Cost segregation studies help real estate investors accelerate depreciation by reclassifying building components from slow 27.5 or 39-year schedules into faster 5, 7, and 15-year categories.
But how much of your building basis can actually be reclassified? The answer depends on your property type, construction quality, and specific components.
TL;DR – Typical Reclassification Percentages
Here’s what you can expect based on industry data and real studies we have conducted at Seneca Cost Segregation:
- Multifamily Residential: 25%
- Single Family Rentals: 25-30%
- Retail Properties: 35%
- Commercial Office: 12-25%
- Industrial/Warehouse: 10-17%
- Manufacturing: 30-60%
- Self-Storage Facilities: 30-35%
- Mobile Home Parks: 80-85% (highest category due to infrastructure)
These percentages translate to substantial tax benefits. To determine whether cost segregation makes sense for your investment, consider factors such as property value, holding period, and tax position.
What Is Building Basis and Why Does It Matter?
The building basis is your adjusted cost in the property for tax purposes. According to the IRS, your adjusted basis is generally your cost in acquiring the property plus the cost of any capital improvements you made, less casualty loss amounts and other decreases.
For commercial and rental properties, building basis forms the foundation for all depreciation calculations. It’s the amount you can depreciate over time to reduce your taxable income.
How to Calculate Building Basis:
Building Basis = Purchase Price + Improvements – Land Value
For example, if you buy a $1 million property where $150,000 represents land value and you make improvements worth $50,000, your depreciable building basis becomes $1,000,000 + $50,000 – $150,000 = $900,000.
You can’t depreciate land since it doesn’t wear out or become obsolete.
Without cost segregation, this entire $900,000 gets depreciated over 27.5 years for residential rental property or 39 years for commercial property.
That’s:
- $32,727.27 per year for residential ($900,000 ÷ 27.5 = $32,727.27) or
- $23,076.92 per year for commercial ($900,000 ÷ 39 = $23,076.92)
With cost segregation, you can reclassify portions of that $900,000 into shorter depreciation periods. The example above shows 12% reclassified to personal property ($108,000) and 16% to site improvements ($144,000), leaving 72% as building property ($648,000).
The IRS requires you to establish a proper building basis through purchase agreements, appraisals, and closing documents. To decide the land value, you’ll need professional appraisals based on comparable sales of vacant land in the area.
How Cost Segregation Reclassifies Building Basis
Cost segregation works by identifying building components that qualify as personal property or land improvements rather than building property. This process requires detailed engineering analysis and adherence to IRS guidelines and relevant court cases.
The Permanency Test (Often Referenced as the Whiteco Factors)
Engineers and tax experts examine each part of a building to determine its type. A famous court case, Whiteco Industries v. Commissioner, established a list of rules to help determine whether something is “permanently part of a building.”
The rules include:
- Can it be moved?
- Is it designed to remain permanently?
- Is it expected to be affixed long-term?
- Is it substantial to remove?
- Would removal cause damage?
- Is it affixed to land or a building?
Components that fail these permanency tests qualify as Section 1245 personal property instead of Section 1250 real property.
Common Reclassifiable Items
Some of the common reclassifiable items are:
Personal Property (5-7 years):
- Carpet and vinyl flooring (when not cemented)
- Decorative lighting fixtures
- Window treatments and blinds
- Removable cabinetry
- Appliances in rental units
- Specialized security systems
- Equipment-serving electrical outlets
Land Improvements (15 years):
- Asphalt parking lots
- Concrete sidewalks and walkways
- Landscaping and irrigation systems
- Site lighting and signage
- Fencing and gates
- Retention ponds
- Sewers, drainage facilities, and wharves
- Radio and television transmitting towers
Engineering Process
Professional engineers conduct site visits, photograph components, review construction drawings, and analyze contractor payment applications.
They calculate costs using actual records or established cost guides, like RS Means, then allocate indirect costs proportionally.
The final deliverable includes detailed schedules organized by recovery period, complete cost reconciliation, legal analysis with case law citations, and professional certification.
