Cost segregation & depreciation glossary.

Accelerated Depreciation

Accelerated depreciation is any depreciation method that front-loads deductions into the early years of an asset's life rather than spreading them evenly. MACRS uses 200% declining balance for 3, 5, 7, and 10-year property and 150% declining balance for 15 and 20-year property, both switching to straight-line when that becomes more favorable. Cost segregation is an accelerated-depreciation strategy: by reclassifying a building's components into shorter MACRS lives (which themselves use declining-balance methods), it dramatically increases early-year deductions.

Example: A $50,000 piece of 5-year property under MACRS 200% declining balance produces about $10,000 of year-one depreciation under the half-year convention — versus $1,818 under 27.5-year residential straight-line.

Related: MACRS , Straight-Line Depreciation , Cost Segregation Study

ADS vs GDS — Alternative vs General Depreciation System

GDS (General Depreciation System) is the default MACRS method most taxpayers use: 27.5 years for residential rental, 39 for nonresidential, 5/7/15 for personal property and land improvements, with accelerated declining-balance methods. ADS (Alternative Depreciation System) uses longer recovery periods (30 years residential, 40 nonresidential) and straight-line only. ADS is required for tax-exempt-use property, certain farming property post-TCJA, listed property used 50% or less for business, and is elected (irrevocably) by real property trades or businesses that elect out of the §163(j) interest limitation.

Example: A real-estate-professional landlord with high mortgage interest who elects out of the §163(j) interest limitation must use ADS for all residential rental property — switching from 27.5-year GDS to 30-year ADS straight-line and disqualifying bonus on land improvements.

Related: MACRS , 27.5-Year Property , 39-Year Property , Straight-Line Depreciation

Asset Class Life

Asset class life is the MACRS recovery period assigned to a particular asset under Rev. Proc. 87-56. Each business asset falls into a numbered class with a defined GDS recovery period (5, 7, 10, 15, 20, 25, 27.5, or 39 years) and a longer ADS class life. The class life dictates how quickly the asset is depreciated. Cost segregation hinges on correctly mapping each reclassified building component to its asset class — pulling carpet from the 27.5-year structure into the 5-year personal-property class, for example.

Example: Land improvements such as fencing, parking lot paving, and exterior lighting fall under asset class 00.3 (land improvements) with a 15-year GDS recovery period — distinct from the 27.5- or 39-year period for the building shell.

Related: MACRS , Rev. Proc. 87-56 , ADS vs GDS

Bonus Depreciation Phase-Out — Bonus Depreciation Phase-Out (Historical)

The bonus-depreciation phase-out was the schedule originally enacted under the Tax Cuts and Jobs Act of 2017 that reduced the §168(k) bonus rate over time: 100% (2017–2022), 80% (2023), 60% (2024), 40% (2025), 20% (2026), and 0% (2027 onward). The phase-out is now historical: the One Big Beautiful Bill Act, signed July 2025, permanently restored 100% bonus for property placed in service in 2025 and later. The 80% (2023) and 60% (2024) rates remain the operative law for those years.

Example: A property placed in service in 2024 with $200,000 of cost-seg-reclassified 5/15-year property qualified for 60% bonus — $120,000 deductible immediately and the remaining $80,000 depreciated under regular MACRS over the asset's life.

Related: §168(k) , OBBBA

Change of Accounting Method

A change in method of accounting is a switch in how a taxpayer treats a recurring item — including how an asset is depreciated. Under Internal Revenue Code §446(e) and Rev. Proc. 2015-13, most changes require IRS consent on Form 3115. Cost-segregation-driven changes qualify as automatic-consent changes (DCN 7 under Rev. Proc. 2024-23) — the form is filed but no advance IRS approval is required. The change carries a §481(a) adjustment to prevent income from being duplicated or omitted as a result of the method change.

Example: Switching a building's depreciation from 27.5-year straight-line to a cost-segregation breakdown (mix of 5, 15, and 27.5-year property) is an automatic-consent change of accounting method requiring Form 3115 filing in the year of change.

