Can You Claim Both 179D and Cost Segregation? (Yes, Here's How)
- Greg Pacioli
- Dec 10, 2025
- 7 min read
I constantly meet CRE investors who've spent a fortune on energy efficient HVAC systems, LED lighting upgrades, and windows (all the good stuff) and then they leave tens of thousands of dollars in tax deductions sitting on the table.
Why? Because they don't realize that two of the most powerful tax strategies available to commercial property owners can actually work together.
I'm talking about Section 179D, the Energy-Efficient Commercial Building Property (EECBP) tax deduction and cost segregation studies.
Most people think it's an either/or situation. Or worse, they worry that claiming both might get them in trouble with the IRS for "double dipping."
Truth is... when you understand how these strategies complement each other, you can legally take more deductions without any compliance issues.
So let's walk you through exactly how these two strategies pair together... what works, what doesn't, and how to make sure you're capturing every government energy incentives you're entitled to.
Understanding Each Strategy's Focus
Cost Segregation: Accelerating Depreciation Across Your Building
Cost segregation is a comprehensive tax strategy that reclassifies building components to shorter depreciation periods. A qualified cost segregation study examines your entire property (from electrical systems and HVAC to flooring and landscaping) identifying which components can be depreciated faster.
The goal is to accelerate depreciation deductions into earlier tax years, improving cash flow and reducing current tax liability. For a $2 million commercial building, a cost segregation study might identify $400,000 to $800,000 in assets that can be reclassified to shorter recovery periods.
179D: Targeting Energy Efficient Building Systems
The 179D deduction rewards building owners who install energy efficient systems. HVAC, interior lighting, and the building envelope (roof, walls, windows, doors, foundation). To qualify, your building must achieve energy cost reductions of at least 25% compared to ASHRAE standards, with the per square foot deduction increasing based on Prevailing Wage and Apprenticeship (PWA) requirements.
Energy Savings | Base (No PWA) | With PWA |
|---|---|---|
25% | $0.58/sf | $2.90/sf |
50% (Max) | $1.16/sf | $5.81/sf |
Unlike cost segregation, which is focused more on timing, 179D provides an immediate deduction for qualifying energy improvements, and this deduction is taken in addition to normal depreciation. Worth noting, the OBBBA is sunsetting the 179D deduction and construction must begin by June 30, 2026.
Why These Strategies Complement Each Other
Cost segregation and 179D work in harmony because they address different aspects of your investment property:
Different Asset Categories
Cost segregation targets personal property throughout your building, everything from carpeting and cabinetry to patios and decorative features.
The 179D deduction specifically covers qualifying energy-efficient HVAC, lighting, and systems.
While there's some overlap in the systems examined (ie. both look at HVAC and lighting), they're approaching these systems from different angles.
Cost segregation identifies which components depreciate over shorter periods, while 179D provides an upfront deduction for systems meeting efficiency thresholds.
Different Timing Benefits
Cost segregation accelerates depreciation deductions over time, particularly powerful when combined with bonus depreciation (which allows you to deduct a percentage of qualifying assets in year one). The 179D deduction provides an immediate deduction based on your building's square footage and energy performance.
This means you can potentially claim the 179D deduction for qualifying efficient systems, as well as accelerate depreciation on those same systems (and other building components) through cost segregation.
Avoiding the Double Dipping
Here's where many building owners get confused...
Can you really claim both deductions on the same systems? The answer is yes, but you need to adjust your basis correctly to avoid double dipping.
The Basis Adjustment Rule
When you claim the 179D deduction, you must reduce the depreciable basis of your building by the amount of the deduction claimed. This is crucial for IRS compliance.
Here's how it works in practice:
Let's say you own a 20,000 sq.ft. building and qualify for the 179D deduction of $5.00 per square foot on energy improvements. That's a $100,000 deduction!
But wait... now you must reduce your building's depreciable basis by that same $100,000.
Cost segregation then works with this adjusted basis. A qualified cost seg specialist can identify which components can be reclassified to shorter depreciation periods based on the reduced depreciable basis after the 179D deduction.
Documentation Is Critical
Both strategies require thorough documentation. Your 179D certification must come from a qualified professional, and your cost segregation study must follow IRS guidelines with detailed engineering analysis. When combining strategies, ensure your cost segregation study specifically accounts for the basis reduction from any 179D deductions claimed.
The Comprehensive Strategy
Smart CRE investors and their tax advisors coordinate all these steps from the start...
Step 1: Conduct an Energy Efficiency Analysis
Before your building is placed in service (or during a renovation project), have a qualified professional assess whether your building systems meet 179D requirements. This analysis determines your potential per square foot deduction and identifies which systems qualify.
Step 2: Claim Your 179D Deduction
If your building qualifies, claim the 179D deduction in the year the building is placed in service. Remember to obtain the required certification from a qualified individual, an engineer or contractor who meets IRS standards and isn't related to you.
