Cost Segregation · Guide · Working level
Cost segregation results by property type: what different buildings actually yield
Typical short-life reclassification runs from roughly 15 percent of basis for a bare warehouse to 40 percent or more for a restaurant or manufacturing plant. What drives the spread — finishes, dedicated equipment, and site work — with component examples for office, multifamily, retail, restaurant, hotel, warehouse, and medical buildings.
Ask what a cost segregation study will find, and the honest answer is: it depends on what the building is. Across the market, studies typically move 15 to 40 percent of depreciable basis out of 39-year (or 27.5-year) treatment and into 5-, 7-, and 15-year classes — but a tilt-up warehouse and a full-service restaurant of identical cost sit at opposite ends of that range. The spread is not marketing noise; it follows directly from what the case law lets a study reclassify: decorative finishes, property serving equipment rather than the building, and land improvements. Buildings rich in those things yield more.
The numbers below are screening tools, not return positions. The IRS's Cost Segregation Audit Techniques Guide explicitly disapproves rule-of-thumb allocations by property type; the percentages tell you whether to commission a study, and the study itself tells you what to claim.
What drives the differences between building types?
Three factors, and they compound:
Finishes. Carpet, vinyl and other non-permanent floor coverings, decorative millwork, accent lighting, movable partitions — 5- or 7-year Section 1245 property under the case law running through Hospital Corporation of America. A building that is mostly drywall and polished concrete has little of this; a hotel lobby is made of it.
Dedicated equipment and the systems serving it. Electrical, plumbing, and mechanical costs allocable to equipment rather than general building operation take the equipment's life. Kitchens, medical suites, laundry rooms, and process floors drag large slices of the MEP (mechanical, electrical, plumbing) budget into 5- and 7-year classes. An office building's MEP mostly serves the building itself and stays at 39 years.
Site work. Parking lots, curbs, sidewalks, exterior lighting, landscaping, fencing, and site utilities are 15-year land improvements (MACRS asset class 00.3 — see Pub 946). Suburban pad sites with big parking fields carry 10–20 percent of cost here; an urban infill tower carries almost none.
Recovery-period mechanics for all of this live in depreciation basics; how the short lives convert into first-year deductions is the bonus depreciation story.
How much moves, by property type?
Directional industry norms for screening only; actual results require a property-specific engineering study, and individual buildings routinely fall outside these figures.
The same ranges, with what sits in each bucket.
| Property type | Typical 5/7-year | Typical 15-year | Combined range | What drives it |
|---|---|---|---|---|
| Warehouse / distribution | 5–10% | 5–12% | 10–20% | Little finish; big paved yards carry the 15-year side |
| Office | 10–18% | 5–10% | 15–28% | Carpet, millwork, data cabling; suburban parking |
| Retail | 12–20% | 8–15% | 20–33% | Display finishes, signage circuits, parking fields |
| Multifamily | 15–22% | 6–12% | 20–32% | Unit appliances and flooring, clubhouse, site amenities |
| Hotel | 18–28% | 5–10% | 25–37% | FF&E-adjacent finishes, kitchen/laundry, pools |
| Medical office | 20–30% | 5–10% | 25–38% | Exam-room plumbing/electrical, imaging support, gases |
| Restaurant | 25–35% | 8–15% | 33–45% | Kitchen equipment systems, grease/vent, patios, drive-through |
Per-type notes and component examples
Office
The archetype middle case. Short-life property is finish-driven: carpet and resilient flooring, decorative and task lighting, demountable partitions, break-room equipment connections, security and data cabling. General HVAC, core restrooms, elevators, and the envelope stay at 39 years. Suburban campuses add meaningful 15-year parking and landscaping; CBD towers do not. A heavily built-out professional suite behaves more like medical; open-plan concrete-and-glass creative space yields less.
Multifamily
The base life is 27.5 years, so the relative acceleration per reclassified dollar is smaller than for commercial property — but multifamily reliably delivers volume: appliances, unit carpet and vinyl, window treatments, and cabinetry-adjacent items at 5 years, plus clubhouses, pools, dog parks, carports, and extensive site utilities at 15. Garden-style communities with big footprints out-yield mid-rise product on the 15-year side. (A dedicated brief covers multifamily specifics.)
