Most commercial property qualifies for cost segregation, but that doesn't mean it's equally beneficial across all types. Hotels are one of the most advantageous candidates for cost segregation studies. A hotel is far more than walls and a roof; it is a fully furnished, hard-working operating business. Every guest room is filled with case goods, soft goods, and decorative finishes. The lobby, restaurant(s), conference centers, and back-of-house are packed with specialty equipment, dedicated electrical and plumbing, and millwork. Outside of the building, there’s paving, landscaping, signage, and sometimes a pool or hot tub area. According to the tax code, a surprising amount of these assets are not considered as the “building”. They are short-life property that can be depreciated much faster than the typical 39-year schedule most owners are defaulted to. The catch? This can only be determined and separated if someone does the engineering to identify it.
When you purchase or construct a commercial building, the IRS default is to depreciate it on a 39-year schedule, which is slow, especially when you could use the cash flow immediately. A cost segregation study is an engineering-based analysis that breaks the purchase price into its real components and then reassigns each component to its correct tax life. Personal property (furniture, fixtures, carpet, specialty lighting, decorative finishes) moves to a 5-year life. Land improvements (parking lots, sidewalks, site utilities, landscaping, pools) move to a 15-year life. Only the true structure stays on the 39-year schedule.
The dollars do not change, meaning you still depreciate the same basis over time, but the timing changes dramatically. Moving deductions forward into the early years of ownership frees up cash exactly when a new hotel needs it most, and the time value of that money is real.
On a typical office building or warehouse, a study might reclassify 20–25% of the basis into short-life categories. Hotels routinely run higher because so much of the asset is functional rather than structural:
A hotel owner acquired a select-service hotel measuring approximately 54,000 square feet for $11.5 million. After removing land and loan costs of $1.15 million, the depreciable basis was $10.35 million. Without a study, the owner would have depreciated all of it over 39 years which equates to about $265,000 of deductions per year.
Veritax Advisors performed an engineering-based cost segregation study: a physical inspection of the property, a component-by-component analysis of the improvements, and classification of each asset under the IRS cost segregation guidelines. Here is how the basis actually broke down.
|
Asset Class |
Recovery Period |
Reclassified Basis |
% of Basis |
|
Personal property (FF&E, finishes, specialty electrical & plumbing) |
5-year |
$2,394,507 |
23.1% |
|
Land improvements (paving, site utilities, landscaping, pool) |
15-year |
$708,897 |
6.9% |
|
Building / structural (long-life real property) |
39-year |
$7,246,596 |
70.0% |
|
Total depreciable basis |
|
$10,350,000 |
100% |
The study reclassified about $3.1 million (roughly 30% of the depreciable basis) out of the 39-year bucket and into 5- and 15-year property. That reclassified $3.1 million is where the real tax savings come from. And thanks to a recent change in federal law, an owner placing a comparable property in service today can deduct all of it in a single year.
Bonus depreciation lets you immediately expense the full cost of assets with a recovery period of 20 years or less, meaning the 5- and 15-year property a cost segregation study identifies. But that benefit hasn't always been this generous — after the Tax Cuts and Jobs Act, it began phasing down, dropping to just 40% for 2025.
The 2025 tax legislation (the One Big Beautiful Bill Act) reversed that. It restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025, and made the provision permanent rather than temporary.
For hotel owners, that means the short-life property a study uncovers can once again be written off entirely in year one. Applied to the case study above, that shift plays out like this:
*Figures are illustrative. Actual bonus percentage depends on the placed-in-service date, and tax savings depend on your marginal rate, entity structure, and ability to use the deductions (including passive activity and real estate professional rules).
A deduction of that size in the first year of ownership can eliminate or sharply reduce taxable income from the hotel, and often from other business or investment income too. That frees up capital to reinvest, pay down debt, or fund the next acquisition. For an owner who is buying, building, or renovating, the timing rarely gets better than the year the asset goes into service.
Cost segregation is worth exploring if you have:
Note that if you bought or built in a prior year and never did a study, you are not too late! A study can typically be applied to property already in service through a catch-up adjustment which allows you to claim the depreciation you should have taken all along, without amending prior returns.
Veritax Advisors provides complimentary, no-obligation benefit estimates for hotel owners. In a short call we can model your property’s likely first-year deduction and tax savings before you commit to anything.
About Veritax Advisors
Veritax Advisors is a specialty tax firm focused on engineering-based cost segregation and R&D tax credit studies. Our studies are built on physical inspection and documented, defensible methodology aligned with the IRS Cost Segregation Audit Technique Guide.
* This article is for general informational purposes only and does not constitute tax, legal, or accounting advice. Every property and taxpayer situation is different; consult a qualified professional before acting. Case study figures are drawn from an actual Veritax study and have been anonymized.