Two Completely Different Cost Seg Studies: Building Owners vs Tenants

If you searched “NNN cost segregation,” you could mean one of two completely different things — and the difference decides which study you need, what you’re allowed to depreciate, and how much of your basis accelerates.

The two situations hiding behind one keyword

Path A — You own the NNN property

You bought a single-tenant net-lease building: a Walgreens, CVS, Dollar General, bank branch, or a QSR pad. You own the land and the 39-year building shell. Your study is a standard commercial cost segregation study — the engineer strips out land, strips out the shell, and reclassifies the remaining 25–35% of basis into accelerated 5-, 7-, and 15-year MACRS. There’s nothing “leasehold” about it. NNN ownership is simply a commercial property type.

Path B — You lease the space and paid for the build-out

You’re a restaurant, retail, medical, gym, or franchise operator. You don’t own the building — but you spent real money building out the space. The basis you analyze is your build-out cost, and you own only the improvements. This is a leasehold / tenant-improvement study, and it behaves very differently.

Side by side

Side by side

	Building owner (NNN / commercial)	Tenant / leaseholder
What you bought	Land + building + improvements	Only the build-out you paid for
Basis analyzed	Purchase price	Build-out cost
Land?	Stripped out first (not depreciable)	None — you don’t own it
39-year shell?	Yes (the bulk of basis)	None — it’s the landlord’s
Typical reclassified	25–35%	70–95%
Key buckets	5/15-yr personal property + site work	5-yr equipment/FF&E + 15-yr QIP
Catch up prior years	Form 3115 / §481(a)	Form 3115 / §481(a)

Why a tenant build-out reclassifies far more

In an owner study, the first two things removed are the land (not depreciable) and the 39-year shell. In a tenant study there’s nothing to remove — you never bought either one. Almost the entire basis is improvement property, so the reclassification share is much higher: typically 70–95%, versus 25–35% for an owner.

The mix shifts by what you operate:

• Restaurant / QSR — 5-year-equipment-heavy (hoods, walk-ins, prep lines, bars). Often 80–95%.
• Medical / dental — casework, dedicated electrical and plumbing, specialty MEP. Often 70–90%.
• Retail — trade fixtures, display millwork, accent lighting, storefront finishes. Often 70–90%.
• Office — QIP-dominant (partitions, HVAC distribution, finishes) plus 7-year furniture. Often 65–85%.

QIP is the engine of a leasehold study

The defining bucket is Qualified Improvement Property (QIP) under §168(e)(6): interior, non-structural improvements to a non-residential building placed in service after the building was first in service. QIP is 15-year property and bonus-eligible under §168(k) — and 100% bonus was restored permanently by OBBBA for property placed in service after January 19, 2025. QIP excludes enlargements, elevators/escalators, and internal structural framework.

Layer 5-year personal property (your equipment and FF&E) on top of the 15-year QIP, and a tenant build-out produces an unusually large year-1 deduction relative to what you spent. (These are modeled estimates that depend on your build-out scope, §168(k) eligibility, §469 status, and entity structure — verify with your CPA.)

What a leasehold study needs from you

Owner studies can lean on public property records. A leasehold study can’t — the value is in your build-out detail. The sharpest, most defensible studies start from:

• Depreciation schedule
• Fixed-asset register
• Construction budget
• AIA G702 / G703 pay applications
• Contractor invoices
• Photos of the finished space

You don’t need all of it to begin — but the more you can share, the better the result.

Built it out a few years ago?

A Form 3115 change in accounting method can catch up previously-missed accelerated depreciation as a §481(a) adjustment in the current year — no amended returns. We provide the workpaper pack; your CPA files the form.

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Spent real money building out a space you lease? Start a leasehold study → — pricing is based on your build-out cost, and our team reviews every leasehold order before it’s delivered. Not sure which case you’re in, or it’s a mixed build-out (landlord allowance + your own money)? Talk to us first.

Frequently asked

Is NNN cost segregation for the owner or the tenant?

It depends on who's asking. An investor who buys an NNN-leased property (a Walgreens, CVS, Dollar General, bank branch, or QSR pad) owns the land and the 39-year building shell — that's a standard commercial cost segregation study, no leasehold logic involved. A tenant who leases a space and paid to build it out owns only the improvements, and needs a leasehold / tenant-improvement study where the basis analyzed is the build-out cost. Same keyword, two different studies, different tax treatment.

Why does a tenant build-out reclassify a higher percentage than an owner's purchase?

Because there is no land to strip out and little-or-no structural shell. In an owner study, the engineer first removes land (not depreciable) and the 39-year building shell, leaving 25–35% to reclassify. A tenant never bought the land or the shell, so almost the entire build-out basis is 5-, 7-, and 15-year improvement property. Tenant build-outs commonly reclassify 70–95%, with restaurants at the high end because of kitchen equipment and FF&E.

What is QIP and how does it apply to leasehold improvements?

Qualified Improvement Property (QIP) under IRC §168(e)(6) is interior, non-structural improvement to a non-residential building placed in service after the building was first placed in service — which is exactly what a tenant build-out is. QIP is 15-year MACRS property and is bonus-eligible under §168(k); 100% bonus was restored permanently by OBBBA for property placed in service after January 19, 2025. QIP excludes enlargements, elevators and escalators, and internal structural framework.

What is the basis in a leasehold cost segregation study?

Your build-out cost — what you, the tenant, spent improving the leased space — not rent and not a property purchase price. The cleanest inputs are your depreciation schedule, fixed-asset register, construction budget, AIA G702/G703 pay applications, and contractor invoices. A leasehold study's accuracy depends almost entirely on this build-out documentation.

I built out my space a few years ago. Can I still benefit?

Often yes. A Form 3115 change in accounting method can allow a §481(a) cumulative catch-up of previously-missed accelerated depreciation in the current tax year, without amending prior returns. Cost Seg Smart provides the workpaper pack; your CPA files the Form 3115. Verify treatment with your CPA before filing.