Related: Form 3115 , §481(a)

Cost Segregation Study

A cost segregation study is an engineering-based analysis that reclassifies portions of a building's depreciable basis from long-life real property (27.5 or 39 years) into shorter MACRS lives (5, 7, or 15 years). The result is accelerated depreciation, larger early-year deductions, and — when paired with §168(k) bonus depreciation — substantial first-year tax savings. The IRS Audit Techniques Guide for Cost Segregation, last updated 2022, defines the methodology. A defensible study includes engineer attestation, RSMeans-based unit costs, regional and quality multipliers, and a documented land allocation.

Example: A cost-seg study on a $900,000 STR typically reclassifies 22–28% of depreciable basis into 5/15-year property — about $180,000–$230,000 — yielding a first-year deduction of similar magnitude when 100% bonus depreciation applies.

Related: Engineering-Based Study , IRS ATG , RSMeans , Depreciable Basis

Learn more: How cost segregation works → · Order a study →

Depreciable Basis

Depreciable basis is the portion of a property's total cost that may be depreciated over time — generally the purchase price plus capitalized closing costs and improvements, minus the value allocated to land. Land is not depreciable. A cost-segregation study works on the depreciable basis only; the land allocation is excluded from the analysis. Errors in computing depreciable basis (over- or under-allocating to land, omitting capitalizable closing costs, ignoring improvements) directly distort the cost-seg result.

Example: A property purchased for $800,000 with $5,000 of capitalizable closing costs and a 20% land allocation has a depreciable basis of $644,000 — the figure on which the cost-segregation study operates.

Related: Land Allocation , Cost Segregation Study

Depreciation Recapture

Depreciation recapture is the tax owed on prior depreciation deductions when a property is sold at a gain. Under §1245, recapture on personal property (5/7/15-year cost-seg components) is taxed as ordinary income up to the depreciation taken, capped at the depreciation amount. Under §1250, recapture on real property (the building shell) is generally taxed at a maximum 25% unrecaptured §1250 gain rate. Recapture does not eliminate the time-value benefit of cost segregation; it shifts character but the deferral itself remains valuable, especially when paired with a §1031 exchange.

Example: An investor who claimed $300,000 of cost-seg depreciation and sells four years later owes recapture: the §1245 portion (~$200,000) at ordinary rates (up to 37%) and the §1250 portion (~$100,000) at the 25% unrecaptured §1250 gain rate — unless the gain is deferred via §1031.

Related: §1245 Property , §1250 Property

Learn more: Recapture and the 1031 exchange →

Engineering-Based Study

An engineering-based cost segregation study uses construction and engineering principles — quantity takeoffs, unit-cost references like RSMeans, regional cost indices, and component-by-component classification — to reconstruct the cost basis of a building's parts. The IRS Audit Techniques Guide identifies the engineering approach as the most defensible methodology, distinguishing it from less rigorous methods like the residual estimation approach or the rule-of-thumb approach. A complete engineering-based study includes a site or virtual inspection, photographic documentation, and an engineer's signed attestation supporting the classifications.

Example: An engineering-based study of a 3,200 sq ft STR catalogs each component — foundation, framing, roof, HVAC, electrical, plumbing, finishes, FF&E, site work — applies RSMeans 2024 unit costs with regional and quality multipliers, then classifies each into its MACRS life under Rev. Proc. 87-56.

Related: Cost Segregation Study , IRS ATG , RSMeans , Residual Method

FF&E — Furniture, Fixtures & Equipment

FF&E refers to movable, non-structural assets inside a building: furniture, appliances, decorative lighting, window treatments, area rugs, electronics, and similar tangible personal property. In cost segregation, FF&E is classified as 5-year MACRS property under Rev. Proc. 87-56 and qualifies for bonus depreciation under §168(k). FF&E is especially significant for short-term rentals, hotels, and furnished MTRs, where a furnished property may carry $20,000–$80,000 of FF&E per unit that would otherwise be buried inside 27.5-year depreciation.

Example: A turn-key STR purchased for $750,000 with $50,000 of furniture, appliances, and decor packaged into the deal allows that $50,000 of FF&E to be reclassified as 5-year property and 100% bonus-depreciated in the first year under §168(k).