Step 3: Reduce Your Depreciable Basis
Subtract the 179D deduction amount from your building's total basis before conducting your cost segregation study. This adjusted basis becomes your starting point for the cost segregation analysis.
Step 4: Conduct Your Cost Segregation Study
With the adjusted basis established, commission a cost segregation study to identify which components throughout your building can be reclassified to shorter depreciation periods. The study should specifically reference the 179D basis adjustment in its analysis.
Step 5: Apply Bonus Depreciation (If Applicable)
For qualifying assets identified in your cost segregation study, you may be eligible for bonus depreciation, which allows you to deduct a significant percentage of those assets in the first year. As of 2025, 100% bonus depreciation is back, which provides valuable acceleration of deductions.
Real-World Example: Combining Strategies
Consider a medical office building with these characteristics:
25,000 square feet
Total construction cost: $5 million
Qualifies for 179D deduction: $125,000 (25,000 sq ft × $5.00)
Cost segregation identifies $1.8 million in shorter-life assets
Without Coordination:
You might claim depreciation on the full $5 million basis, potentially overstating deductions and creating IRS compliance issues if you also claim 179D.
With Proper Coordination:
Year 1: Claim $125,000 179D deduction
Reduce building basis to $4,875,000
Cost segregation reclassifies $1.8 million to 5, 7, and 15-year property
Apply bonus depreciation to qualifying assets
Result: Optimal 1st-year deductions while staying IRS compliant.
When This Combined Strategy Makes Sense
The 179D and cost segregation pairing delivers the most value when:
You're constructing or substantially renovating commercial buildings
Your building includes significant energy-efficient systems
You have sufficient taxable income to absorb accelerated deductions
You're planning to hold the property long enough to benefit from the accelerated depreciation
Your building is at least 10,000 square feet (making 179D deductions meaningful)
Buildings well suited for this combined approach include medical facilities, office buildings, retail centers, warehouses, and multifamily properties with four or more units.
Common 179D Mistakes to Avoid
✖️ Claiming 179D Without Proper Certification
The IRS requires certification from a qualified individual who meets specific independence requirements. DIY certifications or those from related parties won't hold up under audit.
✖️ Failing to Adjust Basis
This is the most common error. You must reduce your depreciable basis by the 179D deduction amount, or you're effectively deducting the same dollars twice, a clear red flag for the IRS.
✖️ Conducting Cost Segregation Without Considering 179D
If your building potentially qualifies for 179D, evaluate this before commissioning a cost segregation study. The basis adjustment affects the entire analysis, and retrofitting these strategies after the fact is more complicated and potentially less valuable.
✖️ Assuming All Buildings Qualify for 179D
Not every eco-friendly building meets 179D requirements. The systems must achieve specific energy cost reduction percentages compared to ASHRAE standards, and certification is mandatory. Don't assume qualification, verify it.
Moving Forward in 2026
Adding more complexity to your tax strategy might feel like the last thing you want to deal with. But if you own a commercial building with energy-efficient systems and you're not exploring both 179D and cost segregation together, you're probably overpaying your taxes.
The beautiful thing about this is that Congress intended to reward property owners who invest in energy efficiency.
However, coordination matters, you can't just bolt these strategies together after the fact and hope for the best. You need professionals who know how to make them work together.
If you're sitting on a commercial property right now thinking, "Wait, could this work for me?" the answer is probably yes.
Get after it. These strategies together will put tax savings back into your business, where they belong.
Frequently Asked Questions
Can I claim 179D on a building I purchased rather than constructed?
Yes, building owners (not just developers or designers) can claim 179D for qualifying systems installed in buildings they own, whether through new construction, purchase, or renovation.
How long do I have to conduct a cost segregation study after acquiring property?
You can conduct a cost segregation study any time after the property is placed in service. For properties held for several years, a "look-back" study can identify missed depreciation deductions through an amended return or Form 3115.
Does the 179D deduction apply to residential rental properties?
The 179D deduction applies to commercial buildings, which includes multifamily residential buildings with four or more units. Single-family homes and duplexes don't qualify.
What happens if I later renovate a building where I claimed 179D?
Additional renovations that improve energy efficiency may qualify for additional 179D deductions, subject to the per-square-foot limits and energy efficiency requirements in effect when the renovation is completed.
Do I need separate professionals for 179D certification and cost segregation?
Yes, typically. 179D requires certification from a qualified engineer or contractor meeting specific IRS independence requirements. Cost segregation studies are conducted by specialists who may be engineers, but the qualifications and deliverables differ. Many firms offer both services and can coordinate them effectively.
Is section 179 and 179D the same thing?
No, they're completely different tax provisions. Section 179 allows businesses to immediately expense qualifying equipment and tangible property like machinery, vehicles, and software up to annual limits, while Section 179D is specifically for energy-efficient commercial building systems. Both can lower your tax liability, but they apply to different types of investments.
This information is meant to be educational. Always consult a tax advisor about your specific situation, especially since rules can change (like updates from ASHRAE). You can find the IRS Form 7205 for 179D claims and Publication 946 for depreciation.
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