Retail
In-line and strip retail runs on tenant-facing finish — storefront display lighting, decorative ceilings, specialty flooring — plus signage and its dedicated circuits, and generous parking. Anchored centers vary tenant by tenant; a vanilla shell yields little until the build-out, at which point qualified improvement property analysis matters as much as classic reclassification.
Restaurant
The perennial chart-topper. Kitchen equipment and its dedicated gas, electrical, plumbing, and ventilation; walk-in coolers; grease interceptors serving equipment; decorative interiors that are substantially trade dress; patios, drive-through lanes, menu-board infrastructure, and parking. Fast-food pads routinely see combined short-life percentages north of 40 percent of improvement basis.
Hotel
Dense decorative finish across lobbies, corridors, and guest rooms; commercial kitchens and laundries with their supporting systems; pools and extensive hardscape at 15 years. Note the boundary: much hotel property is already furniture and equipment on the books (beds, case goods) and never needed a study — the study's yield is the finish and systems layer within the building cost.
Warehouse and distribution
The floor of the range, and the best illustration of neutrality: on a bare-shell distribution box, 5/7-year property can run under 10 percent, and the study may not clear its hurdle — the fact pattern examined in when cost segregation doesn't make sense. Exceptions worth checking: heavy dock packages, racking-related electrical, refrigerated or freezer space (dedicated systems), and very large truck courts and trailer parking that swell the 15-year class.
Medical and dental
Exam-room sinks and dedicated plumbing, medical gas systems, radiology support (shielding is fact-specific), sterilization equipment connections, and above-average electrical density push medical office toward the top of the range. Surgery centers and dialysis facilities go higher still. The classification questions here are use-driven — the same duct or circuit is 39-year if it serves the building and short-life if it serves equipment — which is why site inspection matters more for medical than for most types.
Using the ranges without abusing them
Three legitimate uses. Screening: multiply a rough short-life percentage by improvement basis and by the bonus rate to estimate first-year benefit, and decide whether a study fee is proportionate. Sanity-checking: a delivered report claiming 45 percent short-life on a suburban office building is an outlier that needs an explanation — outliers happen (heavy special-purpose build-out, unusual site costs), but the report should say why. Sequencing: in a portfolio, study the restaurants and hotels first, the shell warehouses last or never.
The illegitimate use is the one the ATG names: filing on the percentage itself. Typical is not a methodology. The building either has the components or it does not, and only an engineering-based study — with inspection, cost sourcing, and per-component authority — turns a screening estimate into a defensible return position.
Frequently asked questions
- What percentage of a building can cost segregation reclassify?
- Typically 15 to 40 percent of depreciable basis moves from 39-year (or 27.5-year) treatment into 5-, 7-, and 15-year classes, depending heavily on property type. Simple warehouses sit near the bottom of that range; restaurants, hotels, medical facilities, and manufacturing plants sit near the top because of dense finishes, dedicated equipment, and heavy site work. These are norms, not entitlements — actual results come from the study.
- Which property types benefit most from cost segregation?
- Restaurants, hotels, medical and dental facilities, manufacturing plants, and amenity-rich multifamily projects typically see the largest reclassification percentages — often 25 to 40 percent or more of basis — because a large share of their cost is decorative finishes, process or business-specific equipment and the electrical and plumbing serving it, and extensive land improvements like parking and landscaping.
- Why do warehouses see low cost segregation results?
- A distribution warehouse is mostly shell: slab, structural steel, roof, and lighting serving the building generally — all 39-year real property. Short-life property is limited to items like dock equipment, racking-related electrical, and office build-out, so 5- and 7-year property may be under 10 percent of basis. Large paved yards can push 15-year land improvements up, which is often the study's main finding.
- Do these percentages apply to my building automatically?
- No. The IRS Cost Segregation Audit Techniques Guide expressly criticizes rule-of-thumb allocations based on property-type averages. Typical ranges are useful for screening whether a study is worth commissioning, but the return position must rest on a property-specific engineering analysis that traces actual components and costs, not an industry percentage applied to basis.
- Does land value affect cost segregation results?
- Yes, before the study even starts. Land is not depreciable, so basis must first be allocated between land and improvements — commonly using the assessor's ratio or an appraisal. The reclassification percentages discussed for property types apply to the depreciable improvement basis only. Overstating the improvement share inflates every class and is one of the first things an examiner checks.