How a Cost Segregation Study Works and Who Qualifies

A cost segregation study splits the cost of a building you own into parts with shorter tax recovery periods, such as 5-, 7- or 15-year property, instead of depreciating it all as 39-year nonresidential or 27.5-year residential rental property. Any business or landlord that buys, builds or renovates depreciable real estate can use one, including for a building placed in service in an earlier year by filing Form 3115.

100%Bonus depreciation: for qualified property acquired and placed in service after January 19, 2025, the One Big Beautiful Bill Act reinstated the 100% special depreciation allowance.

A cost segregation study allocates the total cost of a building purchase or construction project among separate assets, such as land, land improvements, the building, and equipment, furniture and fixtures. The IRS Cost Segregation Audit Technique Guide explains why owners do it: a building is generally nonresidential real property with a 39-year recovery period or residential rental property with a 27.5-year recovery period, and it must be depreciated straight-line. Tangible personal property has shorter recovery periods, such as 5 or 7 years, and may also be eligible for faster methods, bonus depreciation and the section 179 deduction. Moving qualifying costs into shorter-lived classes gives a faster depreciation write-off.

Last checked: November 2, 2026. This page explains the rules only. It is general information, not legal, tax, or financial advice.

The short version

What it does	separates parts of a building's cost into shorter recovery periods. The IRS guide gives examples a study might treat as personal property, such as carpeting, wall coverings, partitions, millwork and lighting fixtures, depending on the facts.
Building	39 years for nonresidential real property, 27.5 years for residential rental property, straight-line.
Personal property	often 5 or 7 years. Land improvements such as paved parking areas and sidewalks are generally 15-year property.
Land	not depreciable, so it's never part of the write-off.
Bonus depreciation	for qualified property acquired and placed in service after January 19, 2025, the One Big Beautiful Bill Act reinstated the 100% special depreciation allowance. Qualified property includes tangible property with a recovery period of 20 years or less, so costs moved out of the building may be eligible.
Older buildings	you can do a study on a building you already own. Changing your depreciation is generally an accounting method change made on Form 3115, not an amended return. Bonus depreciation depends on when the property was acquired and placed in service, so a study on an older building doesn't by itself make those costs eligible for 100%.

Who can use one

There's no program to apply to: a study is a way of classifying a building's costs on your return, and any owner of depreciable real estate used in a business or rental can use one. For a building already on past returns, the change is generally made on Form 3115, Application for Change in Accounting Method. The IRS lists this kind of depreciation change as an automatic change (DCN 7 in Rev. Proc. 2025-23), which means consent is generally granted when the form is filed on time under the automatic procedures, subject to IRS review. Whether it applies to your building depends on your facts, so check with your own CPA or tax professional. Under IRS Publication 946, property is depreciable if:

You own it (including property you bought with a mortgage)
You use it in your business or an income-producing activity, such as a rental
It has a determinable useful life and is expected to last more than 1 year

That covers businesses and landlords who buy, build, expand or renovate commercial buildings or residential rental property. The IRS guide notes that studies can also be done on used or previously existing property. The land under the building doesn't qualify, because land isn't depreciable.

How a study is done

The IRS guide lists six common approaches, from a detailed engineering approach using actual cost records to estimates, surveys, sampling and "rule of thumb" methods. There's no standard format, but the IRS says every study and report should:

Classify assets into property classes (land, land improvements, building, equipment, furniture and fixtures)
Explain the reasoning, with legal citations, for classifying each asset as section 1245 (personal) or section 1250 (real) property
Support the cost of each asset and reconcile total allocated costs to total actual costs

The IRS also says there are no prescribed qualifications for preparers, but a study by a construction engineer is generally more reliable than one by someone with no engineering or construction background, and actual costs are more accurate than estimates.

Who qualifies

The IRS Cost Segregation Audit Technique Guide explains why owners do it: a building is generally nonresidential real property with a 39-year recovery period or residential rental property with a 27.5-year recovery period, and it must be depreciated straight-line.
Tangible personal property has shorter recovery periods, such as 5 or 7 years, and may also be eligible for faster methods, bonus depreciation and the section 179 deduction.
Bonus depreciation: for qualified property acquired and placed in service after January 19, 2025, the One Big Beautiful Bill Act reinstated the 100% special depreciation allowance.
Older buildings: you can do a study on a building you already own.
The land under the building doesn't qualify, because land isn't depreciable.

How to get it

How to get started

Gather your records: the closing statement and purchase price allocation, construction contracts and invoices, and blueprints or as-built drawings.
Choose a preparer with both construction or engineering experience and knowledge of depreciation tax law.
Review the report. Check that it classifies each asset, explains the legal reasoning, and reconciles to your total cost.
New building: use the study's classifications on the return for the year the building is placed in service.
Building already on your returns: work with your tax professional on Form 3115. For an automatic change, the original Form 3115 is attached to your timely filed return (including extensions) for the year of change, and a signed copy goes to the IRS National Office no later than the date you file that return.
Keep the study and supporting documents with your tax records in case the IRS reviews them.

Programs that may match

Look beyond cost segregation

Bonus depreciationsee whether bonus depreciation is 100% in 2026.Vehicles and equipmentsee which vehicles qualify for the Section 179 deduction.Recent tax lawsee what the One Big Beautiful Bill changed for small business taxes.Find other programs that may fit your business with FundPlenty's free match at fundplenty.com.

FAQ

What is a cost segregation study?

An analysis that allocates the cost of a building purchase or construction project among individual assets, so parts that count as personal property or land improvements can be depreciated over shorter recovery periods than the building itself.

Who can use a cost segregation study?

Any owner of depreciable real estate used in a business or income-producing activity, including commercial buildings and residential rental property. Land itself isn't depreciable.

Can I do a cost segregation study on a building I bought years ago?

Yes. The IRS guide says studies can be done on used or previously existing property. The IRS treats the change as a change in accounting method, generally made by filing Form 3115 rather than amending prior returns. Missed depreciation is picked up through a section 481(a) adjustment. Under Publication 946, a negative adjustment is taken in the year of change, and a positive adjustment is generally spread over 4 tax years, or 1 year if the total adjustment is less than $50,000 and you elect it.

Does bonus depreciation apply to a cost segregation study?

It can. Publication 946 says you must take a 100% special depreciation allowance for qualified property acquired and placed in service after January 19, 2025, unless you elect out or elect 40% instead in the first tax year ending after that date. Qualified property includes tangible property with a recovery period of 20 years or less, which doesn't include the 39-year or 27.5-year building.

When is Form 3115 due for a cost segregation change?

For an automatic change, attach the original Form 3115 to your timely filed federal income tax return (including extensions) for the year of change. File a signed copy with the IRS National Office no earlier than the first day of the year of change and no later than the date you file the original with your return.

Who should prepare a cost segregation study?

The IRS says there are no prescribed qualifications, but preparing a study requires knowledge of both construction and the tax rules for classifying property. A study by a construction engineer is generally more reliable, and experience in cost estimating and tax law also matters.