What a cost segregation study does
When you buy or build a building, the default treatment is one asset: everything but the land is depreciated straight line over 27.5 years for residential rental property or 39 years for anything else. But a building contains things the tax law treats differently. The carpet, the dedicated wiring to a dental chair, the parking lot and the landscaping are not structural parts of the building, and they have recovery periods of 5, 7 or 15 years.
A study identifies those components, assigns each a cost from your records, and documents why each one belongs in its class. The result is a larger deduction in the early years and a smaller one later. The total never changes; the timing does.
The IRS does not prescribe a format. Its Cost Segregation Audit Techniques Guide (Pub 5653, revised February 2025) instead describes 13 principal elements of a quality study, ranks the methods from detailed cost records down to rules of thumb, and tells examiners what to look for. Our studies are built to those elements; read what examiners look for.
What a study typically reclassifies
The line between building and equipment comes from the investment tax credit era rules in Treas. Reg. §1.48-1, which the Tax Court applies to MACRS. Each call needs a reason, not a percentage.
| Component | Recovery period (years) | Why |
|---|---|---|
| Carpet, vinyl and other removable floor coverings | 5 or 7 | Personal property under §1.48-1(c) when not a permanent part of the structure; the ATG industry matrices list it by industry. |
| Electrical and plumbing that serve specific equipment | 5 or 7 | Allocated by use: the portion serving equipment, not the building (Scott Paper, 74 T.C. 137). A flat percentage draws IRS review. |
| Millwork, cabinetry and decorative finishes | 5 or 7, or building life | Depends on use and attachment (Whiteco factors). The ATG residential rental matrix keeps apartment kitchen cabinets at 27.5 years. |
| Parking, sidewalks, landscaping, site lighting, fencing | 15 | Land improvements, asset class 00.3 (Rev. Proc. 87-56). |
| HVAC, roof, walls, structural framing | 27.5 or 39 | Structural components of the building. HVAC moves only when its sole justification is equipment or a process (§1.48-1(e)(2)). |
| Land | Never | Not depreciable. Valued first, at highest and best use, before anything else is allocated (ATG ch.5). |
Who a study is worth considering for
Four things decide it: the building, the basis, the timing, and whether you can use the deduction.
You bought, built or renovated a building
Commercial property, rental housing, a medical office, a plant, or your own firm’s office. New construction and major renovations have the best cost records; acquisitions need a careful land and price allocation.
The depreciable basis is meaningful
Providers commonly cite roughly $500,000 to $1 million of depreciable basis as the point where a study tends to pay for itself. That is a rule of thumb, not a test; renovations can justify a study at lower amounts.
You placed it in service this year or earlier
A study in the year you place the building in service changes this year’s depreciation. For a building you have owned for years, a look-back study claims the missed depreciation on Form 3115 (Rev. Proc. 2025-23 §6.01, DCN 7) without amending prior returns.
You can use the deduction
A larger deduction is only worth something if it reduces tax. The §469 passive-loss rules, the excess business loss limit and state decoupling (Pennsylvania, for one) can defer the benefit; your CPA confirms that before you commit.
By property type: medical and dental offices, manufacturing facilities, architecture and engineering firm offices, and short-term rentals.
How a Ricerca study is prepared
AI does the reading and the first pass. Code does every computation. A CPA reviews and approves the study before it is issued.
Models never produce a number in your study. They propose classifications from a closed list, with the authority for each, and draft narrative around figures that code computes from your documents. Before a study can be finalized it needs a documented inspection: a photo walkthrough you complete, or an on-site visit.
- Step 1
Property intake
You describe the property in the client portal and upload what you have: closing statement, purchase contract, appraisal, construction pay applications, invoices, prior depreciation schedules and photos.
- Step 2
Cost records extracted and reconciled
AI reads the cost documents and proposes ledger lines; code reads each amount from the source cell and reconciles the total to what you paid. Nothing is scaled to force a tie.
- Step 3
Components classified, with authority
Each component is matched to a class from a closed catalog, with the IRS matrix entry, revenue procedure or case behind it. A rule-based second vote flags disagreements for staff.
- Step 4
Independent CPA Agent review
A reviewing AI from a different model family checks the assembled study against the ATG quality elements and an examiner’s information requests. Every finding needs a written disposition.
