Cost Segregation and Bonus Depreciation: What Property Buyers Should Know

By Shawn Kormondy | Skor Real Estate Group

Cost segregation and bonus depreciation can change when an investor receives deductions. Understanding the mechanics helps you ask better questions before a purchase instead of relying on a headline about a large write-off.

What is cost segregation?

A cost segregation analysis identifies and supports assets that may have shorter tax recovery periods than the building itself. It can distinguish qualifying personal property and land improvements from building components. The classification depends on the actual asset and its use; a study cannot turn land or an entire residential building into bonus-eligible property.

Think of it as organizing the property’s tax basis into supported categories. You still need a defensible total basis and land allocation.

What does 100% bonus depreciation apply to?

Under current federal law, qualifying property acquired and placed in service after January 19, 2025 can be eligible for 100% additional first-year depreciation, subject to acquisition rules, elections, and other requirements. Eligible assets generally include certain property with recovery periods of 20 years or less. The residential rental building itself generally does not qualify.

The percentage applies to the qualifying assets’ eligible basis, not automatically to the property’s entire purchase price. Ask your CPA to verify acquisition timing, binding-contract issues, asset eligibility, and any elections.

A hypothetical purchase breakdown

Assume a $2,000,000 rental purchase has a supportable $800,000 land allocation and $1,200,000 of depreciable basis. For illustration only, a qualified analysis assigns $180,000 of that depreciable basis to assets that fully qualify for 100% federal bonus depreciation, leaving $1,020,000 in the residential building.

The illustration produces a $180,000 bonus deduction for those assets, plus the applicable building depreciation. It does not produce a $2,000,000 deduction or a $180,000 tax refund. These assumed allocations are not typical percentages or a prediction for any property.

Can you use the deduction now?

Suppose the activity has $60,000 of taxable income before the hypothetical $180,000 bonus deduction. Ignoring other depreciation and adjustments, it would show a $120,000 loss. That loss may be restricted rather than offset your salary. Passive-activity, at-risk, and other tax limitations must be evaluated separately.

Ask your tax adviser to show both the calculated deduction and the amount you can actually use this year.

Compare timing, fees, and the eventual sale

Accelerating depreciation generally uses deductions sooner, leaving less basis to depreciate later. Study fees, recordkeeping, ownership horizon, and the tax treatment when assets are sold all affect the economics. Some gain on shorter-life assets can be taxed as ordinary income through depreciation recapture.

Federal and California depreciation can differ. A federal projection should not be copied into a California return without reviewing the state rules.

Questions to bring to your CPA before closing

• Which assets could qualify, and what evidence supports the classifications?
• What is the projected benefit after loss limits, fees, and state adjustments?
• How will the strategy affect later years and a future sale?
• What records should we obtain before the property is placed in service?

Shawn Kormondy can help you evaluate the property and coordinate purchase information with your advisers. Start an investment-property conversation.

All figures are hypothetical educational examples, not client results or personalized tax advice. Have a qualified CPA evaluate your transaction.

Sources: IRS Publication 946, IRS Notice 2026-11, IRS Publication 925, and California depreciation guidance.