Unlock Cash Flow with Cost Segregation and Accelerated Depreciation in Commercial and Industrial Real Estate Investment

By Tim Vi Tran, | Sep 11, 2025 | Commercial Development, commercial property 1031 exchange, commercial real estate investment, Industrial properties

Using cost segregation to accelerate depreciation delivers strategic tax relief and improved cash flow for commercial real estate and industrial property investment.

Summary:

Commercial and industrial real estate is more than location and tenants — it’s also about smart tax strategies.

🔑 Cost segregation reclassifies parts of a building (such as lighting, plumbing, electric, flooring, or HVAC) into shorter depreciation schedules.

 🔑 Accelerated depreciation front-loads those deductions, putting tax savings in your pocket sooner.

 🔑 Bonus depreciation in the One Big Beautiful Bill Act (“OBBBA”) enacted in July 2025 offers even more tax advantages for commercial real estate investors.

For warehouses, factories, cold storage, or logistics hubs, the potential is even greater. Specialized systems—conveyor belts, reinforced flooring, refrigeration—can qualify for faster write-offs. That means stronger cash flow in the early years of ownership, more capital for reinvestment, and better overall returns.

✅ Works best for acquisitions or buildings over $1M
✅ Requires engineering + tax expertise
✅ IRS-compliant when documented correctly

Bottom line: These tax incentives when used correctly give investors a head start on ROI.

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Full text:

When investors look at a warehouse, office building, or manufacturing facility, they usually see location, tenant mix, and long-term appreciation. What many overlook is the powerful role tax strategy plays in cash flow improvement. In this article, we present two IRS‑sanctioned tools, cost segregation and accelerated depreciation. 

When executed thoughtfully with expert support and documentation, these tools can significantly reduce taxable income by front-loading tax savings at the beginning of ownership, freeing up capital for reinvestment and growth, and accelerate ROI – more than just depreciation.

What is Cost Segregation in Commercial Real Estate Investment?

At its core, cost segregation is a tax planning strategy that depreciates components of a building, such as carpeting, lighting, HVAC, etc, much faster than the entire building itself. 

Normally, buildings depreciate over 27.5 (residential), or 39 years (commercial). These timelines are referred to as straight-line deductions. This article will focus on commercial buildings.

A cost segregation study reclassifies certain building elements into shorter depreciation periods: 5, 7, or 15 years, unlocking early write‑offs and liquidity, especially for the first year of ownership. 

In the early 1980s, legislation was introduced that permitted investors to increase depreciation deduction beyond straight line deductions. A growing number of property owners are taking advantage of accelerated depreciation through utilizing cost segregation. Cost segregation and accelerated depreciation are legal, they’re built into the tax code to encourage investment, construction, and economic activity.

Commercial and industrial properties stand to gain most, since they often harbor assets ripe for reclassification for cost segregation: Industrial building amenities and machinery, conveyors, refrigeration, energy-efficient lighting, reinforced flooring, HVAC, sprinkler systems, rollup  warehouse doors, security monitors, specialized electrical systems, specialized plumbing, power supply panels, transformers, to name a few. 

When these qualify for faster depreciation, cost segregation fronts larger deductions, especially in the first year of ownership. Investors can dramatically reduce taxable income in early years, thus enhancing internal rate of return (“IRR”) and pooling more capital into operations or acquisitions. 

In practice, a cost segregation study often requires engineering, construction, and tax professionals working together to classify and document assets properly. The result: a defensible report that unlocks accelerated write-offs without crossing compliance lines.

How Accelerated Depreciation Interacts with Cost Segregation

Accelerated depreciation shifts the timing of tax benefits to when they’re most useful—today, instead of decades from now. The IRS Publication 946 lays out the technical framework.

Accelerated depreciation is the accounting method that front-load deductions within shorter recovery windows for commercial and industrial property investors:

• Lower taxable income in the first year after purchase or construction
• More cash available for debt service, tenant improvements, or acquisitions
• A hedge against inflation and rising borrowing costs

Cost Segregation & Accelerated Depreciation in Industrial Property Investment

Industrial real estate properties are particularly well-suited for cost segregation and accelerated depreciation, such as factories, logistics hubs, cold storage, data centers, manufacturing plants, and tech flex spaces. 

