Cost Segregation

Cost segregation has always been a powerful tax strategy for real estate investors, but the next three years are especially important. Recent tax law changes now allow many investors to take advantage of 100 percent bonus depreciation again. This creates a significant opportunity for anyone who owns residential rentals, commercial buildings, or owner-occupied real estate.

If you time your cost segregation studies correctly, you can accelerate years of depreciation into a single tax year, increase cash flow, reduce tax liability, and free up capital to reinvest into new properties.

Below is a detailed breakdown of how to unlock bonus depreciation in 2024, 2025, and 2026 with a structured cost segregation strategy.

To explore a study for your property, visit our Cost Segregation Services page.

Understanding Bonus Depreciation and Cost Segregation

Bonus depreciation gives you the ability to immediately deduct a percentage of qualifying property in the year it is placed in service. Under traditional MACRS rules, a building is depreciated over 27.5 years for residential property or 39 years for commercial property. Cost segregation allows engineers to separate building components into:

• 5 year property
  
  
• 7 year property
  
  
• 15 year property
  
  

All of these have a class life under 20 years, so they qualify for bonus depreciation.

A cost segregation study identifies and reclassifies items such as flooring, cabinetry, furniture, electrical improvements, mechanical systems, parking lots, landscaping, and other components so they can be deducted immediately.

This creates a large first year tax deduction and significantly increases cash flow.

For common questions, visit our Cost Segregation FAQ.

Bonus Depreciation Rules for 2024

Under the original Tax Cuts and Jobs Act phase-down, 2024 gives investors 60 percent bonus depreciation for qualifying assets placed in service during the year.

This means:

• A cost segregation study completed on a 2024 property can accelerate personal property and land improvements
  
  
• Sixty percent of those items can be deducted immediately
  
  
• The remaining forty percent is depreciated over their standard recovery periods
  
  

Even with sixty percent bonus, many investors see six-figure write-offs in the first year.

Why 2024 Placed in Service Dates Still Matter for Investors

Even though it is not 100 percent, 2024 offers several advantages:

• You can still capture significant first year depreciation
  
  
• You may combine cost segregation with Section 179 in some cases
  
  
• You can complete a cost segregation study later and apply catch up depreciation using Form 3115
  
  
• You can use 2024 as a planning year if a larger project will be placed in service in 2025 or 2026
  
  

If you acquired a property in 2024 and did not run a study yet, you can still retroactively apply it.

2025: Two Different Bonus Depreciation Periods

2025 is where the opportunity becomes even more strategic. Under the reinstated bonus depreciation rules, real estate investors now have two different periods within the same year.

1. Property Placed in Service On or Before January 19, 2025

Under the previous phase-down schedule, these assets generally fall under:

• 40 percent bonus depreciation
  
  

This applies to items identified in a cost segregation study for early 2025 placements.

2. Property Acquired and Placed in Service After January 19, 2025

The major change is that qualifying property placed in service after this date is eligible for:

• 100 percent bonus depreciation
  
  

This restores full expensing for property with a class life of 20 years or less. Cost segregation becomes extremely valuable again because all identified short-life property can be deducted immediately.

What This Means for Real Estate Investors

If you are planning construction, improvements, or acquisitions:

• Placed-in-service dates matter
  
  
• Delaying a project into the post-January 19 window may double or triple your deduction
  
  
• Large renovations, tenant improvements, and capital expenditures may qualify for full expensing
  
  
• Multi-property owners should consider a timing strategy for each building in their portfolio
  
  

This is the year where planning your cost segregation timeline can create the biggest impact.

2026: 100 Percent Bonus Depreciation Becomes the New Normal

With the updated legislation, any qualifying 5, 7, or 15 year property placed in service in 2026 can also take 100 percent bonus depreciation. This eliminates the previously scheduled drop to 20 percent.

For real estate investors, 2026 becomes:

• A strong year for new acquisitions
  
  
• An ideal year for completing renovations
  
  
• A year where cost segregation and bonus depreciation can offset income from rental operations
  
  
• A year where improvements can be fully expensed instead of depreciated over 15 years
  
  

Because 100 percent bonus is projected to remain stable beyond 2026, investors can build multi-year depreciation strategies instead of rushing everything into one tax year.

Who Benefits the Most in This Three-Year Window

High-Income W-2 Earners with Short Term Rentals

Short term rental material participation rules allow bonus depreciation to offset wages and other income.

Real Estate Professionals

Long term rental portfolios can generate non-passive losses when the investor materially participates.

Business Owners Who Own Their Buildings

Cost segregation studies for owner-occupied properties can offset business income and reduce quarterly tax payments.

Investors Planning Major Renovations or Repositioning

Improvements placed in service after January 19, 2025 receive immediate expensing.

How to Use Cost Segregation Strategically Across 2024, 2025, and 2026

A strategic approach typically includes:

1. Reviewing Properties Placed in Service in 2024

A catch up cost segregation study may still make sense so you can apply accelerated depreciation while rates remain favorable.

2. Planning Acquisition and Construction Timelines Around January 19, 2025

This date now determines whether your project receives 40 percent or 100 percent bonus depreciation.

3. Scheduling Large Improvements for 2025 and 2026

Parking lots, HVAC replacements, roofs, landscaping, and build outs performed after the cutoff date can qualify for full expensing.

4. Coordinating Cost Segregation with Passive Loss Rules

Real estate professional status and short term rental material participation remain key tools for unlocking losses against W-2 or business income.

5. Running Multi-Year Projections

For high-income investors, it is often more valuable to stagger bonus depreciation across several years rather than taking everything at once.

Our case studies show that strategic timing can produce six and seven figure tax savings. You can view examples on our Cost Segregation Case Studies page.

Unlocking Your Bonus Depreciation With Specialty Tax Group

Specialty Tax Group provides engineered cost segregation studies that comply with IRS standards and maximize allowable depreciation. Our team:

• Identifies every eligible short-life component
  
  
• Runs multi-year tax projections
  
  
• Models benefits based on placed-in-service date
  
  
• Works with your CPA to apply bonus depreciation correctly
  
  
• Provides an engineered report designed to withstand IRS scrutiny
  
  

If you want to unlock 100 percent bonus depreciation for 2025 and 2026, now is the time to plan your study.

Start here: Contact Specialty Tax Group