# Cost segregation for office buildings

What a study examines in an office building: tenant improvements, electrical, data rooms, parking, site work and turnover write-offs, and the evidence needed.

## Short answer

An office building is nonresidential real property with a 39-year recovery period, and compared with a hotel or a restaurant it holds relatively little equipment. Walls, partitions, ceilings, doors, general lighting and power, central HVAC, elevators, restrooms and fire protection are structural components that stay with the building. A study still matters, for three reasons. First, the site work, such as surface parking, drives, sidewalks, lighting, drainage and landscaping, is generally 15-year property. Second, an office building is continually rebuilt from the inside: tenant improvements made after the building was first placed in service may be 15-year qualified improvement property. Third, those improvements are torn out and replaced at each tenant turnover, and a detailed asset list is what lets the owner write off the removed portions. Smaller items, such as dedicated circuits for equipment, supplemental cooling for data rooms, furniture in common areas and security or access equipment, need item-by-item analysis. This article covers office building cost segregation for owners and advisers. It is general education, not tax advice.

## What a study examines in an office building

| Component group | Typical treatment to examine | Examples |
|---|---|---|
| Land | Not depreciable | The site |
| Base building | 39-year nonresidential real property | Structure, roof, curtain wall, lobbies, cores, elevators, general electrical and lighting, central HVAC, restrooms, fire protection |
| Site improvements | Generally 15-year land improvements | Surface parking, drives, curbs, sidewalks, site lighting, storm drainage, landscaping, monument sign foundations |
| Parking structures | 39-year under the IRS position | Stand-alone and attached parking garages |
| Tenant improvements after the building was placed in service | May be 15-year qualified improvement property | Suite build-outs, interior partitions, ceilings, finishes, interior lighting and distribution |
| Equipment and furnishings | 5- or 7-year on asset class | Common-area and lobby furniture (00.11), computers and building-management workstations (00.12), equipment-specific connections |

The rows show where questions usually land, not answers for a particular building. Every classification should be explained in the report.

## Base building versus tenant improvements

The most important line in an office building study is often not between building and equipment but between the original building and later interior work.

Qualified improvement property is an improvement made by the taxpayer to an interior portion of a nonresidential building, placed in service after the date the building was first placed in service. It excludes costs for an enlargement, for elevators or escalators, and for the internal structural framework. It is 15-year property and qualified property for bonus depreciation, which applies at 100 percent for qualified property acquired after January 19, 2025. It may also be eligible for section 179 expensing, along with later roofs, HVAC, fire protection and alarm systems, and security systems, though a noncorporate lessor generally cannot use section 179 for property it leases to others.

Three practical points follow:

- **Who made the improvement.** The definition turns on improvements made by the taxpayer. For an acquired building with existing build-outs, the adviser must decide whether those improvements qualify for the buyer; a study should not assume it.
- **Who paid.** A landlord depreciates improvements it funded, including through a tenant allowance; a tenant depreciates improvements it paid for itself. Lease terms and work letters decide this.
- **When.** Each build-out has its own placed-in-service date.

## Turnover and dispositions

Office tenants come and go, and each turnover usually removes some interior work. A landlord's improvements made for a tenant and abandoned at lease end are treated as disposed of at that time. For other components, the partial disposition election lets an owner treat the retirement of a portion of an asset as a disposition; the regulation's own examples include replacing an elevator in an office building. Without the election, the retired cost generally keeps depreciating inside the building. Both outcomes require knowing what the removed items cost, which is the reason to build a detailed asset list at acquisition and to keep it current.

## Electrical, data rooms and parking

- **Electrical.** The IRS guide describes a functional allocation: hook-ups and branch circuits serving lighting, general outlets, HVAC and other building services stay with the building, while circuits supplying dedicated equipment used in the business may be treated differently. Office buildings have few such circuits; a study that reclassifies much of the electrical system should show its allocation.
- **Data rooms and supplemental cooling.** Central HVAC is a structural component. Supplemental cooling installed solely to meet temperature or humidity requirements essential for operating equipment, such as a server room, may fall under the regulation's sole-justification exception; cooling that also serves people or general space does not. The facts and the installation documents decide.
- **Parking structures.** The IRS guide sets out the IRS position that stand-alone open-air parking structures are buildings with a 39-year life, citing the regulation's definition of a building as including structures that provide parking space. Surface parking is generally a land improvement. A study that treats a parking garage as 15-year property is taking a position the IRS disputes and should say so.
- **Lessor classification.** For a landlord, the asset class of leased property is determined as if the tenant owned it, which can matter for equipment in specialized tenant space.

## Acquired buildings versus new construction

The study works differently depending on how the owner came to hold the building.

- **New construction.** The practitioner works from the owner's actual costs: the contract, schedules of values, pay applications and change orders, with indirect costs such as design, permits and general conditions allocated across components by a stated method. Interior work placed in service at the same time as the building is not qualified improvement property, because qualified improvement property must be placed in service after the building was first placed in service. First-generation tenant work completed later raises a timing question for the adviser.
- **Acquisition.** There are no construction invoices for the buyer, so the practitioner allocates the purchase price, after separating the land, using measured quantities, documented unit costs and a reconciliation to the total basis. Existing suites, parking, site work and equipment are all identified at this stage, and the asset list becomes the record that later turnovers draw on.
- **Repositioning.** An owner who buys and then substantially renovates has both events to record, with separate dates and classes, and dispositions of what the renovation removed.


