Cost segregation for owners who hold their building

Many owners buy their building through a separate LLC and lease it to the operating company. It is a sound structure. It is also, very often, depreciated as though the whole purchase were one 39 year asset.

It is not. A building is a collection of assets with very different lives, and the tax code lets you recover them on their own schedules.

What a cost segregation study does

An engineering based study breaks the purchase price into its components. Carpet, cabinetry, dedicated electrical, specialty lighting and similar items can qualify as 5 or 7 year property. Parking lots, landscaping and site work can qualify as 15 year property. What remains is the structure, recovered over 39 years for commercial property or 27.5 years for residential rental.

Those shorter lived components are where the deduction accelerates.

Why 2026 is different

The One Big Beautiful Bill Act restored 100 percent bonus depreciation, and made it permanent, for qualifying property acquired and placed in service after January 19, 2025. The 5, 7 and 15 year components a study identifies can now be deducted in full in the first year rather than over decades.

Buildings bought earlier are not left out. A look back study, filed with an accounting method change on Form 3115, lets you catch up the depreciation you missed in the current year, without amending prior returns.

Where owners get it wrong

• The passive activity rules. A rental to your own operating company follows special rules. Whether the new deduction offsets business income depends on how your activities are grouped and how you participate. Get this wrong and the deduction sits suspended for years.
• Recapture. Faster depreciation is not free money. When the building sells, the accelerated components can be recaptured at ordinary rates. A study makes the most sense when you expect to hold, or when the sale itself is being planned.
• Size. The study has a fee. As a rough guide, it tends to pay when the depreciable building basis is around $500,000 or more. Below that, the math has to be run first.

How we approach it

We start with your projected liability, then model the study's deduction against it: the tax saved this year, the recapture exposure on a future sale, and whether the passive rules let the deduction work at all. Only then do we recommend engaging the engineering firm.

The study is a tool. The projection tells you whether to use it.

This article is educational and is not tax advice for any specific situation.