Cost Segregation in New York: Who Qualifies and How It Works

Real estate investors in New York face two significant obstacles to growing their portfolios faster: high average acquisition costs and high taxes.

Therefore, one of the biggest levers you can pull to get an edge in New York is more proactive tax planning. Cost segregation in New York fits the bill, as it is a tax strategy you can employ all year-round. You don’t have to wait until filing time to start scrambling for deductions.

In this post, we’ll explore how cost segregation works in New York and how to choose the right company to help you do a study.

What is Cost Segregation and Why It Matters

Cost segregation is a tax strategy that allows real estate investors to front-load depreciation and reduce taxable income.

Traditionally, you allocate the depreciable basis of a building linearly over 27.5 years (residential) or 39 years (commercial).

However, allocating the entire depreciable basis over a period that long is inefficient because many property components have shorter useful lives.

Here’s how long the IRS expects various property components to last:

• 27.5 or 39 years: Real property (the core building structure)
• 15 years: Site/land improvements (pavements, outdoor lighting, swimming pools, etc.)
• 5 or 7 years: Personal property (appliances, furniture, removable flooring, etc.)

Cost segregation cures this inefficiency by:

• Identifying and classifying various property components and allocating costs to each
• Subjecting each property component to a depreciation schedule consistent with its actual useful life

Doing so accelerates the depreciation of your property. It matters because acceleration allows you to front-load depreciation and maximize its benefits, which is the most powerful tax deduction.

Think about it: with every other deduction (like mortgage interest, management fees, etc.), that’s money you’ve already spent. With depreciation, you get it simply because you hold a property with a depreciable basis.

Therefore, maximizing depreciation with cost segregation allows you to lower your tax bill without increasing your “actual” expenses.

Why New York Property Owners Need Cost Segregation

Frontloading depreciation with cost segregation unlocks several benefits to property owners.

Here’s why you should consider the tax strategy in New York:

• Improved cash position: Higher deductions mean you get to keep more of your money instead of giving it to the IRS. The improved cash position has several advantages, including increased flexibility to snap up good deals and reduced dependence on expensive loans.
• Better returns in the long run: By frontloading depreciation and reinvesting the tax savings, you give yourself a longer runway to compound the investments. Because of the time value of money, you’ll have significantly better returns over time.
• A way to qualify for bonus depreciation: Assets with recovery periods of 20 years or less qualify for bonus depreciation. Cost segregation helps you classify and allocate costs to personal property and site improvements, with recovery periods of five/seven and fifteen years, respectively.

Also called the Additional First Year Depreciation Deduction, bonus depreciation is a tax incentive that allows you to deduct a significant percentage of the cost of a depreciable asset in the year you put it in service.

The original Tax Cuts and Jobs Act (TCJA) of 2017 initially allowed for 100% bonus depreciation through 2022, phasing it out as follows:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

However, the One Big Beautiful Bill Act, signed into law on July 4, 2025, reversed the phase-out schedule. Bonus depreciation is now back to 100% for properties placed in service after January 19, 2025.

New York Property Types That Maximize Cost Segregation Benefits

Any property with significant personal property and site improvements will benefit from cost segregation.

If you hold the following property types, you are perfectly positioned to maximize the benefits of cost segregation:

• Industrial properties in Upstate: Manufacturing and industrial properties often contain heavy fixtures, including electrical components. Many of these fixtures are five or seven-year properties.
• Mixed-use and multi-family: New York has a lot of these property types, and they contain many shorter-lived assets that can be depreciated faster. For instance, tenant buildouts/leasehold improvements on the retail portions of the buildings can be a goldmine.
• Office conversions: The office-to-residential conversion trend in New York hasn’t slowed down. Such conversions often involve adding many short-lived assets. A cost segregation study is essential to classify such assets and accelerate their depreciation properly.
• Short-term rentals: New York is a major tourist destination. Do you run a short-term rental? Cost segregation studies for short-term rentals (STRs) unlock several tax benefits, as STRs allow bypassing the IRS’s passive activity loss rules. It’s important because you could end up with a paper loss if you claim bonus depreciation.

How to Calculate Your Potential Tax Savings in New York

New York decouples from federal rules regarding bonus depreciation. As such, here’s the treatment for the incentive if you are in New York:

• Federal treatment: You can write off up to 100% of eligible property immediately (the percentage depends on the year you put the property in service).
• New York treatment: You must add the bonus depreciation you claimed to your state income. You’ll then subject the segregated assets to 5/7 and 15-year depreciation schedules (standard MACRS) as if bonus depreciation did not exist.

Even with the New York rules, cost segregation is still worth it in the state for the following reasons:

• You can still claim bonus depreciation at the federal level.
• At the state level, a five- or fifteen-year depreciation schedule on about 20 – 40% of your property’s costs still yields significant state tax savings.

Let’s explore the federal-level impact with a cost segregation study example.

Cost Segregation Example with Bonus Depreciation (Federal-Level)

For illustration purposes, consider a residential property placed in service in 2024 with the following details:

• Purchase: $1,000,000
• Improvements made: $50,000
• Land value: $150,000
• Cost basis: $900,000 (Purchase + Improvements – Land)

With standard straight-line depreciation, you’d allocate the $900,000 linearly over 27.5 years, giving you an annual deduction of $32,727.27.

With cost segregation and bonus depreciation, the tax treatment is different.

