July 17, 2025

Cost segregation studies, when paired with enhanced federal bonus depreciation, can provide significant short-term savings and long-term benefits to real estate investors.

Now that the One Big Beautiful Bill (OBBB) has been signed into law, cost segregation studies are poised to re-emerge as a powerful tax mitigation strategy. Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation was phasing out at a rate of 20% per year starting in 2023, with only 40% bonus depreciation allowed in 2025. However, the OBBB reinstates 100% bonus depreciation for assets placed in service after January 19, 2025.  This is great news for all taxpayers and especially real estate developers and investors.

What Is Cost Segregation?

Cost segregation is an engineering-based tax strategy that breaks down the components of a building into different asset classes. Instead of depreciating the entire building over the standard 27.5 years (residential) or 39 years (commercial), a cost segregation study identifies portions of the property that can be depreciated over shorter time frames — typically 5, 7, or 15 years.

These components may include:

• Flooring, cabinetry, appliances
• Electrical and plumbing systems specific to certain uses
• Landscaping, parking lots, and outdoor lighting

By isolating these shorter-lived components, real estate investors can significantly accelerate depreciation deductions and reduce taxable income in the early years of property ownership.

Interplay With Bonus Depreciation

For federal income tax purposes, these segregated assets generally qualify for bonus depreciation, further enhancing the short-term benefits of the cost segregation study. As the TCJA phased-out bonus depreciation, the benefit had diminished. However, with the return to 100% bonus depreciation under the OBBB, the full benefit of a cost segregation study is once again available.

Example:

A taxpayer purchases a residential rental property after January 19, 2025, assigns $500,000 of basis to the structure, and immediately begins holding the property out for rent.

• Without a cost segregation study, the taxpayer may deduct $17,425 (3.485% of the structure’s basis) in depreciation for tax year 2025.
• With a cost segregation study (assuming 20% of the building’s basis is allocated to shorter-lived assets), total depreciation jumps to $113,940, which includes $100,000 of bonus depreciation on the segregated assets plus 3.485% of the remaining basis.
• This results in a 550% increase in 2025 depreciation

Average Reclassification of Segregated Property

Property Type	Average Basis Reallocation
Apartment Building	20-50%
Office Building	10-40%
Restaurant	20-50%
Hotel	25-45%
Manufacturing	25-60%
Grocery Store	25-50%
Strip Mall	20-40%
Warehouse	10-30%
R&D Facility	30-55%
Residential Rental	20-40%
Car Wash/RV Park/Storage Units	60-100%

_{Source: Porto Leone Consulting, LLC}

How Do I Recognize this Benefit?

The Internal Revenue Code generally limits the use of annual losses from rental activities. So, even if a cost segregation study increases your depreciation deduction by nearly $97,000, you may not be able to use the full deduction immediately.

However, taxpayers can maximize the benefit through one or both of the following strategies:

1. Offsetting income from other rental real estate assets
2. Qualifying as a Real Estate Professional, which allows for broader loss offsetting

Is This Just a Timing Difference?

At first glance, a cost segregation study might appear to be a simple timing difference, accelerating deductions now but repaying them later via depreciation recapture upon sale.

While depreciation recapture is a consideration, cost segregation can provide two additional long-term benefits:

1. Partial asset disposition – If segregated assets are replaced during their holding period, any remaining basis in the replaced assets can be written off, and the new asset can be depreciated.
2. Purchase price allocation – Because cost segregation analyzes the components of a property that property should be thought of as a basket of assets instead of a single asset. When that basket of assets is sold it is reasonable to assign less value to the shorter-lived assets and more value to the longer-lived assets. This allows the seller to minimize depreciation recapture and maximize capital gain.

Final Thoughts

With the reinstatement of 100% bonus depreciation, savvy real estate investors can more readily benefit from the immediate tax savings offered by cost segregation studies. Working with a CPA or cost segregation specialist, these studies can also provide long-term advantages, including strategic asset replacement, improved cash flow and wealth building potential.

As always, consult a tax advisor or cost segregation specialist to determine the best approach based on your property type, investment strategy, and tax profile. When used effectively, cost segregation can unlock hidden value and support your financial success.