- **Closing statement and land support** for an acquired building.
- **Base-building and tenant-improvement construction records:** schedules of values, pay applications, change orders and subcontractor invoices by trade.
- **Leases, work letters and allowance records**, to establish who paid for each improvement and what happens at lease end.
- **Drawings and stacking plans** showing tenant suites, their build-out dates and later demolitions.
- **Prior depreciation schedules**, including tenant improvements already on the books, to avoid double-counting.
- **A site visit**, including vacant suites, mechanical rooms, the roof and the parking areas.

## Common pitfalls

- **Treating tenant improvements in an acquired building as qualified improvement property** without addressing who made them.
- **Double-counting** build-outs already on the seller's or the owner's schedule.
- **Reclassifying office electrical and HVAC broadly** without a functional allocation or sole-justification analysis.
- **Classifying a parking garage as a land improvement** without disclosing the IRS position.
- **Lumping the base building into one line**, which makes later dispositions hard to compute.
- **Applying a percentage from another office building.** The IRS guide tells examiners to view rule-of-thumb approaches with caution.

## How the study fits with your tax adviser's work

The study classifies and supports. Your tax adviser decides how to use it: whether to take bonus depreciation or elect out by class, whether section 179 is available and worthwhile, how a look-back study is filed through a change in accounting method, how passive activity rules affect a landlord's losses, and how dispositions are reported at each turnover. Office buildings are often held through partnerships, and the results flow to partners who face the rules on their own returns. At sale, gain on section 1245 property is recaptured as ordinary income to the extent of depreciation allowed or allowable, and unrecaptured section 1250 gain is taxed at up to 25 percent. State conformity to federal bonus depreciation varies; ask.

## Questions to ask a practitioner

1. How will you separate the base building from tenant improvements, and how will you date each build-out?
2. How will you decide whether existing improvements in an acquired building are qualified improvement property?
3. How will you treat landlord-funded and tenant-funded work?
4. How will you allocate the electrical system and analyze supplemental cooling?
5. How do you treat parking structures, and will the report disclose the IRS position?
6. Will the asset list be detailed enough to support dispositions at each turnover?
7. Who signs the report, and will you support it on examination?

## Questions people also ask

### Is an office building 39-year property?

Yes, as nonresidential real property. Site work, qualifying interior improvements and equipment a study identifies may have shorter lives.

### Are tenant improvements 15-year property?

Interior improvements made by the taxpayer after the building was first placed in service may be qualified improvement property, which is 15-year property, unless they are enlargements, elevators or escalators, or structural framework.

### Is a parking garage 15-year property?

The IRS position is that parking structures are buildings with a 39-year life. Surface parking lots are generally land improvements.

### What happens to old tenant improvements when a tenant leaves?

A landlord's improvements made for a tenant and abandoned at lease end are treated as disposed of then. Other retired components may be written off through the partial disposition election.

### Is a study worth it for an older office building?

It depends on the facts: the remaining basis, the site work, the history of tenant improvements, the owner's tax position and the holding plan. Office building depreciation is one input; your adviser weighs the rest.

## Sources

- https://www.irs.gov/publications/p946 — IRS Publication 946 (2025), How To Depreciate Property: Chapters 2 and 4; Appendix B, asset classes 00.11, 00.12 and 00.3.
- https://www.law.cornell.edu/cfr/text/26/1.48-1 — 26 C.F.R. §1.48-1(e), building and structural components.
- https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapters 3, 4, 6.C, 8.A and 8.B.
- https://www.law.cornell.edu/uscode/text/26/168 — 26 U.S.C. §168(e)(3)(E)(vii), (e)(6) and (i)(8).
- https://www.law.cornell.edu/uscode/text/26/179 — 26 U.S.C. §179(e), qualified real property.
- https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill — IR-2026-06 (January 14, 2026), bonus depreciation guidance.
- https://www.law.cornell.edu/cfr/text/26/1.168%28i%29-8 — 26 C.F.R. §1.168(i)-8, partial disposition election and examples.
- https://www.irs.gov/publications/p544 — IRS Publication 544 (2025), Sales and Other Dispositions of Assets: Chapters 3 and 4.

## Related reading

- [What a cost segregation study does](/articles/what-a-cost-segregation-study-does)
- [Qualified improvement property and cost segregation](/articles/qualified-improvement-property)
- [Cost segregation after a renovation: improvements and partial dispositions](/articles/renovations-improvements-and-partial-dispositions)
- [Cost segregation study cost: what drives the fee](/articles/cost-segregation-study-cost)
- [How to hire a cost segregation practitioner](/articles/how-to-hire-a-cost-segregation-practitioner)

To find a practitioner, search the [NBCSS directory](/directory) or browse [cost segregation specialists by state](/cost-segregation-specialists).

---
Canonical: https://nbcss.org/articles/cost-segregation-office-buildings
Published: 2026-10-01 · Last content change: 2026-10-01
Not professional advice: general educational information from the National Board of Cost Segregation Specialist (NBCSS); not accounting, tax, legal, financial, investment or engineering advice. Verify with a licensed CPA, enrolled agent, attorney or other qualified adviser before acting.