Cost Segregation Glossary: The Complete Guide to Terms & Definitions

The depreciation system introduced by the Economic Recovery Tax Act of 1981, which assigned shorter recovery periods to assets than their actual useful lives. ACRS was replaced by MACRS in 1986 but remains relevant for properties placed in service between 1981 and 1986.

See also: MACRS, Recovery Period

Any depreciation method that allows larger deductions in the early years of an asset's life compared to straight-line depreciation. In a cost segregation study, the primary goal is to reclassify building components into shorter-lived asset categories that qualify for accelerated depreciation methods. Learn more about how cost segregation works.

See also: Bonus Depreciation, 200% Declining Balance, MACRS

The original cost basis of an asset, increased by capital improvements and decreased by depreciation deductions taken. When a property is sold, the adjusted basis is used to determine taxable gain, including any depreciation recapture.

See also: Cost Basis, Depreciable Basis, Depreciation Recapture

A numerical adjustment applied to unit cost estimates to reflect the actual price paid by a taxpayer relative to standard construction costs. In a cost segregation study, the allocation factor reconciles estimated component costs with the total actual cost or purchase price of the property.

See also: Cost Reconstruction, Location Factor, Time Factor

A depreciation method required by the IRS in certain situations that uses longer recovery periods and the straight-line method. ADS is required for property used predominantly outside the U.S., tax-exempt use property, tax-exempt bond-financed property, and property for which ADS is elected. It is also the required system for computing earnings and profits.

See also: GDS, MACRS, Straight-Line Depreciation

The professional trade organization for the cost segregation industry that provides certification, education, and ethical standards for practitioners. The ASCSP administers the CCSP designation and defines cost segregation as the process of identifying property components considered personal property or land improvements under the federal tax code.

See also: CCSP, Cost Segregation Study

The process of categorizing each component of a property as Section 1245 property, Section 1250 property, or land improvements for depreciation purposes. In a cost segregation study, the goal is to identify as much Section 1245 and land improvement property as possible to accelerate depreciation. Learn more about eligibility and classification rules.

See also: Section 1245 Property, Section 1250 Property, Asset Reclassification

The act of moving building components from longer-lived asset categories (typically 27.5 or 39 years) into shorter-lived categories (5, 7, or 15 years) based on the findings of a cost segregation study. Reclassification is what generates the accelerated depreciation deductions and resulting tax savings.

See also: Asset Classification, Recovery Period, Cost Segregation Study

IRS rules under IRC Section 465 that limit the amount of loss a taxpayer can deduct to the amount they have "at risk" in an activity, generally their cash investment plus amounts borrowed for which they are personally liable. These rules can limit the deductibility of depreciation deductions generated by a cost segregation study.

See also: Passive Activity Loss Rules, Real Estate Professional Status

Services provided by a cost segregation firm to assist a taxpayer if the IRS examines the cost segregation study or the resulting depreciation deductions. Reputable firms stand behind their work and provide audit support at no additional charge. Learn more about IRS audit and compliance.

See also: IRS Audit Techniques Guide, 13 Principal Elements

A provision under certain IRS revenue procedures that allows taxpayers to file Form 3115 to change their depreciation method without requesting advance permission from the IRS. Most cost segregation-related changes in accounting method qualify for automatic consent, making retroactive studies straightforward to implement.

See also: Change in Accounting Method, Form 3115, Revenue Procedure

The three-part test under the Tangible Property Regulations used to determine whether an expenditure on a unit of property must be capitalized as an improvement or can be deducted as a repair. If a cost results in a betterment, restores the property, or adapts it to a new use, it must be capitalized.

See also: Tangible Property Regulations, Capitalization vs. Expensing, Unit of Property

A federal tax incentive that allows taxpayers to deduct a large percentage of a qualifying asset's cost in the first year it is placed in service, rather than spreading deductions over the full recovery period. Under the TCJA, bonus depreciation was 100% for assets placed in service after September 27, 2017 through 2022, then phases down 20% per year (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027, though the Tax Relief for American Families and Workers Act and other legislation may modify this schedule). In a cost segregation study, 5-, 7-, and 15-year property identified can often qualify for bonus depreciation. Learn more about bonus depreciation and cost segregation.

See also: 100% Bonus Depreciation, Bonus Depreciation Phase-Down Schedule, Section 179 Expensing

The TCJA-mandated reduction of the bonus depreciation percentage over time: 100% (2017-2022), 80% (2023), 60% (2024), 40% (2025), 20% (2026), and 0% (2027 onward), unless extended or modified by new legislation. This phase-down increases the urgency for property owners to conduct cost segregation studies sooner rather than later. Check the latest on bonus depreciation.

See also: Bonus Depreciation, 100% Bonus Depreciation, Tax Cuts and Jobs Act

The structural and architectural elements that form the exterior enclosure of a building, including the roof, exterior walls, foundation, and windows. In a cost segregation study, the building envelope is generally classified as Section 1250 property with a 27.5- or 39-year life, while non-structural components within it may be reclassified to shorter lives.

See also: Structural Components, Section 1250 Property

Custom or standard cabinets, shelving, trim, and decorative woodwork installed in a building. In a cost segregation study, cabinetry and millwork are often classified as 5-year or 7-year personal property because they serve a specific function and are not part of the building's structural framework.

See also: Personal Property, Non-Structural Components

An expenditure that creates a new asset or adds value to an existing asset, extending its useful life. These costs must be capitalized and depreciated over time rather than deducted immediately. Cost segregation studies analyze capital expenditures to determine the correct asset classification and recovery period for each component.

See also: Capitalization vs. Expensing, Depreciable Basis

The determination of whether a cost must be added to the basis of an asset and depreciated over time (capitalized) or deducted in full in the current tax year (expensed). The Tangible Property Regulations and the BAR test provide the framework for this determination, which directly impacts the scope of a cost segregation study.

See also: BAR Test, Repair vs. Improvement, Tangible Property Regulations

Federal legislation enacted in 2020 that included a technical correction making Qualified Improvement Property eligible for 15-year recovery and bonus depreciation, retroactive to the TCJA's original enactment in 2017. This correction was significant for cost segregation because it allowed interior improvements to nonresidential buildings to qualify for accelerated depreciation.

See also: Qualified Improvement Property, Tax Cuts and Jobs Act, Bonus Depreciation

The net amount of money moving into and out of a business or investment over a given period. Cost segregation studies improve near-term cash flow by accelerating depreciation deductions, which reduces current tax liability and allows property owners to reinvest those savings. Explore the ROI and cash flow impact of cost segregation.