- Step 5
Reviewed and approved by a CPA
A CPA reviews the findings, the classifications and the computations, then approves and signs. No study is issued without that approval.
- Step 6
Report, schedules and workpapers
You receive the study report. Your CPA or tax preparer can request the asset schedule and depreciation workbook, and Form 3115 support where a look-back applies. The workpaper binder an examiner would ask for is kept with the study.
What a study produces
You receive the study report. Your CPA or tax preparer can request the asset schedule, the depreciation workbook and any Form 3115 support; when your CPA firm engages us, the firm receives them directly. The workpaper binder is kept with the study for an examination.
Study report
Summary, property description, methodology, legal analysis, schedules by recovery period, reconciliation to cost, assumptions and limiting conditions, and the approving CPA’s certification.
Asset schedule
Every component with its class, method, convention and placed-in-service date, ready for your preparer’s fixed-asset software.
Form 3115 support
For a look-back, the §481(a) computation and support schedules your preparer needs to file the accounting method change.
Workpaper binder
Source documents, the cost-to-asset trail, photos and the review log, organized around the information requests an examiner issues.
The trade-offs to weigh
- Recapture on sale. Gain on 5-, 7- and 15-year property sold at a profit is taxed as ordinary income to the extent of depreciation taken (§1245). A short hold can give much of the benefit back.
- Passive losses. Under the passive activity rules of §469, a rental loss is usually passive and can only offset passive income. The two exceptions owners rely on: a short-term rental with an average guest stay of 7 days or less is not a rental activity at all (Temp. Reg. §1.469-1T(e)(3)(ii)(A)), so its loss is non-passive if you materially participate; and a real estate professional (more than 750 hours, and more than half of your working time, in real property trades or businesses in which you materially participate) who also materially participates in the rental can treat the loss as non-passive (§469(c)(7)). Otherwise a bigger deduction you cannot use this year carries forward. Your CPA applies these tests; Ricerca does not decide them.
- State tax. Many states do not follow federal bonus depreciation. Pennsylvania, for example, decouples: for the corporate net income tax the federal bonus is added back and the property is depreciated without it, and the personal income tax has its own rules. California never adopted bonus depreciation, and New York, New Jersey and Massachusetts decouple in whole or part. Your state deduction can be much smaller than the federal one in the first year, and you keep a separate state basis.
- Quality. A study built on a percentage or a benchmark rather than your costs is an approach the IRS guide tells examiners to view with caution. Ask how any study you buy ties to actual cost.
Pairs with the R&D credit
Many owner-occupied buildings belong to the same companies that claim the federal R&D tax credit: manufacturers, engineering and architecture firms, labs. The two studies answer different questions about the same facility. The R&D study covers wages, supplies and contract research; depreciable property is never a qualified research expense. The building study covers the building.
Read cost segregation and the R&D credit on the same facility and the §174A expensing guide.
Cost segregation questions
Is cost segregation legal?
Does a study increase total depreciation?
Can I do a study on a building I bought years ago?
How is a Ricerca study priced?
More answers in the cost segregation FAQ.
Primary sources
What this page relies on, as reviewed October 2, 2026.
- IRS Pub 5653, Cost Segregation Audit Techniques Guide (rev. 2-2025)
- IRS Notice 2026-11, additional first-year depreciation after P.L. 119-21
- 26 U.S.C. §168, accelerated cost recovery system (Cornell LII)
- IRS Pub 946, How To Depreciate Property
- Rev. Proc. 2025-23, List of Automatic Changes (DCN 7, §6.01)
- 26 U.S.C. §1245, gain from dispositions of depreciable property (Cornell LII)
- 26 U.S.C. §469, passive activity losses (Cornell LII)
- Treas. Reg. §1.469-1T(e)(3), definition of rental activity (Cornell LII)
- Bloomberg Tax, state conformity to federal bonus depreciation (secondary)
- Pennsylvania Department of Revenue, Corporate Net Income Tax audit manual (bonus depreciation add-back)
- Cost Seg Smart, 2026 reclassification benchmarks (vendor-reported)
Tax law, IRS guidance and state conformity change. Confirm the current rules and how they apply to your property with a qualified professional before acting.