You buy a commercial property for $4 million. How much can you deduct this year? How much will that deduction reduce your tax?

You buy a commercial property for $4 million. How much can you deduct this year? How much will that deduction reduce your tax?

In this example, the purchase includes $2.4 million of building structure with a 39-year life, $600,000 of qualifying five-year components, $200,000 of qualifying 15-year site improvements and $800,000 of land. The land is not depreciable.

A cost segregation study identifies the shorter-life assets. The allocations follow actual function, with costs reconciled to purchase or construction records. The study reallocates basis; it does not create it.

Assume you use a calendar tax year, acquire and place the property in service in July 2026, and claim 100% bonus depreciation on the eligible shorter-life assets without electing out.

Putting all $3.2 million of depreciable basis on a 39-year mid-month schedule produces approximately $37,607 of first-year depreciation. Separating the assets produces an $800,000 bonus deduction, plus depreciation on the structure, for approximately $828,205.

That is $790,598 of additional deductions. If you can use all of them at an assumed 37% federal rate, you defer approximately $292,521 of current tax, before fees and other tax effects.

But if the entire additional deduction becomes a suspended passive loss, the current tax reduction from that deduction is zero. Basis, at-risk and excess-business-loss limits can also delay the benefit.

If you are buying or building, 100% bonus generally requires eligible assets acquired and placed in service after January 19, 2025. Binding contracts, construction timing and used-property restrictions matter. The study does not make the structure or land eligible.

If you already own the property, an eligible Form 3115 method change may recover missed depreciation through a §481(a) adjustment. The bonus rate and elections follow the original service year, not the year you order the study.

If you are renovating, interior improvements you make after a nonresidential building first enters service may qualify as 15-year qualified improvement property. Acquired improvements do not automatically qualify; enlargements, elevators, escalators and internal structural framework are excluded. A timely partial-disposition election may allow a deduction for remaining basis in replaced components.

A §163(j) real-property-business election requires ADS for buildings and qualified improvement property, barring bonus for those assets, not every shorter-life asset.

Selling can trigger ordinary-income recapture under §1245. State taxes and §1031 exchanges need separate analysis; depreciation classification alone does not determine exchange eligibility.

When can you use the deductions? What happens when you sell? You need to answer both before deciding what the deduction is worth to you.