Cost Segregation for Office Buildings

Office is the baseline commercial asset, and its cost segregation profile is correspondingly steady: Engineered Tax Services reports 20% to 40% typical acceleration. The reliable movers are finishes (carpet and resilient flooring, decorative lighting, millwork and reception builds), the low-voltage layer (data cabling, security, access control, AV in conference rooms), dedicated power serving server rooms and kitchen areas, and the site (surface parking, lighting, landscaping, monument signage).

What makes office distinctive is not the component list but the churn. Multi-tenant buildings rebuild suites on every lease cycle, which means a steady stream of tenant improvement spending, each round producing Qualified Improvement Property at 15 years with bonus eligibility, plus a partial disposition write-off of the demolished prior build-out when a study has documented it. Over a decade of normal leasing, that recurring engine frequently out-earns the original Year 1 acceleration.

Two structural notes before the details: structured parking garages are 39-year buildings (surface lots are the 15-year asset), and in a soft office market, defensible purchase-price and land allocations deserve extra care because assessors and appraisals are moving.

When a tenant leaves and the suite is rebuilt, two deductions are available. The new interior work is generally Qualified Improvement Property (interior improvements to a nonresidential building placed in service after the building itself, excluding enlargement, elevators, and structural framework), which carries a 15-year life and bonus eligibility. And the prior build-out being demolished still has basis on your schedule; a partial disposition election under Treasury Regulation 1.168(i)-8 deducts that remaining basis in the demolition year, if component records exist to compute it.

Who captures which side follows the lease economics: improvements the landlord funds and owns sit on the landlord's schedule, tenant-funded improvements the tenant owns sit on the tenant's, and allowance structures decide the boundary. Getting the allowance language right at lease signing (including Section 110 treatment for qualifying short-term retail leases) is a five-minute conversation that determines decades of depreciation ownership.

• Section 179D: lighting, HVAC, and envelope upgrades meeting the energy standards support a per-square-foot deduction that stacks on top of depreciation; office retrofits are the classic use case.
• Owner-user businesses (law firms, medical groups, agencies buying their building) usually hold the real estate in a separate LLC; the self-rental and grouping analysis under Section 469 decides whether the study's loss reaches the operating income.
• Landlord-investors face the standard passive gates: REPS, passive income, or a gain year to absorb the loss.
• 1031 exchanges on disposition, with the study's recapture profile modeled into the exchange math.
• Look-back studies for long-held buildings: Form 3115 captures the missed acceleration in one year, and office buildings with decades of lumped TI history are prime candidates.
• Clean capital-versus-repair books, suite by suite, which our bookkeeping engagements maintain so every turn's two-sided deduction is computable.

We coordinate the engineering through Engineered Tax Services, scoped to capture suite-level detail that future dispositions will rely on. Taxstra implements the schedules, runs the QIP and disposition events each lease cycle, files Form 3115 look-backs where history warrants, and coordinates 179D certifications when you retrofit.

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