See also: Tax Deferral, Net Present Value

The accumulated depreciation deductions a taxpayer was entitled to but did not claim in prior years, which can be recovered in a single year through a Section 481(a) adjustment when filing Form 3115. This is the mechanism that makes retroactive (look-back) cost segregation studies so powerful. Owners can claim years of missed accelerated depreciation without amending prior returns.

See also: Look-Back Study, Section 481(a) Adjustment, Form 3115

A professional certification administered by the ASCSP recognizing individuals who have demonstrated expertise in cost segregation through education, experience, and examination. Hiring a CCSP can increase confidence in the quality and IRS defensibility of a cost segregation study.

See also: ASCSP, Cost Segregation Engineer

An IRS-recognized process by which a taxpayer adjusts how they report certain items, such as depreciation, on their tax return going forward. Implementing a cost segregation study on an existing property typically requires a change in accounting method filed on Form 3115, allowing the taxpayer to claim catch-up depreciation in the current year.

See also: Form 3115, Section 481(a) Adjustment, Automatic Consent

The number of years assigned to a type of asset by the IRS for purposes of calculating depreciation under MACRS. In a cost segregation study, the primary class lives involved are 5 years, 7 years, 15 years, 27.5 years (residential rental), and 39 years (nonresidential real property).

See also: Recovery Period, Useful Life, MACRS

Real property that is not residential rental property, including office buildings, retail centers, warehouses, hotels, restaurants, and medical facilities. It is depreciated over 39 years under MACRS GDS. Cost segregation studies on commercial properties typically reclassify 20-40% of the building's cost into shorter-lived asset categories. Explore cost segregation for different property types.

See also: Residential Rental Property, Mixed-Use Property

The practice of depreciating individual building components separately based on their specific class lives, rather than treating the entire building as a single asset. Cost segregation is essentially the modern, IRS-accepted form of component depreciation, which the IRS prohibited as a general practice in 1981 but reaffirmed through the Hospital Corporation of America decision.

See also: Hospital Corporation of America v. Commissioner, Asset Classification

A fee arrangement where the cost segregation firm is paid based on the amount of tax savings generated by the study, rather than a fixed fee. The IRS Audit Techniques Guide flags contingency fee arrangements as a potential concern because they may incentivize aggressive classifications. Learn about IRS compliance considerations.

See also: IRS Audit Techniques Guide, Audit Defense

The original value of a property for tax purposes, generally the purchase price plus acquisition costs such as closing fees, legal costs, and title insurance. In a cost segregation study, the land value is subtracted from the cost basis to arrive at the depreciable basis, which is then allocated among the property's components.

See also: Depreciable Basis, Adjusted Basis, Purchase Price Allocation

An engineering methodology used to estimate the cost of individual building components when actual construction invoices or contractor records are not available. Cost reconstruction is common in cost segregation studies on purchased (used) properties where the new owner does not have access to the original builder's cost records.

See also: Detailed Engineering Cost Estimate Approach, Unit Cost Method, Quantity Takeoff

The engineering and tax evaluation process that identifies and quantifies building components eligible for shorter depreciation lives. A cost segregation analysis is the analytical work behind a cost segregation study and forms the basis of the final cost segregation report. Learn about the full process.

See also: Cost Segregation Study, Cost Segregation Report

A licensed or credentialed engineer who performs the technical property inspection, component identification, and cost estimation portions of a cost segregation study. The IRS Audit Techniques Guide notes that studies prepared by individuals with construction and engineering backgrounds are generally more reliable.

See also: CCSP, Engineering-Based Study, 13 Principal Elements

The final deliverable of a cost segregation study. A comprehensive document containing an executive summary, methodology description, legal analysis, asset classification schedules, depreciation calculations, supporting exhibits, and photos. A quality report should meet the 13 principal elements outlined in the IRS ATG and be sufficient to support the taxpayer's depreciation deductions in an audit.

See also: Executive Summary, Exhibits, 13 Principal Elements

A broad term for any practitioner (engineer, CPA, or tax professional) who specializes in performing or advising on cost segregation studies. The most credentialed specialists hold the CCSP designation from the ASCSP.

See also: Cost Segregation Engineer, CCSP, ASCSP

An IRS-accepted tax planning strategy that identifies and reclassifies components of a building from long-life real property (27.5 or 39 years) into shorter-lived personal property (5, 7, or 15 years) to accelerate depreciation deductions and increase near-term cash flow. A quality study combines engineering analysis, construction cost data, and tax law expertise to produce a defensible report that can withstand IRS examination. Learn more about cost segregation and how it works.

See also: Cost Segregation Analysis, Cost Segregation Report, Accelerated Depreciation

A standardized numbering system published by the Construction Specifications Institute that organizes construction work into divisions (e.g., Division 03 - Concrete, Division 09 - Finishes, Division 26 - Electrical). The IRS Audit Techniques Guide recommends that cost segregation studies use a common nomenclature consistent with property blueprints, and CSI MasterFormat is the industry standard.

See also: 13 Principal Elements, Engineering-Based Study

Concrete, stone, or asphalt borders installed along driveways, parking areas, and walkways. In a cost segregation study, curbing is classified as a land improvement with a 15-year recovery period.

See also: Land Improvements, Sidewalks & Walkways, Parking Lots & Paved Areas

A provision under the Tangible Property Regulations that allows taxpayers to expense (rather than capitalize) items costing below a certain threshold, $2,500 per item for taxpayers without an applicable financial statement, or $5,000 per item for those with one. This safe harbor can interact with cost segregation by affecting whether certain lower-cost components need to be included in the study.

See also: Tangible Property Regulations, Capitalization vs. Expensing

Lighting fixtures installed for aesthetic purposes rather than general building illumination, such as sconces, pendant lights, track lighting, and display lighting. In a cost segregation study, decorative and accent lighting is typically classified as 5-year personal property separate from the general electrical system.

See also: Electrical Systems, Specialty Electrical, Personal Property

The portion of a property's cost basis that can be depreciated for tax purposes, calculated by subtracting the value of the land (which is not depreciable) from the total cost basis. A cost segregation study allocates the depreciable basis across various asset classes with different recovery periods.

See also: Cost Basis, Adjusted Basis, Purchase Price Allocation

The systematic allocation of an asset's cost over its useful life for tax purposes, reflecting wear and tear, deterioration, or obsolescence. Depreciation allows property owners to deduct a portion of their building's cost each year, reducing taxable income. Learn about how cost segregation accelerates depreciation.

See also: Accelerated Depreciation, Straight-Line Depreciation, MACRS

An adjustment applied in a cost segregation study to reflect the reduction in value of building components due to physical deterioration or functional obsolescence between the original construction date and the date the current taxpayer acquired the property. This factor is primarily used when performing a study on a purchased (used) property.

