Assisted living facilities sit at the intersection of operating business and real estate ownership. The real estate side typically gets treated like generic commercial property — straight-line 39-year depreciation — when in reality a meaningful portion of the building qualifies for much shorter recovery periods. A cost segregation study is one of the highest-leverage tax moves available to facility owners, and most operators never do one.
- Cost segregation reclassifies portions of a building from 39-year property into 5-, 7-, or 15-year property — accelerating depreciation dramatically.
- For an assisted living facility, typical cost seg captures 20–35% of the building basis as accelerated property.
- Bonus depreciation (§ 168(k)) means a portion of those reclassified assets can be deducted immediately in year one.
- Cost seg works both on newly acquired facilities AND retroactively on facilities already owned — through a § 481(a) adjustment.
- Recapture rules apply if the facility is later sold — the analysis should account for the eventual exit.
What cost segregation actually does
Standard commercial real estate (including assisted living facilities) is depreciated straight-line over 39 years. A cost segregation study is performed by engineers who break the building into its components — wiring dedicated to specific equipment, decorative finishes, removable partitions, specialized lighting, land improvements — and reclassifies them into shorter recovery periods (5-year, 7-year, 15-year).
The result: significantly more depreciation in the early years of ownership, when the cash deduction is most valuable.
What typically reclassifies in an assisted living facility
5-year property: removable partitions, specialized care equipment, decorative lighting, kitchen equipment used in the dining program, and specialized HVAC for memory care units.
15-year property (qualified improvement property): interior improvements made after the building was placed in service, landscaping, sidewalks, fencing, and parking lot improvements.
For a typical Bay Area assisted living facility, a properly performed study captures 20-35% of the building basis into these accelerated categories.
Bonus depreciation makes this dramatic
Under IRC § 168(k), bonus depreciation allows immediate first-year deduction of a portion of qualifying assets. For 2024, the rate is 60%; it phases down 20% per year unless Congress extends. For a facility owner doing cost segregation in 2024, the combination of cost seg reclassification PLUS bonus depreciation can produce a six- or seven-figure first-year deduction.
Retroactive cost seg via § 481(a)
If a facility was acquired years ago without a cost segregation study, it is not too late. A study can be performed in any open tax year, and the catch-up depreciation is captured in a single year through a § 481(a) adjustment filed with Form 3115. This often produces a large one-time deduction in the year of the study.
The recapture trade-off
Accelerated depreciation increases recapture exposure if the facility is later sold. Depreciation taken on personal property (5-year, 7-year) is recaptured as ordinary income; § 1250 property recapture follows different rules. The economic benefit of accelerated deduction usually still exceeds the recapture cost — but the math should be modeled, especially for owners who anticipate selling within a few years.
Frequently Asked Questions
What does a cost segregation study cost?
Typical studies run $5,000 to $15,000 depending on facility size and complexity. The cost is usually recovered many times over by the tax savings in the first year alone. For larger facilities, the ROI on a study can be 10x or more.
Does cost segregation work for leased facilities?
For leased facilities, cost segregation can be applied to tenant improvements and leasehold improvements the operator paid for. The benefit is typically smaller than for owned facilities but still meaningful for facilities with significant build-out.
What if I bought the facility years ago?
Cost segregation can be applied retroactively through a § 481(a) adjustment filed with Form 3115. The catch-up depreciation is captured in a single year, often producing a large one-time deduction. No amended returns needed.
How much can I actually save?
For a $5M facility, cost segregation typically reclassifies $1M to $1.75M into accelerated property. With current bonus depreciation rates (60% in 2024), the first-year deduction can be $600K to $1M+ in addition to standard depreciation.
What happens if I sell the facility later?
Depreciation taken on reclassified personal property (5-year, 7-year) is recaptured as ordinary income on sale. § 1250 property follows different rules. The economic benefit of accelerated deduction usually still exceeds the recapture cost, but the trade-off should be modeled for owners expecting to sell within a few years.
Considering cost segregation for your facility?
A complimentary 30-minute consultation to review your facility, run preliminary numbers, and determine whether a study would pencil out.
Active member of the AICPA and CalCPA. Tax strategy and advisory for Bay Area business owners, real estate investors, and high-net-worth families.
This article is for general information and does not constitute tax, legal, or investment advice. Individual situations vary; please consult a CPA before making tax elections. Milestone CPAs is licensed in California and serves clients across the Bay Area and Tri-Valley.