Related: 5-Year Property , §1245 Property , §168(k)

Learn more: STR cost segregation guide →

Form 3115 — Form 3115 (Application for Change in Accounting Method)

Form 3115 is the IRS form used to request — or report — a change in accounting method, including a change in depreciation method. For cost segregation on a property placed in service in a prior tax year, Form 3115 is filed in the year of change to switch from straight-line depreciation to the cost-seg classifications retroactively. Most cost-seg-driven changes qualify as automatic-consent changes under Rev. Proc. 2015-13 and Rev. Proc. 2024-23 (DCN 7), meaning no IRS approval is needed before filing.

Example: An investor performing a cost-seg study in 2026 on a property purchased in 2022 files Form 3115 with the 2026 return, computes the §481(a) catch-up adjustment for the missed 2022–2025 acceleration, and claims the entire catch-up in 2026.

Related: §481(a) , Change of Accounting Method

Learn more: Form 3115 lookback playbook →

Half-Year Convention

The half-year convention is the default MACRS depreciation timing rule for personal property: an asset is treated as placed in service (and disposed of) at the midpoint of the tax year, regardless of the actual date. The result is a half year of depreciation in the first and last years. The convention applies to MACRS personal property — 5, 7, 10, 15, and 20-year property — unless the mid-quarter convention is triggered. It does not apply to real property, which uses the mid-month convention.

Example: $100,000 of 5-year property placed in service in March under the half-year convention receives roughly $20,000 of MACRS depreciation in year one (200% DB method, half-year), instead of the full ~$33,333 a full first year would yield.

Related: Mid-Quarter Convention , Mid-Month Convention , MACRS

IRS ATG — IRS Audit Techniques Guide for Cost Segregation

The IRS Audit Techniques Guide for Cost Segregation is a publicly available IRS document that instructs revenue agents on how to examine cost-segregation studies. It defines the principal cost-seg methodologies (detailed engineering, detailed engineering using surveys, survey/cost estimation, residual estimation, sampling, and rule of thumb) and ranks their defensibility. The Guide identifies the elements of a quality study: a preparer with construction/engineering credentials, a site visit, RSMeans-grade cost data, photographic documentation, and component-by-component classification under Rev. Proc. 87-56. It is the de facto compliance benchmark.

Example: A cost-segregation report that cites the IRS ATG, names its methodology (detailed engineering), and includes engineer attestation plus RSMeans-grade unit costs is materially harder for an IRS examiner to challenge than a rule-of-thumb estimate without supporting documentation.

Related: Engineering-Based Study , Rev. Proc. 87-56 , RSMeans

Land Allocation

Land allocation is the portion of a property's purchase price assigned to non-depreciable land. Because land is never depreciable under MACRS, the larger the land allocation, the smaller the depreciable basis — and the smaller the cost-segregation acceleration. Acceptable methods (in rough order of defensibility) include the county tax assessor's assessed-value ratio, an independent appraisal, statistical metro/state benchmarks, and explicit owner allocation supported by data. The IRS scrutinizes aggressive (very low) land allocations, particularly where local market data shows higher land values.

Example: A $700,000 SFR in a Phoenix suburb with a county assessor land ratio of 18% has a defensible land allocation of $126,000, leaving $574,000 of depreciable basis for the cost-segregation study.

Related: Depreciable Basis , Cost Segregation Study

Land Improvements

Land improvements are depreciable additions to a property's land that are not structural components of a building — fencing, parking lot paving, sidewalks, landscaping, exterior lighting, retaining walls, drainage, and similar items. Under Rev. Proc. 87-56, land improvements fall under asset class 00.3 with a 15-year MACRS recovery period (using 150% declining balance) and qualify for §168(k) bonus depreciation. Note: the underlying land itself is not depreciable. Land improvements are typically the second-largest reclassification bucket in a cost-seg study, after 5-year personal property.

Example: On an STR with $40,000 of asphalt driveway, $15,000 of fencing, $8,000 of landscaping, and $5,000 of exterior lighting, a cost-seg study reclassifies the full $68,000 as 15-year land improvements — eligible for 100% bonus depreciation under OBBBA.

