An engineer splits your building's cost into parts that depreciate over 5, 7 and 15 years instead of 27.5 or 39.
You claim the deductions decades earlier.
Key takeaways
You can deduct most of those parts in one year on the federal return.
Congress permanently restored 100 percent bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.
New York does not follow that rule, and three limits decide whether the deduction reaches you:
the New York addback, the passive activity rules, and how long you hold the building.
Book a consultation
The question is never whether a study will find something. It is whether the deduction it produces is usable in your return this year. Call (212) 641-0673 or send the contact form. Our team gets back to you within 24 hours, and we are available evenings and weekends. Confidential, and handled by a CPA or EA.
One building, many assets
Your building is not one asset for tax purposes
Buy a building and your accountant puts one number on one schedule, recovered over 27.5 years for residential rental property or 39 for commercial. Your building is many assets. Carpet, cabinetry, dedicated electrical serving equipment, decorative lighting, paving and landscaping all wear out long before the shell does, and the code gives them shorter lives.
A study identifies and prices those components using construction records, blueprints and site inspection, then assigns each to its correct recovery period. The total cost does not change. The schedule does.
01The mechanics
What the study separates
A typical study on a commercial or multifamily property reclassifies somewhere between 20% and 35% of the depreciable basis into short-life categories. The exact share depends on the property type. A medical office or a restaurant carries far more short-life content than a warehouse.
| Recovery class | What it typically includes |
|---|---|
| 5-year property | Carpet, cabinetry, appliances, decorative lighting, and electrical dedicated to specific equipment. |
| 7-year property | Certain equipment and specialty fixtures. |
| 15-year land improvements | Paving, sidewalks, curbing, fencing, landscaping and site utilities. |
| 27.5 or 39-year property | The structure, roof, foundation and the balance of the shell. |
| Land | Never depreciable, and a study that allocates too little to it is the first thing an examiner looks at. |
02Bonus depreciation
How 100 percent bonus depreciation changed the math
Congress permanently restored 100 percent bonus depreciation in the One Big Beautiful Bill Act, for qualified property acquired and placed in service after January 19, 2025. It covers property with a recovery period of 20 years or less, which is every bucket a study produces. Used property qualifies as long as you have not used the asset before.
100%
bonus depreciation for qualified property with a binding contract and placed-in-service date after January 19, 2025
40%
phase-down rate for 2025 if you signed a binding contract on or before January 19, 2025
- Both dates matter. You need the binding contract date and the placed in service date to fall after January 19, 2025. Sign a binding contract on or before that date and your property stays on the old phase-down schedule, which for 2025 gives 40 percent.
- You can elect 40 percent instead of 100. For the first tax year ending after January 19, 2025, you can elect the lower rate across all qualified property acquired that year, attaching a statement to the timely filed return. In a low income year, taking less now can be worth more later.
- Qualified improvement property qualifies, with three exclusions. Interior improvements to nonresidential buildings carry a 15 year life, so tenant buildouts, lighting, flooring and interior HVAC work sit inside the bonus rules. Enlargements, elevators and escalators, and the internal structural framework fall outside.
- Older properties are not excluded. A study on a building already in service is picked up through a change in accounting method, covered below.
03State vs. federal
What New York does differently
This is the part most national guidance skips, and for a New York owner it changes the shape of the benefit rather than the size of it.
New York removes the first-year write-off and keeps the shorter recovery periods. For property placed in service on or after June 1, 2003, you add the federal special allowance back on the state return. Narrow exceptions apply for qualified New York Liberty Zone and resurgence zone property.
New York then lets you depreciate as though you had never claimed the special allowance. In practice that means regular MACRS over the reclassified 5, 7 and 15 year lives:
You still gain on the state return.
Five year MACRS runs far faster than 39 year straight line, so the reclassification pays.
You gain over years, not in one year.
The state deduction arrives across the recovery period.
You report a federal loss and New York income on the same property.
Both returns are correct.
Model a study on the federal number alone and you overstate the after-tax benefit.
Individuals file Form IT-398. Corporations file Form CT-399.
Section 179
Section 179 can rescue part of the New York deduction, and it does not always apply. New York generally accepts section 179 expensing where you add bonus depreciation back, so some advisors allocate section 179 to the reclassified short life assets instead.
Three limits decide whether you can:
- Dollar limits on the amount you expense in a year.
- A taxable income limitation, which caps the deduction at your business income.
- A trade or business requirement, which a passive rental may not meet.
We model it rather than assume it.