See also: Cost Reconstruction, Allocation Factor

The IRS provision requiring taxpayers to pay tax on the portion of gain attributable to depreciation deductions previously claimed when a property is sold. For cost segregation, Section 1245 property is recaptured as ordinary income, while Section 1250 property is generally subject to a maximum 25% rate on unrecaptured Section 1250 gain. Learn more about depreciation recapture.

See also: Section 1250 Recapture, Unrecaptured Section 1250 Gain, Section 1245 Property

A cost segregation study performed remotely using available property records, photos, blueprints, and public data without a physical site inspection. Desktop studies are generally less expensive but may not meet the IRS ATG standards for a quality study. The ATG emphasizes the value of on-site inspections and interviews.

See also: Engineering-Based Study, 13 Principal Elements

The cost segregation methodology considered by the IRS to be the most accurate and reliable, which uses actual construction invoices, contractor records, and accounting data to assign costs to individual building components. This approach is most commonly used for newly constructed properties where detailed cost breakdowns are available.

See also: Detailed Engineering Cost Estimate Approach, 13 Principal Elements

A cost segregation methodology that uses engineering cost estimates (rather than actual cost records) to determine the value of individual building components. This approach is commonly used for purchased (used) properties where the buyer does not have access to original construction cost data, and relies on tools like RSMeans and Marshall & Swift.

See also: Detailed Engineering Approach, Cost Reconstruction, RSMeans Cost Data

An expense that can be specifically traced to a particular building component or asset, such as the labor and materials used to install a specific HVAC unit or lay carpet in a specific area. In a cost segregation study, direct costs are allocated to the specific asset they created, while indirect costs are allocated proportionally across asset classes.

See also: Indirect Cost, Soft Costs

An analysis conducted when building components are removed, retired, or replaced to determine the remaining tax basis of the disposed asset and claim a loss deduction. Disposition studies work in tandem with cost segregation. When a component identified in a prior study is replaced, the taxpayer can write off the undepreciated value of the old component.

See also: Partial Asset Disposition, Fixed Asset Review

The records, evidence, and supporting materials that the IRS expects to see in a cost segregation study and report, including construction documents, engineering analyses, cost allocations, photographs, and legal citations. The 13 principal elements defined in the IRS ATG outline specific documentation standards. Learn about IRS compliance requirements.

See also: 13 Principal Elements, IRS Audit Techniques Guide, Exhibits

Pipes, culverts, catch basins, detention ponds, and grading structures designed to manage stormwater and wastewater on a property site. In a cost segregation study, exterior drainage systems are typically classified as 15-year land improvements.

See also: Land Improvements, Site Improvements, Site Utilities

The actual percentage of total income paid in taxes after deductions, credits, and other adjustments, as opposed to the marginal tax rate. Cost segregation studies are most beneficial for taxpayers with higher effective tax rates, since larger deductions produce proportionally greater tax savings.

See also: Marginal Tax Rate, Taxable Income

The wiring, panels, circuits, and distribution infrastructure that deliver power throughout a building. In a cost segregation study, the general electrical system (main panels, feeders, risers) is typically Section 1250 property, while dedicated circuits and outlets serving specific equipment (computers, appliances, specialized machinery) can be reclassified as 5-year Section 1245 property.

See also: Specialty Electrical, Decorative Lighting, Structural Components

Federal and state tax deductions and credits available for energy-efficient building improvements, including Section 179D, Section 45L, and renewable energy credits. These incentives can be stacked with cost segregation to maximize total tax benefits. Explore energy tax incentives and stacking strategies.

See also: Section 179D Energy Deduction, Section 45L Energy Credit, Stacking Tax Strategies

A cost segregation study that relies on licensed engineers or construction professionals to inspect the property, review blueprints, and apply engineering cost estimation techniques. The IRS ATG considers engineering-based approaches the most reliable methodology for cost segregation. Learn about the study process.

See also: Detailed Engineering Approach, Cost Segregation Engineer, 13 Principal Elements

The opening section of a cost segregation report that identifies the preparer, property, taxpayer, study date, methodology used, and a high-level summary of asset reclassifications and estimated tax savings. The IRS ATG lists the executive summary as a required component of a quality report.

See also: Cost Segregation Report, Exhibits, 13 Principal Elements

The detailed supporting schedules and documentation appended to a cost segregation report, including asset class summaries, cost breakdowns by component, depreciation schedules, photographs, methodology explanations, and legal citations. Exhibits provide the evidentiary support that makes the study defensible in an IRS examination.

See also: Cost Segregation Report, Executive Summary, Documentation Requirements

The price a property would sell for on the open market between a willing buyer and seller, each having reasonable knowledge of the relevant facts. FMV is used in cost segregation to help allocate the purchase price between land and building components when performing a study on an acquired (used) property.

See also: Purchase Price Allocation, Cost Basis

A preliminary estimate of the potential tax benefits of a cost segregation study, typically provided at no cost, which evaluates the property type, size, cost basis, and taxpayer's tax situation to determine whether a full study is worthwhile. Most reputable cost segregation firms offer a complimentary feasibility analysis as a first step. Learn about eligibility and next steps.

See also: Cost Segregation Study, ROI

Fences, gates, guardrails, and retaining walls installed on the exterior of a property. In a cost segregation study, these items are generally classified as 15-year land improvements rather than part of the building structure.

See also: Land Improvements, Site Improvements

A MACRS depreciation method that allows a deduction of 150% of the straight-line rate in the early years of an asset's life, gradually declining until it switches to straight-line for the remainder. Under MACRS GDS, 15-year and 20-year property uses the 150% declining balance method.

See also: 200% Declining Balance, Straight-Line Depreciation, MACRS

Sprinkler systems, fire alarms, smoke detectors, fire suppression systems, and related equipment installed in a building. In a cost segregation study, fire protection components are generally classified as Section 1250 property (part of the building) unless they serve a specific, non-building function, though dedicated fire suppression in certain tenant or equipment areas may qualify for shorter lives.

See also: Structural Components, Security Systems

An analysis of a taxpayer's existing fixed asset ledger to identify errors in depreciation methods, recovery periods, or asset classifications. A fixed asset review is often performed alongside or as a complement to a cost segregation study to ensure all assets are being depreciated correctly.

See also: Disposition Study, Partial Asset Disposition

Floor coverings including carpet, vinyl composition tile (VCT), hardwood, ceramic tile, and specialty flooring installed in a building. In a cost segregation study, removable or shorter-lived flooring such as carpet and VCT is typically classified as 5-year personal property, while flooring that is permanently affixed (like structural concrete) remains part of the building.