Related: 15-Year Property , Asset Class Life , Rev. Proc. 87-56

MACRS — Modified Accelerated Cost Recovery System

MACRS is the depreciation system the IRS has required for most tangible business property placed in service after 1986. It assigns each asset a recovery period (5, 7, 15, 27.5, or 39 years) and an applicable depreciation method (200%/150% declining balance for short-life property, straight-line for real property). Authorized under Internal Revenue Code §168, MACRS is the framework that makes cost segregation possible — by reclassifying a building's components into shorter MACRS classes, an investor accelerates deductions while remaining fully compliant with the Code.

Example: A $1,000,000 short-term rental depreciated entirely as 27.5-year residential property yields about $36,000 of year-one depreciation. After a cost-seg study reclassifies $200,000 into 5-year MACRS property and $50,000 into 15-year, the year-one deduction can exceed $250,000 with bonus depreciation applied.

Related: §168(k) , Rev. Proc. 87-56 , Asset Class Life , Accelerated Depreciation

Learn more: How cost segregation works → · MACRS class life table (Rev. Proc. 87-56) →

Material Participation

Material participation is the IRS test under Treas. Reg. §1.469-5T for whether a taxpayer is actively involved in a trade or business — and therefore whether resulting losses are passive or non-passive. The regulation lists seven tests; a taxpayer materially participates by meeting any one. The most common are: more than 500 hours in the activity, substantially all participation, more than 100 hours and more than anyone else, or significant participation in multiple activities totaling 500+ hours. Material participation is required for REPS and for the STR loophole.

Example: An STR owner who personally manages bookings, cleaning coordination, and maintenance for 110 hours in a year — more than anyone else involved — meets the 'more than 100 hours and more than anyone else' test for material participation.

Related: REPS , Passive Activity Loss

Learn more: STR loophole and material participation →

Mid-Month Convention

The mid-month convention is the MACRS timing rule for real property — residential rental (27.5-year) and nonresidential (39-year) — and for railroad gradings and tunnel bores. Real property is treated as placed in service (or disposed of) at the midpoint of the month it actually entered service. This produces a partial first-year deduction equal to half a month plus any full remaining months, divided by 12, of the annual straight-line amount. The convention only applies to real property, not personal property.

Example: A $1,000,000 nonresidential building (39-year property, $25,641/year straight-line) placed in service on May 8 takes 7.5 months of depreciation in year one — roughly $16,000 — rather than a full year's $25,641.

Related: Half-Year Convention , 27.5-Year Property , 39-Year Property

Mid-Quarter Convention

The mid-quarter convention is a MACRS depreciation timing rule that overrides the half-year convention when more than 40% of all personal property placed in service during the year is placed in service in the final quarter. Each asset is then deemed placed in service at the midpoint of its actual quarter, producing more or less first-year depreciation depending on placement date. The mid-quarter convention is tested at the entity level and can meaningfully shift the first-year deduction if year-end purchases dominate the calendar.

Example: An investor who places $80,000 of 5-year property in service in January and $200,000 more in November triggers the mid-quarter convention because >40% was placed in Q4; the November assets receive only 1.5 months of first-year depreciation.

Related: Half-Year Convention , MACRS

OBBBA — One Big Beautiful Bill Act

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, permanently restored 100% bonus depreciation under §168(k) for qualifying property placed in service on or after January 1, 2025. OBBBA reversed the TCJA-era phase-down (80% in 2023, 60% in 2024, scheduled to drop to 40% in 2025 and zero by 2027) and made the 100% rate permanent rather than time-limited. The change materially increases the value of cost segregation for properties placed in service in 2025 and later, particularly for STRs and other accelerated-depreciation strategies.

Example: An STR placed in service in March 2025 with $250,000 of cost-seg-reclassified 5/15-year property qualifies for 100% bonus depreciation under OBBBA — the entire $250,000 is deductible in 2025, versus only $150,000 if the pre-OBBBA 60% rate had remained in effect.

