Key Takeaways
- Cost segregation is a tax strategy that reclassifies portions of a building from real property into shorter depreciation categories of five, seven, or 15 years, accelerating deductions and improving cash flow.
- The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualifying property placed in service after Jan. 19, 2025, reversing the phase-down that had been reducing it toward zero.
- Since the law passed, cost segregation studies have increased significantly, particularly for multi-family properties and vacation rental properties.
- A new provision, Qualified Production Property (QPP), allows certain newly constructed manufacturing and production facilities to immediately expense 100% of construction costs.
- Property owners who have never completed a study, even on properties held for years, may still capture missed deductions through a look-back study generally by filing a Form 3115, without amending prior tax returns.
Cost segregation has been around for a long time. It is a tax strategy that accelerates deductions into the earlier years of ownership and frees up cash for reinvestment. It works by reclassifying portions of a building from 39-year or 27.5-year real property assets to five-, seven-, or 15-year personal property assets.
The July 2025 signing of the One Big Beautiful Bill Act (OBBBA) ushered in one of the most notable tax developments affecting real estate investors in recent years: the restoration of 100% bonus depreciation. More than a year later, we reflect on what has transpired.
As expected, we have experienced a significant uptick in cost segregation studies across asset classes, with the largest increases occurring in income-producing second homes and vacation rental properties, as well as multi-family properties of varying sizes. For multi-family properties the gradual reduction of bonus depreciation prior to the OBBBA and the corresponding reduced cash flow savings benefit likely caused some investors to not pursue cost segregation studies. Permanent 100% bonus depreciation changed that very quickly, driving a significant increase in cost segregation studies of multi-family properties.
For individuals owning a second home, the dynamic is much different in that many individuals had not previously heard of a cost segregation study. The publicity around the OBBBA — specifically 100% bonus depreciation — increased awareness to the point that many individuals now realize they may be able to benefit from a cost segregation study for their second home. This has driven the sizable increase we are experiencing in conducting cost segregation studies on second homes.
Below we provide a refresher on cost segregation and additional detail regarding the restoration of 100% bonus depreciation.
What Is a Cost Segregation Study?
A cost segregation study is an engineering-based analysis that separates a building’s components into different depreciation categories. Rather than depreciating an entire commercial building over 39 years or residential rental property over 27.5 years, certain assets can be reclassified into shorter recovery periods of five, seven, or 15 years.
Common examples include:
- Appliances and equipment
- Specialized electrical and plumbing systems
- Certain flooring and cabinetry
- Parking lots and sidewalks
- Fencing, landscaping, and outdoor lighting
These shorter-lived assets often qualify for accelerated depreciation, allowing owners to claim deductions much sooner than under traditional depreciation methods.
How Should a Tax Preparer Evaluate Whether a Cost Segregation Study Is Reasonable?
For tax preparers or anyone assessing if a cost segregation study could be beneficial, the simplest approach is to review the tax fixed asset ledger to understand if all building-related assets are categorized as 39-year life (or 27.5-year life for residential properties) or if relevant assets have already been reallocated to shorter-lived categories. In reviewing the reasonableness of an already prepared cost segregation study, focus should be placed on the percentage of costs that were reallocated to shorter lived categories relative to comparable properties to ensure the results are within a reasonable range. It is also worth confirming whether a site visit was performed as part of the cost segregation analysis, and, most importantly, that the cost segregation study was conducted in a manner consistent with Internal Revenue Service guidelines.
How Did the OBBBA Change Bonus Depreciation?
We first examined the proposal in June 2025, before it was signed into law, in Bonus Depreciation and the One, Big, Beautiful Bill.
As mentioned above, the biggest change affecting cost segregation is the permanent restoration of 100% bonus depreciation for qualifying assets acquired after Jan. 19, 2025. Under prior law, bonus depreciation gradually phased down from 100% to 80%, 60%, 40%, and eventually to zero.
The OBBBA reversed that trend by reinstating full first-year expensing for eligible assets. As a result, property owners who complete a cost segregation study can often deduct the full value of qualifying five-, seven-, and 15-year property in the year it is placed in service.
This change significantly enhances the cash-flow benefits of cost segregation by accelerating deductions that would otherwise be spread over multiple years.
What Is Qualified Production Property Under the OBBBA?
