For more than two decades, cost segregation has been a core tax planning strategy for commercial real estate owners. Its value accelerated dramatically after the introduction of 100 percent bonus depreciation under the Tax Cuts and Jobs Act, allowing investors to front-load depreciation deductions and significantly improve early-year cash flow.
By 2026, the landscape has changed. Bonus depreciation has largely phased out, prompting renewed scrutiny from CPAs, real estate investors, and business owners who are reassessing whether cost segregation still justifies its cost and complexity.
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This article examines cost segregation through a 2026 lens. It explains what has changed, what has not, and how the strategy should be evaluated in a post-bonus depreciation environment.
What Cost Segregation Actually Does
Cost segregation is a technical tax study that dissects a building into its individual components and assigns each component the appropriate depreciation life under the Internal Revenue Code.
Instead of depreciating an entire property over:
- 27.5 years for residential rental property, or
- 39 years for nonresidential property
a cost segregation study identifies assets that qualify for shorter recovery periods, such as:
- 5-year property (electrical systems serving specific equipment, certain plumbing, floor coverings)
- 7-year property (furniture, fixtures, some specialty equipment)
- 15-year property (parking lots, sidewalks, site lighting, drainage systems)
This reclassification accelerates depreciation deductions into earlier tax years without changing total depreciation over the life of the property.
The methodology is well established and supported by guidance from the Internal Revenue Service, including audit technique guides and relevant court rulings.
Bonus Depreciation Phase-out: Where Things Stand in 2026
Bonus depreciation was never permanent. Under current law, it has declined on a fixed schedule:
- 2023: 80 percent
- 2024: 60 percent
- 2025: 40 percent
- 2026: 20 percent
- 2027 onward: 0 percent
This means that in 2026, only 20 percent of qualifying accelerated depreciation can be deducted immediately. The remaining balance is depreciated using standard MACRS schedules.
While this significantly reduces the upfront benefit compared to prior years, it does not eliminate the underlying value of cost segregation. The strategy has shifted from aggressive front-loading to disciplined tax deferral.
Is Cost Segregation Still Worth It in 2026?
The Core Value Proposition Has Changed
In earlier years, cost segregation was often evaluated primarily on the size of the first-year deduction. In 2026, that framework is incomplete.
The true benefit now lies in:
- Earlier recognition of depreciation, even without full expensing
- Improved cash flow timing
- Alignment with long-term tax and investment planning
Cost segregation remains valuable when its benefits are measured over multiple years rather than concentrated in year one.
Situations Where Cost Segregation Still Makes Sense
Cost segregation in 2026 tends to deliver the strongest results under the following conditions:
- Commercial or multifamily properties with high acquisition or construction costs
- Properties placed in service within the past several years
- Owners in higher marginal tax brackets
- Assets with complex building systems (hotels, medical facilities, industrial properties)
- Long-term hold strategies, where early tax deferral compounds over time
In these scenarios, even partial bonus depreciation combined with accelerated MACRS schedules can produce meaningful net present value benefits.
Common Misconceptions in the Post-Bonus Environment
“Cost segregation is no longer useful without 100 percent bonus depreciation”
This is incorrect. Bonus depreciation enhanced cost segregation but did not create it. The strategy existed long before bonus depreciation and continues to function as a timing mechanism.
“The IRS scrutinizes all cost segregation studies”
The IRS scrutinizes poorly prepared studies. Engineering-based analyses that follow audit technique guidance and proper documentation standards are well established and defensible.
“Depreciation recapture wipes out the benefit”
Depreciation recapture must be modeled, but it does not automatically negate the strategy. The time value of money, inflation, and deferral options such as exchanges often preserve net benefits.
Risks and Limitations to Consider in 2026
Cost segregation is not universally appropriate. In 2026, its limitations are more pronounced and must be carefully evaluated.
Key considerations include:
- Reduced immediate deductions compared to prior years
- Potential depreciation recapture upon sale
- Study costs that may outweigh benefits for smaller properties
- Increased complexity in partnership or multi-entity ownership structures
A detailed cost-benefit analysis is essential, particularly when bonus depreciation is limited.
Alternative and Complementary Tax Strategies
When cost segregation alone does not produce sufficient value, it may still play a role alongside other planning tools:
- Strategic timing of capital improvements to maximize depreciation periods
- Qualified improvement planning, where applicable
- Energy-related deductions and credits, depending on property upgrades
- Entity and income structuring, which can sometimes deliver greater impact than depreciation acceleration alone
The most effective tax strategies in 2026 are integrated rather than isolated.
How Professionals Are Evaluating Cost Segregation Today
In today’s world, tax consulting companies like KB Tax Deviser CPAs are likely to evaluate cost segregation within the context of a comprehensive tax planning model. The evaluation is not done in isolation but takes into consideration assumptions about holding period, exit strategy, future income, and overall tax liability.
This is because the reality of 2026 is that cost segregation is still applicable but only within the context of a comprehensive and forward-looking tax planning model.
When Cost Segregation May No Longer Be the Right Choice
Cost segregation may offer limited value when:
- Property values are relatively low
- The investor anticipates a near-term sale without exchange planning
- The taxpayer is temporarily in a low tax bracket
- State tax treatment significantly reduces overall benefits
In these cases, simpler depreciation approaches or alternative planning may be more appropriate.
Conclusion
The phase-out of bonus depreciation has affected the economics of cost segregation but not its applicability. In 2026, cost segregation is still a viable and useful strategy when selectively applied and considered over the entire life of an investment.
For CPAs, real estate investors, and business owners, the goal should no longer be to maximize first-year tax benefits. Rather, the goal should be to achieve long-term tax efficiency, cash flow optimization, and strategic alignment with overall financial objectives.
Cost segregation in 2026 is no longer a universal answer. It is a precision tool, and when used in the right circumstances, it continues to deliver measurable value.