Cost Segregation Glossary

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.