Cost Segregation Overview

Cost segregation is a strategic tax process that reclassifies building components from long-lived real property (27.5 or 39 years) into shorter-lived personal property or land improvements (5, 7, or 15 years), thereby accelerating depreciation deductions and significantly enhancing near-term cash flow. 

This strategy has been revitalized by the One Big Beautiful Bill Act (OBBBA) of 2025, which permanently reinstated 100% bonus depreciation for qualified assets acquired and placed in service on or after January 20, 2025. 

To withstand IRS scrutiny, studies should utilize a detailed engineering approach based on actual cost records, as simple "rule of thumb" methods are explicitly discouraged and viewed as audit red flags. 

Legally, the practice relies on precedents like Whiteco Industries, which established permanency tests for asset classification, and HCA v. Commissioner, which validated treating non-essential structural components as separate personal property. 

While providing immediate liquidity, the strategy requires planning for depreciation recapture at the time of sale and ensuring purchase price allocations are clearly defined in sales contracts to remain binding under the Peco Foods ruling. Furthermore, owners of properties acquired in previous years can perform "look-back" studies to catch up on missed deductions by filing IRS Form 3115 without amending prior returns.