Most real estate investors are leaving significant tax savings on the table. A recent R.E. Cost Seg analysis of a $1 million property reveals the stark difference between standard depreciation and cost segregation services: over $129,000 in additional tax savings in the first year alone, thanks to the newly passed Big Beautiful Bill.
This case study examines an actual mixed-use property purchased for $1 million in February 2025. With land value at $200,000 and a depreciable basis of $800,000, this property represents a typical investment opportunity for serious real estate professionals.
Under standard depreciation rules, the owner would claim just $20,513 annually over 39 years. The actual opportunity proved dramatically greater.
Through detailed cost segregation analysis combined with the permanent 100% bonus depreciation restored by the Big Beautiful Bill for properties acquired and placed in service after January 19, 2025, R.E. Cost Seg identified extraordinary tax benefits. The results demonstrate how strategic tax planning transforms property economics from day one.
This analysis provides concrete numbers and implementation strategies for investors considering cost segregation. The data reflects current tax law, including the Big Beautiful Bill provisions. Every calculation follows IRS guidelines and represents achievable results for similar properties.
Traditional Approach to Property Depreciation
How Standard Depreciation Works
Standard depreciation follows IRS-mandated recovery periods based on property classification. Residential rental properties depreciate over 27.5 years using straight-line method. Commercial properties require 39 years. The distinction matters significantly for tax planning.
For residential rental property to qualify for 27.5-year depreciation, at least 80% of gross rental income must come from dwelling units. All other rental properties fall under commercial classification at 39 years. This classification directly impacts annual deduction amounts and long-term tax strategy.
Consider our $1 million property example with $800,000 depreciable basis after deducting land value. Under commercial classification at 39 years:
- Annual depreciation: $20,513
- First-year tax savings at 37% rate: $7,590
- Total five-year tax benefit: $37,950
These calculations assume mid-month convention and no additional improvements. The depreciation remains constant annually until the basis is fully recovered.
What's the difference between residential and commercial property depreciation?
The IRS distinguishes properties based on use and income source. Residential rental property generating 80% or more income from dwelling units qualifies for 27.5-year depreciation. This includes apartment buildings, single-family rentals, and duplexes used primarily for housing.
Commercial property encompasses office buildings, retail spaces, warehouses, and mixed-use properties not meeting residential criteria. Short-term rental properties operating like hotels also fall under commercial classification. The longer depreciation period significantly reduces annual deductions, making cost segregation particularly valuable for commercial property owners.
Breaking Down Property Components
What Cost Segregation Actually Does
Cost segregation services systematically identify and reclassify property components into shorter depreciation categories. Instead of treating the entire building as one asset, engineering-based studies separate components based on IRS guidelines. This reclassification accelerates depreciation deductions without changing the property's total depreciable basis.
A comprehensive study typically identifies these component categories:
- 5-year property: 20-30% of building value
- 7-year property: 5-10% of building value
- 15-year property: 10-15% of building value
- 27.5/39-year property: remaining structure
Common 5-Year Property Items:
- Carpeting and vinyl flooring
- Window treatments and blinds
- Removable cabinetry and millwork
- Appliances and equipment
- Decorative lighting fixtures
- Security and communication systems
- Dedicated electrical for equipment
15-Year Property Examples:
- Parking lots and driveways
- Landscaping and irrigation
- Sidewalks and walkways
- Fencing and gates
- Site lighting and utilities
- Stormwater management systems
The Accelerated Depreciation Advantage
Permanent 100% bonus depreciation for qualified property means all 5-year, 7-year, and 15-year property identified through cost segregation can be fully deducted in year one. Properties with recovery periods of 20 years or less qualify for immediate expensing.
This represents a fundamental shift in property investment economics. Instead of waiting decades to recover costs, investors can claim substantial deductions immediately, dramatically improving cash flow and return on investment.
How much of my property typically qualifies for accelerated depreciation?
Engineering studies consistently identify 20-35% of building value for reclassification into shorter-life categories. Newer properties and those with extensive fit-outs often exceed 35%. Properties with minimal land improvements or basic finishes may fall below 20%.
The exact percentage depends on property specifics discovered during site visits. Factors include construction quality, mechanical systems complexity, and special-use areas. Each property requires individual analysis to determine accurate reclassification potential.
Property Details
Quick Property Stats:
- Purchase Price: $1,000,000
- Land Value: $200,000 (20%)
- Depreciable Basis: $800,000
- Property Type: Mixed-use commercial
- Location: Denver metropolitan area
- Acquisition Date: February 2025
The 20% land value allocation reflects county assessor data and market comparables. The building includes retail space on the ground floor with office units above. Modern HVAC systems and quality finishes throughout provide excellent cost segregation opportunities.
Standard Depreciation Scenario
Under traditional depreciation, the entire $800,000 depreciable basis follows a 39-year straight-line schedule. No distinction exists between structural components and personal property. Every element receives identical treatment.
Year-by-Year Breakdown (First 5 Years):
This approach provides consistent but minimal annual benefits. The owner must wait 39 years to fully recover the investment through depreciation deductions.
Cost Segregation with 100% Bonus Depreciation Scenario
R.E. Cost Seg conducted a detailed engineering study, including site visits and document review. With 100% bonus depreciation, the results are extraordinary.
