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COST SEGREGATION GLOSSARY

Every Term Your CPA Uses — Explained Like a Human Being.

Every term in cost segregation and real estate tax law — defined in plain English with real-world examples. No prerequisites. No assumed knowledge. If your CPA said it and you nodded politely, find it here.

28+
Terms Defined
Plain English
Every Definition
Real Examples
For Every Term
125+
IRS Audits Defended
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Plain-English definitions · Real examples for every term · IRS Approaches 1 & 2 only · 125+ audits defended, zero losses

THE FUNDAMENTALS

Start Here. These Are the Building Blocks.

1
Cost Segregation
What it means
An IRS-recognized engineering analysis that reclassifies components of a commercial building from 39-year property to 5-year and 15-year property, accelerating depreciation deductions.
Real-world example
You buy a $2M office building. Standard depreciation: $51,282 per year for 39 years. After a cost segregation study, $400,000 in components is reclassified. With 100% bonus depreciation, you deduct $400,000 in year one instead of $51,282.
In plain English
The IRS lets you write off a building slowly over 39 years. Cost segregation says: wait, the carpet, the specialty lighting, and the parking lot are not the same as the building shell. They wear out faster. Let's depreciate them faster. The IRS agrees — if you document it properly.
2
Depreciation
What it means
The annual tax deduction that allows a property owner to recover the cost of an asset over its useful life, as defined by IRS depreciation schedules under MACRS.
Real-world example
A $1,000,000 commercial building (excluding land) is depreciated over 39 years. Each year you deduct $25,641 from your taxable income — even though no cash left your pocket.
In plain English
The IRS acknowledges that buildings wear out over time. Depreciation is the tax code's way of letting you account for that wear. You bought the building. The IRS lets you write it off gradually. The question is how fast.
3
MACRS (Modified Accelerated Cost Recovery System)
What it means
The IRS depreciation system that assigns recovery periods to different types of property and prescribes how depreciation is calculated. All commercial real estate depreciation uses MACRS.
Real-world example
Under MACRS, a commercial building shell = 39 years. Carpet = 5 years. Parking lot = 15 years. Cost segregation moves components from the 39-year bucket into the shorter-life buckets.
In plain English
MACRS is the rulebook the IRS uses to say how long each type of asset takes to depreciate. The schedule tells you which bucket each component goes in.
4
Placed in Service Date
What it means
The date a property is first made available for use in a trade or business, which determines when depreciation begins and which tax rules apply.
Real-world example
You close on a building on December 15, 2024, but it is not ready for occupancy until January 3, 2025. Your placed-in-service date is January 3, 2025 — and that is when the depreciation clock starts.
In plain English
It is not when you buy it. It is when it's available for use for its intended purpose. That date matters for bonus depreciation rates, study timing, and Form 3115 catch-up calculations.
5
Depreciable Basis
What it means
The portion of a property's cost basis that can be depreciated for tax purposes. Land is never depreciable. Depreciable basis = total cost basis minus the allocated value of land.
Real-world example
You pay $3,000,000 for a commercial building. An appraisal allocates $600,000 to land and $2,400,000 to the building and improvements. Depreciable basis = $2,400,000. Cost segregation analyzes and reclassifies that $2,400,000 — not the full purchase price.
In plain English
You can depreciate the building. You cannot depreciate the dirt under it. Depreciable basis is everything except the land. The higher your depreciable basis relative to your purchase price, the more cost segregation can find.
6
Land Value Allocation
What it means
The process of separating the value of land from the value of improvements (building and components) in a property purchase, establishing the depreciable basis. Land has no depreciation life — only the improvements above it are depreciable.
Real-world example
A $2,000,000 office building purchase in a dense urban market might allocate 35% ($700,000) to land and 65% ($1,300,000) to depreciable improvements. The same building in a rural market might allocate only 10% to land — giving $1,800,000 in depreciable basis.
In plain English
Every time you buy a property, someone has to decide how much of the purchase price is for the land and how much is for the building. That split determines how much you can depreciate. Cost segregation uses the depreciable portion only — never the land value.
7
Study ROI (Return on Investment)
What it means
The ratio of tax savings generated by a cost segregation study to the fee paid for the study. Because tax savings are immediate and the study fee is a one-time cost, ROI on a properly engineered study is typically 10x to 50x or more.
Real-world example
A $5,200 cost segregation study on a $1.5M commercial property identifies $320,000 in accelerated deductions. At a 37% tax bracket, the Year 1 federal tax savings = $118,400. Study ROI: $118,400 ÷ $5,200 = 22.8x. Every dollar spent on the study returned $22.80 in tax savings.
In plain English
How much did the study cost vs. how much did it save you in taxes this year? On a well-engineered study for a qualifying property, the answer is almost always a double-digit multiple. This is why the first question is never "what does the study cost" — it's "what does the property qualify for."