Cost Segregation Glossary

Definitions in plain language, written for owners rather than specialists. Terms link to fuller explanations where available. Definitions are general and simplified. Verify details with a professional.

A to C

Adjusted basis

Your cost in a property, adjusted for items such as depreciation taken and improvements. Gain on sale is measured against it. See Depreciation Recapture on Sale: What Comes Back.

At-risk rules

Limits on deducting losses beyond the amount you have at risk in an activity. See At-Risk and Excess Business Loss Limits.

Bonus depreciation

A rule that allows a percentage of the cost of qualifying property to be deducted in the first year. See Bonus Depreciation: Rules as Currently Understood (Verify).

Boot

Cash or non-like-kind property received in an exchange, which may be taxable. See Section 1031 Exchanges and Depreciation Recapture.

Catch-up adjustment

The amount recognized in the year of an accounting method change to account for depreciation not previously claimed. See The Section 481(a) Adjustment Explained Simply.

Cost basis

What you paid for or spent on a property, including certain closing costs. It is the starting point for depreciation.

Cost segregation study

An analysis that separates a property's cost into components with different recovery periods. See What a Cost Segregation Study Actually Does.

D to L

Declining balance

A depreciation method that deducts a percentage of the remaining basis each year, front-loading deductions.

Depreciable basis

The portion of your cost that can be depreciated, generally excluding land. See Land Versus Building Allocation and Why It Comes First.

Depreciation recapture

Gain on sale attributable to depreciation that may be taxed differently from ordinary capital gain. See Depreciation Recapture on Sale: What Comes Back.

Disposition

A sale, exchange, abandonment, or other event ending your interest in an asset or part of one. See Partial Dispositions, Replaced Components, and Studies.

Engineering-based study

A study that generally includes site inspection and detailed cost analysis by qualified personnel. See Engineering-Based Versus Software-Only Studies.

Excess business loss

A limit on the net business losses an individual can deduct against nonbusiness income in a year. See At-Risk and Excess Business Loss Limits.

Form 3115

The form used to request a change in accounting method, including many depreciation method changes. See Catch-Up Depreciation With Form 3115.

Form 4562

The tax form used to report depreciation and amortization. See Form 4562 and Reporting Basics After a Study.

Land improvement

An improvement to land other than a building, such as paving or fencing, generally with a 15 year life. See Land Improvements and the 15 Year Class.

Like-kind exchange

An exchange of real property that can defer gain under Section 1031 when requirements are met. See Section 1031 Exchanges and Depreciation Recapture.

M to R

MACRS

The Modified Accelerated Cost Recovery System, the framework for assigning recovery periods and methods. See Depreciation Classes: 5, 7, 15, 27.5, and 39 Years.

Material participation

Involvement in an activity that meets one of several regulatory tests, deciding whether it is passive for you. See Material Participation Tests in Plain Language.

Mid-month convention

A rule treating real property as placed in service in the middle of the month for the first-year computation.

Net investment income tax

An additional tax that may apply to certain investment income for higher-income taxpayers. See Net Investment Income Tax and Depreciation.

Nonresidential real property

Buildings generally not qualifying as residential rental property, depreciated over 39 years. See Nonresidential Property and the 39 Year Class.

Passive activity

An activity in which you do not materially participate, or a rental activity with exceptions. See The Passive Activity Loss Rules and Cost Segregation.

Personal property (for tax)

Tangible items that are not part of the building structure, commonly 5 or 7 year property. See Examples of 5 and 7 Year Property in Rentals and Commercial Buildings.

Placed in service

The date property is ready and available for its intended use. See Year of Acquisition: Why Timing Matters for a Study.

Qualified improvement property

Certain interior improvements to nonresidential buildings, generally with a 15 year life.

Real estate professional

An individual meeting the time tests in Section 469(c)(7). See Real Estate Professional Status and Study Decisions.

Recovery period

The number of years over which an asset is depreciated.

Residential rental property

A building where at least 80 percent of gross rent is from dwelling units, generally 27.5 years. See Residential Rental Property and the 27.5 Year Class.

S to Z

Section 179

An election to expense certain property up to limits. See Section 179 Versus Bonus Depreciation for the Study Decision.

Section 481(a)

The tax code section requiring an adjustment when an accounting method changes. See The Section 481(a) Adjustment Explained Simply.

Section 1245 property

Depreciable personal property, where gain on sale up to depreciation taken is generally ordinary income. See Depreciation Recapture on Sale: What Comes Back.

Section 1250 property

Depreciable real property such as buildings. See Unrecaptured Section 1250 Gain in Plain Terms.

Short-term rental

A rental with a short average customer stay. Tax treatment depends on the average stay and participation. See The Short-Term Rental Rules Explained Carefully.

Straight line

A depreciation method deducting equal amounts each year.

Suspended loss

A loss disallowed in the current year and carried forward. See Suspended Losses and Carryforwards.

Unrecaptured Section 1250 gain

Gain on real property attributable to depreciation, taxed at a special maximum rate. See Unrecaptured Section 1250 Gain in Plain Terms.