Depreciation does not restart when you move a rental or commercial property during 2026 into a single-member LLC that is disregarded for federal income tax purposes, or into a partnership or corporation in a §721 or §351 nonrecognition transfer, because the existing §168 schedule carries over, and cost segregation then usually changes the asset detail or catch-up mechanics for the 2026 return rather than giving the property a fresh depreciation life.
Cost segregation still matters after the transfer because a document-driven, human-reviewed cost segregation study can identify shorter-life §168 assets that were missed, while your tax advisor decides whether the 2026 return uses current-year depreciation, Form 3115, or an entity-level allocation.
Does a single-member LLC make rental depreciation start over?
A single-member LLC that has not elected to be taxed as a corporation is disregarded for federal income tax purposes, so the owner keeps depreciating the rental or commercial property under §168 on the same schedule and the same federal return.
The deed transfer may matter for state law, liability planning, insurance or lender consent, but the disregarded LLC is not usually a new federal taxpayer for the property.
If the building was already being depreciated as 27.5-year residential rental property or 39-year nonresidential real property under §168, the disregarded LLC does not reset the recovery period, method or convention.
If the property was never studied, cost segregation can still separate 5-year, 7-year and 15-year property from the building shell under §168, but the result must be applied to the existing owner’s depreciation history.
What happens when I transfer the property to a partnership or corporation?
When a transfer to a partnership, including a multi-member LLC taxed as a partnership, qualifies under §721, or a transfer to a controlled corporation qualifies under §351, §168(i)(7) generally makes the entity step into the transferor’s shoes for the carryover-basis portion of the property.
In that nonrecognition transfer, the entity generally continues the remaining recovery period, depreciation method and convention for the carryover-basis portion under §168(i)(7), and the transfer year’s depreciation is divided between transferor and transferee under Treas. Reg. §1.168(d)-1(b)(7)(ii).
A 2026 contribution under §721 or §351 therefore usually splits 2026 depreciation under Treas. Reg. §1.168(d)-1(b)(7)(ii) rather than restarting the §168 recovery period, and your tax advisor should confirm the entity classification, transfer date and allocation before the 2026 return is filed.
If the entity gives cash, debt relief or other consideration and the transaction is not fully nonrecognition under §721 or §351, the depreciation answer can change because part of the transaction may be treated as a sale or exchange.
What does placed in service by December 31 mean for a calendar-year taxpayer?
Property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function under Treas. Reg. §1.46-3(d)(1)(ii) and Treas. Reg. §1.167(a)-11(e)(1)(i), and for a calendar-year taxpayer, property placed in service by December 31, 2026 can be depreciated on the 2026 return under §168.
For a rental building, placed in service means the property is ready and available to rent under Treas. Reg. §1.46-3(d)(1)(ii), not merely that the deed transferred and not necessarily the day the first tenant moves in.
A rental bought with tenants in place is usually placed in service at acquisition under Treas. Reg. §1.46-3(d)(1)(ii), while a rental needing renovation before it can be rented usually is not placed in service until it is ready and available to rent under Treas. Reg. §1.167(a)-11(e)(1)(i).
For a calendar-year taxpayer, property placed in service on January 1, 2027 or later is first depreciated on the 2027 return under §168, while a fiscal-year taxpayer uses the end of its own tax year.
A transfer to a disregarded LLC, or a §721 or §351 nonrecognition transfer covered by §168(i)(7), does not give the carryover-basis portion a new placed-in-service date, so the original placed-in-service date still sets the recovery period and convention for that portion.
The first-year conventions for property placed in service late in the year are covered in Mid-Quarter Convention and Cost Segregation for Fourth-Quarter Property.
Can cost segregation still help after the LLC or entity transfer?
Cost segregation can still help after a transfer when the building was placed in service in an earlier tax year and the existing depreciation schedule did not separate shorter-life §168 assets from the 27.5-year or 39-year building shell.
A cost segregation study is worth it when three conditions hold together: the basis is large enough for the accelerated deductions to outweigh the cost of the study, the deduction is usable this year given the owner's passive-activity position, and the hold is long enough to survive recapture. All three, or the honest answer is no.
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For a building you placed in service in 2026 under §168, the cost segregation result belongs on the original 2026 return and no Form 3115 is needed because the property is first being reported for depreciation on that return.
