Cost Segregation Glossary

A to C

A

Accelerated Depreciation: writing off an asset's cost faster than the standard straight-line schedule. This is the entire purpose of a cost segregation study.

Audit Techniques Guide (ATG): the IRS's own publication (Pub 5653) describing how a proper cost segregation study should be performed. A study built to this standard is following the IRS's playbook, not exploiting a loophole.

Average Guest Stay (7-Day Rule): the year-average length of a short-term rental's bookings. Seven days or less removes the property from section 469's passive rental activity definition under Reg. 1.469-1T(e)(3)(ii).

B

Bonus Depreciation: the section 168(k) rule letting 5-, 7-, and 15-year property identified by a study be written off immediately. It is 100% and permanent for property acquired after January 19, 2025 under the OBBBA law.

Budget Engineered Study: one of two study tiers we offer. It is still a full 70-page engineered, IRS-aligned report, priced for smaller or simpler properties.

Building Basis: the depreciable cost of a building and its improvements, after land value has been carved out. Land itself never depreciates.

C

Component Classification: the process of sorting a building's cost into IRS-recognized depreciation classes (5-, 7-, 15-, or 39/27.5-year). This is the core work of a cost segregation study.

Cost Segregation Study: an engineered analysis that reclassifies parts of a building into faster depreciation schedules instead of leaving the entire cost on the standard 39-year or 27.5-year schedule.

D to M

D

Depreciation Recapture: the tax collected back at sale on depreciation taken earlier. Ordinary rates apply to 5- and 7-year (1245) property; up to 25% applies to the real property portion, called unrecaptured section 1250 gain.

E

Election (Section 179): the taxpayer's choice to expense specific nonresidential building systems instead of depreciating them, made component by component and subject to annual and income limits.

Engineered Study: a cost segregation study performed by engineers using IRS-accepted methodology, as opposed to a rule-of-thumb estimate or software alone.

F

Fifteen-Year Property: land improvements identified in a study, paving, fencing, landscaping, site utilities, and outdoor lighting, depreciated (and bonus-eligible) on a 15-year schedule.

Five-Year Property: personal property components identified in a study, carpet, most flooring, decorative lighting, cabinetry, appliances, and certain electrical and plumbing serving equipment, on a 5-year schedule.

Form 3115: the IRS form used to claim a look-back cost segregation study on a property already owned, generating a current-year catch-up deduction with no amended return required.

Full Engineered Study: the more comprehensive of our two study tiers, sized for larger or more complex commercial properties, still a 70-page IRS-aligned report.

H

Hospital Corporation of America v. Commissioner: the 1997 Tax Court case (109 T.C. 21) the IRS lost, settling that component depreciation through a proper study is valid. It is the legal foundation the entire industry stands on.

I

Increased First-Year Deductions: the additional depreciation a study produces in year one compared to what straight-line depreciation alone would have allowed.

L

Land Value: the portion of a purchase price attributable to land rather than the building. It is excluded first, before any depreciation calculation begins, because land never depreciates.

Look-Back Study: a cost segregation study performed on a property already owned for years, claimed through Form 3115 with a section 481(a) catch-up deduction rather than an amended return.

M

MACRS (Modified Accelerated Cost Recovery System): the IRS depreciation system that assigns each asset class its own recovery period and method. It is the framework a cost segregation study classifies assets within.

Material Participation: the section 469 test (Temp. Reg. 1.469-5T) deciding whether a rental loss can offset other income now. Common tests include 500 hours, substantially all participation, or 100 hours and more than anyone else.

N to R

N

New Construction Cost Segregation: a study performed on a newly built property, using construction cost detail rather than a purchase price, to classify the building's cost into depreciation schedules from day one.

Nonresidential Real Property: commercial buildings, depreciated on a 39-year schedule for the structural shell. This is the property type section 179 qualified real property applies to.

O

OBBBA (One Big Beautiful Bill Act): the 2025 law that restored 100% bonus depreciation permanently for qualifying property acquired after January 19, 2025.

P

Partial Asset Disposition (PAD): the election under Treas. Reg. 1.168(i)-8 to write off a replaced component's remaining basis (an old roof, an old HVAC system), available only in the tax year of the replacement.

Passive Activity Loss Rules: section 469's default treatment of rental losses as passive, meaning they can only offset passive income unless an exception, like the short-term rental exception, or material participation applies.

