Commercial Real Estate & Hotel Cost Segregation

Cost segregation is a proven tax and cash-flow optimization strategy for commercial real estate (CRE) and hospitality properties, including office buildings, retail centers, mixed-use developments, and hotels.

When executed using a rigorous engineering- and appraisal-driven methodology, cost segregation allows owners to accelerate depreciation on qualifying components of a property—improving early-period cash flow while maintaining IRS defensibility.

The House passed the Senate’s version of the One Big Beautiful Bill Act (OBBBA), which was subsequently signed into law by the President. This legislation represents a major shift toward domestic production, capital investment, and pro-business tax policy.

A key outcome of the Act is the restoration of 100% bonus depreciation.

• 100% bonus depreciation is restored
• Applies to qualifying property placed in service on or after January 20, 2025
• Eliminates the previously scheduled phase-down of bonus depreciation
• Applies to new and used property (original-use requirement removed)
   

This change significantly enhances the value of properly executed cost segregation studies for CRE and hotel properties.

The Act also introduced a new provision for Qualified Production Property (QPP) under Section 168(n).

• Manufacturing QPP is eligible for 100% bonus depreciation through 2029
• Particularly impactful for:
  • domestic manufacturers
  • supply-chain and industrial operators
  • facilities with significant process-driven improvements

This provision further underscores the importance of accurate classification and documentation in cost segregation studies.

Commercial and hospitality properties consist of multiple asset classes with different tax recovery lives, including:

• §1245 property
  (5-, 7-, and 15-year recovery lives — often eligible for 100% bonus depreciation)
• §1250 property
  (27.5-year straight-line depreciation for residential rental property or 39-year straight-line depreciation for non-residential real property)
• Non-depreciable land
   

A cost segregation study identifies and reclassifies qualifying components so depreciation aligns more closely with the economic life of the assets.

Generic or percentage-based studies often fail under IRS scrutiny—particularly for larger CRE and hotel assets.

Our methodology integrates:

• engineering-based identification of building systems
• reconstruction of Replacement Cost New (RCN)
• recognition of physical and functional depreciation
• residual and market-based land value abstraction
• defensible allocation of §1245, §1250, and land components 

This approach improves documentation quality, audit defensibility, and consistency across asset types.

14-Story Office Building

• Purchase Price: $37,170,000
• Improvements Basis (excluding land): $30,985,316
   

• 5-year property: $5,888,901 (19.01%)
• 7-year property: $154,563 (0.50%)
• 15-year property: $324,665 (1.05%)
   

Total eligible for 100% bonus depreciation (Year 1):
$6,368,129

• First-year depreciation under prior rules: $2,432,923
• Incremental first-year depreciation: $3,935,206
   

Assuming a 37% marginal tax rate, the additional first-year tax benefit equals approximately:

$1,456,026
(Actual tax impact varies by taxpayer and entity structure.)

Cost segregation may apply to:

• Office buildings
• Hotels and motels
• Retail and grocery stores
• Restaurants
• Industrial and warehouse facilities
• Apartments and mixed-use properties
• Gas stations and car washes
• Nursing homes and healthcare facilities
• Golf courses
• Auto-related properties
• Leased tenant improvements
   

Any commercial or investment real property placed in service since January 1, 1987 may be eligible.
Critical timing is the placed-in-service date by the current owner, not the original construction date.

A properly executed cost segregation study may provide:

• accelerated depreciation deductions
• improved early-year cash flow
• enhanced capital recovery timing
• better alignment of tax and economic asset lives
• audit-ready documentation for CPAs and advisors
   

Cost segregation is governed by federal tax law. We serve CRE and hotel owners nationwide, supporting single assets, renovations, and multi-property portfolios.

We offer a no-fee preliminary feasibility review to assess suitability and scope before a full engagement.