--- title: Cost Segregation for Farms and Ranches | DeepYield description: "How a cost segregation study works for farms, ranches and rental or commercial property: how buildings, structures and land improvements are classified." --- [Skip to content](https://go.deepyield.com/learn/cost-segregation-for-farms-and-ranches#main-content) [![DeepYield Tax Strategies Logo](https://go.deepyield.com/hs-fs/hubfs/1080x1080px-1.png?width=1001&height=1001&name=1080x1080px-1.png)Homepage](https://deepyield.com/) - Home - Products - Pricing - Blog - Company Get started - Home - Products - Pricing - Blog - Company Get started DEEPYIELDTAX STRATEGIES # Cost Segregation for Farms and Ranches: How a Study Works and What It Looks At **Short answer:** A cost segregation study takes the cost of a building or property you built or bought and sorts it into the right property classes (land, land improvements, buildings, and equipment) so each part is depreciated over the recovery period the tax rules give it. The IRS's Cost Segregation Audit Techniques Guide describes it as using cost-estimating techniques to "segregate" or "allocate" lump-sum costs to individual assets. On a farm or ranch, the first question is one many studies skip: how the tax rules already classify farm structures. Whether a study is worth doing for your property depends on its cost, its records, when it was placed in service and your overall tax position. We don't say it fits until we've looked. **[Request your free two-year look-back →](https://deepyield.com/get-started/#inv-form)** ### What is a cost segregation study? To figure depreciation, you have to use the correct method and recovery period for each asset you own. A property you build or buy usually contains many asset types with different recovery periods. When you have the actual cost of each item, sorting them is simple. When you only have a lump-sum cost, the costs have to be allocated, and that analysis is generally called a cost segregation study (IRS Cost Segregation Audit Techniques Guide, ch. 1). The guide explains that studies are most commonly prepared to allocate building costs (section 1250 property, depreciated straight line over a long recovery period) to tangible personal property (section 1245 property), which has shorter recovery periods. It also says these items "may or may not constitute § 1245 property depending on the particular facts and circumstances." One note on the source: the Audit Techniques Guide (ATG) is written for IRS examiners, and it says it "is not an official IRS pronouncement and may not be cited as authority." We point to it because it is the clearest public description of how the IRS reviews a study. ### How do the tax rules classify farm buildings and structures? This is where farm cost segregation differs from an office building or a warehouse. IRS Publication 225, Table 7-1, *Farm Property Recovery Periods*, already gives farm structures their own classes (rows copied from the current 2025 edition): | Asset (as named in Pub 225, Table 7-1) | GDS recovery period | ADS recovery period | | --- | --- | --- | | Nonresidential real property | 39 years | 40 years | | Farm buildings (not including single-purpose agricultural or horticultural structures) | 20 years | 25 years | | Agricultural structures (single purpose) | 10 years | 15 years | | Horticultural structures (single purpose) | 10 years | 15 years | | Grain bin | 7 years | 10 years | | Fences (agricultural) | 7 years | 10 years | | Drainage facilities | 15 years | 20 years | | Water wells | 15 years | 20 years | | Paved lots | 15 years | 20 years | Publication 225, chapter 9, adds two points that matter for a study: - **Single-purpose agricultural (livestock) or horticultural structures are section 1245 property**, not buildings, if they meet the definition. Publication 225 defines a single-purpose livestock structure as one specifically designed, constructed and used to house, raise and feed a particular type of livestock and its produce, and to house the equipment needed for that, with the equipment an integral part of the structure. It must be used only for the purpose that qualified it: "a hog barn will not be qualifying property if you use it to house poultry." - **Grain storage bins and silos are not treated as buildings**, but as section 1245 property. By contrast, "building" includes a barn, and "structural components" include walls, floors, windows, doors, central air conditioning and light fixtures. So on a farm, a study usually starts by asking which class a structure belongs in at all, before it asks which components inside it might belong somewhere else. ### What does a farm cost segregation study look at? We go looking for what's missing. On a farm or ranch, that means going through the property asset by asset: - **The structures themselves.** Is each one a general-purpose farm building, a single-purpose agricultural or horticultural structure, a grain bin or silo, or nonresidential real property? Does its actual use still match the purpose that qualified it? - **Equipment and systems.** Ventilation, feeding, watering, waste-handling and electrical systems in barns, poultry houses, dairies and other confinement facilities, and whether each is part of the structure or separate property. - **Site work and land improvements.** Paved lots, drainage, fences, wells and other improvements that may have been rolled into one construction contract or one purchase price. - **Land.** Land is never depreciable; Publication 225 says the cost of land "generally includes the cost of clearing, grading, planting, and landscaping." The ATG says a quality study explains how land and land-development costs were treated, and that these costs are generally allocated to non-depreciable land accounts. ### Does cost segregation apply to a farm or ranch you bought? It can be considered, and the purchase is where the groundwork is laid. If you buy land and improvements for a lump sum, Publication 225 says you allocate your cost basis between land and improvements according to their fair market values at the time of purchase. You and the seller may agree in the sales contract to a specific allocation; if it is based on the value of each asset and you have adverse tax interests, Publication 225 says it "will generally be accepted." That contract language can follow you. The ATG discusses *Peco Foods, Inc. v. Commissioner*, where a buyer of two poultry processing plants had agreed in writing to a purchase price allocation and later tried to reclassify assets through a cost segregation study. The Tax Court held the buyer was bound by the original allocation schedules. The ATG notes it is unclear whether that holding applies beyond applicable asset acquisitions under section 1060. When a group of assets that makes up a trade or business is bought, both seller and buyer may have to report the sale on Form 8594 (see "About Form 8594" for when it applies). For acquired property, the ATG says a study should allocate the purchase price between non-depreciable land, buildings and personal property based on their value as of the date of purchase, with land value determined first. **If you're buying, talk with your CPA about the allocation before you sign.