Cost Segregation + Bonus Depreciation vs MACRS Straight-Line Comparison
Compare straight-line MACRS depreciation (27.5 / 39 years) to a cost segregation study with bonus depreciation on 5/7/15-year property. See first-year deduction, total NPV tax savings, and recapture impact.
| Component | MACRS | Cost seg + bonus |
|---|
What is cost segregation and how does it work?
Cost segregation is an engineering-based tax strategy where you allocate a building's purchase price among shorter-life MACRS asset classes — 5-year (carpet, appliances, decorative lighting), 7-year (specialty equipment), 15-year (land improvements like parking, fencing, landscaping) — rather than depreciating the entire structure over 27.5 years (residential) or 39 years (commercial). The reclassified portions can also qualify for bonus depreciation, allowing massive front-loaded deductions in year one.
A typical residential rental might reclassify 20–30% into shorter lives; commercial buildings 25–40%; specialty properties like hotels, restaurants and short-term rentals can hit 40–50%. The reclassification must be supported by an engineering report — a qualified cost segregation study costs $5,000–$15,000 for typical properties and is itself deductible.
Bonus depreciation phase-down 2025–2028
Bonus depreciation lets you immediately deduct a percentage of qualifying short-life property in the year placed in service. The Tax Cuts and Jobs Act of 2017 set bonus at 100% through 2022, with a phase-down: 80% in 2023, 60% in 2024, 40% in 2025–2026, 20% in 2027, 0% in 2028. Several 2026 tax bills propose restoring 100% bonus retroactively. As of 2027 baseline law, only 20% remains.
Cost segregation combined with bonus depreciation can shift hundreds of thousands of dollars of deductions from years 10–39 forward to year one. For a $2,000,000 commercial building with 30% reclassification at 2027's 20% bonus rate, year-one bonus alone is $120,000 — generating $38,400 in tax savings at a 32% rate, even before regular MACRS depreciation.
Recapture risk and exit planning
Cost segregation accelerates deductions but creates higher Section 1245 depreciation recapture (taxed at ordinary income rates up to 37%) on the reclassified components at sale, vs Section 1250 recapture (capped at 25%) on real property. Investors planning to do a 1031 like-kind exchange at sale can defer both forms of recapture indefinitely. Investors planning to step up basis at death pass the recapture cost to heirs at zero (Section 1014 basis step-up at death).
The IRS Audit Technique Guide on cost segregation (IRS ATG 2017) outlines required documentation: detailed engineering report, photos, blueprints, asset class breakdown, and supporting cost data. A study performed by a qualified engineering firm has very low audit risk.
Sources: IRS ATG on Cost Segregation, IRC §168(k) bonus depreciation, NAR.realtor cost seg advocacy, BiggerPockets cost segregation guides, IRS Publication 946 (How to Depreciate Property). Last updated: May 2026.