This educational article is not legal or tax advice, and you should confirm your filing position, depreciation method, and passive-activity treatment with your tax advisor before you file.
If you closed on a property or started building in 2025 under §168(k) as amended by OBBBA and IRS Notice 2026-11, the key question for your cost segregation study is not just when you closed. Cost segregation matters because the written-binding-contract date can determine whether the shorter-life property identified by the study receives 100% bonus depreciation or remains subject to the 40% TCJA phase-down for qualified property.
A cost segregation study changes the 2025 return by moving eligible building components out of the long-life building category and into shorter recovery periods that may qualify for bonus depreciation under §168(k). If your contract date puts you on the wrong side of the January 19, 2025 cutoff under IRS Notice 2026-11, cost segregation can still help, but the year-one value may be materially different, because a pre-cutoff acquisition placed in service in 2025 is at 40% bonus depreciation under the TCJA phase-down — 20% if it was placed in service in 2026 — and neither is the same result as 100%.
What does the January 19, 2025 written-binding-contract cutoff under IRS Notice 2026-11 mean for my cost segregation deduction?
Under §168(k) as amended by OBBBA and IRS Notice 2026-11, qualified property acquired after January 19, 2025 can qualify for 100% bonus depreciation when the property is placed in service and otherwise eligible. Under IRS Notice 2026-11, acquired is tested by the written-binding-contract date rather than the closing date for this cutoff.
If your written binding contract was signed on or before January 19, 2025, IRS Notice 2026-11 treats the property as acquired on or before the cutoff, and qualified property placed in service in 2025 generally remains on the TCJA phase-down of 40% under §168(k). If your written binding contract was signed after January 19, 2025 under IRS Notice 2026-11, the shorter-life property that a cost segregation study identifies may qualify for 100% bonus depreciation under §168(k), assuming the other eligibility rules are met.
For this bonus depreciation cutoff, IRS Notice 2026-11 points the acquisition test to the written-binding-contract date, not the later closing date.
IRS Notice 2026-11, applying §168(k) as amended by OBBBA
Bonus depreciation applies only to property with a recovery period of 20 years or less under §168(k), so cost segregation is the work that separates potential 5-year and 7-year §1245 personal property and 15-year §1250 land improvements from the 27.5-year residential rental or 39-year nonresidential §1250 building shell under §168. Land never receives depreciation under §167 and §168, so land value must be removed before the cost segregation analysis measures depreciable basis.
Did my closing date or my written binding contract date control bonus depreciation for the 2025 property?
The written-binding-contract date controls the acquisition cutoff under IRS Notice 2026-11, so a later closing date does not by itself move the property into 100% bonus depreciation under §168(k). If your purchase agreement became binding before the cutoff described in IRS Notice 2026-11, a closing after the cutoff does not by itself create an after-cutoff acquisition for §168(k).
For an investor who started building in 2025 rather than buying, the written-binding-contract test does not apply at all: under IRC §168(k)(2)(E)(i), self-constructed property is treated as acquired when construction begins, so a project whose construction began after January 19, 2025 can reach 100% bonus depreciation under §168(k) while a project that broke ground on or before that date stays on the TCJA phase-down for its placed-in-service year. If the project was not placed in service in 2025 under §168, cost segregation does not create a 2025 depreciation deduction because depreciation begins when the property is placed in service.
The practical return question is simple: what percentage of the study-identified short-life basis can your 2025 return use under §168(k). If your after-cutoff acquisition qualifies for 100% bonus depreciation under §168(k), the cost segregation study can move the full eligible short-life amount into the placed-in-service year. If your on-or-before-cutoff acquisition was placed in service in 2025 and therefore remains at 40% bonus depreciation under §168(k), the study can still accelerate depreciation, but part of the short-life basis follows regular MACRS depreciation after the bonus portion.
Can I use a cost segregation study by the October 15, 2026 extended deadline if I filed Form 4868 and am on extension and have not yet filed my 2025 return?
If you filed Form 4868 and are on extension and have not yet filed your 2025 Form 1040 return, October 15, 2026 is the extended due date for that individual return under Form 4868. If a calendar-year C corporation filed Form 7004 and is on extension and has not yet filed its 2025 income tax return, October 15, 2026 is also its extended due date under Form 7004.
For partnerships filing Form 1065 and S corporations filing Form 1120-S, the extended entity return due date was September 15, 2026 under Form 7004, so a property owner holding the asset through one of those entities should not treat the individual extended date as the entity return due date. If your entity return has already been filed, the route for cost segregation may change even if your personal return is still open.
A cost segregation study must be complete before the return that uses the study is filed. If you file the 2025 return before the study is complete, you are not out of options, but the filing path may shift to an amended return or an accounting-method change depending on how many returns have already included depreciation for the property.
Because this is a filing decision rather than a general tax-news issue, start by checking whether the property, basis, contract date, placed-in-service date, and loss-use facts justify a study before you file. You can begin that screening here: check whether cost segregation fits your property before you file.
Can Form 3115 catch up depreciation if I filed earlier returns without cost segregation?
If a property was placed in service in an earlier year and was depreciated on two or more filed returns without a cost segregation study, Rev. Proc. 2015-13 generally allows an automatic accounting-method change on Form 3115 with a current-year return, and the missed depreciation is taken as a §481(a) adjustment rather than by amending prior returns. If only one filed return has included the property depreciation, the correction is generally an amended return rather than Form 3115 under the method-change rules, and you should confirm which route applies with your tax advisor.
Form 3115 is especially relevant for an owner who discovers after filing that the building contained substantial short-life §1245 property that was depreciated as §1250 building property. The study still needs support, and an engineering-based cost segregation report built on the methodology in the IRS Cost Segregation Audit Techniques Guide is designed to document how the building costs were classified.