Under the automatic change procedures of Rev. Proc. 2015-13 and section 6.01 of Rev. Proc. 2025-23, the missed depreciation is claimed on Form 3115 with no amended returns when the property has been depreciated on two or more filed returns, or on one filed return if the taxpayer placed it in service in the tax year immediately before the year of change (the year of the return the Form 3115 is filed with), and the taxpayer still owned the property at the start of the year of change and meets the other eligibility rules.
For a building you placed in service in 2024 or earlier and still own at the start of the 2026 year of change, Form 3115 filed with the 2026 return can report missed depreciation as a §481(a) adjustment if section 6.01 of Rev. Proc. 2025-23 and Rev. Proc. 2015-13 eligibility rules are met.
For a building you placed in service in 2025 with the 2025 return filed, Form 3115 with the 2026 return or an amended 2025 return filed before the 2026 return is filed may both be available, so your tax advisor should confirm the route.
A prior election out of bonus depreciation cannot be undone through this accounting-method change under section 6.01(1)(c)(vi) of Rev. Proc. 2025-23, so the cost segregation study may reclassify assets while the bonus election history limits what the 2026 return can claim.
A transferee in a §168(i)(7) transaction continues the transferor’s depreciation method for the carryover-basis portion, so an unstudied schedule does not reset in the transfer, and after a partnership or corporation transfer, which taxpayer files Form 3115 under Rev. Proc. 2015-13 and section 6.01 of Rev. Proc. 2025-23 depends on the transfer treatment, the year of change and who owns the property at the start of that year.
For more on the correction route, see cost segregation and Form 3115 catch-up depreciation, and the ClickDrag cost segregation qualifier sends you to the next step for your property.
Does bonus depreciation restart on carried-over basis after the transfer?
Bonus depreciation generally does not restart on carryover-basis property, placed in service by the transferor in an earlier year, that is transferred to a partnership under §721 or to a controlled corporation under §351 because §168(k)(2)(E)(ii) requires a used-property acquisition to meet §179(d)(2)(A), (B) and (C) and §179(d)(3), and §179(d)(2)(C) excludes property whose basis is determined in whole or in part by reference to the transferor’s adjusted basis.
Under §168(k), bonus depreciation applies only to qualified property with a recovery period of 20 years or less, including the 5-year, 7-year and 15-year property a cost segregation study may identify, and bonus depreciation never applies to land or to the 27.5-year residential rental or 39-year nonresidential real property shell.
Under §168(k), as amended by OBBBA, qualified property acquired after January 19, 2025 is eligible for 100 percent bonus depreciation when all qualification rules are met, and IRS Notice 2026-11 ties acquired date to the written binding contract rules rather than merely to closing.
For a written binding contract, IRS Notice 2026-11 and Treas. Reg. §1.168(k)-2(b)(5)(ii)(B) treat the acquired date as the latest of the date the contract was signed, the date it became enforceable under state law, the end of any cancellation period and the date any contingency was satisfied.
A written binding contract for §168(k) purposes is enforceable under state law and does not limit damages to a specified amount, including through a liquidated damages clause, under Treas. Reg. §1.168(k)-2(b)(5)(iii).
When a contract is not binding in that §168(k) sense, the acquired date is generally when the taxpayer has paid or incurred more than 10 percent of the total cost, excluding land and preliminary activities, under Treas. Reg. §1.168(k)-2(b)(5)(iii) and Treas. Reg. §1.168(k)-2(b)(5)(v).
For self-constructed property, including property built for the taxpayer under a written binding contract entered into before construction began, §168(k) treats the property as acquired when physical work of a significant nature begins, and paying or incurring more than 10 percent of total cost, excluding land and preliminary activities, is a safe harbor under Treas. Reg. §1.168(k)-2(b)(5)(iv).
Qualified property acquired on or before January 19, 2025 and placed in service in 2026 remains on the 20 percent TCJA phase-down for 2026 under §168(k)(6)(A), except long-production-period property and certain aircraft described in §168(k)(2)(B) and §168(k)(2)(C), which keep 40 percent for 2026 under §168(k)(6)(B) as enacted by the Tax Cuts and Jobs Act.