These industrial properties are often loaded with high-cost, short-life, specialized systems: reinforced flooring for heavy equipment, advanced ventilation, racking and storage installations, energy-efficient lighting, and dedicated utility connections. Each of these may qualify for shorter depreciation lives. Examples:

• A manufacturer installs custom electrical lines for production equipment.
• A distribution center invests in conveyor systems and climate-control units.
• A cold storage facility builds out refrigeration infrastructure.
• A warehouse or a flex space with specialized electrical gear, clean room, R&D.
• A factory upgrades LED lighting, and HVAC system to adhere to recent code.

A cost segregation breaks out the components and these features can be reclassified and depreciated faster, providing sizable tax benefits by speeding up depreciation and returning cash, while the facility is still ramping up rental revenue.

Bonus Depreciation in the “One Big Beautiful Bill Act” (OBBBA)

New federal legislation in July 2025 has codified more tax advantages for commercial property owners. The following is quoted from Google:

“Bonus depreciation is an immediate and substantial tax deduction that allows businesses to deduct a large percentage of an eligible asset’s cost in the first year it is placed in service. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, has permanently reinstated 100% bonus depreciation for qualifying assets acquired after January 19, 2025. 

This change reverses the previous phase-down schedule established by the Tax Cuts and Jobs Act (TCJA) of 2017, which had gradually reduced bonus depreciation from 100% in 2022 to 60% in 2024 and 40% for the first part of 2025. 

What qualifies for 100% bonus depreciation in 2025

For assets to qualify for the new 100% rate, they must meet the following criteria: 

Acquisition and placed-in-service date: The property must have been both acquired and placed in service after January 19, 2025. Assets acquired before January 20, 2025, are subject to the old phase-down rules.

Recovery period: Eligible property includes “Modified Accelerated Cost Recovery System” (MACRS) assets with a recovery period of 20 years or less.

New or used property: The bonus depreciation applies to both new and used property, provided the business claiming the deduction has not previously used the asset.

Asset Categories:

Asset Component	Depreciation Life
Structural (Roof, foundation, walls, etc)	27.5 (residential), or 39 (commercial)
Land Improvements (Landscaping, fence, parking lot, etc)	15 years
Personal property (Flooring, fixtures, etc)	5 or 7 years

 

How bonus depreciation works with Section 179

Bonus depreciation and Section 179 expensing can be combined to accelerate deductions. While they both provide immediate write-offs, there are key differences: 

Feature	Bonus Depreciation	Section 179 Expensing
Calculation	Based on a percentage of the asset’s cost (100% for most of 2025).	A set dollar amount limit ($2.5 million for 2025).
Income limitation	Can be used to create or increase a net loss for the business.	Cannot create a business loss. The deduction is limited to the business’s taxable income.
Investment limitation	No dollar-based investment limit.	A phase-out threshold applies ($4 million for 2025).
Application order	For maximum benefit, Section 179 is typically applied first, followed by bonus depreciation.	Must be applied first for certain assets to maximize the total deduction.

Important considerations

State conformity: While the federal rule is in place, state tax treatment of bonus depreciation varies significantly. Many states do not conform to the federal rules and have their own deduction schedules.

Cost segregation: For real estate investors, a cost segregation study can help maximize benefits by separating components of a building (e.g., HVAC, lighting) into shorter-lived asset categories that are eligible for bonus depreciation.

Electing out: Businesses can elect out of bonus depreciation on a class-by-class basis. This provides flexibility for tax planning, especially for businesses that expect higher income in future years and may want to spread out their deductions.”

As the IRS rules evolve, the opportunity remains clear: these tools can tilt the numbers in your favor, especially in capital-intensive sectors like industrial property investment.

Real-World Proof of Tax Savings for Real People 

In a case study by the Ivy Group, $439,011 tax savings were realized using cost segregation and accelerated depreciation.

