Cost segregation explained for UK owners of US property
British capital has been buying American commercial real estate for decades. What gets less attention is what happens after completion, when the US accountant sets up the depreciation schedule and files the first return.
In most cases that schedule is the default one. The building is written down in equal instalments over 39 years if it is commercial, or 27.5 years if it is residential rental. That treatment is correct, and for a great many buildings it is also the slowest one the rules permit.
What a cost segregation study does
US depreciation rules treat a building as one asset unless you do the work to show otherwise. In reality a building is an assembly of components with very different working lives, and US tax law has long accepted that some of them sit in shorter recovery classes.
A cost segregation study separates them out. Carpeting and vinyl flooring, decorative lighting, wiring that serves specific equipment rather than the building generally, cabinetry, signage, car park surfacing, fencing and landscaping can often be reclassified into 5, 7 or 15 year categories rather than sitting inside the 39 year building cost.
The work is done through engineering-based cost segregation studies rather than a desk estimate. The provider reviews construction invoices, drawings and closing documents, inspects the property, and allocates costs component by component, documenting the reasoning behind each reclassification.
How much sits in those shorter categories varies with the building. US specialist CSSI Services puts the usual range at 20% to 40% of building value, with heavier fit-out and extensive site works pushing towards the upper end. A distribution centre with yard works, racking and specialist power looks very different from a plain office suite.
Why 2025 changed the arithmetic
Reclassification has always been worth something. Since last year it has been worth a good deal more.
The One Big Beautiful Bill Act, signed in July 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after 19 January 2025. Bonus depreciation had been tapering under the previous schedule, down to 60% in 2024 and 40% for the first nineteen days of 2025, and was due to disappear entirely by 2027.
Here is the part that connects the two. Bonus depreciation only reaches property with a recovery period of 20 years or less, so a 39 year building never qualifies for it. The 5, 7 and 15 year components identified in a study do. Reclassify first, and the reclassified amount can then be deducted in full in the year the property goes into service.
What that looks like on a building
Take a $1m depreciable basis, land excluded, on a commercial property. On the default schedule that produces a deduction of about $25,600 a year, every year, for 39 years.
Now assume a study moves 25% of that basis, $250,000, into shorter-life categories, and those components are written off in full under bonus depreciation. The remaining $750,000 carries on over 39 years at roughly $19,200 a year. The first full year with the study lands near $269,000.
The gap is around $243,000 of additional deduction. At a 37% US federal marginal rate that is somewhere near $90,000 of tax, moved out of the early years and into later ones. The figures are illustrative and the real split depends entirely on the building.
Purchase timing widens the gap further. Real property runs on a mid-month convention, so in the year of acquisition the building portion is prorated from the month it goes into service. Bonus depreciation on the reclassified components is not prorated in the same way. Complete in October and the default schedule returns a few thousand dollars that first year, while the study still delivers the whole reclassified amount.
That phrase “moved into later ones” is doing a lot of work. Cost segregation accelerates deductions, it does not manufacture new ones. Every dollar taken early is a dollar unavailable later, and on sale some of the accelerated depreciation is recaptured, part of it at ordinary income rates rather than capital gains rates. The benefit is cash flow and the time value of money, which on a leveraged property in its early years can be considerable. It should still be modelled as a timing benefit, because that is what it is.
The complication for UK owners
This is where a US-side calculation on its own can mislead.
A UK resident with US rental income generally pays US tax on it and then relieves that US tax against their UK liability under the UK/US double taxation treaty. UK tax does not permit depreciation as a deduction at all. Relief for capital spending arrives through capital allowances instead, and the timing bears no resemblance to the US position: structures and buildings allowance runs at 3% a year on a straight line across 33 and a third years, covers non-residential property only, and sits alongside plant and machinery allowances that follow their own separate rules.
So if a study drives US tax close to nil in year one, there may be little US tax left to credit against the UK charge, while the UK computation carries on much as before. The US saving is real. Whether it survives to the bottom of a UK taxpayer’s return depends on how the property is held: individual or company, US LLC and how each side treats it, whether there is a US corporate filer in the chain, and how losses are restricted.
None of that is an argument against a study. It is an argument for running both sides before commissioning one, with an adviser who looks at the US and UK positions together rather than in isolation. Where a US corporate owner is the taxpayer, or US tax is otherwise the binding constraint, the case is usually straightforward. A UK individual holding directly needs to check.
Is it worth looking at?
A few rough tests. The depreciable basis should be meaningful, and providers commonly look for at least $200,000. You should expect to hold for several years, since selling early triggers the recapture before the deferral has had time to be worth much. Buildings with substantial fit-out, specialist services or significant external works have more to find than a bare shell.
If you have owned the property for years, a study is still open to you. A look-back study picks up depreciation that was never claimed and brings the whole catch-up into the current return through a change of accounting method on Form 3115, with no need to amend earlier filings. Properties placed in service as far back as 1987 can be reviewed.
On choosing a provider, the IRS publishes its own Cost Segregation Audit Techniques Guide, the document its examiners work from when reviewing a study. It is long, but the chapter on methodology repays a skim, because it draws a clear line between studies built on engineering analysis of actual costs and those built on rule-of-thumb percentages. Ask which approach a provider uses, whether anyone actually visits the property, and what support you get if the return is examined.
Frequently asked questions
Can a study be done on a property bought several years ago? Yes. A look-back study captures the depreciation that was not claimed and brings it into the current tax year as a single adjustment via Form 3115. Prior returns do not need amending. Properties placed in service since 1987 are generally eligible.
Is cost segregation available to non-US owners? The study analyses the property, not the owner, so the same reclassification applies. Anyone filing a US return that reports depreciation on US property can use the result. The open question is whether the deduction is worth much to you once your home country position is taken into account.
Does a study increase the chance of an IRS examination? A properly evidenced study is a documented position, and the IRS publishes the guide its own examiners use. The risk sits with the quality of the work. Allocations supported by construction records and a physical inspection are straightforward to defend; percentages applied without underlying analysis are the weak point examiners look for.
What does a study cost? Fees vary with the size of the building, its complexity, its renovation history and how complete the cost records are. Most providers quote after a short preliminary review and will indicate the likely benefit before you commit, so the fee can be weighed against the outcome rather than agreed blind.
Does bonus depreciation apply to the building itself? No. It only reaches property with a recovery period of 20 years or less, which rules out the 39 year and 27.5 year building components. Moving qualifying components into shorter classes is what brings them within scope.
Cost segregation has been part of mainstream US tax practice since the late 1990s, so there is nothing exotic about it. What has changed is the size of the first year effect. For any UK business or investor holding US property that has never been looked at properly, that alone makes it worth an hour of someone’s time.