See also: Personal Property, Non-Structural Components

The IRS form filed to request a change in accounting method, which is required when implementing a cost segregation study on a property that was placed in service in a prior tax year. Filing Form 3115 allows the taxpayer to claim catch-up depreciation through a Section 481(a) adjustment without amending prior-year returns. Learn more about Form 3115.

See also: Change in Accounting Method, Section 481(a) Adjustment, Look-Back Study

An IRS election under IRC Section 168(i)(4) that allows a taxpayer to group assets with the same recovery period, depreciation method, and convention into a single account for depreciation purposes. GAA elections can simplify record-keeping but may complicate partial asset dispositions identified through a cost segregation study.

See also: Partial Asset Disposition, Recovery Period

The default depreciation system under MACRS used by most taxpayers, which provides shorter recovery periods and allows accelerated depreciation methods (declining balance). GDS is the system that produces the 5-, 7-, 15-, 27.5-, and 39-year recovery periods commonly referenced in cost segregation studies.

See also: ADS, MACRS, Recovery Period

A MACRS convention that treats all property placed in service (or disposed of) during a tax year as if it were placed in service at the midpoint of the year, allowing a half-year of depreciation in the first and last year. The half-year convention is the default for most personal property identified in a cost segregation study, unless the mid-quarter convention applies.

See also: Mid-Quarter Convention, Mid-Month Convention, MACRS

A federal tax credit equal to 20% of qualified rehabilitation expenditures on certified historic structures, administered through the National Park Service. HTCs can be combined with cost segregation as part of a broader tax stacking strategy, though the rehabilitation must comply with the Secretary of the Interior's Standards. Learn about historic tax credits.

See also: Energy Tax Incentives, Stacking Tax Strategies

The landmark 1997 Tax Court case (109 T.C. 21) that established the legal foundation for modern cost segregation by affirming that taxpayers can reclassify building components as Section 1245 property for accelerated depreciation using the same rules previously applied to the Investment Tax Credit. The IRS acquiesced to this decision, which led to the widespread adoption of cost segregation studies.

See also: Component Depreciation, Section 1245 Property, IRS Audit Techniques Guide

Hotels, motels, resorts, restaurants, bars, and entertainment venues, a property category that typically benefits significantly from cost segregation due to the high percentage of personal property and specialized finishes (furniture, kitchen equipment, decorative elements). Hospitality properties are classified as nonresidential real property with a 39-year life, but studies commonly reclassify 30-40%+ of costs into shorter lives.

See also: Commercial Property, Personal Property

Heating, ventilation, and air conditioning systems within a building, including rooftop units, ductwork, thermostats, chillers, and boilers. In a cost segregation study, the general HVAC system is typically Section 1250 property, but dedicated HVAC components serving specific tenants, processes, or equipment (such as a kitchen exhaust system) may be reclassified as shorter-lived Section 1245 property.

See also: Structural Components, Electrical Systems, Plumbing Systems

An expense that benefits the overall property or multiple building components but cannot be directly traced to a single asset, examples include architect fees, engineering fees, contractor overhead, and profit. In a cost segregation study, indirect costs (also called soft costs) are allocated proportionally across all asset classes identified in the analysis.

See also: Direct Cost, Soft Costs, Indirect Cost Allocation

The methodology used to distribute indirect costs proportionally among the asset classes identified in a cost segregation study. The IRS ATG considers proper explanation and treatment of indirect costs one of the 13 principal elements of a quality study.

See also: Indirect Cost, 13 Principal Elements

Manufacturing facilities, processing plants, distribution centers, and similar properties used for production or logistics. Industrial properties often benefit significantly from cost segregation because they contain substantial amounts of specialized equipment, process piping, and dedicated electrical systems that qualify as Section 1245 property.

See also: Commercial Property, Personal Property

The Internal Revenue Code section that authorizes depreciation deductions for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or held for the production of income. Section 167 provides the foundational statutory authority for all depreciation, including the accelerated deductions generated by a cost segregation study.

See also: IRC Section 168, Depreciation

The Internal Revenue Code section that establishes MACRS and prescribes the specific recovery periods, depreciation methods, and conventions for tangible property. Section 168 is the primary code section applied in cost segregation studies to determine the correct class life and depreciation method for each reclassified component.

See also: IRC Section 167, MACRS, Recovery Period

A comprehensive reference manual published by the IRS (Publication 5653, most recently updated February 2025) to help IRS examiners review and evaluate cost segregation studies. While not an official legal pronouncement, the ATG is widely used by tax professionals as the standard for conducting quality studies. It outlines acceptable methodologies, the 13 principal elements of a quality study, and key areas of IRS scrutiny. Learn more about IRS audit and compliance.

See also: 13 Principal Elements, Audit Defense, Documentation Requirements

Tangible property constructed on or added to land outside the building itself, including parking lots, sidewalks, landscaping, fencing, retaining walls, exterior lighting, drainage, and site utilities. In a cost segregation study, land improvements are typically classified as 15-year property under MACRS GDS and may qualify for bonus depreciation.

See also: Site Improvements, Parking Lots & Paved Areas, Landscaping

Trees, shrubs, sod, mulch, rock, decorative plantings, irrigation systems, and other exterior greenery installed on a property. In a cost segregation study, landscaping is classified as a 15-year land improvement and can be further broken into subcomponents (plants, trees, irrigation) for precise cost allocation.

See also: Land Improvements, Site Improvements

An adjustment applied to standardized unit costs in a cost segregation study to account for regional differences in construction labor and material costs. For example, construction costs in New York City are significantly higher than in rural areas, and the location factor adjusts standard cost data (from sources like RSMeans) to reflect local pricing.

See also: Allocation Factor, Time Factor, RSMeans Cost Data

A cost segregation study performed on a property that was placed in service in a prior tax year, allowing the taxpayer to claim catch-up depreciation for all missed accelerated deductions in the current year via Form 3115. Look-back studies are particularly valuable because the entire catch-up amount can be deducted in a single year without amending prior returns. Learn about timing and strategy.

See also: Catch-Up Depreciation, Form 3115, Retroactive Cost Segregation

A federal tax credit under IRC Section 42 that incentivizes the development of affordable rental housing by providing dollar-for-dollar tax credits over a 10-year period. LIHTC projects can benefit from cost segregation while maintaining compliance with affordable housing requirements. Learn more about LIHTC and cost segregation.

