What is MACRS and why does cost segregation rely on it?

MACRS is the Modified Accelerated Cost Recovery System defined in IRC Section 168 and used for most property placed in service after 1986. It sets recovery periods of 5, 7, 15, 27.5, and 39 years. Cost segregation shifts components out of the 27.5 or 39-year real property class into the 5, 7, and 15-year MACRS classes to accelerate deductions.

What is Section 168(k) bonus depreciation in 2026?

Section 168(k) is the additional first-year depreciation deduction. OBBBA (Public Law 119-21, signed July 4, 2025) permanently restored the rate to 100% for property acquired and placed in service after January 19, 2025. Property under a binding contract before that date stays on the phase-down: 40% in 2025, 20% in 2026, 0% thereafter.

How is Section 179 different from bonus depreciation?

Section 179 is an election to expense qualifying property up to an annual cap. OBBBA raised the Section 179 cap to $2.5M with a $4M phaseout threshold. Section 179 is limited to business taxable income and cannot create a loss. Section 168(k) bonus has no cap, no income limit, and can create or increase a net operating loss.

What does REPS require under IRC Section 469(c)(7)?

Real Estate Professional Status requires more than 750 hours in real property trades or businesses during the year and more than half of all personal services performed during the year in those trades or businesses. Both tests are conjunctive. Each spouse tests independently under IRC Section 469(c)(7)(B). REPS reclassifies rental losses as nonpassive.

What is the STR loophole and what regulation authorizes it?

The short-term rental loophole is Treas. Reg. 1.469-1T(e)(3)(ii). It excludes rental activity from the rental definition when average customer use is seven days or less. If the owner materially participates under one of the seven Reg. 1.469-5T tests, losses are nonpassive and offset W-2 or ordinary income without requiring REPS.

What is Section 1245 recapture versus unrecaptured Section 1250 gain?

Section 1245 recapture applies to personal property and 15-year land improvements. It is taxed at ordinary income rates at disposition. Unrecaptured Section 1250 gain applies to real property depreciation and is capped at a 25% federal rate. Net Investment Income Tax adds 3.8% for taxpayers over the $200K single or $250K joint thresholds.

What is Form 3115 and when do I file it?

Form 3115 is the Application for Change in Accounting Method. Cost segregation look-back studies use Designated Change Number 7 under Rev. Proc. 2022-14. The Section 481(a) catch-up adjustment posts in the year of change, deducting all missed depreciation from prior years without amending prior returns.

Cost Segregation Glossary

By Zawwad Ul Sami, Founder, WeCostSegPublished: 2026-05-14Last updated: 2026-07-28

Every term you need for cost seg, bonus depreciation, REPS, STR loophole, recapture, and Form 3115. Linked to the pillar pages where applicable.

