Cost Segregation Services

What Is a Cost Segregation Study?

A cost segregation study is an engineering-based analysis of a property’s construction or acquisition costs that identifies assets eligible for accelerated depreciation under the Modified Accelerated Cost Recovery System (MACRS). Under MACRS, every depreciable component of a building is assigned a recovery period based on its asset class. 

Without a cost segregation study, most of a building’s cost is lumped into a single real property category and depreciated over 27.5 or 39 years. A quality study reclassifies components such as specialty lighting, decorative finishes, removable partitions, dedicated electrical systems, parking lot surfaces, and landscaping into shorter-lived asset classes, generating larger deductions in the early years of ownership.

The IRS has published a Cost Segregation Audit Technique Guide that establishes what constitutes a quality study. The most methodical and accurate approach, according to the IRS, is the detailed engineering from actual records method, which uses contemporaneous construction and accounting records to document each reclassification. Appraisal Economics prepares cost segregation studies using this approach, producing reports that are fully documented and designed to withstand IRS examination.

Cost Segregation and Bonus Depreciation

The value of cost segregation is closely tied to the bonus depreciation rules in effect at the time a property is placed in service. Under the One Big Beautiful Bill Act, signed into law on July 4, 2025, 100% bonus depreciation was permanently reinstated for qualified property acquired and placed in service after January 19, 2025. 

Qualified property includes tangible assets with a recovery period of 20 years or less, precisely the assets that a cost segregation study reclassifies out of the 27.5- or 39-year building category. This means that assets reclassified through a cost segregation study into 5-, 7-, or 15-year property can now be fully deducted in the year placed in service, substantially increasing the first-year tax benefit of a cost segregation engagement.

Property owners who acquired or placed assets in service before January 20, 2025, are subject to the prior phase-down rules. For those situations, the assets reclassified through a cost segregation study still benefit from accelerated MACRS depreciation over their shorter recovery periods, even if bonus depreciation does not apply at 100%.

When to Commission a Cost Segregation Study

Cost segregation services are most commonly performed in connection with:

• New construction: Commissioning a study when a building is placed in service allows the property owner to maximize accelerated depreciation from day one and ensures that engineers can document asset classifications based on firsthand inspection.
• Acquisitions: When a property is purchased, the acquisition cost can be allocated between real and personal property components through a cost segregation study, establishing the correct depreciable basis for each asset class.
• Renovations and capital improvements: Substantial renovation projects introduce new assets that may qualify for shorter recovery periods, and may also trigger the disposition of old assets that can generate additional tax deductions.
• Look-back studies: The IRS permits property owners to commission a cost segregation study for properties already placed in service in prior years. A look-back study allows the taxpayer to catch up on accelerated depreciation that was not claimed, using Form 3115 under Revenue Procedure 2023-15 to make the adjustment without amending prior returns.

What Cost Segregation Services Involve

A cost segregation study from Appraisal Economics begins with a physical inspection of the property, during which our engineers identify and document the individual components that make up the building. Construction drawings, contracts, invoices, and cost data are then collected and analyzed to establish the actual cost of each component.

Each item is classified into the appropriate MACRS asset class based on its function, expected useful life, and applicable IRS guidance, including Revenue Procedure 87-56 and relevant court precedents such as Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997). A written report is then prepared that documents the methodology, supports each classification decision, and reconciles the total segregated costs to the property’s acquisition or construction cost. The result is a study that can be presented to auditors, lenders, and other stakeholders as a credible, defensible analysis.

Who Benefits from Cost Segregation Services

• Real estate investors and property owners who have acquired, constructed, or substantially renovated commercial or investment property and want to maximize first-year depreciation deductions
• Corporate real estate and finance teams managing large property portfolios where accurate asset classification affects both tax reporting and financial statement depreciation
• CPAs and tax advisors seeking to provide their clients with a defensible, engineering-based cost segregation study that meets IRS quality standards
• Lenders and financial institutions requiring an independent assessment of depreciable asset values in connection with a financing transaction

Why Choose Appraisal Economics for Cost Segregation

Appraisal Economics offers valuation services that span the full range of business and asset appraisal disciplines, including cost segregation, fairness and solvency opinions, power plant appraisals, ASC 805 purchase price allocations, and intangible asset valuations. 

Our cost segregation practice draws on a team of engineers, CPAs, and appraisal professionals with direct experience in construction cost analysis and IRS compliance. Every study is prepared in accordance with the IRS Cost Segregation Audit Technique Guide and supported by the documentation standards the IRS expects in a quality report.

To discuss a cost segregation engagement, Contact Us for a no-cost proposal.

Frequently Asked Questions About Cost Segregation

What is the difference between cost segregation and standard depreciation?

Under standard MACRS depreciation, most of a building’s cost is assigned to the real property asset class and depreciated over 27.5 years for residential rental property or 39 years for nonresidential real property. Cost segregation identifies components within the building that qualify for shorter recovery periods of 5, 7, or 15 years under MACRS. By reclassifying these components, the taxpayer accelerates depreciation deductions, generating larger deductions in the early years rather than spreading them evenly over 27.5 or 39 years.

Does cost segregation increase audit risk?

A well-prepared, engineering-based cost segregation study does not materially increase audit risk. The IRS has published explicit guidance on what constitutes a quality study through its Cost Segregation Audit Technique Guide, and studies that follow this guidance, using actual cost records, qualified engineers, and proper documentation, are designed to withstand examination. The IRS has acknowledged that quality studies greatly expedite the Service’s review, thereby minimizing audit burden on all parties.

Can a cost segregation study be performed on a property already in service?

Yes. The IRS allows look-back studies for properties already placed in service in prior years. Under Revenue Procedure 2023-15, a taxpayer can file Form 3115 to change their accounting method and claim the catch-up depreciation in the current year as a Section 481(a) adjustment, without the need to amend prior returns. This approach is available regardless of how many years ago the property was placed in service.