Commercial property owners in Florida can take advantage of some substantial tax deductions if they use the right cost segregation techniques. They must take into consideration rules about passive activity, depreciation recapture, how long they expect to hold the property and any consequences of a future sale. But if these factors are well understood, the upfront tax deduction on commercial property from undertaking a Florida cost segregation analysis and following its recommendations can be substantial.
A Worked Example
Consider a Florida investor who acquires a nonresidential commercial property for $4,200,000, of which $700,000 is allocated to land, leaving a depreciable building basis of $3,500,000. The investor separately purchases $95,000 of furniture, fixtures and equipment. The property is placed in service in January.
Without a cost segregation study, the building is depreciated over 39 years and the first-year deduction under the mid-month convention is $86,135; the separately purchased FF&E receives 100% bonus depreciation of $95,000 whether or not a study is performed, for a total of $181,135.
With a study, $455,000 is reclassified to five-year personal property and $385,000 to 15-year land improvements, giving $840,000 of accelerated basis eligible for 100% bonus depreciation. The remaining $2,660,000 stays on the 39-year schedule and produces $65,463 in year one. Adding the $95,000 of FF&E, the first-year deduction is $1,000,463. The study’s incremental contribution is $819,328, which at a 37% marginal federal rate defers roughly $303,151 of tax.
Holding Period Should be Considered As Part of the Equation
When running the equation on how useful cost segregation might be for you in Florida, it is important to consider your planned holding period. Commercial property owners who expect to hold an asset over a long period of years have a greater chance to benefit from any tax deductions that occur earlier, as well as from the deferral of federal income tax.
However, if you expect to sell after a short period of years, the time you have available to benefit from the deferral is reduced.
This doesn’t mean that cost segregation is irrelevant for shorter-term commercial property investments; it just means that the way you analyze it should be slightly different. Most importantly, the first-year deduction should not be viewed by people in such a position in isolation.
Cost Segregation Should Be Part of Your Exit Planning
When you think about using a cost segregation strategy, you should consider not only the immediate after-sale period, but also your eventual exit strategy. If the sale of the property is a taxable event, it could trigger depreciation recapture, and the final tax outcome of the property sale will be influenced by the selling price, allocation of asset class and adjusted basis.
It could be smart for commercial property investors to draw up models for a variety of different exit times and sale prices. This will help investors to understand how valuable accelerated depreciation can be for them.
It could be possible for the earlier deductions to be reinvested to support other projects or objectives throughout the holding period.
Passive Activity Limits in Florida
These deductions are not automatically usable. Under IRC Sec. 469, rental real estate is generally a passive activity, and passive losses offset only passive income; unused losses are suspended and carried forward until the taxpayer has passive income or disposes of the activity in a fully taxable transaction.
A taxpayer who qualifies as a real estate professional under Sec. 469(c)(7) and materially participates may treat the losses as non-passive. Separately, a rental with an average guest stay of seven days or less is not a rental activity under Reg. Sec. 1.469-1T(e)(3)(ii)(A), so material participation alone can make the losses non-passive without real estate professional status.
Depreciation Recapture For Florida Property
Accelerated depreciation is a deferral, not forgiveness. On a taxable sale, depreciation claimed on the five- and 15-year property a study reclassifies is recaptured under IRC Sec. 1245 as ordinary income to the extent of depreciation taken, potentially at rates up to 37%, rather than the 25% maximum applying to unrecaptured Sec. 1250 gain on the building itself.
A study therefore shifts part of future gain from Sec. 1250 to Sec. 1245 treatment. The net benefit depends on the time value of the deferral and the expected holding period, and is generally weaker for property expected to be sold within a few years.
Current Laws Due to The OBBBA
The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, made the 100% first-year bonus depreciation rate under IRC Sec. 168(k) permanent for qualifying property acquired and placed in service on or after January 20, 2025.
Before that change the rate was phasing down on a fixed schedule of 80%, 60%, 40%, 20% and then 0%. Property acquired before January 20, 2025 remains subject to the phase-down percentage in effect at the time of acquisition.
There Is A Corporate Add-Back That Applies in Florida
Florida imposes no personal income tax, so an individual investor’s benefit is measured entirely at the federal level. C corporations are treated differently.
Florida requires an add-back of federal bonus depreciation for corporate income tax purposes, and the treatment of qualified improvement property is harsher than the standard add-back: QIP bonus depreciation added back does not qualify for the seven-year recovery mechanism available to other bonus depreciation add-backs, so the corporate-level deferral is lost rather than spread.
Entity choice therefore materially changes the outcome in Florida.
In Closing
For any commercial property owners or investors in Florida, undertaking cost segregation should be considered as part of a broader tax or investment strategy, not something that is done as rote.
Things like the expected holding period, depreciation recapture, passive activity rules, eventual exit plan and entity structure should all be taken into consideration and weighed up to properly calculate how valuable accelerated depreciation might be for a property. The governing provisions are IRC Sec. 1245 and IRC Sec. 1250.
