Cost Segregation Depreciation Schedules Explained

Cost segregation depreciation schedules are detailed records showing how different building components depreciate over their assigned recovery periods. Instead of a single depreciation amount each year, cost segregation creates multiple asset categories, each with its own depreciation timeline and annual deduction.

The depreciation schedule tracks basis allocation, recovery period, depreciation method, annual deduction amounts, and accumulated depreciation by asset class. This detail supports tax reporting, component tracking, and future disposition accounting.

For investors, cost segregation depreciation schedules translate engineering allocations into financial projections. The schedule shows exactly when deductions occur, how they change over time, and how the pattern compares to standard building depreciation.

The Modified Accelerated Cost Recovery System (MACRS) assigns recovery periods to different property types based on asset class and use. Cost segregation MACRS schedules separate building components into these classes to accelerate depreciation.

Each asset class follows specific depreciation conventions including half year convention for personal property and mid month convention for real property. These conventions affect first and last year deductions.

The 5 7 15 year depreciation cost segregation categories represent the primary opportunities for acceleration. Understanding what qualifies for each category and how fast the basis depreciates helps investors evaluate potential benefits.

Five year property

Five year property includes personal property with the shortest approved recovery period. Carpets, drapes, specialty finishes, and certain equipment typically qualify. Under MACRS without bonus depreciation, five year property depreciates at 20% in year one using half year convention.

Seven year property

Seven year property covers most furniture, fixtures, and equipment not specifically assigned to other categories. Office furniture, removable cabinetry, and trade fixtures often fall here. First year MACRS rate is 14.29% without bonus.

Fifteen year property

Fifteen year property encompasses land improvements like parking lots, sidewalks, fencing, and site utilities. While slower than 5 and 7 year classes, fifteen year depreciation still accelerates significantly compared to building life. First year rate is 5.00% without bonus.

The difference between standard building depreciation and accelerated depreciation schedules from cost segregation becomes clear when comparing annual deduction patterns over time.

The depreciation schedule cost segregation approach creates is fundamentally about timing. The total depreciation over full building life remains similar, but the pattern shifts dramatically toward early years.

Bonus depreciation transforms cost segregation depreciation schedules by allowing immediate expensing of eligible personal property and certain land improvements. When 100% bonus applies, the entire reclassified amount can be deducted in year one.

Bonus depreciation schedule impact

• Year one deductions increase dramatically as bonus eligible basis is fully expensed.
• Later year deductions on accelerated assets decrease because basis was taken upfront.
• Building component depreciation continues unchanged on straight line schedule.
• Overall depreciation schedule shows extreme front loading followed by lower ongoing amounts.

As bonus depreciation phases down or sunsets, the depreciation schedule pattern moderates. With no bonus, accelerated MACRS schedules still provide meaningful early year benefits but spread over more years.

A detailed example shows how component allocations translate into annual depreciation schedules. This example uses a $2 million commercial property with 25% reclassified into shorter lives.

This schedule shows the accelerated pattern clearly. Without cost segregation, this property would generate $51,282 annually ($2M ÷ 39 years). With cost segregation, year one jumps to $107,395, more than double. The benefit tapers but remains meaningful through year six.

Multi year projections help investors understand how cost segregation depreciation schedules evolve and when the cumulative benefit is realized. Most acceleration occurs in the first 5 to 10 years depending on component mix and bonus depreciation availability.

Cumulative depreciation comparison

• Years 1 to 5: Cost segregation produces substantially higher cumulative deductions, often 2x to 3x standard depreciation.
• Years 6 to 10: Cumulative gap continues widening but annual incremental benefit decreases as short life assets fully depreciate.
• Years 11 to 20: Annual cost segregation depreciation may fall below standard as only building components remain, narrowing cumulative advantage.
• Beyond 20 years: Depreciation patterns converge as most components are fully depreciated under both methods.

For perspective on what portion of your building typically gets reclassified into these shorter schedules, see typical building segregation percentages.

Cost segregation depreciation schedules affect disposition tax outcomes. The accumulated depreciation shown on the schedule reduces adjusted basis, which impacts gain calculation. Additionally, depreciation on personal property and certain land improvements may face recapture at ordinary income rates.

Recapture implications by asset class

• 5 and 7 year personal property: Depreciation recaptured as ordinary income to extent of gain, Section 1245 property.
• 15 year land improvements: Generally treated as Section 1250 property with unrecaptured Section 1250 gain taxed at 25% maximum rate.
• Building components: Unrecaptured Section 1250 gain applies, typically at 25% rate.

Proper depreciation schedules track accumulated depreciation by asset class, which allows accurate recapture calculation at disposition. Your CPA should model disposition scenarios to evaluate net after tax proceeds under different holding periods and exit strategies.