Now, assume Seneca Cost Segregation did a study and found that 12% of the cost basis is personal property and 16% is site improvements. The remaining 72% is Real Property (27.5-year depreciation).

• 12% of $900,000 = $108,000
• 16% of $900,000 = $144,000
• 72% of $900,000 = $648,000

Since the property was placed in service in 2024, it qualifies for 60% bonus depreciation as per the phase-out schedule discussed earlier.

• $108,000 x 60% = $64,800. The remaining 40% comes in over the next 5 years.
• $144,000 x 60% = $86,400. The remaining 40% comes in over the next 15 years.
• $648,000 / 27.5 = $23,563.64 every year until Year 28.

The total first-year deduction = $64,800 + $86,400 + 23,563.64 = $174,763.64

Additional 1st year depreciation = Bonus Depreciation 1st Year – SL depreciation 1st year = $174,763.64 – $32,727.27 = $142,036.37

You then get a tax deduction of $142,036.37 instead of $32,727.27. At a 37% federal tax rate, this nets you a check from the IRS for $52,553.46.

Evidently, the tax savings from cost segregation can be pretty substantial. How much can you potentially save on the property you currently hold?

Use our cost segregation calculator today to estimate your potential tax savings. It’s fast and accurate, and gives you easy-to-interpret estimates.

The Cost Segregation Process for New York Properties

At Seneca Cost Segregation, we conduct engineering-based cost segregation studies, which are more reliable in the eyes of the IRS.

Here’s how a typical engineering-based study conducted by our team will unfold.

Preliminary Review and Data Collection

We first conduct a preliminary review of your property to help you establish if it is eligible for cost segregation. You’ll get an estimate of your potential tax savings.

If you decide to proceed with the study, you’ll provide the documentation we need to conduct the study. You can provide ownership, purchase, and construction documents.

Property Tour and Engineering Analysis

We’ll conduct an on-site or virtual inspection of your property. The inspection will include identifying the assets on your property and classifying them as personal property, site improvements, or real property.

Using engineering-based costing techniques and industry best practices, our team will allocate costs to the identified property components.

Report Preparation and Post-Study Support

We’ll prepare a report detailing our asset classifications, cost allocations, and the methodologies we’ve used to arrive at the decisions.

Your CPA can use the report to prepare your tax filings. We’ll be available post-study to help you and your CPA implement the findings effectively.

How to Choose the Right Cost Segregation Company in New York

Cost segregation can help you reduce your tax liability significantly. As such, the IRS frequently evaluates reports to prevent abuse. To reduce the risk of an audit, you must only work with the best cost segregation specialists.

You should choose a cost segregation company only if it meets the following criteria:

• Engineering-based methodology: In its Cost Segregation Audit Techniques Guide, the IRS explicitly states that a study conducted by a construction engineer is more reliable than one done by someone with no construction or engineering background.
• Demonstrable experience: Like any other specialized professional services field, cost segregation benefits from the technical skills and pattern recognition abilities that can only be acquired through extensive industry experience.
• Post-study support: Does the company offer post-study support and audit defense? Every study we do is backed by our Seneca AuditDefense guarantee. In the unlikely event of an audit, we’ll be available to help you defend it.

Common Challenges and How to Avoid Them

When you work with the right company, you’ll avoid most of the common cost segregation challenges.

That said, you should be aware of the following two common challenges so you can prepare for them:

• New York-specific rules: New York decouples from federal bonus depreciation rules. You should work with a CPA who is familiar with the tax treatment of cost segregation and bonus depreciation at both the federal and state levels.
• Complex 1031 exchanges: Because of the different federal and state treatments above, the process complicates your 1031 exchange basis calculations. However, you can easily manage it if you work with the right CPA.

Frequently Asked Questions (FAQs)

Let’s now answer some of the common questions we get about doing cost segregation in New York:

What Are the Fees for Cost Segregation Companies in New York?

The fee will mostly depend on the size of your property and its complexity.

Generally, you can expect a study to start at around a couple of grand.

Can Cost Segregation Be Applied To Mixed-Use Buildings in New York?

Yes, cost segregation can be applied to mixed-use buildings in New York.

Moreover, the typical retail tenant often requires leasehold improvements/tenant buildouts that can be depreciated faster.

Can I Combine Cost Segregation With 1031 Exchange Strategies?

Yes, you can. However, you should ensure the new building does not have a shortfall in personal property and site improvements.

Otherwise, the IRS will consider the shortfall as a “boot”, and you will have to deal with recapture tax on that specific shortfall.

What Documentation Should Property Owners Prepare Before a Study?

You should have property ownership documents, construction drawings/blueprints, construction invoices, change orders, inspection reports, appraisal reports, and other relevant documentation.

Conclusion

New York is one of the most competitive real estate markets in the nation. If you don’t use the federal and state tax incentives available to real estate investors, you’ll be left behind.

Moreover, if you are currently depreciating your entire property over 27.5 or 39 years, you are effectively giving the IRS an interest-free loan. That’s money you should be using to grow your portfolio faster.

With Seneca Cost Segregation by your side, you can change your tax strategy. We have a simple three-step process that has helped many investors across the nation unlock significant tax savings. Our experienced engineers have conducted over 10,200 studies nationwide.

Contact us today to begin the journey to turning 20% to 40% of your property costs into immediate tax savings.