A taxpayer may elect out of bonus depreciation for a class of property for a taxable year under §168(k)(7), so the cost segregation study should be coordinated with the bonus election history and the transfer documents.
What if I sell the property to my LLC, partnership or corporation?
A sale to a related entity is different from a disregarded transfer or nonrecognition contribution because the seller may recognize gain, the buyer may have a new cost basis and related-party limits can affect bonus depreciation under §168(k).
Related-party acquisitions are generally barred from bonus depreciation under the used-property rules of §168(k)(2)(E)(ii), which incorporate the related-person bar of §179(d)(2)(A) and §179(d)(2)(B), so selling a rental building to a controlled LLC, partnership or corporation should not be treated as a simple way to create new bonus depreciation.
When depreciable property is sold to a controlled entity (more than 50 percent owned, directly or indirectly, under §1239(c)), §1239 can make gain ordinary income if the buyer’s property is depreciable in the buyer’s hands, so the income character should be modeled before the transfer documents are signed.
On a taxable sale at a gain, recapture applies up to the amount of that gain, however long the property was held, outside the Opportunity Zone 10-year rule, which applies only to a qualifying investment held at least 10 years with the IRC §1400Z-2(c) election and a sale of the qualified opportunity fund interest; an Opportunity Zone structure needs separate modeling, covered in our Opportunity Zone cost segregation guide.
For a taxable sale at a gain, §1245 recapture on 5-year and 7-year property is ordinary income, §1250 recapture of depreciation taken above straight-line on 15-year land improvements held more than one year is ordinary income, and the remaining depreciation on those 15-year land improvements and on the 27.5-year or 39-year structure is unrecaptured §1250 gain taxed at up to 25 percent for a noncorporate taxpayer.
A §721 or §351 contribution on which no gain is recognized does not itself trigger §1245 or §1250 recapture, and the recapture potential carries over to the entity under §1245(b)(3) and §1250(d)(3).
Cost segregation accelerates deductions under §168; over the life of the building, the same basis is recovered, so the transfer plan should be made for ownership, legal and business reasons rather than for depreciation acceleration alone.
How do passive-loss rules affect the cost segregation decision after a transfer?
Passive-loss rules can limit the value of cost segregation after a transfer because a rental activity is passive unless an exception applies under §469(c)(2), and a passive loss that passive income does not absorb is disallowed under §469(a) and carried forward under §469(b).
Under §469(i), an individual who actively participates in a rental real estate activity (a separate test from material participation, and one that requires an interest of at least 10% by value (a spouse’s interest counts) throughout the year) is exempt from the §469(a) disallowance for up to $25,000 of loss from the rental real estate activities in which the individual actively participates; the $25,000 is reduced by 50% of modified adjusted gross income above $100,000 and is gone at $150,000, and for a married individual filing separately it is $12,500, phasing out between $50,000 and $75,000, only if the spouses lived apart for the entire year, and zero if they lived together at any time during the year.
Under §469(c)(7), a taxpayer is a real estate professional only if more than one-half of the personal services the taxpayer performs in trades or businesses during the year are performed in real property trades or businesses in which the taxpayer materially participates, and the taxpayer performs more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participates (on a joint return, one spouse must meet both tests alone); the rental loss is then nonpassive only if the taxpayer also materially participates in that rental activity, with each rental tested separately unless the election under Treas. Reg. §1.469-9(g) to treat all interests in rental real estate as one activity was made.
An activity is not a rental activity when the average period of customer use is seven days or less under Treas. Reg. §1.469-1T(e)(3)(ii)(A), or 30 days or less with significant personal services provided by or on behalf of the owner under Treas. Reg. §1.469-1T(e)(3)(ii)(B), and either activity produces nonpassive loss only when the taxpayer materially participates under Treas. Reg. §1.469-5T(a).
Participation is counted for the tax year, and the hours must be real and documented.
A nonpassive loss can offset wages or other nonpassive income only when the basis rules, the at-risk rules under §465 and the excess business loss rules under §461(l) also allow the deduction in that year.
Under §469(g), a suspended passive loss is released, meaning it is treated as a loss that is not from a passive activity, when the taxpayer disposes of the entire interest in the activity in a fully taxable transaction (one in which all gain or loss realized is recognized) to an unrelated party.
