The One Big Beautiful Bill Act (OBBBA), passed in July 2025, introduces changes to tax regulations that significantly affect real estate investors. One of the most important changes is the restoration of 100% bonus depreciation, making cost segregation studies an even more compelling tax strategy.
What is a Cost Segregation Study and Why Consider It?
An investor can use a cost segregation study to allocate the basis of real property into specific asset classes, allowing for accelerated depreciation deductions for certain asset classes. In fact, any qualified improvement property or personal property will be eligible for 100% bonus depreciation, making it deductible in the year the property is purchased and placed in service. This includes building components and land improvements such as flooring, windows, fencing, and sidewalks.
Quantifying the Impact
The example below illustrates the tax benefit of depreciation using a cost segregation study for a taxpayer who acquires a $3 million commercial property in 2025.
Tax Benefit without Cost Segregation:
- Land allocation: $600,000 (not depreciable)
- Entire building: $2,400,000 – depreciated over 39 years
- Annual depreciation: $61,538
- First-year tax benefit (37% bracket): $22,769
Tax Benefit with Cost Segregation and 100% Bonus Depreciation (Restored by OBBBA):
- Land allocation: $600,000 (not depreciable)
- Building allocation: $1,800,000 (39-year depreciation = $46,154 annually)
- Qualified improvements identified by study: $600,000 (immediately deductible)
- Total first-year deductions: $646,154
- First-year tax benefit (37% bracket): $239,077
The restoration of 100% bonus depreciation and a cost segregation study transforms a $22,769 first-year tax benefit into a $239,077 benefit, more than tenfold increase. This example demonstrates how investors can accelerate depreciation deductions, reduce their tax liability, increase cash flow, and enhance overall return on investment.
Considerations in Advance
Before initiating a cost segregation study, taxpayers should evaluate their specific tax position and property characteristics to determine the eligibility and potential tax savings. They should also gather available property documentation, including recent appraisals, site maps or surveys, closing documents at time of purchase, and architectural or construction plans.
Eligible Properties
Properties that are eligible for depreciation are eligible for cost segregation studies, including both residential and commercial properties. While this strategy can be applied broadly, it proves most effective on larger projects since the expected benefit correlates to the total cost of the project.
Timing the Study
Taxpayers can initiate a Cost Segregation Study at three key phases:
- When purchased or constructed: Investors can commission a study on a newly acquired or constructed property. The study should be completed prior to the filing of the tax return for the year the property was placed in service, allowing for depreciation of the various components according to the classifications as set out in the study.
- Retroactively: Investors can perform a study on properties placed in service in prior years. However, this requires filing a Form 3115 to claim the depreciation that would have been allowed. Note that bonus depreciation rates were less than 100% in 2023 and 2024, diminishing the benefits.
In Summary
A cost segregation study is a strategic tax planning tool that allows real estate investors to accelerate depreciation deductions, resulting in significant tax deferrals and increased cash flow, particularly in the early years of ownership. It is especially valuable for newly constructed buildings, renovations, or acquisitions, and may also be applied retroactively. By front-loading depreciation, businesses can reinvest savings, improve ROI, and enhance financial performance.
To explore the applicability of this strategy to your specific situation, please contact Dean Dorton’s real estate team.