See also: Stacking Tax Strategies, Energy Tax Incentives

The current federal tax depreciation system for most tangible property, established by the Tax Reform Act of 1986, which assigns specific recovery periods and depreciation methods to different asset classes. MACRS is the backbone of cost segregation. The study identifies components that can be moved from the default 27.5- or 39-year building life into the 5-, 7-, or 15-year MACRS categories. Learn more about how cost segregation works.

See also: GDS, ADS, Recovery Period, ACRS

The tax rate applied to the last dollar of a taxpayer's income, the rate at which additional income is taxed. The marginal tax rate is a key factor in calculating the dollar value of cost segregation tax savings, since higher-bracket taxpayers receive greater benefit from each dollar of additional depreciation deductions.

See also: Effective Tax Rate, Taxable Income

A widely recognized commercial construction cost database and valuation service used by engineers and appraisers to estimate replacement costs of building components. In cost segregation studies, Marshall & Swift data (along with RSMeans) is commonly referenced to support component cost estimates, particularly in the detailed engineering cost estimate approach.

See also: RSMeans Cost Data, Cost Reconstruction, Unit Cost Method

An IRS standard under IRC Section 469 that determines whether a taxpayer is actively involved in a business or rental activity on a regular, continuous, and substantial basis. Meeting material participation tests can allow a real estate professional to deduct losses from rental activities (including depreciation from cost segregation) against ordinary income. Learn about material participation.

See also: Real Estate Professional Status, Passive Activity Loss Rules

Hospitals, outpatient clinics, dental offices, surgical centers, assisted living facilities, and veterinary clinics. Healthcare properties often yield substantial cost segregation benefits due to specialized medical equipment, dedicated electrical and plumbing systems, shielded rooms, and specialized HVAC requirements.

See also: Commercial Property, Personal Property

A MACRS convention applied to all real property (27.5-year and 39-year assets) that treats property as placed in service at the midpoint of the month, prorating the first-year depreciation based on the month the property was placed in service. This convention applies to the Section 1250 property portion of a building, not the personal property reclassified by a cost segregation study.

See also: Half-Year Convention, Mid-Quarter Convention

A MACRS convention that applies when more than 40% of all personal property placed in service during a tax year is placed in service in the last quarter. Under this convention, assets are treated as placed in service at the midpoint of the quarter. A cost segregation study may trigger the mid-quarter convention if the reclassified personal property represents a significant portion of all personal property acquired that year.

See also: Half-Year Convention, Mid-Month Convention

A building that combines two or more uses, such as residential and commercial, under one structure (e.g., ground-floor retail with apartments above). Cost segregation studies on mixed-use properties require careful allocation between the residential portion (27.5-year life) and commercial portion (39-year life), as well as identification of shared personal property and land improvements.

See also: Commercial Property, Residential Rental Property

Apartment complexes, condominiums, duplexes, student housing, and senior living facilities containing multiple residential units. Multifamily properties are classified as residential rental property (27.5-year life) and typically see 15-30% of costs reclassified into shorter lives through cost segregation. Explore cost segregation by property type.

See also: Residential Rental Property, Short-Term Rental

A financial metric that calculates the current value of future cash flows discounted at a specified rate of return. NPV is used to evaluate the true economic benefit of a cost segregation study by accounting for the time value of money. Receiving tax savings sooner is worth more than receiving them later. Explore ROI and financial analysis.

See also: Time Value of Money, Cash Flow, ROI

A federal tax credit under IRC Section 45D that incentivizes private investment in low-income communities by providing a 39% tax credit over seven years on qualified equity investments. NMTC-financed projects can layer cost segregation with community development incentives for enhanced tax benefits. Learn about NMTC and cost segregation.

See also: Stacking Tax Strategies, LIHTC

Building elements that do not contribute to the structural integrity or overall operation and maintenance of the building, such as decorative finishes, specialty lighting, certain plumbing and electrical items, and removable fixtures. In a cost segregation study, non-structural components are the primary targets for reclassification into shorter-lived asset categories.

See also: Structural Components, Personal Property, Section 1245 Property

The provision under the TCJA allowing taxpayers to immediately deduct the entire cost of qualifying assets in the year they are placed in service, available for property placed in service after September 27, 2017 through December 31, 2022. The percentage is now phasing down annually. Check the current bonus depreciation rules.

See also: Bonus Depreciation, Bonus Depreciation Phase-Down Schedule

A federal program created by the TCJA that provides capital gains tax incentives for investments in designated low-income census tracts. Investors can defer and potentially reduce capital gains taxes by investing in Qualified Opportunity Funds, and cost segregation can be applied to Opportunity Zone properties to further accelerate depreciation. Learn about Opportunity Zones and cost segregation.

See also: Stacking Tax Strategies, Tax Deferral, 1031 Exchange

Asphalt or concrete surfaces used for vehicle parking, driveways, and loading areas on a property site. In a cost segregation study, parking lots and paved areas are classified as 15-year land improvements and are among the most common components reclassified from the building's default life.

See also: Land Improvements, Curbing, Sidewalks & Walkways

An IRS provision under Treasury Regulation 1.168(i)-8 that allows a taxpayer to claim a loss deduction when a component of a larger asset is retired, disposed of, or replaced. When paired with a cost segregation study, partial dispositions allow property owners to write off the remaining undepreciated basis of components being replaced (e.g., a new roof replacing an old one). Learn about partial asset dispositions.

See also: Disposition Study, Fixed Asset Review

IRS rules under IRC Section 469 that generally prevent taxpayers from deducting losses from passive activities (including most rental real estate) against non-passive income such as wages. These rules can limit the immediate benefit of cost segregation deductions unless the taxpayer qualifies as a real estate professional or meets material participation requirements. Learn about passive activity loss rules.

See also: Real Estate Professional Status, Material Participation, At-Risk Rules

Federal legislation that made permanent several tax provisions relevant to cost segregation, including 15-year recovery for qualified leasehold improvements, qualified retail improvements, and qualified restaurant property. Many PATH Act provisions were later modified or superseded by the TCJA.

See also: Tax Cuts and Jobs Act, Qualified Improvement Property

Assets that are not permanently affixed to or an integral part of a building's structure, including fixtures, equipment, cabinetry, specialty electrical, and removable finishes. In a cost segregation study, personal property items are classified as Section 1245 property with 5-year or 7-year recovery periods under MACRS.

See also: Section 1245 Property, Real Property, Non-Structural Components

The date on which a property or asset is ready and available for its intended use, which determines the start of depreciation and the applicable tax year for bonus depreciation. In a cost segregation study, the placed-in-service date establishes which tax rules and bonus depreciation percentages apply. Learn about timing and strategy.