When does cost segregation not help my 2025 return even if bonus depreciation is available?
Cost segregation generally helps most when the property has enough depreciable basis, the taxpayer can use the deduction, and the hold period is long enough that §1245 recapture on sale does not erase the timing benefit. As a ClickDrag Finance screening reference, cost segregation is usually worth reviewing when the owner can actually use the current-year deduction and the anticipated hold period makes acceleration meaningful after considering §1245 recapture; the depreciable basis excluding land has to clear the study fee rather than a fixed number, because the widely quoted $500K floor was calculated against $40,000–$70,000 engineering studies and moves down as the fee does.
If your rental losses are passive under §469 and you have no passive income or applicable exception, cost segregation can create or increase suspended losses rather than reduce current-year tax. Under §469(i), the $25,000 active-participation allowance phases out between $100,000 and $150,000 of modified AGI, so that allowance may not help if your modified AGI is above the statutory range.
Under §469(c)(7), real estate professional status requires more than 750 hours and more than half of personal services in real property trades or businesses, so the cost segregation deduction may be nonpassive only if the owner also satisfies the material-participation requirements for the relevant activity. Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), a short-term rental with an average customer stay of 7 days or less is not treated as a rental activity, and its losses are nonpassive only if the owner materially participates.
If passive losses are suspended, §469(b) carries them forward and §469(g) generally releases them on a fully taxable disposition. That means cost segregation can still be useful in the right plan, but a study does not automatically create spendable current-year tax savings if §469 blocks the loss on the return you are about to file.
Cost segregation also does not change the total depreciable basis recovered over the life of the building under §168. It accelerates deductions into earlier years, and that acceleration is most valuable when the taxpayer can use the deduction and the sale plan does not give back the benefit through §1245 recapture too quickly.
What documents should I gather before deciding whether the study fits this return?
A cost segregation review usually starts with the closing or settlement statement, because that document helps separate purchase price, land, building, and transaction items. For construction or renovation, the study uses construction costs and invoices, or the contractor pay applications, so the engineering-based analysis can connect actual costs to building systems and components.
The current depreciation schedule is also needed because the study must match what the return has already capitalized and depreciated. A land-value source, such as an assessor ratio or an appraisal, is needed because land is not depreciable under §167 and §168.
For a 2025 acquisition under §168(k) and IRS Notice 2026-11, the written binding contract is critical because it may determine whether the study-identified qualified property receives 100% bonus depreciation or the 40% TCJA phase-down. If you only look at the closing statement, you may miss the exact fact that controls the bonus depreciation percentage.
How should I decide before filing whether cost segregation is worth ordering for this property?
Start with the acquisition cutoff, because the difference between 100% bonus depreciation and 40% bonus depreciation under §168(k) can change the year-one value of the study. Then test whether the short-life property is likely meaningful for the property type, whether the depreciable basis excluding land is large enough, and whether §469 allows you to use the deduction on the return you are filing.
Next, look at your hold period. If you expect to sell quickly, §1245 recapture can reduce the value of accelerated deductions because many cost segregation components are reclassified from §1250 building property into §1245 personal property.
Finally, choose a study process that matches the return position you intend to take. ClickDrag Finance uses an engineering-based cost segregation approach built on the methodology in the IRS Cost Segregation Audit Techniques Guide, and you can compare provider models here: best cost segregation companies.
If the property is in an Opportunity Zone structure, the depreciation and basis questions may interact with the Opportunity Zone rules, and this related guide may help: Opportunity Zone cost segregation. For the immediate filing decision, however, the next step is to screen your property facts through the cost segregation qualifier before you file.
Frequently Asked Questions
Does the January 19, 2025 cutoff use my closing date for bonus depreciation?
No, for purchased property IRS Notice 2026-11 uses the written-binding-contract date rather than the closing date for the January 19, 2025 acquisition cutoff under §168(k), and for self-constructed property IRC §168(k)(2)(E)(i) uses the date construction began instead. If your binding contract was on or before that cutoff, qualified property placed in service in 2025 generally remains at the 40% TCJA phase-down, and if your binding contract was after that cutoff, eligible short-life property may qualify for 100% bonus depreciation.
Can cost segregation still help if my 2025 property only gets 40% bonus depreciation?
Yes, cost segregation can still help if the study identifies meaningful 5-year, 7-year, or 15-year property under §168 and you can use the deductions on your return. The year-one benefit is usually lower than it would be with 100% bonus depreciation under §168(k), but the study may still accelerate depreciation compared with treating the full depreciable building as 27.5-year or 39-year §1250 property.
Does 100% bonus depreciation apply to the whole building after the cutoff?
No, 100% bonus depreciation under §168(k) applies only to qualified property with a recovery period of 20 years or less. A cost segregation study identifies potentially eligible §1245 components, while land, the 27.5-year residential rental shell, and the 39-year nonresidential building shell do not receive bonus depreciation under §168(k).
What if depreciation losses from cost segregation are passive?
If §469 treats your rental losses as passive and no exception applies, cost segregation may create suspended losses instead of current-year savings. Suspended losses carry forward under §469(b) and are generally released on a fully taxable disposition under §469(g), so the deduction may still have value if your broader tax plan can use it later.
Can I file now and add cost segregation later with Form 3115?
Maybe, but the route depends on how many filed returns have already depreciated the property. If two or more filed returns have used the prior depreciation method, Rev. Proc. 2015-13 generally allows Form 3115 and a §481(a) catch-up adjustment, while if only one return has been filed, the correction is generally an amended return that you should confirm with your tax advisor.