04Timing
Do it yourself, or wait until later?
Nothing in the code stops you. There is no license requirement and no filing that asks who prepared the allocation, and DIY software exists that will produce a report from photographs and a purchase price.
The risk is not that the IRS rejects the idea. It is that the allocation itself has no engineering basis behind it, and that only becomes a problem years later when somebody asks how you arrived at the numbers.
- Land allocation is where self-prepared studies fail first. Land is never depreciable, and in the five boroughs it is often the largest single component of the price. Understating it inflates every other number in the study.
- A rule of thumb is not a methodology. The audit techniques guide describes the detailed engineering approach as the most defensible, and a percentage lifted from a comparable property as the weakest.
- The documentation burden survives the study. An examination usually arrives several years after the deduction, by which time the reasoning has to be written down or it does not exist.
- The correction is expensive. A reallocation on examination brings back the depreciation, plus interest, and potentially penalties, in a year you were not planning for it.
On a small residential property with a modest basis, a self-prepared allocation may be a reasonable risk. On a mixed-use building in Manhattan with a seven-figure basis and a large land component, the fee for a proper study is a fraction of what a reallocation would cost.
A study on a building you already own
The most common reason owners assume it is too late is the belief that a study only works in the year of purchase. It does not.
A property already in service is picked up through a change in accounting method on Form 3115, which brings the depreciation you should have taken in earlier years into the current year as a single catch-up adjustment under section 481(a). No amended returns are required, and the adjustment is taken in full in the year of change where it is in your favor.
It is an automatic change,
so no advance IRS consent is needed, though the form still has to be filed correctly and on time with the return.
The catch-up can be substantial
on a building held for several years, because it recovers every year of understated depreciation at once.
New York follows the same logic,
with the state modification computed on the state's own schedule rather than the federal one.
The property has to have been in service in a prior year.
A purchase in the current year is handled on the return itself, not on a 3115.
This route is what makes a study worth considering on a building bought in 2019 or 2015, not only on one bought last month.
Have a study reviewed
Have someone read it before it goes on a return. If you have already had a study done, or produced one yourself, we will review it against the audit techniques guide standards and tell you which allocations would survive an examination and which would not. Call (212) 641-0673 or send the contact form. Cheaper than the reallocation, and considerably cheaper than the interest.
05The trade-offs
What a cost segregation study does not do
Check all three before you commission a study rather than after.
- A study moves your deductions. It does not create them. Depreciation you take early is depreciation you cannot take later. Where your income is rising, you take the deduction in your cheapest year and give it up in your most expensive one.
- You pay some of it back when you sell. You report the depreciation on the reclassified assets as ordinary income at sale.
- You may not be able to use the deduction this year. The IRS treats a rental loss as passive, and a passive loss waits for passive income or a sale.
How depreciation recapture works when you sell
You pay back the accelerated depreciation when you sell, and you pay two different rates on it.
| Asset class | What happens at sale |
|---|---|
| Section 1245 property, the 5, 7 and 15 year assets | You report the depreciation you took as ordinary income, at your top marginal rate. |
| Section 1250 property, the building shell | You depreciate it straight line under MACRS, so you have no excess to recapture. You pay a maximum of 25 percent on the gain attributable to that depreciation, as unrecaptured section 1250 gain. |
An engineer moves cost into the class you pay ordinary rates on. You take that trade where you deduct early at a high rate and sell in a lower one, or where you hold the building.
You avoid the recapture two ways:
A 1031 exchange.
You defer the gain and the recapture into the replacement property, and you keep the depreciation you took.
Holding to death.
Your heirs take a basis equal to the property's value at your death, and they inherit no recapture.
We ask about hold period before property type. We reach different answers on the same building for a three year hold and a hold to death.
06Passive loss rules
When you can deduct the loss against your salary
The IRS treats a rental loss as passive. You carry it forward until you have passive income or you sell.
You get a non-passive loss on one of three routes, and we check which one applies before we model a study.
Real estate professional status.
You spend more than half your working time in real property trades or businesses. You also spend more than 750 hours a year on them, and you materially participate in the rental.
The short term rental route.
Where your average period of customer use runs to seven days or less, you do not have a rental activity under the regulations. You then need only to materially participate, and you can meet any one of seven tests to do it.
The $25,000 allowance.
Where you actively participate, you deduct up to $25,000 of rental loss against other income. The allowance phases out between $100,000 and $150,000 of modified adjusted gross income, so a high earner does not reach it.