See also: Bonus Depreciation, Recovery Period

The pipes, fixtures, and water distribution systems within a building. Similar to electrical, the general plumbing system (main lines, risers, drainage) is typically Section 1250 property, while dedicated plumbing serving specific equipment or processes (kitchen sinks, breakroom fixtures, specialty drains) may be reclassified as 5-year Section 1245 property.

See also: HVAC Systems, Electrical Systems, Structural Components

A written response from the IRS to a specific taxpayer's request for guidance on the tax treatment of a particular transaction or situation. PLRs are not binding precedent for other taxpayers but can provide insight into the IRS's position on cost segregation issues.

See also: Revenue Procedure, IRS Audit Techniques Guide

The systematic inspection and evaluation of each element within a building to identify its function, construction, and appropriate tax classification. Property component analysis is the core engineering activity in a cost segregation study. Learn about the full study process.

See also: Cost Segregation Analysis, Asset Classification

A cost segregation study conducted on a property in the year it is placed in service, so the accelerated depreciation applies going forward from day one. Prospective studies eliminate the need for Form 3115 and are considered the optimal timing for maximum benefit. Learn about timing and strategy.

See also: Retroactive Cost Segregation, Look-Back Study

The process of dividing the total acquisition cost of a property between land (non-depreciable), building structure, and other identifiable assets. In a cost segregation study on an acquired property, a proper purchase price allocation establishes the depreciable basis and is the starting point for component-level analysis.

See also: Cost Basis, Depreciable Basis, Fair Market Value

Improvements made to the interior of an existing nonresidential building after it has been placed in service, excluding enlargements, elevators, escalators, and internal structural framework. Thanks to a CARES Act correction, QIP has a 15-year MACRS recovery period and is eligible for bonus depreciation. QIP is identified and classified during a cost segregation study. Learn about QIP.

See also: CARES Act, Tenant Improvements, Land Improvements

The process of measuring and counting each building component from architectural drawings, blueprints, and specifications to determine quantities for cost estimation. In a cost segregation study, the quantity takeoff is a fundamental engineering step that forms the basis for assigning costs to individual components.

See also: Cost Reconstruction, Unit Cost Method, Engineering-Based Study

Federal and state tax credits available for qualifying research and development activities, which can include certain design, engineering, and construction processes used in building projects. R&D credits can be combined with cost segregation as part of a stacking strategy. Learn about R&D tax credits.

See also: Stacking Tax Strategies, Energy Tax Incentives

An IRS designation under IRC Section 469(c)(7) for taxpayers who spend more than 750 hours per year and more than half of their working time in real property trades or businesses. Qualifying as a real estate professional allows rental losses, including accelerated depreciation from cost segregation, to be deducted against ordinary income without passive activity limitations. Learn about real estate professional status.

See also: Passive Activity Loss Rules, Material Participation, At-Risk Rules

Land and anything permanently attached to it, including buildings and their structural components. For depreciation purposes under MACRS, real property is classified as either residential rental property (27.5 years) or nonresidential real property (39 years). Cost segregation studies reclassify qualifying elements of real property into personal property or land improvement categories.

See also: Personal Property, Section 1250 Property

The number of years over which the IRS allows a taxpayer to depreciate an asset under MACRS. The primary recovery periods in cost segregation are 5 years (certain personal property), 7 years (other personal property), 15 years (land improvements and QIP), 27.5 years (residential rental property), and 39 years (nonresidential real property).

See also: Class Life, MACRS, GDS

The determination under the Tangible Property Regulations of whether an expenditure on existing property is a deductible repair or a capitalizable improvement. Repairs can be deducted in the current year, while improvements must be capitalized and depreciated. The BAR test is the primary framework for this analysis.

See also: BAR Test, Tangible Property Regulations, Capitalization vs. Expensing

A building where 80% or more of its gross rental income comes from dwelling units (apartments, houses, condos rented to tenants). Residential rental property is depreciated over 27.5 years under MACRS, compared to 39 years for commercial property. Cost segregation can reclassify 15-30% of costs into shorter-lived categories.

See also: Commercial Property, Multifamily Property, Mixed-Use Property

The portion of total property cost assigned to Section 1245 assets, which is subtracted from the associated Section 1250 property to avoid double-counting. This ensures that the reclassified components' values are deducted from the building's depreciable basis.

See also: Section 1245 Property, Section 1250 Property, Depreciable Basis

A cost segregation methodology that estimates the cost of Section 1250 property (the building shell) and derives the value of Section 1245 property and land improvements as the residual amount. The IRS considers this approach less reliable than detailed engineering methods.

See also: Detailed Engineering Approach, Rule of Thumb Approach

Shopping centers, standalone stores, strip malls, and mixed-use retail developments. Retail properties typically contain significant amounts of personal property (display fixtures, specialty lighting, decorative finishes) and land improvements (parking areas, landscaping) that can be reclassified through cost segregation.

See also: Commercial Property, Hospitality Property

A cost segregation study performed on a property placed in service in a prior tax year, often called a look-back study. Since 1996, taxpayers can claim the full amount of catch-up depreciation in a single year through Form 3115, making retroactive studies highly valuable for properties placed in service within the past 15+ years. Learn about timing strategies.

See also: Look-Back Study, Catch-Up Depreciation, Prospective Cost Segregation

An official IRS statement that describes the administrative and procedural requirements for taxpayers to follow in specific situations. Revenue Procedures establish the rules for filing Form 3115, including which accounting method changes qualify for automatic consent.

See also: Automatic Consent, Form 3115, Private Letter Ruling

The ratio of net benefit to cost, typically expressed as a multiple or percentage. Quality cost segregation studies commonly deliver a 10:1 or greater ROI, meaning the tax savings generated are at least 10 times the cost of the study. Explore ROI and financial analysis.

See also: Net Present Value, Cash Flow, Feasibility Analysis

A provision under the Tangible Property Regulations allowing taxpayers to deduct routine maintenance activities, work expected to be performed more than once during a property's class life, without capitalizing them. This safe harbor interacts with cost segregation by affecting whether certain ongoing costs are expensed or capitalized.

See also: Tangible Property Regulations, De Minimis Safe Harbor, BAR Test

A widely used construction cost database (published by Gordian) that provides standardized unit costs for labor, materials, and equipment by building type, location, and year. Cost segregation engineers frequently reference RSMeans data to estimate individual component costs in the detailed engineering cost estimate approach.

See also: Marshall & Swift Valuation, Unit Cost Method, Cost Reconstruction

A cost segregation methodology that applies predetermined percentages to allocate costs to different asset classes based on industry averages or general assumptions, without detailed engineering analysis. The IRS ATG considers this the least reliable approach and notes it may receive heightened scrutiny.