Typical Percentage of Building Basis Reclassified with Cost Segregation
We see consistent patterns across property types. Reclassification percentages change based on construction details and how the property is used.
The table below shows typical ranges:
| Property Type | Typical Reclassification Range |
| Warehouses | 10-17% |
| Offices | 12-25% |
| Apartments | 20-30% |
| Retail Stores | 15-32% |
| Auto Dealerships | 20-35% |
| Hotels | 25-35% |
| Grocery Stores | 27-37% |
| Restaurants | 23-40% |
| Banks | 25-43% |
| Medical Facilities | 25-43% |
| Golf Courses | 35-50% |
| Manufacturing Facilities |
30-60% |
These percentages represent the portion of the total building basis that can be reclassified from 27.5- or 39-year depreciation schedules to accelerated 5-, 7-, and 15-year categories.
Properties with more specialized equipment and extensive personal property achieve higher reclassification rates.
Now, let’s see some actual cost segregation studies completed by Seneca Cost Segregation to see real-world reclassification percentages across different property types.
These case studies show the specific breakdown of assets and actual tax savings achieved.
Multi-Family Properties: 23.76% Total Reclassification
Multi-family properties achieve solid reclassification percentages through unit-specific appliances, common area amenities, and site improvements.
The Waverly Townhomes in Albany, Oregon, showed the following results for new construction:
Property Details:
- Cost of Improvements: $5,891,061
- Square Footage: 21,250
- Units: 35 two-story townhomes (1 and 2-bedroom)
- Occupancy Granted: 2023
- Tax Rate: 37%
- Bonus Depreciation: 80%
Reclassification Results:
- 19.77% reclassified to 5-year property ($1,164,773 from $5,891,061 basis)
- 3.99% reclassified to 15-year property ($235,063 from $5,891,061 basis)
- 76.24% remained as a 27.5-year building property
Total reclassification: 23.76% of building basis moved to accelerated schedules. The study found $1,403,836 in assets qualifying for faster depreciation. It generated $1,250,371 in first-year deductions and $423,006 in tax savings with 80% bonus depreciation.
Single Family Rentals: 33.14% Total Reclassification
Single-family rental properties achieve reclassification percentages by identifying personal property and improvements used in the rental business.
A Las Vegas single-family home shows typical results:
Property Details:
- Purchase Price (less land): $370,000
- Cost of Improvements: $50,000
- Total Building Basis: $420,000
- Square Footage: 1,574
- Put in Service: October 2022
- Tax Rate: 37%
- Bonus Depreciation: 100%
Reclassification Results:
- 10.15% reclassified to 5-year property ($42,630 from $420,000 basis)
- 22.99% reclassified to 15-year property ($96,558 from $420,000 basis)
- 66.86% remained as a 27.5-year building property
Total reclassification: 33.14% of building basis moved to accelerated schedules. The study found $72,505 in assets qualifying for faster depreciation, generating $119,377 in first-year deductions and $41,832 in tax savings with 100% bonus depreciation.
Components included kitchen remodel items, bathroom improvements, new flooring, pool equipment, and HVAC systems.
Self-Storage Facilities: 31.66% Total Reclassification
Self-storage facilities typically achieve moderate to strong reclassification percentages due to specialized equipment and site improvements.
A 1980-built facility with 56,062 square feet demonstrated these results:
Property Details:
- Purchase Price (less land): $872,550
- Square Footage: 56,062
- Acquired: July 2023
- Tax Rate: 37%
- Bonus Depreciation: 80%
Reclassification Results:
- 18.36% reclassified to 5-year property (specialized storage equipment, removable fixtures)
- 13.30% reclassified to 15-year property (site lighting, paving, fencing, landscaping)
- 68.34% remained as a 39-year-old building property
Total reclassification: 31.66% of building basis moved to accelerated schedules, generating $276,187 in faster-depreciating assets and $88,582 in first-year tax savings.
