By Alex Thompson, March 10, 2026

Asena Advisors

Look Before You Leap: Business Strategies Unpacked | Part 1 of an Ongoing Series

About This Series

“Look Before You Leap: Business Strategies Unpacked” is an ongoing series aimed at demystifying various business and financial strategies that often capture attention in the digital landscape. Each article aims to provide a comprehensive overview of a particular strategy, discussing not only the attractive benefits but also the inherent costs, operational implications, risks, and insightful questions that leadership must consider before making commitments. Our mission is to ensure that decision-makers fully understand what they are getting into before they make any jumps into new strategies.

Cost segregation studies have gained considerable traction in the realm of tax strategy for real estate investors and business owners. These studies have the potential to deliver significant benefits. Yet, they are often presented in a way that exaggerates their advantages and downplays possible drawbacks. Here’s a deeper dive into what cost segregation studies really entail and what business owners should be aware of before pursuing one.

Understanding Cost Segregation Studies

When an individual or entity purchases or constructs a commercial property, the IRS typically considers the building as a singular asset that depreciates over a lengthy period—specifically, 39 years for most commercial properties. Such a long depreciation schedule leads to relatively modest annual deductions, which extend far into the future.

A cost segregation study is a detailed analysis performed by qualified engineering and tax professionals. It dissects the property into its various components and reclassifies those elements into shorter depreciation categories—often ranging from 5 to 15 years. Assets such as land improvements, specialized electrical systems, plumbing, and non-structural components can typically be reallocated to these shorter timeframes.

The primary outcome of this process is accelerated depreciation in the early ownership years, leading to lower taxable income during those years and deferring tax liability to later dates. With the reintroduction of bonus depreciation to 100% under the One Big Beautiful Bill Act (OBBBA), effective January 19, 2025, the near-term financial benefits can indeed be significant.

The Gap Between Promotion and Reality

While cost segregation studies are often pitched as a definitive way to secure substantial tax savings, it is essential to clarify that they primarily result in tax deferral. This is a notable distinction. The depreciation claimed today is merely postponement; it will eventually be recaptured and taxed when the property is sold.

Realistically, if the property in question is sold before an owner realizes the full value of the deferral, they may be subjected to depreciation recapture. This taxation often occurs at rates that might be higher than the long-term capital gains taxes one would otherwise anticipate. Proper planning is essential; owners who do not intend to maintain the property long-term or who do not fall into a high tax bracket may find that the net benefits are not as advantageous as touted.

Additionally, it’s critical to consider passive activity loss implications. If a property owner does not qualify as a real estate professional according to IRS definitions, any excess depreciation from cost segregation could be classified as passive losses, which can only offset passive income. If such income is not available, the losses may remain dormant until the property sells, thus complicating timing and claiming benefits.

What Are the Actual Costs Involved?

While many discussions on cost segregation studies focus primarily on benefits, the associated costs often go unaddressed. For a business to correctly execute a cost segregation study, considerable investment is necessary in both financial resources and internal time.

• Cost of the Study: A thorough cost segregation study conducted by a reputable firm usually ranges from $5,000 to $15,000 for smaller properties. For larger and more complex properties, costs can escalate to between $20,000 to $50,000 or beyond. Caution is warranted when firms offer studies at remarkably low rates, as they may not conduct the level of engineering analysis that would withstand IRS scrutiny.
• Expert Review: After conducting the study, your CPA or tax advisor’s involvement is crucial. The integration of the study’s findings into your tax return requires specialized knowledge, leading to additional costs that may not be included in your existing service agreements.
• Amendments for Retroactive Applications: Should you wish to apply a cost segregation study to previous years, be prepared for the complexity of filing Form 3115, including necessary documentation. This process is neither quick nor inexpensive.
• Internal Team Commitment: Your internal team must allocate time to gather essential documentation, such as property records, invoices, and construction documents. This task often falls on personnel who are otherwise fully occupied, which can introduce significant opportunity costs.
• Ongoing Compliance Requirements: Post-study, managing reclassified assets adds a layer of complexity to your ongoing accounting processes and tax filings. This extended commitment demands adequate resources to ensure meticulous execution.
• Planning for Recapture: When the property eventually sells, careful management of depreciation recapture is essential. This should be part of a broader strategy that includes considerations for potential costs associated with this aspect.

Identifying Potential Risks

In addition to financial considerations, it is critical to recognize the potential risks associated with cost segregation studies:

• IRS Audit Risks: Cost segregation studies can serve as a red flag in audits, particularly if significant reclassifications are made. A study lacking credible engineering support is likely to attract scrutiny.
• Inflated Projections: Many firms may present overly optimistic scenarios regarding tax benefits. Actual benefits from a cost segregation study can vary significantly based on your tax rate, passive income situation, holding period, and current bonus depreciation legislation.
• Depreciation Recapture Risks: As mentioned, premature sale of property can mitigate tax savings stemming from depreciation deferral. Careful financial modeling is necessary to understand these repercussions.

Considerations for CFOs

It is imperative to recognize that tax savings fundamentally require a thorough evaluation from your CPA. In contrast, the CFO must focus on questions that assess the business’s operational readiness for undertaking a cost segregation study.

CFOs should critically analyze the overall execution cost compared to available business resources to absorb such an investment. This includes considering the study fees, the internal staff time needed for documentation and management, the complexities added to the depreciation schedule and year-end processes, the ongoing compliance responsibilities, and cash flow impacts of recapture during future property sales.

Moreover, CFOs should assess the additional reporting burdens that reclassification can introduce. For businesses with limited accounting resources, the resulting complexities may necessitate additional external support, adversely affecting overall profitability.

It is essential to recognize that effective execution, documentation, and ongoing maintenance of a cost segregation study can make the difference between a valuable asset and an exposed liability subjected to audits.

Key questions to consider before initiating a study include:

• What is the total execution cost, inclusive of internal team involvement, CPA fees, and ongoing compliance?
• Does our accounting team possess the capacity to handle the increased complexity associated with new depreciation schedules?
• What is our intended holding period for the property, and have we accounted for potential recapture implications upon disposition?
• Are our CPA and tax advisor aligned on this approach for our unique situation prior to hiring external consultants?

A Final Reflection

Before committing to a cost segregation study, it is vital to consider the owner’s overarching long-term objectives for both the property and the business itself. The appropriateness of a cost segregation study can vary drastically between a property that an investor intends to hold for 20 years versus one they plan to sell within a 3 to 5-year horizon. The answers to these strategic questions should drive further decisions. We aim to delve deeper into this topic in the next installment of our series.

The Bottom Line

Cost segregation is an established strategy that does not constitute a hidden gem your CPA is withholding from you. It is neither a foolproof method for guaranteed profits nor effortlessly executed. The key is to analyze the entire landscape—accounting for study expenses, potential benefits, recapture liabilities, passive activity limitations, internal resource allocation, and compliance requirements ahead of time. This evaluation should occur in collaboration with both your CPA and your CFO, devoid of influences from parties selling such studies. The essence of our argument is simple: assess the full spectrum before making a leap. And when that leap is made, one must uphold the rigor necessary for effective execution, as the IRS’s standards are unwavering.

Next in the series: Depreciation Recapture—the often-overlooked consequence that every business owner with depreciable assets must understand.

If you are contemplating a cost segregation study or any major business strategy, Asena Advisors can assist you in modeling the broader picture before you make a commitment.