See also: Engineering-Based Study, Detailed Engineering Approach, Residual Estimation Approach

A methodology used in cost segregation studies where representative samples of repetitive building units (such as hotel rooms or apartment units) are analyzed in detail, and the findings are extrapolated to similar units. The IRS ATG recognizes sampling as acceptable when properly documented and statistically valid.

See also: Engineering-Based Study, 13 Principal Elements

An IRC provision allowing businesses to immediately deduct (rather than depreciate) the full cost of qualifying tangible personal property and certain improvements, up to an annual dollar limit ($1,250,000 for 2024, indexed for inflation). Section 179 can complement cost segregation by providing immediate expensing for qualifying assets identified in the study. Learn about stacking strategies.

See also: Bonus Depreciation, Stacking Tax Strategies, Personal Property

A federal tax deduction for energy-efficient improvements to commercial buildings, covering lighting, HVAC, and building envelope systems that meet specified energy reduction targets (up to $5.81 per square foot under the Inflation Reduction Act). Section 179D is frequently stacked with cost segregation for maximum tax benefit. Learn more about Section 179D.

See also: Energy Tax Incentives, Section 45L Energy Credit, Stacking Tax Strategies

Depreciable property and real property used in a trade or business and held for more than one year. Gains on Section 1231 property are generally taxed at long-term capital gains rates, while losses are treated as ordinary losses, providing a tax-favorable best of both worlds treatment that makes cost segregation even more advantageous.

See also: Section 1245 Property, Section 1250 Property

Depreciable personal property and certain other property (not including buildings or their structural components) that is subject to ordinary income recapture upon sale to the extent of depreciation previously claimed. In a cost segregation study, the goal is to maximize the amount of property classified as Section 1245. These are the 5-year and 7-year assets that qualify for accelerated depreciation and bonus depreciation.

See also: Section 1250 Property, Personal Property, Asset Classification

Depreciable real property (buildings and their structural components) that is subject to depreciation recapture at a maximum 25% rate on unrecaptured Section 1250 gain when sold. In a cost segregation study, the building itself and its structural systems are classified as Section 1250 property with 27.5-year or 39-year lives. Learn about depreciation recapture.

See also: Section 1245 Property, Structural Components, Depreciation Recapture

The tax on gain from the sale of Section 1250 property to the extent depreciation claimed exceeded straight-line depreciation. Under current law, most Section 1250 recapture involves unrecaptured Section 1250 gain taxed at a maximum 25% rate. Learn about depreciation recapture.

See also: Depreciation Recapture, Unrecaptured Section 1250 Gain

A federal tax credit for builders and developers of new energy-efficient residential properties, providing $500 to $5,000 per dwelling unit depending on energy efficiency certification levels (enhanced under the Inflation Reduction Act). Section 45L credits can be stacked with cost segregation on qualifying projects. Learn about Section 45L.

See also: Section 179D Energy Deduction, Energy Tax Incentives, Stacking Tax Strategies

A cumulative adjustment to taxable income required when a taxpayer changes their accounting method, calculated as the difference between depreciation previously claimed and the amount that should have been claimed under the new method. In a look-back cost segregation study, the Section 481(a) adjustment typically represents a large favorable deduction capturing all prior years' missed accelerated depreciation in a single year.

See also: Change in Accounting Method, Form 3115, Catch-Up Depreciation

Surveillance cameras, access control systems, alarm systems, intercoms, and related security equipment installed in a building. In a cost segregation study, security systems are often classified as 5-year or 7-year personal property because they serve a specific function independent of the building's structure.

See also: Fire Protection Systems, Personal Property

Climate-controlled and non-climate-controlled storage buildings rented to individuals and businesses. Self-storage properties benefit from cost segregation because they contain substantial land improvements (paving, fencing, lighting), roll-up doors, and partition walls that can be reclassified.

See also: Commercial Property, Land Improvements

Vacation rentals, Airbnb/VRBO properties, and furnished rentals with average stay periods of 7 days or less. STR properties can benefit from cost segregation, and under certain IRS rules, short-term rentals may not be treated as rental activities for passive loss purposes, potentially allowing investors to deduct losses against ordinary income without REPS qualification. Learn about short-term rentals.

See also: Residential Rental Property, Passive Activity Loss Rules, Real Estate Professional Status

Paved pedestrian paths, concrete stairs, patios, and walkways on a property's exterior. In a cost segregation study, sidewalks and walkways are classified as 15-year land improvements.

See also: Land Improvements, Curbing, Parking Lots & Paved Areas

Signs, directories, wayfinding displays, and branded elements installed inside or outside a building. In a cost segregation study, signage is typically classified as 5-year or 7-year personal property, making it one of the easier components to reclassify for accelerated depreciation.

See also: Personal Property, Non-Structural Components

All exterior improvements to a property's land other than the building itself, encompassing parking lots, landscaping, fencing, sidewalks, drainage, exterior lighting, and site utilities. Site improvements are generally classified as 15-year land improvements in a cost segregation study.

See also: Land Improvements, Curbing

Underground and exterior utility infrastructure serving a property, including water lines, sewer lines, gas lines, electrical conduit, and storm drains running from the building to the property line or public connection. In a cost segregation study, site utilities are classified as 15-year land improvements.

See also: Land Improvements, Drainage Systems, Site Improvements

Indirect construction expenditures that are not directly tied to physical construction activities, including architect and engineering fees, permits, insurance, legal costs, financing costs, and contractor overhead and profit. In a cost segregation study, soft costs are allocated proportionally across all identified asset classes as indirect costs.

See also: Indirect Cost, Direct Cost, Indirect Cost Allocation

Electrical outlets, circuits, and wiring specifically dedicated to serving particular equipment, such as computers, kitchen appliances, manufacturing machinery, or specialized medical devices. In a cost segregation study, dedicated electrical components are classified as 5-year personal property, separate from the building's general electrical distribution system.

See also: Electrical Systems, Decorative Lighting, Personal Property

The practice of combining multiple tax incentives on a single property or project to maximize total tax benefits, for example, applying cost segregation alongside Section 179D, Section 45L, 1031 exchanges, Opportunity Zone benefits, and R&D credits. Learn about stacking strategies and complete tax planning.

See also: Section 179D Energy Deduction, Section 45L Energy Credit, 1031 Exchange

A depreciation method that spreads an asset's cost evenly over its recovery period in equal annual installments. Straight-line is the required method for 27.5-year residential and 39-year nonresidential real property under MACRS. Cost segregation's value lies in reclassifying components out of these long straight-line categories into shorter-lived classes that allow accelerated depreciation.

