What Does Cost Segregation and Depreciation Look Like for Real Estate Owners in 2026?

One strategy that continues to generate significant interest is cost segregation. Whether you’ve recently purchased a building, completed new construction, or invested in major renovations, a cost segregation study may allow you to recover certain costs much sooner than traditional depreciation methods.

At Froehling Anderson, we help clients understand whether cost segregation makes financial sense based on their property, tax situation, long-term ownership goals, and overall business strategy; not simply whether they qualify.

Cost segregation is a tax planning strategy that identifies specific components of a building that can be depreciated over shorter recovery periods instead of the standard building life.

Typically:

• Commercial buildings are depreciated over 39 years
• Residential rental property is depreciated over 27.5 years

However, a detailed engineering-based cost segregation study can identify qualifying assets that may instead be depreciated over:

• 5 years
• 7 years
• 15 years

By accelerating depreciation on these assets, property owners may significantly increase current-year deductions and reduce taxable income.

One reason is the return of 100% federal bonus depreciation under recent tax legislation.

When qualifying assets are identified through a cost segregation study, many may be eligible for immediate first-year expensing rather than being depreciated over many years.

Potential benefits may include:

• Larger first-year tax deductions
• Improved business cash flow
• Reduced federal tax liability
• Greater flexibility when reinvesting capital into the business or additional properties

Even if an asset does not qualify for bonus depreciation, accelerating depreciation from 39 years to 15, 7, or 5 years can still provide meaningful tax savings over time.

Cost segregation is often associated with large commercial developments, but the strategy can benefit a wide variety of real estate owners.

The following are examples of estimates:

• Office buildings (15-20% re-classifiable)
• Apartment complexes (20-30% re-classifiable)
• Retail spaces (15-30% re-classifiable)
• Industrial properties (30-45% re-classifiable)
• Newly constructed buildings
• Recently acquired properties
• Major renovation projects

The overall benefit depends on several factors, including the building’s cost basis, expected ownership period, and the amount of property eligible for reclassification.

A cost segregation study looks beyond the building itself to identify assets with shorter useful lives.

Depending on the property, qualifying components may include:

• Flooring and carpeting (1-2 years, ROI timeline)
• Decorative lighting (1-2 years, ROI timeline)
• Appliances (1-2 years, ROI timeline)
• Specialized electrical systems (6-18 months, ROI timeline)
• HVAC distribution systems (1-3 years, ROI timeline)
• Signage (1-2 years, ROI timeline)
• Parking lots
• Sidewalks
• Retaining walls
• Landscaping improvements
• Certain site improvements

These assets often qualify for shorter depreciation lives than the building structure itself, creating opportunities to accelerate deductions.

Not necessarily.

While cost segregation can provide substantial tax savings, every situation is different.

Questions we often discuss with clients include:

• How long do you plan to own the property?
• Will accelerated depreciation create passive losses that cannot currently be used?
• Does your business have sufficient taxable income to benefit?
• What are your long-term investment goals?
• How could depreciation recapture affect you when the property is eventually sold?

These factors can dramatically impact whether cost segregation produces the desired financial outcome.

Business owners in Minnesota should understand that federal tax rules do not always match Minnesota tax law.

For example, Minnesota does not fully conform to every federal bonus depreciation provision. While taxpayers may receive significant federal tax benefits, state tax treatment can differ.

Additionally, Section 179 depreciation may offer another planning opportunity depending on the facts and current state conformity rules.

Because federal and state tax treatment may vary, it’s important to evaluate both together before making decisions.

A successful cost segregation strategy begins with accurate documentation.

The IRS expects cost segregation studies to be well-supported, and high-quality engineering analysis is essential to properly identify qualifying assets. Working with experienced professionals and qualified specialists helps ensure the study is properly documented and aligns with current tax guidance.

Strong documentation also provides valuable support should questions arise in the future.

Every property, and every owner, is different.

If you’ve recently:

• Purchased commercial real estate
• Built a new facility
• Renovated an existing building
• Expanded your investment portfolio

It may be worthwhile to evaluate whether cost segregation could improve your current tax position while supporting your long-term financial strategy.

At Froehling Anderson, we believe cost segregation is about much more than accelerating depreciation.

Our trusted advisors begin by understanding your complete financial picture, including:

• Your business objectives
• Current taxable income
• Cash flow needs
• Financing considerations
• Passive activity limitations
• Future exit strategy
• Federal and Minnesota tax implications

When appropriate, we work alongside qualified engineering specialists to evaluate whether a cost segregation study makes financial sense for your situation. Rather than applying a one-size-fits-all solution, we focus on strategies that support your long-term business goals.

Whether you’re purchasing your first commercial property or managing a growing real estate portfolio, our team helps you evaluate opportunities through both a tax and business advisory lens. We work with business owners, investors, and developers to identify practical tax planning opportunities that align with broader business goals and are here to help you make informed decisions with confidence.

Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or audit advice. Please consult with your plan advisor or CPA for guidance tailored to your situation.