Component Breakdown:
- 5-year property (25%): $200,000 - Security systems, removable fixtures, specialty electrical
- 7-year property (8%): $64,000 - Office furniture, data cabling, equipment
- 15-year property (12%): $96,000 - Parking areas, landscaping, exterior lighting
- 39-year property (55%): $440,000 - Building structure, permanent systems
Enhanced Depreciation Schedule with 100% Bonus:
*Year 1 includes: $360,000 (100% bonus on 5, 7, and 15-year property) + $11,282 (regular depreciation on 39-year property)
The Bottom Line:
- First-year depreciation: $371,282 vs. $20,513 standard
- First-year tax savings: $137,374 vs. $7,590 standard
- Additional first-year benefit: $129,784
- Cost segregation study fee: $5,000
- First-year return on investment: 2,596%
What happens if I sell the property after taking accelerated depreciation?
Depreciation recapture applies when selling property after claiming bonus depreciation. Section 1245 property faces recapture at ordinary income rates up to 37%. However, the time value of money strongly favors taking immediate deductions. Strategic exits through 1031 exchanges can defer recapture indefinitely while maintaining the cash flow benefits.
When Cost Segregation Makes Sense
Strategic Considerations for Investors:
- Acquisition after January 19, 2025 (for 100% bonus)
- Planning to hold property three years minimum
- Need for current year tax deductions
- High personal income tax bracket (32% or higher)
- Qualifying for real estate professional status
- Tax savings meaningfully outweigh study costs
While some advisors suggest $300,000-$500,000 as a rule of thumb, there's no strict property value threshold for cost segregation. The decision should be strategic, made between the investor and their CPA based on overall tax planning goals. R.E. Cost Seg has successfully completed studies on properties of various sizes, when the analysis showed meaningful tax benefits relative to study costs.
The Big Beautiful Bill makes cost segregation even more compelling for properties of all sizes. With permanent 100% bonus depreciation for properties acquired after January 19, 2025, even smaller properties can generate substantial first-year deductions. A $300,000 property with 25% personal property components could generate $75,000 in immediate deductions, creating $27,750 in tax savings at a 37% rate.
The Real Decision Factor
Don't let property value alone determine your strategy. The key question is whether tax savings meaningfully exceed the study cost. Consider:
- A $300,000 property might generate $15,000-$20,000 in additional first-year tax savings
- A $3,000 study fee represents just 15-20% of potential benefits
- Every property deserves individual analysis based on its unique characteristics
R.E. Cost Seg works with CPAs to evaluate each opportunity strategically. Properties with extensive personal property, recent renovations, or specialized use areas often justify studies regardless of total value.
Steps to Implementation
Pre-purchase analysis: R.E. Cost Seg provides preliminary estimates before closing. These projections incorporate 100% bonus depreciation benefits for qualifying properties.
Engage qualified professionals: Engineering-based studies require specialized expertise. Qualified firms combine engineering knowledge with tax code understanding. Quality studies withstand IRS scrutiny.
Complete study within tax year: Studies must conclude before filing returns. Site visits typically occur within two weeks of engagement. Final reports require three to four weeks including engineering analysis.
Document everything: Maintain all supporting materials including photos, invoices, and engineering reports. Comprehensive documentation supports depreciation positions during IRS examinations.
Can I apply cost segregation to properties I've owned for years?
Yes. File Form 3115 to change accounting methods. This automatic consent procedure allows catching up all missed depreciation in the current year without amending prior returns. Properties acquired before the Big Beautiful Bill still benefit from cost segregation through accelerated depreciation methods.
Understanding the Downsides
Key Risks to Consider:
Depreciation recapture represents the primary concern. Section 1245 property faces recapture at ordinary income rates upon sale. With 100% bonus depreciation, the entire amount of personal property becomes subject to recapture consideration.
IRS audit potential exists but remains manageable. Quality engineering studies following established methodologies rarely face successful challenges. R.E. Cost Seg provides full audit support with all studies.
Upfront study costs range from $2,500 to $5,000, depending on property complexity. Larger properties requiring detailed site visits cost more. With 100% bonus depreciation, the investment typically generates returns exceeding 2,000% in the first year.
Future depreciation decreases after taking a 100% bonus. Only the 39-year structural components provide ongoing annual deductions. This front-loading requires careful tax planning for future years.
Maximizing Benefits While Minimizing Risk
Best Practices:
Use IRS-compliant engineering-based studies exclusively. Avoid percentage-based estimates or rule-of-thumb allocations. Proper methodology ensures defensible positions.
Maintain comprehensive documentation, including photos, floor plans, and invoices. The Big Beautiful Bill's generous provisions increase scrutiny importance.
Consider 1031 exchanges when selling properties with significant recapture exposure. Properly structured exchanges defer recapture while preserving bonus depreciation benefits.
How does cost segregation affect a 1031 exchange?
Section 1245 property requires matching in replacement property to avoid recapture. With 100% bonus depreciation, planning becomes critical for maintaining tax deferral benefits.
Your Next Steps
This million-dollar property case study demonstrates unprecedented advantages. Cost segregation, combined with the Big Beautiful Bill's permanent 100% bonus depreciation, delivered $129,784 in additional first-year tax savings compared to standard depreciation. The 2,596% return on study investment revolutionizes property investment economics.
Every month without cost segregation services costs thousands in lost deductions. The comparison between cost segregation vs standard depreciation under current law shows no contest.
Take action today. Calculate your property's cost segregation potential with R.E. Cost Seg's free estimate tool.
Ready to begin your tax savings journey?