See also: Accelerated Depreciation, 200% Declining Balance, MACRS

Building elements that relate to the overall operation and maintenance of the building, including the foundation, roof, exterior walls, load-bearing walls, general electrical, general plumbing, and general HVAC systems. In a cost segregation study, structural components remain classified as Section 1250 property with 27.5- or 39-year lives.

See also: Non-Structural Components, Building Envelope, Section 1250 Property

A cost segregation methodology that involves contacting contractors and subcontractors to obtain specific cost information for individual building components. The IRS ATG considers this an acceptable alternative to the detailed engineering approach for newly constructed properties where contractor records are available.

See also: Detailed Engineering Approach, Detailed Engineering Cost Estimate Approach

IRS regulations (issued in 2013, effective 2014) that provide comprehensive guidance on when expenditures on tangible property must be capitalized versus deducted as repairs. The TPR introduced the BAR test, de minimis safe harbor, routine maintenance safe harbor, and unit of property framework, all of which interact with cost segregation analysis. Learn about tangible property regulations.

See also: BAR Test, De Minimis Safe Harbor, Repair vs. Improvement

The major federal tax reform legislation enacted in December 2017 that significantly impacted cost segregation by increasing bonus depreciation to 100%, extending it to used (acquired) property, and creating the phase-down schedule. The TCJA also created Opportunity Zones and modified other provisions relevant to real estate investors. Learn more about bonus depreciation under the TCJA.

See also: Bonus Depreciation, CARES Act, PATH Act

The postponement of tax payments to a future period. Cost segregation is fundamentally a tax deferral strategy, accelerating depreciation deductions into earlier years and reducing current taxes, with the understanding that total depreciation over the property's life remains the same. The time value of money makes receiving deductions sooner more valuable. Explore the ROI of cost segregation.

See also: Time Value of Money, Accelerated Depreciation, Cash Flow

Gross income minus allowable deductions, credits, and exemptions, the amount of income subject to federal income tax. Cost segregation reduces taxable income by increasing depreciation deductions in the early years of property ownership.

See also: Marginal Tax Rate, Depreciation

Improvements made to leased commercial or retail space to customize it for a specific tenant's needs, such as interior build-outs, partition walls, specialty electrical, and finishes. In a cost segregation study, tenant improvements may be classified as Section 1245 property, Qualified Improvement Property, or remain as part of the building depending on their nature and permanence.

See also: Qualified Improvement Property, Personal Property

The specific quality standards outlined in Chapter 4 of the IRS Audit Techniques Guide that define what the IRS considers a properly conducted study. These elements include preparation by qualified individuals, use of appropriate documentation, site inspection, interviews, common nomenclature, legal analysis, unit cost determination, asset organization, cost reconciliation, indirect cost treatment, Section 1245/1250 identification, and consideration of related issues such as Section 263A and changes in accounting method. Learn about IRS compliance standards.

See also: IRS Audit Techniques Guide, Documentation Requirements, Audit Defense

An IRC Section 1031 transaction that allows a taxpayer to defer capital gains taxes by exchanging one investment or business-use property for another of like kind. Cost segregation interacts with 1031 exchanges in important ways, particularly regarding depreciation recapture and the basis allocation of the replacement property. Learn about 1031 exchanges and cost segregation.

See also: Depreciation Recapture, Opportunity Zones, Stacking Tax Strategies

An adjustment applied to standardized construction cost data to account for cost inflation or deflation between the reference year of the cost database and the actual year the property was constructed or acquired. Cost segregation engineers apply time factors when using RSMeans or Marshall & Swift data from a different year than the construction date.

See also: Location Factor, Allocation Factor, RSMeans Cost Data

The financial principle that a dollar received today is worth more than a dollar received in the future due to its potential earning capacity. This concept is the fundamental economic rationale for cost segregation. Accelerating depreciation deductions generates tax savings sooner, and those savings can be reinvested immediately. Explore the financial impact of cost segregation.

See also: Net Present Value, Tax Deferral, Cash Flow

A MACRS depreciation method (also called double-declining balance) that allows a deduction of 200% of the straight-line rate in the early years, switching to straight-line when that produces a larger deduction. Under MACRS GDS, 3-year, 5-year, 7-year, and 10-year property uses the 200% declining balance method. These are the accelerated classes most commonly identified in cost segregation studies.

See also: 150% Declining Balance, Straight-Line Depreciation, MACRS

IRS rules under IRC Section 263A requiring taxpayers to capitalize certain indirect costs (such as interest, taxes, and overhead) incurred during the production or construction of property. In a cost segregation study, the treatment of Section 263A costs is one of the 13 principal elements the IRS looks for in a quality study.

See also: Indirect Cost, 13 Principal Elements, Soft Costs

A cost estimation technique that assigns a standardized cost per unit (per square foot, per linear foot, per each) to individual building components using reference databases like RSMeans or Marshall & Swift. Cost segregation engineers use unit costs combined with quantity takeoffs to reconstruct component-level costs.

See also: RSMeans Cost Data, Quantity Takeoff, Cost Reconstruction

The level at which a taxpayer must analyze whether an expenditure is a capitalizable improvement or a deductible repair under the Tangible Property Regulations. For buildings, the IRS defines major UOPs as HVAC, plumbing, electrical, escalators, elevators, fire protection/alarm/security, gas distribution, and the building structure itself. The UOP framework directly impacts how components are evaluated in a cost segregation context.

See also: Tangible Property Regulations, BAR Test, Partial Asset Disposition

The portion of gain on the sale of depreciable real property attributable to depreciation deductions previously claimed under the straight-line method, taxed at a maximum rate of 25% (rather than the regular capital gains rate). This is a key consideration when evaluating the long-term impact of cost segregation, since reclassified Section 1245 property is recaptured as ordinary income while the remaining Section 1250 portion is subject to this 25% rate. Learn about depreciation recapture.

See also: Depreciation Recapture, Section 1250 Recapture, Section 1245 Property

The estimated period of time over which an asset is expected to be functional and contribute to income generation. While useful life is a general concept, the IRS prescribes specific recovery periods under MACRS that may differ from an asset's actual physical useful life.

See also: Class Life, Recovery Period

A common commercial flooring material made from vinyl and limestone that is relatively inexpensive and easy to install and replace. In a cost segregation study, VCT flooring is typically classified as 5-year personal property because it is removable and has a shorter functional life than the building itself.

See also: Flooring, Personal Property

A notable Tax Court case sometimes referenced in cost segregation discussions that addressed the classification of building components for depreciation purposes. Court decisions like this one, along with Hospital Corporation of America, form the legal precedent that supports current cost segregation practices.

See also: Hospital Corporation of America v. Commissioner