Cost Segregation
Cost segregation is an engineering study that carves a building into its faster-depreciating parts so you can write much of it off in the first year instead of spreading it over 27.5 or 39 years.
Buy a commercial building and the IRS makes you depreciate it over 39 years (27.5 for residential rental). That's the default, and it's slow. A cost segregation study breaks the purchase price apart and moves everything that isn't the structural shell into 5-, 7-, and 15-year property, where the deductions land far sooner.
A qualified engineer does the work, walking the building and the construction records to assign each component a recovery period. Carpet and removable flooring go to 5-year property, along with specialty items like decorative lighting, dedicated electrical for specific equipment, cabinetry, and millwork. A smaller slice of furniture and certain equipment falls into 7-year property. Parking lots, sidewalks, fencing, and landscaping become 15-year land improvements. On a typical building, 20% to 40% of the purchase price reclassifies this way.
Here's what changed the math. The One Big Beautiful Bill Act, signed July 4, 2025, made 100% bonus depreciation permanent for property acquired and placed in service after January 19, 2025. Anything with a recovery period of 20 years or less qualifies, which is exactly the buckets a cost seg study fills. So the 20% to 40% you reclassify isn't just accelerated anymore. It's fully deductible in year one. On a $1 million building, that's $200,000 to $400,000 of deductions you can take immediately instead of spreading it over four decades.
A traditional engineering-based study runs $5,000 to $15,000, depending on the building's size and complexity. The rule of thumb is that it pays for itself on properties around $500,000 and up, and the bigger the building, the better the ratio. If your projected tax savings don't clear two to three times the study fee, skip it.
Missed the window on a building you already own? You don't have to amend old returns. File Form 3115 to change your accounting method and claim every year of catch-up depreciation in the current tax year as a single Section 481(a) adjustment. That's often the most lucrative version of this move, because you collect several years of deductions at once.
Practical Example
A dentist buys a $1.2M office building in 2026. A $10,000 study reclassifies $360,000 (30% of the price) into 5-, 7-, and 15-year property. Because the One Big Beautiful Bill Act made 100% bonus depreciation permanent, the full $360,000 is deductible in year one. Without that law, bonus depreciation was set to fall to 20% in 2026, so only about $72,000 of it would have been immediately deductible. Sitting in the 24% bracket, taking the full amount now is roughly $86,400 in federal tax saved this year off a $10,000 study.