Run a short term rental and you meet the seven day test, so you do not have a rental activity. The hours you spend on it then do not count toward the 750 you need for real estate professional status.
An examiner tests your records. They ask whether your booking records show the average stay you claim, and whether your time log shows the participation you claim.
07Audit defense
What makes a study hold up under examination
The IRS publishes an audit techniques guide for exactly this, updated in February 2025, and it is the clearest available statement of what a defensible study looks like.
A qualified preparer with engineering or construction background, not a spreadsheet allocation.
A detailed engineering approach built from actual cost records where those exist, and documented estimation where they do not.
A written methodology explaining how each allocation was reached.
Reconciliation to total cost, so the pieces add back to the price paid.
Documentation retained, because the examination usually arrives years after the study.
The depreciation rules themselves are the backdrop, but the study is what puts numbers against them.
08How we help
Cost segregation support from a New York CPA firm
We do not sell studies. We model whether one pays, coordinate the engineering firm when it does, and put the result on the return correctly, federal and New York.
Pre-study modeling.
Estimated reclassification, first-year federal deduction, the New York addback, and the usable portion after passive loss limits, before you commit to a fee.
Hold period analysis.
What recapture costs at your expected exit, weighed against the time value of the deduction now.
Form 3115 filings.
Change in accounting method for properties already in service, with the section 481(a) adjustment computed and supported.
Study review.
Reading a third-party or self-prepared study before it goes on a return, against the audit techniques guide standards.
State modifications.
Form IT-398 or CT-399 and the year-by-year subtractions that follow the addback.
Return preparation and examination support.
The business return filed with the schedule behind it, and the file kept in case anyone asks.
Where the property sits inside a business with reviewed or audited financial statements, the book and tax treatment diverge immediately, which is the deferred tax asset and review conversation. For entities that need an audit, the depreciation schedule is one of the first items requested.
What we see most often
The pattern we correct most often: an investor who commissions a study, gets a large first-year number, and then discovers the loss is passive and sits suspended because nobody asked about material participation first. The study was fine. The sequencing was backwards. Twenty minutes of modeling before the engagement tells you whether the deduction lands against your other income this year or waits for a sale, and that answer changes whether the study is worth doing at all.
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From the record
On modeling before we recommend, and on the results clients see
"You just sold a home and you know you have capital gains. You just got married and you don't know what your taxes are going to look like with your spouse. Plan early because if you don't there might be a surprise."
George Dimov, CPA
"I came to Dimov through a colleague's recommendation to aid in some complex real estate tax optimizations… they exceeded in their guidance but absolutely delivered with top notch service, quick responses and impeccable work."
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09FAQ
Cost segregation questions we are asked most
Is it too late if I bought the building years ago?
No. A Form 3115 change in accounting method brings the missed depreciation into the current year as a single catch-up adjustment, with no amended returns. The building only needs to have been placed in service in a prior year.
Does New York allow bonus depreciation?
No, other than for qualified Liberty Zone and resurgence zone property. The federal deduction is added back on the state return and the same basis is recovered over the reclassified lives instead. The reclassification still helps in New York; it just pays out over several years.
What does a study cost?
It tracks the property type, the basis, whether construction records survive, and how many buildings are involved. A single small residential property with complete records sits at the light end, and a mixed-use building with no cost records at the other. We model whether the fee is worth paying before anyone commissions anything.
What if I sell in three years?
On a short hold you give back the section 1245 depreciation as ordinary income at sale, and you keep the time value of having deducted it early. Whether that trade pays depends on your rate now against your rate at sale. End the hold in a 1031 exchange or hold to death and you avoid the recapture. We ask about hold period before property type.
Can I take the deduction against my salary?
Only if the loss is not passive. That generally means material participation plus real estate professional status, or a property that meets the short-term rental exception. Without one of those, the deduction suspends and waits for passive income or a sale.
Do I need an engineer, or will software do?
The IRS audit techniques guide ranks a detailed engineering approach as the most defensible and a rule of thumb allocation as the weakest. Software gives you what you put into it, and it does not write the methodology an examiner asks for. In New York City the land allocation is where a self prepared study fails first.
Ready when you are
Bring the closing statement, the depreciation schedule you are using now, and a rough hold period.
That is enough to say whether a study pays. Call (212) 641-0673 or send the contact form. Our team gets back to you within 24 hours, and we are available evenings and weekends. Confidential, and handled by a CPA or EA, not a call center.
Reviewed by George Dimov, CPA, New York, NY. Licensed in all 50 states, 15+ years advising on real estate depreciation and business tax planning. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.