Many business plans include a milestone where the company stops renting and buys its own building. The plan usually models the down payment, the mortgage payment, insurance and property taxes. Fewer plans model depreciation, even though it is often one of the largest deductions ownership creates and its size depends heavily on how the purchase is analyzed.
That gap matters for the plan’s cash flow. A lease produces a rent deduction every month. A purchase produces no deduction for the price itself, only depreciation over time, and the default schedule for a commercial building is slow.
Before the purchase closes, it is worth asking a cost segregation firm for a no-cost analysis of the property, so the plan uses figures for that building instead of a rule of thumb.
The difference can be large. CSSI Services, a tax firm that has completed more than 65,000 studies, published results for an office condominium acquired in 2025 for $1,179,466, excluding land. A cost segregation study and 100 percent bonus depreciation increased the first-year federal deduction by $652,727 compared with the default straight-line schedule, producing $241,509 of first-year federal tax savings at the 37 percent rate used in that example.
Rent Versus Own: What Changes on the Tax Return
When a business leases, rent is generally deductible as it is paid. When it buys, the price is split between land and building. Land is never depreciated. The building is depreciated over 39 years on a straight-line basis, and under the mid-month convention the first year is prorated by the month the building is placed in service. IRS Publication 946 explains the recovery periods and conventions in detail.
Owning also brings deductions for mortgage interest and property taxes, with the interest subject to limits on business interest that apply mainly to larger companies. The split between land and building deserves attention at closing, because every dollar assigned to land is a dollar that will never be depreciated.
What a Cost Segregation Study Adds
For tax purposes, a building is treated as a single asset unless someone analyzes its parts. Carpet and other removable flooring, electrical work dedicated to equipment, cabinetry, decorative lighting, signage, parking areas, fencing and landscaping often belong in 5-, 7- or 15-year recovery classes. A cost segregation study identifies those components and assigns each a cost and a class. CSSI puts the share of building value that typically moves into shorter lives at 20 to 40 percent, depending on the asset.
Bonus depreciation is what makes the shorter classes valuable. Federal law now allows 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Bonus depreciation reaches only property with a recovery period of 20 years or less, so the 39-year building itself generally does not qualify, but the reclassified components generally do. Property bought under a written binding contract signed before January 20, 2025 is treated as acquired before that date and gets a lower rate.
Improvements After You Move In
Most owners renovate. Interior improvements to a commercial building made after the building was first placed in service are generally qualified improvement property, which is 15-year property and eligible for bonus depreciation. Enlargements, elevators and escalators, and the building’s internal structural framework are excluded.
Section 179 expensing is another option for some of that work. It can apply to qualified improvement property and to new roofs, heating and air-conditioning systems, fire protection and alarm systems, and security systems added after the building was first placed in service. For tax years beginning in 2026, the limit is $2,560,000, reduced dollar for dollar once the cost of qualifying property placed in service that year exceeds $4,090,000. The deduction cannot exceed the taxable income from the active conduct of the business for the year, and the excess carries forward.
Putting Depreciation Into the Plan
- Model the timing. Depreciation starts when the building is placed in service, so a purchase that closes and opens in December produces a very different first-year figure from one that slips into January.
- Show after-tax cash flow. Depreciation is a non-cash expense. It lowers taxable income without lowering operating cash, which is why lenders and investors reading a plan often look at both the pre-tax and after-tax numbers.
- Check the state return. Several states, including California and New York, do not follow federal bonus depreciation, so the state deduction in the first year can be far smaller than the federal one.
- Decide on the ownership structure early. Many owners hold the building in a separate company that leases it to the operating business. The passive activity rules then decide whether a depreciation-driven loss can offset the operating company’s income. In some cases the two can be treated as one activity, for example when each owner holds the same share of both companies, and in others the loss stays passive.
The Caveat: Depreciation Defers Tax
Accelerated depreciation moves deductions earlier. It does not make them larger over the life of the building. When the property is sold, much of the depreciation taken on reclassified components is recaptured at ordinary income rates to the extent of the gain, and depreciation on the building itself is taxed, for individual owners, at a maximum federal income tax rate of 25 percent, plus the 3.8 percent net investment income tax where it applies. A business plan that shows the first-year savings should also show what happens at a sale, or at least assume a holding period long enough for the deferral to pay off.
Frequently Asked Questions
How long does it take to depreciate a commercial building?
A commercial building is generally depreciated over 39 years using the straight-line method, starting in the month it is placed in service. Land is not depreciated. Components identified in a cost segregation study can be depreciated over 5, 7 or 15 years instead.
Can a business use Section 179 on a building it buys?
Not on the building itself. Section 179 can apply to qualified improvement property and to certain improvements made after the building was placed in service, such as roofs, HVAC systems, fire protection and alarm systems and security systems. It can also apply to personal property components identified in a cost segregation study. All of it is subject to the annual limits and the taxable income limit.
Is cost segregation worth it for an owner-occupied building?
It can be, especially for a building acquired after January 19, 2025, when reclassified components can qualify for 100 percent bonus depreciation. The answer depends on the building’s cost, how long the business expects to own it and whether it can use the deductions.
What if the building is owned by a separate LLC?
The company that owns the building claims the depreciation (or, for a single-member LLC disregarded for tax purposes, its owner). If it leases the building to the operating business, the passive activity rules decide whether a loss can offset the business’s income, so the structure is worth settling with a CPA before closing.
What happens when the building is sold?
Much of the depreciation on reclassified components is recaptured at ordinary income rates to the extent of the gain, and depreciation on the building is taxed at up to 25 percent federally for individual owners. The deductions shift tax to later years rather than eliminating it.
This article is general information, not tax advice for any particular business. Talk with your CPA about how these rules apply to you.
