Cost Segregation — Glossary — IRS Depreciation Rules

Cost Segregation

An engineering-based methodology for partitioning the depreciable basis of a building into MACRS class lives shorter than the default 27.5- or 39-year recovery period. Components reclassified to 5-, 7-, or 15-year property accelerate depreciation deductions and, where eligible, qualify for §168(k) bonus depreciation.

STATUTE BASIS · IRC §168 · IRS Pub. 5653 (Cost Segregation Audit Techniques Guide)

In context

The methodology is grounded in Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997) — the Tax Court case that established the modern framework for distinguishing IRC §1245 personal property from §1250 real property within a building. The IRS subsequently published the Cost Segregation Audit Techniques Guide (Pub. 5653) describing the methodologies the Service finds acceptable.

A cost segregation study reclassifies components — interior finishes, dedicated electrical, decorative lighting, removable flooring, site improvements, specialized HVAC — out of the building shell and into shorter-life classes. The shell continues to depreciate over 27.5 or 39 years; the reclassified components depreciate over 5, 7, or 15 years and may take bonus depreciation in the placed-in-service year.

For properties already placed in service, the catch-up is captured via a Form 3115 change in accounting method and a §481(a) adjustment — no amended returns required.

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