IRS Cost Segregation Audit Techniques Guide methodology
• Get audit defense guarantees in your engagement letter