Qualified Production Property (QPP) is a new OBBBA provision that allows certain manufacturing and production facilities to immediately expense 100% of construction costs, a benefit traditional nonresidential buildings depreciated over 39 years have never had access to.
While most attention on the OBBBA has focused on the return of 100% bonus depreciation for personal property and land improvements, QPP opens a comparable opportunity for a different category of building altogether: newly constructed production facilities
Traditionally, most nonresidential buildings are depreciated over 39 years and are not eligible for bonus depreciation. Under the OBBBA, taxpayers may be eligible to immediately expense 100% of the cost of certain newly constructed production facilities that are used in qualified manufacturing, production, or refining activities.
Generally, to qualify:
- Construction must begin after Jan. 19, 2025, and before Jan. 1, 2029.
- The property must be placed in service before Jan. 1, 2031.
- The facility must be located in the United States.
- The property must be used as an integral part of a qualified production activity.
- Original use must begin with the taxpayer.
This provision creates a significant incentive for manufacturers and industrial businesses considering the construction of new facilities. Unlike traditional cost segregation studies, which primarily accelerate depreciation through the identification of shorter-lived assets, the QPP provisions may allow certain qualifying building costs themselves to be immediately deducted.
Even when a facility qualifies as QPP, cost segregation studies can remain valuable. These studies help identify assets that may receive different tax treatment, support accurate asset classification, and provide the detailed documentation often required to support a taxpayer’s position in the event of examination.
What Are the Benefits of Restored Bonus Depreciation?
The return of full bonus depreciation dramatically improves the economics of a cost segregation study. The ability to take large depreciation deductions immediately rather than spread them out over several years leads to several benefits including:
- Larger first-year deductions
- Reduced current tax liability
- Improved cash flow
- Additional capital for reinvestment
For many investors, these accelerated deductions can meaningfully increase after-tax returns on real estate investments.
Property owners should also evaluate anticipated holding periods and potential depreciation recapture upon disposition. While accelerated depreciation often provides substantial present-value benefits, understanding the long-term tax implications remains an important part of the analysis.
| Related Insight “Bonus Depreciation and the One, Big, Beautiful Bill“ Published in June 2025, before the Act was signed into law, this earlier piece examined the proposed 100% expensing provision and how pairing it with a cost segregation study can increase tax savings. Read it alongside this article to see how the proposal became law and what we have seen since. |
Does Cost Segregation Create Additional Deductions, or Just Change Their Timing?
A common misconception is that cost segregation creates additional depreciation. In reality, it primarily changes when deductions are recognized. Total lifetime depreciation generally remains the same, but more of it is taken in earlier years.
This timing benefit can be extremely valuable because earlier tax savings improve liquidity and allow investors to redeploy capital into other opportunities. When contemplating a cost segregation study, it is helpful to consider the expected hold period for the investment.
Can You Do a Cost Segregation Study on a Property You Already Own?
Property owners who never completed a cost segregation study may still have opportunities to benefit. Through a look-back study and accounting method change, taxpayers can often capture missed depreciation deductions without amending prior tax returns. For many owners, this can create substantial current-year deductions even when a property has been owned for several years.
For example, a recent retroactive study on a New York City multi-family portfolio, covering acquisitions made between 2016 and 2025, identified $3.7 million in first-year net present value savings by reallocating 18% of the portfolio’s $210.4 million depreciable basis, without a single amended return.
Key Takeaways for Property Owners, Manufacturers, and Tax Preparers
- Restored bonus depreciation and Qualified Production Property (QPP) are creating new opportunities. Permanent 100% bonus depreciation has renewed interest in cost segregation, particularly for multifamily, vacation rental, and other income-producing properties. QPP creates significant planning opportunities for manufacturers and industrial businesses constructing new facilities in the U.S.
- Fit the strategy to the property. Whether a property is newly acquired, long held, or under construction, taxpayers should assess how cost segregation, bonus depreciation, and other accelerated cost recovery provisions fit their overall tax and investment strategy. Properly implemented, these tools provide meaningful cash-flow benefits and improve the present value of deductions.
- Engage a specialist. A cost segregation specialist is a vital part of the process, helping ensure the study will withstand any potential IRS scrutiny.
| See What This Means for Your Property Whether you are evaluating this for your own property or a client’s, Ankura’s complimentary assessment identifies the tax savings opportunity and provides a baseline estimate from our analysis. Request your preliminary assessment > |
© Copyright 2026. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC, its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