A transfer to a disregarded LLC, or a §721 or §351 contribution, is not a disposition of the entire interest in a fully taxable transaction to an unrelated party, so it does not by itself release a suspended passive loss under §469(g).
When the LLC is taxed as a partnership, the partner-level limits also apply: A partner can deduct its share of the loss only up to its basis in the partnership interest (§704(d)) and its amount at risk (§465, which counts qualified nonrecourse financing secured by real property under §465(b)(6)), and a limited partner’s interest is generally treated as passive (§469(h)(2)), so the loss offsets passive income, with any loss the passive-activity rules disallow carried forward to the next year (§469(b)); a general partner or an LLC member is passive or not depending on material participation.
What documents should I gather for cost segregation after a transfer?
The documents to gather show the original placed-in-service date, the transfer treatment and the existing depreciation schedule, because cost segregation after a transfer depends on the building’s history under §168 rather than only on the new entity name.
The closing or settlement statement supports the original acquisition basis and land allocation under §1012 and §167.
Construction costs, invoices or contractor pay applications support the asset costs that a cost segregation study analyzes under §168.
The current depreciation schedule shows whether the property is on a 27.5-year or 39-year schedule under §168 and whether 5-year, 7-year or 15-year assets have already been separated.
A land-value source, such as an assessor ratio or appraisal, supports the nondepreciable land allocation under §167; how that split is made from fair market values is explained in purchase price allocation for real estate.
The deed, contribution agreement, operating agreement, partnership agreement or corporate transfer documents help your tax advisor decide whether §721, §351, §168(i)(7), §1239 or sale treatment applies.
ClickDrag’s cost segregation process is document-driven, human-reviewed and built on the methodology in the IRS Cost Segregation Audit Techniques Guide, so the quality of the study depends heavily on the documents uploaded and the facts your tax advisor confirms.
If you are comparing study providers, review how to compare cost segregation companies, and the property qualifier sends you to the next step for your property.
Related reading: Placed in Service by December 31: Calendar-Year Rental Depreciation and Cost Segregation for 2026, Bonus Depreciation in 2026: What Real Estate Owners Need to Know and The January 19, 2025 Line: How the Acquired-Date Test Sets Your Bonus Depreciation Rate.
Frequently Asked Questions
Does depreciation restart when I transfer my rental property into a single-member LLC?
Depreciation generally does not restart when a single-member LLC is disregarded for federal income tax purposes, because the same owner keeps depreciating the same property under §168 on the same schedule. The deed may move into the LLC for legal reasons, but the federal depreciation schedule usually continues unless the LLC elects corporate tax status or another taxable transaction occurs.
Does cost segregation still work after I transfer a building to a partnership?
Cost segregation can still work after a partnership transfer when the building was placed in service in an earlier year and the existing §168 schedule did not separate shorter-life assets. If the contribution qualifies under §721 and §168(i)(7), the partnership generally continues the carryover-basis depreciation history, and the tax advisor must decide whether any Form 3115 filing belongs with the transferor or transferee.
Can a corporation claim new bonus depreciation after a §351 transfer?
A corporation generally cannot claim new bonus depreciation on the carryover-basis portion of property received in a §351 transfer because §168(k)(2)(E)(ii) excludes used property when the basis is determined by reference to the transferor’s basis. Bonus may be relevant only for separately acquired qualified property with a recovery period of 20 years or less when the §168(k) acquisition and placed-in-service rules are met.
Do I need Form 3115 for cost segregation after moving the property into an LLC?
Form 3115 is needed only when the cost segregation result is being made as an accounting-method change for eligible property already depreciated on filed returns under Rev. Proc. 2015-13 and section 6.01 of Rev. Proc. 2025-23. A building you placed in service in 2026 under §168 goes on the original 2026 return, while a building you placed in service in 2024 or earlier and still own may use Form 3115 if the eligibility rules are met.
Can cost segregation depreciation offset my wages after the transfer?
Cost segregation depreciation can offset wages only when the rental loss is nonpassive under §469 and the basis, at-risk rules under §465 and excess business loss rules under §461(l) also allow the deduction. A rental is passive unless an exception applies under §469(c)(2), so the entity transfer by itself does not change whether the loss is passive.
