IRC §168, IRC §1250, IRC §168(k) — 100% bonus depreciation restored

Cost Segregation Study

Cost segregation front-loads depreciation by reclassifying parts of a building into shorter-lived categories (5, 7, or 15 years instead of 27.5 or 39), creating large deductions in year one. The savings are a deferral — you’re pulling future depreciation forward, not creating new deductions.

On sale, the accelerated portion is recaptured and taxed at 25% (IRC §1250). The strategy makes sense when your current tax rate is higher than your expected rate at sale, or when you plan to 1031 exchange and indefinitely defer the recapture.

Who this may apply to

Own rental or investment property
Property value generally $300,000+
Recently purchased, renovated, or constructed
Have income to offset with the accelerated deductions

Strategy connections

Enables

Real Estate Professional Status (REPS): Accelerated rental deductions may be more useful when the taxpayer qualifies to treat rental losses as nonpassive.
Short-Term Rental Loophole: Accelerated deductions may be more useful when a short-term rental activity is nonpassive and materially participated in.

Works well with

1031 Exchange: Disposition and replacement-property planning should account for basis and depreciation recapture.

What could block this

No depreciable real property
Remaining basis and expected tax benefit do not justify a study
Property records do not support component classification

Important considerations

If you sell the property, cost segregation accelerates depreciation now but creates higher depreciation recapture (taxed at 25%) on sale
Without REPS status or the STR loophole, losses from cost segregation are passive and can only offset passive income — consult your CPA on how to unlock these deductions
A poorly done cost segregation study can be disallowed on audit — use a qualified engineering firm, not a spreadsheet estimate

Professional support

Real Estate Tax Specialist + Cost Seg Engineer

Will conduct a cost segregation study, reclassify assets, and maximize first-year depreciation deductions.

Timing

Can be done at any time during ownership, including retroactively (with Form 3115). Most impactful in the year of purchase. Studies should be commissioned before the tax return is filed.

Official sources

Reviewed 2026-07-24