An investor purchased a $1,220,000 flex building in 2021 (100% bonus depreciation).

A professional cost segregation study yielded:

• $89,361 in 5 year assets (interior finishes, lighting, electrical)
• $9,710 in 15 year assets (concrete, exterior improvements)
• $339,941 in 39 year assets

First year bonus depreciation: $89,361 + $9,710 + $339,941 = $439,011 deduction in the first year.

A CPA reported saving a commercial investor $1.8 million in tax using cost segregation—after spending just $10,000 on the study. That client reclassified 20–40% of a building’s cost into shorter categories, yielding massive first-year savings, per a story on Business Insider.

Even niche sectors like car wash facilities benefit: equipment such as vacuums or water‑recycling systems may qualify via cost segregation and bonus depreciation, enhancing early cash flow, per Kiplinger.

Done right, cost segregation can turn tax code complexity into capital advantage.

When Cost Segregation Makes Sense, Rewards, and Risks

Cost segregation and accelerated depreciation are more than just about saving on taxes—they’re about optimizing cash flow and investment cycles. In competitive markets, the ability to deploy capital sooner can mean the difference between seizing the next deal or sitting on the sidelines.

For investors, the key is working with licensed and qualified engineers, CPAs, and tax strategists to ensure compliance while maximizing value. Commercial real estate investors need to see the bigger picture before making tax and financial decisions.

The strategy generally makes sense for:

• Acquisition or construction above $1 million, and the investor plans to hold long enough to capitalize on early tax relief, 
• Properties with specialized buildouts (industrial is prime asset category),
• Investors with significant taxable income to offset.

Like any strategy, cost segregation and accelerated depreciation come with caveats.

Benefits:

• Substantial upfront tax savings,
• Improved internal rate of return (IRR),
• Increased liquidity for reinvestment.

Risks and considerations:

• Up front studies demand professional engineering and tax expertise, costing thousands of dollars,
• Improper classification risks IRS scrutiny – documentation matters,
• Recapture rules apply when the property is sold (depreciation deductions may be “clawed back” at higher tax rates), eroding benefits. However, recaptures can be deferred using a 1031 Exchange,

Weighing the Trade-Offs, and Pulling It All Together: 

• Know your timeline: Are you early in acquisition or renovation? Cost segregation works strongest upfront, especially in the first year of ownership.
• Perform a proper study: Hire professional engineers and tax pros to document classifications and compliance.
• Layer on accelerated methods: Use MACRS, bonus depreciation, or Section 179 to maximize early deductions.
• Anticipate recapture: Build that into your exit modeling, to keep IRR accurate.
• Use Cost Segregation with 1031 Exchange: Combining the two can create even greater tax deferral and cash flow. After completing your 1031 exchange, a property owner can conduct a Cost Segregation study on the new property to accelerate depreciation and generate significant first year deductions.

Bottom Line

When investing in commercial real estate, tax strategies and tactics are important factors that drive the ultimate yield, in addition to location or tenant quality.

Cost segregation is more than a legal loophole…it’s a strategic financial tool backed by IRS guidance and used by the biggest players in real estate. With bonus depreciation made permanent under the 2025 OBBBA, cost segregation is now more valuable than ever.

Cost segregation and accelerated depreciation, the two IRS-approved tools can turn tax structure into a cash-flow engine. Commercial and industrial real estate investors can use them to accelerate cash flow forward, boost returns, and reinvest more effectively. It is a tool to move value to the front of the timeline. A cost segregation study could be your most valuable next move…boosting cash flow, reducing tax liability, and creating new opportunities to scale your portfolio. Executed wisely, they transform a passive tax obligation into an active financial strategy. They tilt the calculus from waiting for depreciation to capturing value in the clutch. 

Want to pinpoint how cost segregation fits into your next commercial property acquisition? Contact us. 

When you need to sell, buy, or lease, the Ivy Group is ready to help you reach your goals with more than 100 years of combined experience and expertise in real estate, investment, technology and engineering. Contact us with your next real estate needs.

Copyright ©️ 2025 by Tim Vi Tran, SIOR, CCIM. All rights reserved.