Cost Segregation Study: An engineering-based analysis that reclassifies building components from long-life real property (27.5 or 39 years) into shorter recovery periods (5, 7, or 15 years), accelerating depreciation deductions. full guide.
OBBBA: One Big Beautiful Bill Act, Public Law 119-21, signed July 4, 2025. Permanently restored 100% bonus depreciation under Section 168(k) for property acquired after January 19, 2025. full guide.
IRS Publication 5653: The IRS Cost Segregation Audit Techniques Guide. Describes six methodologies and the 13 Principal Elements of a Quality Cost Segregation Study. Most recent edition February 2025. full guide.
MACRS: Modified Accelerated Cost Recovery System. The depreciation system used for most property placed in service after 1986. Defined in IRC Section 168.
Section 168(k) Bonus Depreciation: Additional first-year depreciation deduction allowed for qualified property. Restored to 100% permanently for property acquired after January 19, 2025 under OBBBA. full guide.
Section 179 Expensing: Election to expense rather than depreciate qualifying property. OBBBA raised the cap to $2.5M with a $4M phaseout threshold. full guide.
Qualified Improvement Property (QIP): Improvements to the interior of nonresidential property placed in service after the building, excluding enlargements and structural framework. 15-year recovery period. full guide.
Section 168(n) Qualified Production Property: Nonresidential real property used in qualified production. Added by OBBBA. 100% bonus depreciation if construction begins after January 19, 2025 and before January 1, 2029.
Section 1245 Recapture: Recapture of depreciation on personal property and 15-year land improvements. Taxed at ordinary income rates at disposition. full guide.
Unrecaptured Section 1250 Gain: Recapture of depreciation on real property. Capped at 25% federal rate, plus NIIT and state tax. full guide.
Net Investment Income Tax (NIIT): Additional 3.8% tax on net investment income for taxpayers over the income threshold ($200K single, $250K married filing jointly).
REPS (Real Estate Professional Status): IRC Section 469(c)(7) classification allowing rental losses to be nonpassive. Requires more than 750 hours and more than half of personal services in real property trades or businesses. full guide.
Material Participation: Active involvement in an activity. Seven tests under Temp. Reg. 1.469-5T. Required for STR loophole and for REPS-qualified taxpayers to treat individual rentals as nonpassive. full guide.
STR Loophole: Treas. Reg. 1.469-1T(e)(3)(ii) excludes short-term rental activity (average customer use ≤ 7 days) from the rental definition when the owner materially participates. Losses are nonpassive. full guide.
Form 3115: Application for Change in Accounting Method. Used with Designated Change Number 7 to claim a look-back cost seg catch-up via Section 481(a). full guide.
Section 481(a) Catch-Up: The cumulative depreciation correction that posts in the year of method change. Allows a multi-year look-back to be deducted in a single tax year without amending prior returns.
13 Principal Elements: The thirteen quality elements identified by IRS Pub 5653 Chapter 4 that constitute a Quality Cost Segregation Study. WeCostSeg studies address all 13. full guide.
Hospital Corporation of America v. Commissioner: 109 T.C. 21 (1997). Landmark Tax Court case allowing component depreciation. IRS acquiesced. Foundation of modern cost segregation practice.

Frequently asked questions

What is MACRS and why does cost segregation rely on it?: MACRS is the Modified Accelerated Cost Recovery System defined in IRC Section 168 and used for most property placed in service after 1986. It sets recovery periods of 5, 7, 15, 27.5, and 39 years. Cost segregation shifts components out of the 27.5 or 39-year real property class into the 5, 7, and 15-year MACRS classes to accelerate deductions.
What is Section 168(k) bonus depreciation in 2026?: Section 168(k) is the additional first-year depreciation deduction. OBBBA (Public Law 119-21, signed July 4, 2025) permanently restored the rate to 100% for property acquired and placed in service after January 19, 2025. Property under a binding contract before that date stays on the phase-down: 40% in 2025, 20% in 2026, 0% thereafter.
How is Section 179 different from bonus depreciation?: Section 179 is an election to expense qualifying property up to an annual cap. OBBBA raised the Section 179 cap to $2.5M with a $4M phaseout threshold. Section 179 is limited to business taxable income and cannot create a loss. Section 168(k) bonus has no cap, no income limit, and can create or increase a net operating loss.
What does REPS require under IRC Section 469(c)(7)?: Real Estate Professional Status requires more than 750 hours in real property trades or businesses during the year and more than half of all personal services performed during the year in those trades or businesses. Both tests are conjunctive. Each spouse tests independently under IRC Section 469(c)(7)(B). REPS reclassifies rental losses as nonpassive.
What is the STR loophole and what regulation authorizes it?: The short-term rental loophole is Treas. Reg. 1.469-1T(e)(3)(ii). It excludes rental activity from the rental definition when average customer use is seven days or less. If the owner materially participates under one of the seven Reg. 1.469-5T tests, losses are nonpassive and offset W-2 or ordinary income without requiring REPS.
What is Section 1245 recapture versus unrecaptured Section 1250 gain?: Section 1245 recapture applies to personal property and 15-year land improvements. It is taxed at ordinary income rates at disposition. Unrecaptured Section 1250 gain applies to real property depreciation and is capped at a 25% federal rate. Net Investment Income Tax adds 3.8% for taxpayers over the $200K single or $250K joint thresholds.
What is Form 3115 and when do I file it?: Form 3115 is the Application for Change in Accounting Method. Cost segregation look-back studies use Designated Change Number 7 under Rev. Proc. 2022-14. The Section 481(a) catch-up adjustment posts in the year of change, deducting all missed depreciation from prior years without amending prior returns.

About the author

Zawwad Ul Sami, Founder

Zawwad Ul Sami is the founder of WeCostSeg, a founder-led cost segregation firm serving real estate investors across the US. He focuses on strategy, pricing, and the firm's overall direction.