Mobile Home Parks: 84.53% Total Reclassification
Mobile home parks achieve some of the highest reclassification percentages due to extensive infrastructure and site improvements.
A Paradise, CA, mobile home park rebuilt after fires showed exceptional results:
Property Details:
- Purchase Price (less land): $1,800,000
- Cost of Improvements: $70,000
- Total Building Basis: $1,870,000
- Put in Service: March 2024
- Tax Rate: 37%
- Bonus Depreciation: 80%
Reclassification Results:
- 1.53% reclassified to 5-year property ($28,631 from $1,870,000 basis)
- 83.00% reclassified to 15-year property ($1,552,100 from $1,870,000 basis)
- 15.47% remained as a 39-year-old building property
Total reclassification: 84.53% of building basis moved to accelerated schedules. The study found $313,796 in assets qualifying for faster depreciation, generating $248,628 in first-year deductions and $91,993 in tax savings.
The high percentage reflects the infrastructure-heavy nature of mobile home parks, where utilities, hookups, pads, and site improvements represent the majority of depreciable assets.
IRS Guidelines for Reclassifying Building Basis
The IRS provides comprehensive guidance through its Cost Segregation Audit Techniques Guide, spanning 347 pages with detailed procedures.
Regulatory Foundation
Here are some of the terms you should know:
- Section 167: General depreciation provisions
- Section 168: Modified Accelerated Cost Recovery System (MACRS)
- Section 1245: Defines tangible personal property
- Section 1250: Defines real property
- Revenue Procedure 87-56: Authoritative recovery period classifications
This process basically reclassifies certain building costs from § 1250 property (real property) to § 1245 property (tangible personal property).
13 Elements of Quality Studies
The IRS identifies these requirements for defensible cost segregation:
- Preparation by qualified professionals with construction/engineering expertise
- Detailed methodology description
- Appropriate supporting documentation
- Contractor and property manager interviews
- Standard Construction Specification Institute (CSI) nomenclature
- Thorough legal analysis with case citations
- Engineering-based unit costs and take-offs
- Asset organization by recovery period
- Complete cost reconciliation to actual expenditures
- Indirect cost allocation explanation
- Proper Section 1245 property identification
- Consideration of related tax issues
- Professional certification and signature
Bonus Depreciation Impact
The July 2025 legislation permanently restored 100% bonus depreciation for property acquired after January 19, 2025, under the One Big Beautiful Bill Act.
This means all qualifying personal property and land improvements receive immediate full expensing. It’ll dramatically increase first-year tax benefits.
Audit Focus Areas
IRS examiners scrutinize functional allocation of electrical systems, land value determinations, proper classification of structural components, documentation quality, and indirect cost allocation methods.
They view “rule of thumb” approaches applying predetermined percentages with skepticism.
Key Outcomes and Limitations to Consider
Cost segregation has its benefits but comes with important considerations that affect long-term tax planning.
Key Outcomes:
- Immediate Tax Savings: Cost segregation typically generates around $40,000 in tax savings per $1 million of building costs over the first five years. It delivers around 10:1 return on investment.
- Improved Cash Flow: Accelerated depreciation puts more money in your pocket immediately, which you can reinvest or use for other purposes.
- Retroactive Benefits: You can perform cost segregation on properties purchased up to 10 years ago and claim all missed depreciation in the current year through IRS Section 481(a) adjustments.
- Bonus Depreciation Eligibility: With 100% bonus depreciation restored permanently in 2025, all qualifying personal property and land improvements receive immediate full expensing.
Important Limitations:
- Depreciation Recapture Risk: When you sell the property, accelerated depreciation gets “recaptured” as taxable income. Section 1245 property (5-7 year assets) recaptures at ordinary income rates up to 37%, while Section 1250 property (buildings, 15-year improvements) recaptures at a maximum 25%.
- Passive Loss Restrictions: Rental real estate losses can only offset passive income under IRC Section 469. The $25,000 special allowance phases out completely at $150,000 modified adjusted gross income, limiting benefits for high earners.
