Cost segregation is often talked about as if it were a single strategy that works the same way for every building. In practice, the mechanics shift depending on where a property is in its life cycle, freshly constructed and about to be placed in service, or already up and running for years. And layered on top of that timing question is a second one that has become far more consequential in the last year: exactly when the property was, or will be, placed in service, and where that date falls relative to bonus depreciation’s phase-down schedule.
Understanding both pieces; new versus existing, and old schedule versus new law; is essential for property owners trying to figure out what a cost segregation study can actually deliver for them.
A Quick Refresher: What Cost Segregation Does
Cost segregation is an engineering-based study that identifies components of a commercial building that qualify for shorter depreciation lives (typically 5, 7, or 15 years) rather than the standard 39-year (or 27.5-year residential rental) schedule. Items like specialty electrical, certain plumbing, site improvements, and non-structural interior finishes are common candidates. Reclassifying these components accelerates deductions into the early years of ownership, which improves cash flow when it matters most.
The engineering methodology is the same regardless of the building’s age. What changes is when the study is performed, how the deduction is claimed, and, critically, what depreciation rules were in effect for that property’s placed-in-service date.
Cost Segregation for New Construction
For a newly constructed or newly acquired building, a cost segregation study is typically performed in the same tax year the property is placed in service. The reclassified components are simply depreciated on their correct schedules from day one, and any bonus depreciation available is claimed as part of that year’s original return. There’s no lookback involved, no amended filings, and no catch-up calculation, the benefit flows through cleanly because the study happens before or alongside the first depreciation schedule is filed.
The main variable for new construction is timing the placed-in-service date itself. As discussed below, a project that’s substantially complete but not placed in service until a few weeks later than expected can land on a different side of a bonus depreciation cutoff, which is exactly what happened with the January 19, 2025 date.
Cost Segregation for Existing Properties
Buildings that have already been in service for one or more years can still benefit from cost segregation through a lookback study. Rather than amending prior-year tax returns, the accounting method change is made using Form 3115 (Application for Change in Accounting Method), typically under Designated Change Number 7, an automatic consent change that requires no IRS pre-approval or filing fee.
The real value in this approach is the Section 481(a) adjustment. When a cost segregation study is applied retroactively, the missed depreciation from all prior years can generally be captured as a single deduction in the current tax year, rather than spread out going forward. For a property that’s been held for several years without ever having a study performed, that catch-up can be substantial.
Here’s the detail that’s easy to miss: the bonus depreciation rate available for those reclassified components is generally tied to the year the property was originally placed in service, not the year the lookback study is performed. That makes the placed-in-service date just as important for an existing building as it is for new construction.
Why the In-Service Date Is the Whole Ballgame
Under the Tax Cuts and Jobs Act, 100% bonus depreciation was available for qualifying property placed in service from late 2017 through 2022, and then began phasing down on a fixed schedule:
- Placed in service late 2017 through 2022: 100%
- 2023: 80%
- 2024: 60%
- January 1 – January 19, 2025: 40%
- 2026 (under the old schedule, since superseded): 20%
- 2027 and after (under the old schedule, since superseded): 0%
That phase-down was still the law property owners were planning around for early 2025. Then, under the One Big Beautiful Bill Act, Congress reinstated 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025, and, based on the guidance issued since, this 100% rate is intended to stay in place going forward rather than resume phasing down.
The practical effect is a hard line drawn in the middle of a single tax year. Two otherwise identical properties, placed in service just weeks apart, can be locked into very different bonus depreciation outcomes:
- A property placed in service on January 15, 2025 falls under the old phase-down schedule and is limited to the 40% rate.
- A property placed in service on January 20, 2025 or later qualifies for the new 100% rate.
There are additional nuances around acquisition timing (for example, how binding contracts entered into before the cutoff can affect eligibility) which is exactly the kind of detail that should be confirmed against the specific facts of a project rather than assumed.
What This Means for New Construction
For projects placed in service after January 19, 2025, a cost segregation study now captures reclassified components at the full 100% bonus rate, meaningfully increasing first-year deductions compared to what would have been available under the 40% (or lower) rates the old schedule called for. For large developments where the placed-in-service date is close to a year-end or a known cutoff, it’s worth confirming exactly when that date falls, a difference of days can change the applicable rate substantially.
What This Means for Existing Properties
This is where the opportunity is often underestimated. A property placed in service anytime from late 2017 through 2022 was subject to the 100% bonus rate at the time, and if a cost segregation study was never performed, that 100% rate is generally still what applies to the reclassified components when a lookback study is done today. In other words, an owner who has been sitting on an older building without ever pursuing a study may still be able to capture a full 100% bonus depreciation benefit through a properly executed 481(a) adjustment, even years later.
Properties placed in service in 2023 or 2024, by contrast, are generally locked into the 80% or 60% rates that applied in those years, respectively, the January 2025 change does not reach backward to increase the rate for property already placed in service before the cutoff. That doesn’t mean a lookback study isn’t worthwhile for those properties; the accelerated classification itself still produces meaningful savings, just at the bonus percentage tied to that placed-in-service year.
The Common Thread
Whether a building is brand new or has been operating for a decade, the questions worth asking are the same: has a cost segregation study ever been performed, and what bonus depreciation rate applies given exactly when the property was placed in service? Those two questions determine the size of the opportunity, and getting the answer right requires looking at the specific facts of the property rather than general assumptions about “new” versus “old” construction.
Frequently Asked Questions
Does cost segregation work the same way for new construction and existing buildings? The underlying engineering methodology is the same, but the mechanics differ. New construction typically claims the benefit in the year the property is placed in service. Existing properties use a lookback study and Form 3115 to capture missed depreciation from prior years through a Section 481(a) adjustment, without amending returns.
My building was placed in service before January 20, 2025. Am I stuck with the old bonus depreciation rate?Generally, yes, the rate that applied in the year the property was placed in service is the rate tied to that property, regardless of when a study is later performed. That’s a separate question from whether cost segregation is still worthwhile, which in most cases it is.
Can an older building still qualify for 100% bonus depreciation? Possibly. If the property was placed in service between late 2017 and 2022, the 100% rate that applied at that time can generally still be captured through a lookback study, even if that study is performed now. This is one of the more overlooked opportunities for owners of properties that have never had a cost segregation study.
Do I need to file an amended tax return to claim missed depreciation on an existing property? No. A lookback study is implemented through Form 3115, an automatic accounting method change, rather than an amended return.
Does timing the placed-in-service date matter for new construction? Yes. Because the 100% bonus depreciation rate applies to property placed in service after January 19, 2025, a project completed just before or after that date can see a significant difference in first-year deductions.
Talk to a Specialist
Every property’s situation depends on its specific placed-in-service date, acquisition terms, and asset mix, details that matter for both new construction and existing buildings. Request a free analysis with a CSSI specialist to see exactly where your property falls and what a cost segregation study could mean for your cash flow.