Personal Use Days: the section 280A threshold, the greater of 14 days or 10% of rental days, above which an owner's personal use of a property limits available deductions.

Placed in Service Date: the date an asset is ready and available for its intended use. This is the date depreciation begins, and the date that determines which bonus depreciation rate applies.

Property Manager (100-Hour Test): a full-service manager whose hours often exceed an owner's own. This is why the 100-hour material participation test, 100 hours and more than anyone else, is commonly broken by hiring one.

Q

Quantity Survey Method: the engineering-based approach to cost segregation that builds a detailed cost estimate for each building component from construction documents, drawings, and specifications. It is the most defensible method under the IRS's own guidance.

R

Real Estate Professional Status: a separate, harder section 469 exception requiring 750 or more hours and more than half of an individual's working time in real property trades, plus material participation in the rentals.

Renovation-Triggered Study: a cost segregation study performed after a renovation, using the fresh basis the renovation created plus any partial asset disposition opportunity from components removed during the work.

Residential Rental Property: rental housing, including short-term rentals, depreciated on a 27.5-year schedule for its structural shell.

S to U

S

Section 179 Qualified Real Property: specific nonresidential building systems, roofs, HVAC, fire protection and alarm systems, and security systems, eligible for expensing subject to annual dollar and business income limits.

Section 280A: the code section limiting deductions when personal use of a rental exceeds the greater of 14 days or 10% of rental days.

Section 469: the passive activity loss code section that treats rental income and losses as passive by default, with material participation and the short-term rental exception as the two main exits.

Section 481(a) Adjustment: the catch-up deduction, or income adjustment, generated when a look-back cost segregation study changes a property's method of accounting, claimed through Form 3115.

Section 1031 Exchange: a like-kind exchange that can defer both depreciation recapture and unrecaptured section 1250 gain, including on a property with a prior cost segregation study, when the replacement property rules are met.

Section 1245 Property: the 5- and 7-year personal property a study identifies. Gain attributable to its depreciation is recaptured at ordinary income rates on sale.

Section 1250 Property: real property depreciated on a straight-line basis. Gain attributable to that depreciation is unrecaptured section 1250 gain, taxed at up to 25% on sale.

Seven-Year Property: certain fixtures and furniture identified in a study, depreciated (and bonus-eligible) on a 7-year schedule.

Short-Term Rental (STR) Exception: the rule under Reg. 1.469-1T(e)(3)(ii) removing a property with a 7-day-or-less average guest stay from section 469's rental activity definition.

Straight-Line Depreciation: the default, even-installment depreciation method a building uses absent a cost segregation study. It is the baseline a study accelerates against.

Suspended Passive Losses: losses that failed to clear material participation or another passive-activity exception. They carry forward and generally release in full when the activity is disposed of in a taxable sale.

T

Turnaround Time: how long a cost segregation study takes to complete, typically 4 to 6 weeks during tax season and 2 to 3 weeks in January and February.

U

Unrecaptured Section 1250 Gain: the portion of a real property sale's gain attributable to straight-line depreciation, taxed at up to 25% rather than ordinary capital gains rates.

Frequently asked questions

What is the difference between 5-year, 7-year, and 15-year property?

These are the depreciation classes a cost segregation study assigns to different building components. Five-year covers items like carpet and cabinetry, seven-year covers certain fixtures and furniture, and fifteen-year covers land improvements like paving and landscaping. All three are bonus-depreciation eligible; the 39- or 27.5-year structural shell is not.

Is a roof or central HVAC system ever 5-year property?

No. A structural roof and a building's central HVAC system are structural components on the 39-year (commercial) or 27.5-year (residential) schedule, not 5-year property. This is one of the most common misconceptions in the glossary above.

What is the difference between a full engineered study and a budget engineered study?

Both are complete, 70-page engineered reports aligned to the IRS Audit Techniques Guide. The budget tier is priced for smaller or simpler properties; the full tier is sized for larger or more complex commercial buildings.

Do I need to know all these terms before starting a cost segregation study?

No. This glossary exists so an owner or their CPA can look up a specific term when it comes up, not as a prerequisite. Our engineering team handles the classification and computation directly and takes technical questions from a CPA on any of these terms.

What is the most important term on this page to understand before a study?

Building basis. Every other mechanic, bonus depreciation, section 179, partial asset disposition, applies to some portion of that basis, so understanding what counts as basis and what does not is the foundation the rest of the glossary builds on.