You may have more deductions available to claim than you realize. Changes to the tax code in 2025 created a new opportunity for property owners to accelerate deductions and improve cash flow. But you don't have to be buying a property today to benefit. If you acquired an investment property in recent years without a cost segregation study, you may still be able to capture deductions you missed.
Cost segregation can help you identify building components that qualify for shorter depreciation schedules. Combined with 100% bonus depreciation for qualifying property, that reclassification can reduce current-year taxable income and improve near-term cash flow, rather than years down the road.
The strategy comes down to three things: how cost segregation works, what changed with bonus depreciation, and how a look-back study can help you claim missed deductions.
How Cost Segregation Speeds Up Your Deductions
A commercial building typically depreciates over 39 years. Residential rental property depreciates over 27.5 years. Those long timelines delay the tax benefits of capital investments for decades.
Cost segregation shortens that timeline. Instead of treating a building as a single asset, an engineering-based study breaks it into individual components, such as flooring, fixtures, certain electrical and plumbing systems, and land improvements. Many of those components may qualify for 5-, 7-, or 15-year schedules instead of 39.
Pair that reclassification with bonus depreciation, and qualifying shorter-life components may qualify for a full deduction in the year you complete the study. That can move a significant portion of the tax benefit into the current year instead of waiting for those deductions to accrue over the property's standard depreciation schedule.
What Could That Look Like?
Consider an investor who purchases a $2 million commercial property. The building itself follows a 39-year depreciation schedule, but a cost segregation study identifies $400,000 in components that qualify for shorter depreciation schedules.
With 100% bonus depreciation, those qualifying components could generate a $400,000 first-year deduction, subject to the applicable tax rules and the investor's individual circumstances. Without cost segregation, the investor would depreciate those components under the building's longer schedule.
Why Bonus Depreciation Is Different Now
Bonus depreciation used to shrink every year. Congress had scheduled it to phase down from 100% to 80% to then 60% and so forth until only 20% of the costs of qualifying assets could be immediately deducted permanently. The One Big Beautiful Bill Act became law on July 4, 2025, and restored 100% bonus depreciation permanently for qualifying property acquired after January 19, 2025, and placed in service after that date.
Bonus depreciation gives investors a planning tool to consider with future acquisitions, developments, and qualifying improvements. For owners actively buying, developing, or renovating property, the change makes depreciation planning worth discussing with your tax advisor now instead of at year-end.
The ability to immediately expense qualifying capital assets keeps more cash flow available for future opportunities.
Claim What You Missed with a Look-Back Study
You don't need to complete a cost segregation study in the same year you buy or build a property. If you still own a property within its 27.5- or 39-year depreciation period, a look-back study may still identify deductions you missed. The potential benefit generally decreases as a property ages, although a property more than 10 years old may still justify a study if it has significant identifiable shorter-life assets.
A look-back study identifies components that could have qualified as short-life property from the start, even years after you closed on the purchase. Rather than amending prior returns, you can make the adjustment through a change in accounting method using IRS Form 3115 and claim the resulting catch-up deduction in the current year.
If you assumed you missed the window on bonus depreciation, you may not have. If you still own the property, a look-back study could help you capture depreciation you didn't claim when you acquired it.
Who Should Consider Cost Segregation
Many real estate investors can benefit from cost segregation, but it can be particularly valuable for:
- Active investors and operators managing multiple properties or entities, where accelerating depreciation can affect the cash available to reinvest or distribute.
- Developers placing new construction or major renovations into service, where accurate cost tracking from the beginning can help maximize available deductions.
- Owners preparing for a refinance or major renovation, or who purchased before 2025 when bonus depreciation was still phasing down, who need a clear picture of their depreciation position before making their next move.
Cost segregation can apply to a range of property types, including multifamily, industrial, retail, and office properties, depending on the property and its components.
Cost segregation doesn't make sense for every property. The potential tax benefit needs to justify the cost of the study, and the analysis needs to stand up if the IRS examines it. Existing properties without detailed construction records generally require a study grounded in both engineering expertise and the tax rules governing depreciation. New construction or major remodels with detailed contractor cost breakdowns can be a great starting point for evaluating the potential benefit of a cost segregation study.
How ODC Helps Real Estate Investors
ODC coordinates cost segregation studies with qualified engineering partners and models the potential tax impact before you make a property decision. For look-back studies, we file the accounting method change needed to claim missed depreciation, using the documentation from your cost segregation study. We also help you plan the timing of acquisitions, dispositions, and capital improvements in accordance with applicable depreciation rules.
Those strategies depend on accurate financial information. We help keep your books, entity structure, and financials ready for the study, the lender, and the IRS.
Whether you're planning a new acquisition or sitting on properties you acquired years ago, it may be worth taking a closer look at your depreciation strategy.
Reach out to the ODC team to talk through your portfolio and see what you might be missing
