Cost Segregation in 2026: Major IRS Changes Every Property Owner Must Know

The clock is ticking on one of the most powerful tax benefits in real estate investing. In 2026, bonus depreciation drops to just 20%—and by 2027, it's gone entirely (unless Congress acts). For property owners considering cost segregation, understanding these changes is critical to maximizing your tax savings.

The 2026 IRS Changes: What's Happening

Bonus Depreciation Phase-Out Timeline

The Tax Cuts and Jobs Act of 2017 introduced 100% bonus depreciation, but it was always scheduled to phase out:

What This Means: For every $100,000 in assets reclassified through cost segregation:

• 2025: $40,000 immediate deduction + remaining over asset life
• 2026: $20,000 immediate deduction + remaining over asset life
• 2027+: $0 immediate bonus; standard depreciation only

Why This Matters So Much

Let's quantify the difference with a real example:

Property: $2 million commercial building Cost Segregation Result: $500,000 reclassified to short-life property Tax Bracket: 37% Standard accelerated depreciation only Acting in 2025 instead of 2027 means an extra ~$49,000 in first-year tax savings.

What's NOT Changing in 2026

Before you panic, here's what remains valuable:

1. Cost Segregation Itself Is Not Going Away

Cost segregation is an IRS-approved methodology that has been around for decades. The only thing changing is the bonus depreciation add-on.

2. Accelerated Depreciation Still Works

Even without bonus depreciation, cost segregation provides significant benefits:

Without Cost Segregation:

• Full building depreciated over 27.5 years (residential) or 39 years (commercial)

With Cost Segregation (no bonus):

• 5-year property: Depreciated over 5 years (faster!)
• 7-year property: Depreciated over 7 years
• 15-year property: Depreciated over 15 years
• Remaining building: 27.5 or 39 years

Even post-2027, you're still getting deductions 3-8x faster on reclassified assets.

3. Look-Back Studies Remain Valid

You can still do cost segregation on properties you've owned for years and catch up on missed accelerated depreciation.

4. Section 179 Continues

Section 179 expensing (subject to annual limits and phase-outs) remains available for certain qualifying assets, providing an alternative immediate deduction.

How the 2026 Changes Affect Different Property Owners

New Property Buyers in 2026

Impact: Reduced first-year tax benefits Strategy:

• Consider closing acquisitions in late 2025 if practical
• Still pursue cost segregation for accelerated (non-bonus) depreciation
• May need higher property values to justify study costs

Current Property Owners

Impact: Last chance for bonus depreciation on look-back studies Strategy:

• Complete look-back studies in 2025 to capture 40% bonus
• Claim accumulated missed depreciation with Form 3115
• Don't wait until 2026—the window is closing

Developers and New Construction

Impact: Significant reduction in first-year write-offs Strategy:

• Time project completion for 2025 if possible
• "Placed in service" date determines applicable bonus rate
• Consider partial asset studies during construction phases

Real Estate Professionals (REPS)

Impact: Still valuable, but less powerful for W-2 offset Strategy:

• Maximize 2025 acquisitions to front-load losses
• Continue cost segregation for ongoing accelerated deductions
• May need to adjust expectations for passive loss generation

Timeline: What You Should Do and When

Now Through December 2025

Priority Actions:

Complete Cost Segregation on Existing Properties

• Any property you've purchased in the last 15 years
• Properties with significant improvements
• Look-back studies to capture bonus depreciation on reclassified assets

Accelerate Planned Acquisitions

• If you're buying property anyway, close in 2025
• 40% bonus > 20% bonus
• The difference can be tens of thousands of dollars

Finish Construction Projects

• "Placed in service" in 2025 = 40% bonus
• "Placed in service" in 2026 = 20% bonus
• Work with contractors on timeline if feasible

Order Cost Seg Studies Early

• Study providers get busy in Q4
• Don't wait until December
• Summer 2025 is ideal timing

January - December 2026

Adjusted Strategies:

Cost Segregation Still Makes Sense

• 20% bonus is still better than 0%
• Accelerated depreciation continues to provide value
• ROI remains positive for most properties

Consider Multi-Year Planning

• Losses may build up over years 1-5
• Plan for when you'll use passive losses
• Real estate professional status becomes more valuable

Evaluate Each Property Individually

• Higher-value properties still excellent candidates
• Smaller properties may have marginal ROI
• Use free calculators to assess before committing

2027 and Beyond

The New Normal:

• No more bonus depreciation (unless Congress acts)
• Cost segregation value is ~60-70% of what it was in 2022
• Still significantly better than straight-line depreciation
• Time value of money continues to favor acceleration

Will Congress Extend Bonus Depreciation?

