How Cost Segregation and 100% Bonus Depreciation Create Massive Upfront Tax Savings
We are doing our best to bring you timely and accurate updates as the IRS continues to review the One Big Beautiful Bill (OBBB) and draft guidance for taxpayers. Until those regulations are finalized, we must rely on the statutory language itself.
That said, there is already sufficient clarity for property owners and business operators to begin evaluating how these changes could materially affect their tax positions. Our goal is to get this information to you early, so you’re ready to act when final guidance is issued.
Last week, we discussed the return of 100% bonus depreciation and its benefits for landlords, tenants, and owner-user buyers. Today, we turn to another powerful tax strategy that the OBBB has significantly enhanced: cost segregation.
What Is Cost Segregation in Commercial Real Estate?
Cost segregation is an alternative method of depreciating commercial real estate. Instead of depreciating a building over 39 years after subtracting land value, cost segregation breaks the property into individual components with shorter economic lives.
These components, such as:
- HVAC systems
- Electrical and power distribution
- Plumbing and gas lines
- Lighting and specialty build-outs
- Site improvements and irrigation
are depreciated over 3, 5, 7, 15, or 20 years, depending on IRS classifications. Cost segregation is frequently evaluated as part of broader commercial real estate tax planning strategies for owners seeking to improve early cash flow.
How the OBBB Supercharges Cost Segregation
Under prior law, accelerated depreciation was already valuable, but now it’s dramatically more powerful.
With 100% bonus depreciation reinstated, any cost-segregated component with an economic life of 20 years or less can be fully depreciated in Year 1.
This means cost segregation and bonus depreciation now work together to create front-loaded tax savings that were previously spread out over many years.
Why This Matters for Owner-Users and Buyers
By accelerating depreciation into the early years of ownership, cost segregation improves after-tax cash flow precisely when capital needs are highest.
According to cost segregation specialists, the accelerated portion of depreciation can range from 20% to more than 80%, depending on property type and improvements. Every building is different, which is why a professional cost segregation study is essential for IRS compliance.
These benefits are especially relevant to owner-user industrial property buyers who use SBA financing or make significant improvements.
A Simple Example: How the Numbers Can Work
Let’s look at a simplified example.
A buyer purchases a $4,000,000 industrial building in Anaheim. After allocating land value, the depreciable basis is $3,000,000.
If 40% of that basis is attributed to cost-segregated components (a conservative midpoint):
- Accelerated depreciation in Year 1 = $1,200,000
- Buyer’s federal tax bracket = 37%
- Federal tax savings = $444,000
If the buyer used SBA financing with a 10% down payment ($400,000), the depreciation tax savings alone would exceed the initial cash invested.
And if the buyer cannot use the full deduction in Year 1, the resulting net operating loss (NOL) can generally be carried forward to offset future taxable income.
Who Benefits Most from Cost Segregation Today
Cost segregation enhanced by bonus depreciation is particularly attractive for:
- Manufacturing and fabrication businesses
- Distribution and logistics operators
- Equipment-intensive users
- Buyers planning major tenant improvements
These properties typically contain more qualifying components, such as specialty power, ventilation, and plumbing, increasing the amount eligible for accelerated depreciation. These dynamics are already influencing industrial real estate acquisition decisions in today’s market.
Why This Could Shift the Market
For buyers who have been hesitant to purchase since 2022, the combined benefits of:
- 100% bonus depreciation
- Cost segregation
- Mortgage rates are drifting back into the low-6% range, which may be enough to pull them off the sidelines.
If that happens, demand could once again outpace supply, reducing the likelihood of the correction many expected and shortening time-on-market for quality assets.
What You Should Do Next
Cost segregation is not a DIY exercise. The only way to know whether it makes sense for your property is to engage a qualified specialist and coordinate with your CPA.
We are currently working with cost segregation professionals to build real-world models that can help owners evaluate whether this strategy is worth pursuing under the new law.
More guidance is coming soon as IRS regulations are finalized.
Considering a Purchase or Major Improvements? Let’s Run the Numbers.
If cost segregation and 100% bonus depreciation could materially impact your buying or expansion decision, a short strategy discussion can help you understand timing, space options, and tax-driven advantages.
👉 Talk to a Zehner Hill industrial real estate advisor