Key Takeaways
- New construction with complete cost records usually produces the most accurate study.
- For a recent purchase, the study starts from the purchase price, so the land allocation and the site visit carry more weight.
- A building owned for years and never studied can still be reviewed through a look-back study, using Form 3115 instead of amended returns.
- The bonus depreciation rate depends on when the property was acquired. The permanent 100% rate applies to qualified property acquired after January 19, 2025.
- In every case, the study moves deductions earlier. It does not create new ones, and recapture can apply when the property is sold.
A cost segregation study separates a building into its parts and assigns each part a recovery period. Carpet, certain electrical and plumbing serving equipment, cabinetry, parking lots and landscaping can often be depreciated over 5, 7 or 15 years. The rest of the building stays on the 27.5-year schedule for residential rentals or the 39-year schedule for commercial property.
The basic method is the same for every building. What changes is the starting point. A new building, a building bought last year and a building owned since 2010 each come with different records, different questions and a different path onto the tax return.
The Ambrose Group’s cost segregation study guide covers the full process. This article looks at how that process changes across the three most common cases.
Case 1: New construction or a recent build-out
New construction is usually the strongest case for a study. The owner has the construction contract, pay applications, change orders and invoices. Those records show what each part of the project actually cost.
With that level of detail, the engineer can trace costs directly to components instead of estimating them. A study based on actual costs is easier to support if the IRS asks questions later.
Timing also helps. A study done in the year the building is placed in service lets the owner start the correct depreciation schedules on the first return. There is no catch-up to calculate and no accounting method change to file.
Build-outs and major renovations work the same way. A tenant improvement project or a restaurant remodel can produce a large share of shorter-lived components, such as finishes, millwork and specialty electrical work.
For projects that began after January 19, 2025, the 5-, 7- and 15-year components may qualify for 100% bonus depreciation. The rules on when property counts as acquired, especially for self-constructed property, are covered in IRS Notice 2026-11. The owner’s CPA should confirm how they apply to a specific project.
Case 2: A building that was recently purchased
Most studies involve a building the owner bought rather than built. In this case, there are no construction invoices. The starting point is the purchase price.
That changes two parts of the work.
The first is the land allocation. Land cannot be depreciated, so the purchase price has to be split between land and improvements before anything else happens. Daniel Ambrose, MAI, Executive Vice President of Tax Services at The Ambrose Group, puts it simply in the firm’s guide: “Land doesn’t depreciate, so what you paid for it has to be separated from what you paid for everything else.” The guide recommends setting land value with appraisal methods rather than a default percentage, since every dollar assigned to land is a dollar that will never be depreciated.
The second is the site visit. Without cost records, the engineer has to inspect the building, measure and count components, and estimate their cost. Photos, floor plans and any available drawings help. The more complete the inspection, the better the study holds up.
Who does this work matters. According to the guide, a quality study needs construction and cost-estimating knowledge along with tax knowledge. In most cases an engineer prices the components, a valuation professional handles the land, and the CPA files the result. Firms offering cost segregation consultants should be able to explain who handles each step.
Like new construction, a study on a recent purchase is best completed before the return for the first year is filed. Property acquired after January 19, 2025, may qualify for the permanent 100% bonus rate on its shorter-lived components.
Case 3: A building owned for years and never studied
Many owners bought or built a property years ago and have been depreciating the entire building on a straight-line basis. That does not close the door.
A look-back study applies the same analysis to a building already in service. The engineer reviews the original cost or purchase price, inspects the property and classifies its components as they existed when the building was placed in service.
The difference is how the result flows through to the return. Instead of amending past returns, the owner generally files Form 3115 to change accounting methods. The depreciation that was missed in earlier years is claimed as a catch-up adjustment under Section 481(a). The guide notes that this is done without amending old returns.
One point deserves attention. The bonus depreciation rate depends on when the property was acquired and placed in service, not on when the study is done. A building bought before January 19, 2025, follows the rules that applied in its year. The look-back study can still produce a meaningful catch-up deduction, but the owner’s CPA should model the numbers with the correct rate for that year.
Look-back studies make sense for owners who plan to keep the property for several more years and who have taxable income to absorb the deduction.
When a study makes sense in any case
The three cases share the same basic test. The guide gives a working floor of about $500,000 in building basis. Below that level, the fee may outweigh the benefit.
Holding period matters too. If the owner plans to sell within a year or two, recapture can erase much of the gain. When a property sells, depreciation taken on shorter-lived personal property components is generally recaptured as ordinary income. A study moves deductions earlier. It does not make them permanent.
Property type also plays a role. The guide lists medical and dental facilities, restaurants, and hotels as properties that tend to benefit most because a larger share of their cost sits in finishes, equipment-related systems, and site work. Residential and short-term rentals use the same approach on a 27.5-year base.
Cost and timing
According to the guide, market figures run from a few thousand dollars for smaller residential rentals to the low five figures for well-executed commercial studies. A typical study takes about four to eight weeks from kickoff to the final report. New construction with complete records can move faster. Look-back studies on older buildings may take longer if records have to be rebuilt.
Owners who want a first estimate can use the cost segregation calculator before requesting a formal study.
Choosing who does the study
The report’s quality matters in all three cases. IRS Publication 5653, the Cost Segregation Audit Techniques Guide, describes the elements examiners look for in a study. A summary with a single number is harder to defend than a report that shows its methods and sources.
Fees, credentials, the engineer’s role, and the method used for land value are all worth asking about. A separate article covers how to evaluate cost segregation companies in more detail.
Whether the building is new, recently bought, or owned for a decade, the process follows the same logic: start with the right records, separate the land, classify each component, and report the result correctly on the return.
About The Ambrose Group: The Ambrose Group is a Texas real estate consulting firm based in Jersey Village that has provided appraisal, property tax consulting and cost segregation services since 1994.
The Ambrose Group
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