The honest answer: We don't know.

Arguments for Extension

• Bipartisan support for business investment incentives
• Real estate industry lobbying efforts
• Economic stimulus considerations
• Previous extensions of similar provisions

Arguments Against

• Budget deficit concerns
• Political gridlock
• Expiration was intentional design
• Other priorities competing for attention

What You Should Do

Don't wait for Congress.

• Assume current law will remain in effect
• Make decisions based on existing rules
• If Congress extends bonus depreciation, great—bonus savings
• If not, you've already captured the benefits

The Math: Is Cost Segregation Still Worth It in 2026 and Beyond?

2026 Analysis (20% Bonus)

Property: $1 million residential rental (excluding land) Cost Seg Result: 28% reclassified ($280,000) Tax Bracket: 35% Additional Year-1 Savings: $20,523 Typical Study Cost: $3,500 ROI: 486% Verdict: ✅ Still very much worth it

2027+ Analysis (0% Bonus)

Same property as above: Additional Year-1 Savings: $14,573 Typical Study Cost: $3,500 ROI: 316% Verdict: ✅ Still worth it for most properties

The Bottom Line

Even without any bonus depreciation, cost segregation typically delivers 3-5x ROI. It's less than the 10-20x ROI possible in the 100% bonus years, but still one of the best tax investments available to property owners.

Comparing Your Options: Act Now vs. Wait

Option 1: Complete Cost Segregation in 2025

Advantages:

• 40% bonus depreciation on reclassified assets
• Highest immediate tax savings
• No uncertainty about future rules
• More time for tax planning with your CPA

Best For:

• Properties you already own
• Acquisitions you're committed to
• Maximizing short-term cash flow

Option 2: Wait Until 2026

Disadvantages:

• Only 20% bonus depreciation
• Miss $20,000+ per $100,000 reclassified (vs. 2025)
• Rules could change unfavorably

Only Makes Sense If:

• You're acquiring property in 2026 anyway
• Property won't be placed in service until 2026
• You have passive losses you can't use yet

Option 3: Wait Until 2027+

Disadvantages:

• No bonus depreciation
• Miss $40,000+ per $100,000 reclassified (vs. 2025)
• Smaller first-year deductions

Rarely Makes Sense:

• Essentially leaving money on the table
• Time value of money works against you
• No strategic advantage to waiting

Frequently Asked Questions About 2026 Changes

"Should I rush to buy property before 2026?"

Only if it makes sense otherwise. Don't make a bad investment just for tax benefits. But if you're planning to buy anyway, 2025 offers better depreciation treatment.

"What if I bought property in 2025 but don't complete the study until 2026?"

You still get 2025 rates. The bonus depreciation rate is based on when the property was placed in service, not when the study is completed. (Note: Consult your CPA on filing implications.)

"Are there any exceptions to the phase-out?"

Certain long-production-period property has different rules, but standard real estate follows the schedule above. Section 179 has different limits and rules that may provide alternatives.

"Will my CPA know about these changes?"

Most should. But it's worth having a specific conversation about your 2025 and 2026 tax planning to ensure you're optimizing timing of purchases and cost segregation studies.

"Is 20% bonus depreciation even worth pursuing in 2026?"

Yes. 20% immediate deduction is still better than 0%. Plus you get accelerated depreciation over 5/7/15 years on reclassified assets regardless of bonus rates.

Action Checklist: Maximize Your Position Before 2026

For Current Property Owners

• [ ] List all investment properties acquired in the last 15 years
• [ ] Estimate potential savings with free cost seg calculator
• [ ] Identify highest-ROI candidates for immediate study
• [ ] Contact cost seg provider before Q4 2025 rush
• [ ] Coordinate with CPA on tax filing strategy

For Active Buyers

• [ ] Evaluate closing timeline for pending acquisitions
• [ ] Consider accelerating purchases planned for 2026
• [ ] Factor in 40% vs. 20% bonus in investment analysis
• [ ] Order cost seg study pre-closing for immediate deductions

For New Construction

• [ ] Review project completion timelines
• [ ] Discuss "placed in service" optimization with contractors
• [ ] Consider partial asset studies during construction
• [ ] Plan cost segregation study timing

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Don't Miss Your 40% Bonus Depreciation Window

2025 represents one of the last meaningful opportunities to capture substantial bonus depreciation on your investment properties. With rates dropping to 20% in 2026 and 0% in 2027, the time to act is now.

Our platform provides instant cost segregation estimates so you can make informed decisions quickly—before the year-end rush.

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