Related: §168(k) , Bonus Depreciation Phase-Out

Learn more: Bonus depreciation 2025 explained →

Passive Activity Loss — Passive Activity Loss (PAL)

A passive activity loss arises when deductions from a passive activity exceed income from passive activities. Under Internal Revenue Code §469, passive losses generally cannot offset non-passive income (W-2 wages, business income, portfolio income) and instead suspend, carrying forward indefinitely until passive income is realized or the activity is fully disposed of. Long-term rentals are passive by default. Cost segregation can generate large passive losses that suspend without a passive-loss escape — REPS, the STR exception, or §469(i)'s $25,000 active-participation allowance.

Example: A cost-seg study on a long-term rental generates a $120,000 first-year loss. Without REPS or the STR exception, the entire $120,000 suspends as a PAL carryforward — usable only against future passive income or at full disposition of the property.

Related: REPS , Material Participation

PPI Cost Index

The Producer Price Index (PPI) for nonresidential and residential construction, published by the U.S. Bureau of Labor Statistics, measures the change in selling prices for new construction over time. Cost-segregation engines use the PPI to time-adjust unit costs from a reference year (e.g., RSMeans 2024) to the property's actual placed-in-service year. This keeps reclassified component costs aligned with the inflation-adjusted construction cost environment at the date the property was acquired or placed in service.

Example: A property placed in service in early 2026 with RSMeans 2024 base costs is adjusted upward by roughly 5–7% via the PPI nonresidential construction index, reflecting two years of construction cost inflation between the 2024 reference and the 2026 in-service date.

Related: RSMeans , Cost Segregation Study

QIP — Qualified Improvement Property

Qualified Improvement Property (QIP) is an interior, non-structural improvement to a nonresidential building made after the building is first placed in service. Under §168(e)(6) (post-CARES Act technical correction), QIP has a 15-year MACRS recovery period and qualifies for §168(k) bonus depreciation. QIP excludes elevators, escalators, internal structural framework, and building enlargements. For nonresidential property, QIP is the principal vehicle through which interior renovations and tenant improvements receive accelerated depreciation rather than 39-year treatment.

Example: A landlord spending $300,000 to renovate the interior of a leased office space (drywall, flooring, lighting, partitions, HVAC distribution) in 2026 can classify the work as QIP — 15-year MACRS property eligible for 100% bonus under OBBBA, deductible in full in year one.

Related: 15-Year Property , §168(k) , OBBBA

Real Property vs Personal Property

For depreciation purposes, real property (§1250) is land, buildings, and structural components — items physically and permanently affixed to the land. Personal property (§1245) is movable, non-structural tangible property — furniture, equipment, decorative finishes, removable carpet, specialized lighting, and similar assets. Cost segregation is fundamentally the exercise of identifying the personal-property and land-improvement components embedded inside a building's purchase price and reclassifying them out of the §1250 real-property bucket into shorter MACRS lives. The distinction is enforced under Treas. Reg. §1.48-1.

Example: Inside a $900,000 STR, the foundation, framing, and roof are real property (§1250, 27.5-year). The carpet, furniture, decorative lighting, and removable cabinetry are personal property (§1245, 5-year) — and a cost-seg study is what separates them on paper.

Related: §1245 Property , §1250 Property , Structural Component , FF&E

REPS — Real Estate Professional Status

Real Estate Professional Status (REPS) is an IRS designation under Internal Revenue Code §469(c)(7) that allows a taxpayer to treat rental real estate as non-passive — making losses (including cost-segregation-driven losses) deductible against W-2 and other ordinary income. To qualify, a taxpayer must spend more than 750 hours per year and more than half of all personal-services time in real-property trades or businesses, AND materially participate in each rental activity (or elect to aggregate them). REPS is the most powerful (and most audited) status in real estate tax planning.

Example: A spouse who quits a W-2 job to manage a $5M rental portfolio full-time can qualify for REPS, then a cost-segregation-driven $400,000 paper loss offsets the working spouse's W-2 income — a tax-savings outcome impossible without REPS.

