Splitting a multi-tenant building into separate utility meters can cost tens of thousands of dollars. So does retrofitting an office for a new tenant, updating electrical service, or replacing a building’s HVAC system. No dispute there! But what often gets missed is the other half of the equation: the tax tools that can recover a meaningful chunk of that cost in the same year you spent it.
Here are two examples, their costs, and strategies for offsetting them.
Separating utilities
Take a building on a single electric and gas meter, with several tenants paying a flat or nominal utility charge folded into their rent. This arrangement works fine until you want to bring in a longer-term tenant, like a medical tenant, who wants control over their own HVAC and doesn’t want to subsidize a neighbor running their AC at 65° all summer.
Separating that single-meter setup into individually metered units is a big project. Rewriting and repiping a building that wasn’t built that way costs real money. David Ozger, a CRE partner at Ozger Properties LLC, said that, in one instance, updates cost $200,000 for a single building.
That number isn’t unusual for a structure never designed for individual tenant metering. What generates the cost? Not fixture swapping. You have to cut in new service runs, panels, and meter banks through an occupied building.
The upside, however, is straightforward. Tenants who control their own utility costs tend to be happier. They may stay longer because no one likes paying for square footage whose environment they can’t control. For an owner converting an older building into long-term medical or professional space, that retention value often justifies the spend. The harder question is how to ease the pain of the capital outlay in the year you spend it.
Enter cost segregation.
Cost segregation (and why $200K doesn’t have to depreciate for decades)
Under standard IRS rules, commercial buildings depreciate over 39 years. That number is the default and the slow way to recover the cost of a major capital project. A cost segregation study breaks the property — or a major improvement to one — into its individual components and reclassifies those that don’t last 39 years: electrical systems, certain wiring and panel work, HVAC components and similar items that the IRS recognizes as having a 5, 7, or 15-year useful life.
The financial case is significant enough that owners embarking on six-figure capital projects without looking into this option leave money on the table. Industry sources generally put the cost of an engineering-based segregation study between $5,000 and $15,000, depending on the property’s size and complexity. Against that cost, the savings on a project in the $100K+ range can run into five figures in the first year alone, particularly with current bonus depreciation rules in play.
That last point matters and is worth getting correct before you act on it. The One Big Beautiful Bill Act, signed into law in 2025, restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025. The type of electrical and mechanical work involved in separately metering a building may be eligible for full deduction in the year it’s completed, rather than spread out over decades.
Do the math on that $200K metering project. Under a standard 39-year depreciation, the owner recovers approximately $5,100 each year. Reclassify a meaningful share of that work as shorter-life property through a cost segregation study, and you could potentially deduct a large portion of that project cost the same year you complete it.
The exact qualifying percentage depends on the specific components involved, hence the need for an engineering study. But the difference between waiting 39 years and writing off a much more significant amount in year one isn’t a rounding error. It’s the difference between a project that affects your cash flow for years and one that pays part of itself back at tax time.
The mechanics matter here, too. You can’t eyeball a cost segregation study. You need an engineering-based review of the property, ideally timed to the acquisition, construction, or major renovation — and it must hold up if the IRS ever conducts an audit or asks questions about it.
The IRS has its own Cost Segregation Audit Techniques Guide that examiners use to evaluate these studies, which is one reason why a properly engineered study (not a back-of-the-envelope estimate) is worth the extra cost.
Section 179: A second, less expensive option
Cost segregation is built for big-ticket structural work. You have another option for furniture, fixtures, and some interior improvements. Section 179 is a simpler tool that tenants and smaller owners use less often than they could.
This tool lets a business deduct the full cost of qualifying equipment and certain property improvements in the year they’re placed in service, rather than depreciating them over time. Section 179 covers a fairly wide range of things relevant to commercial space:
- Office furniture
- Some HVAC and security system components
- Other tangible business property
The annual dollar amounts are substantial and adjust periodically, so the ceiling isn’t usually the constraint for a typical tenant buildout or furniture refresh.
What limits Section 179 is awareness. Tenants moving into a new space may take advantage of it because someone, often the furniture dealer or contractor, mentions it during the buildout conversation. Existing tenants doing smaller refreshes, replacing a few pieces of furniture, or upgrading a conference room, for example, are far less likely to think about it, even though the same deduction applies.
A tenant who just spent a few thousand dollars upgrading their space has often left a straightforward deduction unclaimed only because no one mentioned it.
The pattern across both
Whether it’s a $200,000 utility separation or a smaller furniture-and-fixture upgrade, the same gap appears: owners and tenants make the capital investment because it’s the right move for the building or business. But they never circle back to ask what’s recoverable on the tax side.
Cost segregation and Section 179 aren’t aggressive or unusual strategies. They’re IRS-sanctioned tools that exist specifically for this kind of spending.
If you’re planning a capital improvement of any size, the conversation worth having before the work starts — not after — is with a CPA or cost segregation specialist who can tell you which parts of the project qualify for accelerated treatment. The improvement still has to make sense on its own. But knowing what you can recover changes how the number lands on your books.
Are you a commercial real estate investor or seeking a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from over 65 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