- Minimum Property Value: Cost segregation becomes cost-effective for properties with $300,000 (excluding land) depreciable basis. Smaller properties may not justify the cost segregation study costs.
- Holding Period Considerations: Properties sold within 3-5 years face immediate recapture of accelerated deductions, potentially offsetting benefits due to time value of money compression.
- Income Requirements: You need sufficient taxable income to use the deductions immediately, or proper entity structures like Real Estate Professional Status or grouping elections.
Who You Need on Your Side for a Compliant Study
The IRS doesn’t require specific qualifications for cost segregation preparers. But they clearly state that studies by construction engineers are more reliable than those by people without an engineering background.
Here are the key professionals you need for a compliant study:
- Professional Engineers: Engineers provide the highest credibility. They have four-year engineering degrees and work experience. They understand building systems and construction processes.
- Certified Public Accountants: CPAs handle the tax side. They integrate study results into your tax returns, file required forms, and coordinate your overall tax strategy.
- Cost Estimators: These specialists know RS Means and Marshall Valuation data. They provide accurate cost calculations that the IRS expects to see.
- Construction Experts: People with real construction experience understand how buildings actually get built. This knowledge helps identify which components qualify for shorter depreciation periods.
- Multi-Disciplinary Teams: The best studies combine engineering analysis, tax knowledge, and construction expertise. This is why engineering-based cost segregation studies are superior to simple rule-of-thumb approaches.
- What to Avoid: Stay away from providers who use predetermined percentages without analyzing your specific property. Avoid anyone who won’t visit your property virtually or physically and provide detailed documentation.
- Quality Indicators: Look for providers who follow IRS guidelines, offer audit defense, and have clean track records.
The right team makes all the difference in maximizing your tax savings while staying compliant.
With Seneca Cost Segregation, you can turn 20-40% of your property cost into immediate tax savings with an average first-year deduction of $171,243.
As one investor shared on Reddit about us: “You might talk to Seneca Cost Seg – they are similar to cost seg guys, but (in my experience) a little more affordable and helped me understand how much depreciation would apply to my 2024 tax filing.”
Get a free estimate to get started.
Frequently Asked Questions (FAQs)
Below are frequently asked questions about building basis reclassification in cost segregation studies:
What Records Do You Need to Reclassify Building Basis?
For new construction, you need as-built drawings, construction contracts, contractor payment applications (AIA Forms), and all invoices.
For acquired properties, you need the purchase agreement, closing statements, and property appraisals showing land value allocation.
What Depreciation Methods Apply After Reclassification?
Personal property (5-7 years) uses declining balance or straight-line methods and qualifies for 100% bonus depreciation. Land improvements (15 years) use 150% declining balance and also qualify for bonus depreciation.
Building property (27.5/39 years) uses straight-line only and doesn’t qualify for bonus depreciation.
How Much Can I Save by Reclassifying Building Basis?
Tax savings depend on your property value, reclassification percentage, tax bracket, and ability to use deductions immediately. You can estimate your potential savings before committing to a full study.
At Seneca, our clients achieve an average first-year deduction of $171,243, which translates to substantial tax savings based on their individual tax situations.
How Accurate Are Reclassification Estimates in Cost Segregation Studies?
Preliminary estimates provide general feasibility guidance and take a few business days to complete.
Detailed engineering studies take several weeks but offer the highest accuracy when following IRS guidelines with complete documentation and cost reconciliation.
Conclusion
Smart property owners don’t leave money on the table. With typical reclassification rates ranging from 20-40% of building basis, cost segregation transforms your property into an immediate tax-saving machine.
At Seneca Cost Segregation, co-founder Paul Spies brings his Marine Corps discipline and 8+ years of construction expertise to every study. Our engineering team has analyzed over 10,200 properties across all 50 states with 12+ years of specialized experience.
We also guarantee results. If the IRS audits your study, we defend it completely and refund your investment if there’s a material issue.
Don’t wait for another tax season to unlock these savings. Request a free proposal and discover exactly how much you can save.