Related: Material Participation , Passive Activity Loss

Learn more: REPS qualification guide →

Residual Method

The residual method (sometimes called the residual estimation approach) is a cost-segregation methodology where short-life property values are estimated directly and the remainder of the cost basis is residualized as 39-year or 27.5-year real property. The IRS Audit Techniques Guide treats the residual method as less rigorous than the detailed engineering approach because it does not independently document the long-life portion. It is acceptable in some contexts but generally yields a weaker audit-defense posture, and many CPAs prefer engineering-based studies for properties placed in service at higher acquisition costs.

Example: On a $400,000 SFR, a residual-method study might estimate $80,000 of 5-year and 15-year property, then assign the remaining $280,000 (after a $40,000 land allocation) to 27.5-year property without itemizing the structural components.

Related: Engineering-Based Study , Cost Segregation Study , IRS ATG

Rev. Proc. 87-56

Revenue Procedure 87-56 is the IRS revenue procedure that established the MACRS asset class lives still in use today. It assigns each business asset to a recovery period — for example, asset class 00.11 (office furniture, fixtures, and equipment) is 7-year property; class 57.0 (distributive trades and services) is 5-year. Cost-segregation studies map each reclassified building component to its Rev. Proc. 87-56 asset class to justify its MACRS life. The procedure has been amended (e.g., Rev. Proc. 88-22) but remains the foundational class-life authority.

Example: Carpeting in a residential rental is classified as 5-year property under asset class 57.0 (distributive trades and services) per Rev. Proc. 87-56 — the citation that makes the reclassification defensible to an IRS examiner.

Related: MACRS , Asset Class Life , IRS ATG

RSMeans

RSMeans (now Gordian RSMeans Data) is an industry-standard construction cost reference publishing unit-cost data for materials, labor, and equipment across hundreds of construction line items. RSMeans is the most-cited cost source in defensible cost-segregation studies and is referenced in the IRS Audit Techniques Guide as an acceptable basis for component cost estimation. A cost-seg study typically applies RSMeans unit costs to the property's components, then layers regional cost indices, quality multipliers, and a PPI time adjustment to reach the placed-in-service-date estimate.

Example: RSMeans 2024 lists per-square-foot installed costs for asphalt-shingle roofing, framing, drywall, and dozens of other components — those base costs, multiplied by a regional index (e.g., 1.18 for Seattle) and a quality multiplier, drive the cost-seg component basis.

Related: PPI Cost Index , Engineering-Based Study , IRS ATG

Straight-Line Depreciation

Straight-line depreciation deducts an asset's depreciable basis evenly over its recovery period — equal amounts each year. Under MACRS, real property (residential 27.5-year and nonresidential 39-year) is required to use straight-line, as is all property under the Alternative Depreciation System (ADS). It is the most conservative method and produces the smallest early-year deductions. Cost segregation is, in effect, a partial escape from real-property straight-line: components that can be reclassified out of the building shell move from straight-line to MACRS declining balance.

Example: A $1,000,000 residential rental depreciated entirely as 27.5-year straight-line property yields $36,364 of depreciation each year — exactly the same amount in year one as in year twenty-seven.

Related: Accelerated Depreciation , ADS vs GDS , MACRS

Structural Component

A structural component is any part of a building permanently affixed and integral to the building's operation as a building — walls, partitions, floors, ceilings, plumbing, central HVAC, electrical wiring, lighting fixtures, sprinklers, fire escapes, elevators, and similar items. Treas. Reg. §1.48-1(e)(2) defines the term. Structural components are §1250 real property depreciated over 27.5 or 39 years and are excluded from the §1245 personal-property bucket — the boundary line that cost-segregation studies must defend item by item.

Example: Central HVAC ductwork is a structural component (39-year, §1250). A window-unit air conditioner serving a single tenant space is not a structural component — it is removable §1245 personal property eligible for 5-year MACRS treatment.

Related: §1250 Property , Real Property vs Personal Property , 27.5-Year Property

§1245 Property

§1245 property is depreciable personal property and certain other tangible property used in a trade or business — equipment, furniture, fixtures, carpet, decorative lighting, and similar items not structurally integral to the building. Under Internal Revenue Code §1245, on sale, prior depreciation on this property is recaptured as ordinary income (not capital gain) up to the amount of depreciation claimed. In a cost-segregation study, the 5-year and 7-year reclassified components are §1245 property; the building shell remains §1250 property.

