Commercial Property Owners: Give Cost Segregation a Fresh Look

Recent tax law changes have made a longstanding tax planning strategy even more attractive for some commercial property owners. A cost segregation study uses accounting and engineering analyses to identify building components that may qualify for shorter depreciation recovery periods, potentially accelerating depreciation deductions, deferring taxes and improving cash flow.

How Cost Segregation Generates Tax Savings

Commercial rental properties and buildings used for business purposes are generally depreciated over 39 years under federal tax law. But such properties may include a wide range of components with much shorter depreciation recovery periods, creating opportunities to accelerate tax savings. These shorter-lived assets may include parts of various systems such as HVAC, plumbing, electrical, fire protection and alarm/security systems, as well as:

• Drywall
• Doors
• Fixtures
• Data and communication ports
• Flooring
• Cabinetry

These assets could have useful lives of five, seven or 15 years - all significantly less than 39 years. By segregating such assets, you can claim greater depreciation deductions sooner. While the total depreciation claimed over time remains the same, this approach can reduce your tax bill in the short term, providing greater cash flow.

Why Cost Segregation May Be More Valuable Today

Recent tax law changes under the One Big Beautiful Bill Act (OBBBA) enhanced these benefits by increasing first-year depreciation write-offs. The most widely relevant provisions include:

• Bonus depreciation. The OBBBA restored 100% first-year bonus depreciation deductions for eligible assets acquired and placed in service after Jan. 19, 2025. While commercial real properties aren't eligible for first-year bonus depreciation, segregated building components with shorter recovery periods may be eligible. There are no phaseout limits for bonus depreciation, which is helpful for larger companies.
• Section 179 expensing. For tax years beginning in 2025, the OBBBA increased the maximum amount of eligible assets you can immediately deduct under the Sec. 179 expensing election to $2.5 million. A phaseout reduces the maximum Sec. 179 deduction if, during the year, you place in service eligible assets in excess of $4 million. Both figures are adjusted annually for inflation. For 2026, the maximum amounts are $2.56 million and $4.09 million, respectively. Again, commercial real properties aren't eligible for Sec. 179 expensing, but segregated building components with shorter recovery periods may be eligible.
• Qualified production property (QPP). If your business involves manufacturing or certain agricultural activities, you may be eligible for a new depreciation-related tax break. The OBBBA introduced a 100% deduction for the cost of QPP. To be eligible, among other requirements, a qualifying real property's construction must begin after Jan. 19, 2025, and before Jan. 1, 2029, and it must be placed in service before 2031. This break allows eligible businesses to immediately deduct the cost of QPP rather than depreciate it over 39 years.

The QPP deduction makes cost segregation studies less relevant for qualifying property, but it's subject to several specific requirements and exceptions that may prevent you from claiming it.