As we move into the second half of 2026, commercial real estate brokers have an opportunity to add significant value to their clients simply by understanding what I call the 20/20 Rule.
The rule isn’t an IRS rule. It’s a practical rule of thumb that can help buyers quickly estimate the potential tax benefits of a cost segregation study. The tax savings is often significant and is material for the new owner. It continues to surprise me that more CRE brokers never bring this up with your clients. Here’s a back of the napkin pitch that will help CRE brokers give their clients an idea on roughly how this might work to their benefit.
Here’s how it works.
The First 20: Land Value
Many commercial properties allocate approximately 20% of the purchase price to land. Every property is different, and buyers should discuss this with their CPA to determine the right land allocation. This is not something we as a cost seg firm determine for you. But for the purposes of this exercise, let’s use 20% because that’s a pretty common allocation.
Let’s assume a buyer purchases a commercial building for $1.2 million.
- Purchase Price: $1,200,000
- Land Allocation (20%): $200,000
- Building Basis: $1,000,000
That leaves approximately $1 million of depreciable basis. This is new basis provided the property was not acquired through a 1031 Exchange. If it was, that will affect the basis and we would need the owner’s CPA to provide us with the carryover basis and new basis in order to make a decent estimate of what a cost segregation study might yield.
The Second 20: Accelerated Depreciation aka 100% Bonus Depreciation
The OBBBA make 100% bonus depreciation permanent in the tax code. There is no longer a phase out or sunset. Every commercial property is going to be different but most will tend to see something like 15-25% of the cost basis eligible for 100% bonus depreciation. 100% bonus depreciation is for assets that are 20 year class life or less. Many of these buildings will have 5-15% that might be 5 year life and 10-15% that might be 15 year life. Again, for the purposes of making this simple, let’s say that 20% of the cost basis can be accelerated – i.e. qualify for 100% bonus depreciation. This can be taken in year one of ownership or whenever the owner ends up applying the cost segregation to his taxes. It’s a one time tax benefit and it’s powerful.
Again, every property is different. Some properties may be closer to 15%. Others may be 25%, 30%, or even higher. However, 20% is a solid number to use when penciling this out.
Using our example:
- Building Basis: $1,000,000
- Bonus Depreciation (20%): $200,000
Potential First-Year Deduction: $200,000
What Happens Without Cost Segregation?
Without a cost segregation study, the buyer depreciates the building over 39 years.
Using the same $1 million building basis, the first-year depreciation deduction for a property acquired midway through the year may be roughly $12,500. At a 35% federal tax rate for example, that’s a tax savings of $4,375. And the depreciation deduction in year one gets less the later in the year you close on a property. Depreciation is pro-rated.
What Happens With Cost Segregation?
The owner gets a deduction of $200,000 in this example and it doesn’t matter if he closed on the property at any date throughout the year. It’s not pro-rated like straight line depreciation. The tax rules allow the owner to take ALL the bonus depreciation that is eligible in year one. In the event it creates a loss because he can’t use it all, then he will just have a loss carryforward and can use that to offset his tax liability next year.
The $200,000 deduction at a 35% tax rate equals a $70,000 income tax savings for the year. That’s 16x greater than the straight line deduction. NOTE: we like to talk tax savings and it is for the year in which you take it, but it’s really a deferral and is why we always recommend owners discuss with their own tax advisors to be sure this is the right move for them. This will impact the recapture tax that will be owed if you sell the building in the future. Of course you could do a 1031 exchange to further defer the tax. Most owner understand the time value of money and would rather have the $70,000 in tax savings today and deal with the taxes at a later date. Those tax savings are free for the owner to use as he sees fit. He could make further investments, renovations, hire someone, buy a truck or just keep it in his bank account. He does not need to reinvest it back into this specific building.
The Opportunity for Commercial Real Estate Brokers
Most buyers and brokers focus on location, cap rates, financing, and cash flow. Very few understand the potential tax benefits available after closing.
That’s where brokers can create additional value and further demonstrate their difference in the marketplace. You don’t need to be a tax expert. Just do a back of the napkin estimate for your buyer and encourage them to get a quote for cost segregation estimate before or shortly after closing. I will often recommend CRE brokers to reach out if you have a buyer who is serious about a property. Let our team run the numbers for you so you have something solid to help in the decision making on the property. Cost segregation will help improve cashflow and ROI.
Remember most studies will often see a 10, 15, 20x return on their investment. For most owners, it’s a no-brainer. As a CRE broker, why not be the one to introduce your buyer to the concept of cost segregation. I would think by saving the owner such a substantial amount on his taxes that he might be more loyal to you and maybe do another deal with you in the future. It’s also key for you to have a trusted resource to get quotes and free consultation about cost segregation and it’s benefits. I’ll give you the straight information without over-promising.
Final Thought for CRE Brokers
The next time you’re selling a commercial property, remember the 20/20 Rule:
- 20% land allocation
- 20% of the building cost basis may be accelerated through cost segregation.
It’s a simple concept, but it can create significant tax savings for buyers and help brokers deliver value long after the transaction closes.