Example: If a cost-seg study reclassifies $200,000 of a property's basis into §1245 personal property and the investor later sells, depreciation taken on that $200,000 is recaptured at ordinary income rates (up to 37%) instead of the 25% §1250 rate.

Related: §1250 Property , Depreciation Recapture , FF&E , 5-Year Property

§1250 Property

§1250 property is depreciable real property — buildings and their structural components — that is not §1245 property. It includes the foundation, framing, roof, exterior walls, HVAC distribution, and other items integral to the building's structure. Under Internal Revenue Code §1250, depreciation recapture on this property is generally limited to the excess of accelerated over straight-line depreciation, taxed at a maximum 25% unrecaptured §1250 gain rate. Because real estate uses straight-line depreciation, §1250 recapture is usually limited to that 25% rate on prior depreciation.

Example: A building's foundation, framing, and roof are §1250 property depreciated over 27.5 or 39 years. On sale, prior depreciation is taxed at the 25% unrecaptured §1250 gain rate — distinct from the ordinary-income recapture on §1245 components.

Related: §1245 Property , Depreciation Recapture , Structural Component , 27.5-Year Property

15-Year Property

15-year MACRS property is a class of assets with a fifteen-year GDS recovery period — primarily land improvements (asset class 00.3) and Qualified Improvement Property (QIP) for nonresidential buildings. 15-year property uses the 150% declining-balance method, the half-year convention by default, and qualifies for §168(k) bonus depreciation. In a typical cost-seg study, 15-year property captures site work — paving, fencing, exterior lighting, landscaping, retaining walls — and represents 4–9% of depreciable basis on residential and 6–14% on commercial.

Example: On a $1.2M small-office property, a cost-seg study identifies $90,000 of parking lot, sidewalks, exterior lighting, and landscaping as 15-year land improvements — fully bonus-depreciable under OBBBA in 2025.

Related: Land Improvements , QIP , MACRS

§168(k) — §168(k) Bonus Depreciation

§168(k) is the Internal Revenue Code section authorizing bonus depreciation — an immediate first-year deduction for qualifying property with a MACRS recovery period of 20 years or less. Bonus is in addition to (and computed before) regular MACRS depreciation. It applies automatically unless the taxpayer elects out by class. Under the One Big Beautiful Bill Act (OBBBA, signed July 2025), the bonus rate was permanently restored to 100% for property placed in service in 2025 and later, after a phase-down to 80% (2023) and 60% (2024).

Example: On a property placed in service in 2025, $250,000 of reclassified 5-year and 15-year property qualifies for 100% bonus under §168(k) — the entire $250,000 is deductible in year one.

Related: OBBBA , Bonus Depreciation Phase-Out , QIP , 5-Year Property , 15-Year Property

Learn more: Bonus depreciation 2025 explained →

§179 — §179 Expensing

§179 is an Internal Revenue Code provision allowing a taxpayer to elect immediate expensing of qualifying tangible personal property and certain real property improvements, in lieu of MACRS depreciation. The 2025 §179 limit is $1.25M with a $3.13M phase-out threshold (indexed for inflation). §179 is most useful for small-business taxpayers who would otherwise be capacity-limited by §168(k); for cost-segregation purposes, it is generally redundant when 100% bonus is available, but matters for active-trade-or-business income limitations and for property that would be ineligible for bonus.

Example: A small business buying $500,000 of equipment in 2026 can elect §179 expensing on the full amount (within the $1.25M limit), deducting it immediately against active-trade-or-business income — but cannot use §179 to create a net operating loss, unlike §168(k) bonus.

Related: §168(k) , QIP

27.5-Year Property — 27.5-Year Property (Residential Real Property)

Residential rental real property has a 27.5-year MACRS recovery period under Internal Revenue Code §168(c) and is depreciated straight-line using the mid-month convention. Property qualifies as residential rental if at least 80% of gross rental income comes from dwelling units — a threshold that includes most SFRs, duplexes, fourplexes, and apartment buildings, but excludes hotels and STRs taxed as transient lodging. The 27.5-year period is the default treatment for the building shell; cost segregation does not change it but reclassifies portions out into shorter-life buckets.

Example: A $400,000 long-term residential rental (after a $80,000 land allocation, $320,000 depreciable basis) without cost segregation is depreciated at $11,636/year over 27.5 years, with the mid-month convention dictating the partial first-year deduction.

Related: 39-Year Property , Mid-Month Convention , Structural Component , ADS vs GDS

39-Year Property — 39-Year Property (Nonresidential Real Property)

Nonresidential real property has a 39-year MACRS recovery period under Internal Revenue Code §168(c) and is depreciated straight-line using the mid-month convention. It includes office buildings, retail, industrial, restaurants, medical office, hotels, and STRs treated as transient lodging (average rental period of 7 days or less). 39 years is the default treatment for the building shell; cost segregation reclassifies interior personal property into 5/7-year and exterior site work into 15-year, but the residual structural shell remains 39-year property.

Example: A $2,000,000 office building (after a $300,000 land allocation, $1,700,000 depreciable basis) without cost segregation is depreciated at $43,590/year over 39 years. After cost-seg reclassifies $400,000 into 5/15-year, only $1,300,000 remains in the 39-year bucket.

Related: 27.5-Year Property , Mid-Month Convention , Structural Component

§481(a) — §481(a) Catch-Up Adjustment

The §481(a) catch-up is an IRS-blessed mechanism that lets a taxpayer who used a wrong depreciation method in prior years claim the missed deductions as a single adjustment in the current year. For real estate, this is how an investor who took straight-line depreciation on a property purchased in prior years can retroactively claim the cost-segregation acceleration via Form 3115 — without amending old returns. Authorized under Rev. Proc. 2015-13 (and earlier Rev. Procs.) as an automatic accounting-method change.

Example: An investor who bought a $500,000 STR in 2022 and took straight-line depreciation can file Form 3115 in 2026, retroactively reclassify ~$135,000 into 5/15-year property, and claim a §481(a) catch-up adjustment of roughly $90,000 — all in 2026.

Related: Form 3115 , Change of Accounting Method , Cost Segregation Study

Learn more: Form 3115 lookback playbook → · 481(a) Catch-Up Calculator →

5-Year Property

5-year MACRS property is a class of assets with a five-year GDS recovery period under Rev. Proc. 87-56 — including office furniture in some asset classes, computers, light vehicles, and (most relevant to cost segregation) the personal-property components of a building: carpet, removable cabinetry, decorative lighting, appliances, window treatments, and FF&E. 5-year property uses the 200% declining-balance method, the half-year convention by default, and qualifies for §168(k) bonus depreciation. The 5-year bucket is the largest reclassification bucket in most cost-seg studies.

Example: On a $750,000 furnished STR, a cost-seg study typically identifies $120,000–$180,000 of 5-year property — carpet, FF&E, decorative lighting, removable cabinets — all eligible for 100% bonus depreciation in year one under OBBBA.

Related: MACRS , FF&E , §1245 Property , §168(k)

7-Year Property

7-year MACRS property is a class of assets with a seven-year GDS recovery period under Rev. Proc. 87-56 — including office furniture, fixtures, and equipment (asset class 00.11), agricultural machinery, and certain manufacturing assets. 7-year property uses the 200% declining-balance method, the half-year convention by default, and qualifies for §168(k) bonus depreciation. In residential cost-segregation studies the 7-year bucket is small or empty; in commercial studies (especially office), 7-year property captures office FF&E that does not qualify as 5-year distributive-trades-and-services property.

Example: A medical-office cost-seg study identifies $80,000 of office furniture, fixtures, and equipment (waiting-room chairs, exam tables, reception desks) classified as 7-year property under asset class 00.11 — accelerated under MACRS 200% DB and bonus-depreciable in 2025 under OBBBA.

Related: MACRS , Rev. Proc. 87-56 , Asset Class Life