** ### Can a study be done on a building you already own? Sometimes. The ATG says a taxpayer may do a cost segregation study on previously existing property and recompute depreciation. The route matters. A taxpayer generally adopts a method of accounting for an asset by treating it the same way on two or more consecutively filed returns. After that, reclassifying it is a change in method of accounting that generally requires **Form 3115**, *Application for Change in Accounting Method*, with the adjustment made under section 481(a). The ATG says a taxpayer that has adopted a method "may not change the method by amending its prior income tax returns." Publication 946 ("How Do You Correct Depreciation Deductions?") describes the same rule. Which route applies depends on your facts, and it is decided with your CPA. ### If you own rental or commercial real estate Cost segregation isn't only for farms. If you hold rental or commercial property alongside a high-paying career or a business, the same idea applies: the building is long-life property, and some of what's in it and around it may not be. According to IRS Publication 946: - **Buildings.** Residential rental property is depreciated over 27.5 years and nonresidential real property over 39 years under the general depreciation system. - **Contents.** Appliances, carpets, furniture and similar items used in a residential rental real estate activity are 5-year property. Office furniture and fixtures are 7-year property. - **Land improvements.** Certain improvements made directly to land or added to it, such as shrubbery, fences, roads, sidewalks and bridges, are 15-year property. - **Land.** As on a farm, land itself is never depreciable. One rule matters more here than on most farms. In general, rental activities, including rental real estate activities, are passive activities even if you materially participate, and passive activity losses that exceed passive activity income are disallowed for the current year and carried forward to the next year (IRS Topic No. 425). There are exceptions, including one for qualifying real estate professionals and a limited one for rental real estate in which you actively participate; Publication 925 explains them. So added depreciation on a rental doesn't automatically offset wages or business income. Whether a study makes sense depends on the property, the records and the rest of your return. ### What makes a study well-supported? The IRS "has not established any requirements or standards for the preparation of cost segregation studies," according to the ATG. It also says the determination of section 1245 property "is factually intensive and must be supported by corroborating evidence," and that there are "no prescribed qualifications for cost segregation preparers." What the ATG does list are the principal elements of a quality study, including: - Preparation by someone with knowledge of both construction and the tax law on property classification, with the preparer and their credentials identified. - A detailed description of the methodology used. - The best available documentation: construction drawings, specifications, contractor payment applications and invoices for new construction; the purchase agreement, appraisals and other corroborating evidence for acquired property. - A site visit, with photographs. - Interviews with contractors, owners and the people who run the property. - A reconciliation of total allocated costs to total actual costs. The ATG also tells examiners to view "rule of thumb" studies with caution: ones that estimate the share of section 1245 property from industry averages, with little or no documentation. That is one reason you won't see a percentage on this page. Every property is different, and the answer comes from the documents and the site, not an average. ### What should you weigh before ordering a study? - **Whether it's worth it for this property.** Some reviews end with "a study doesn't make sense here," and that's a useful answer. - **What happens when you sell.** Publication 225 says gain on the sale of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. - **Bonus depreciation and section 179.** Under the 2025 law commonly called the One Big Beautiful Bill Act (Public Law 119-21, section 70301), the special depreciation allowance (often called bonus depreciation) is permanent and covers the full depreciable basis of qualified property acquired and placed in service after January 19, 2025 (IRS Notice 2026-11; Publication 946). Qualified property generally means tangible property depreciated under MACRS with a recovery period of 20 years or less, so a 27.5- or 39-year building doesn't qualify, while property a study places in a shorter class may. Property acquired before January 20, 2025 stays under the earlier phase-down rules, and for qualified property placed in service in the first tax year ending after January 19, 2025, you can elect a smaller allowance instead (Publication 946 gives the rates). Some farm elections change this: if your farming business elects out of the business interest limit, Publication 225 says you must use ADS for farming property with a recovery period of 10 years or more and can't claim the special allowance for that property. Whether the allowance or section 179 applies, and whether using it makes sense for your return, depends on your facts. - **The rest of your return.** Whether, and when, added depreciation is useful depends on your overall tax position. - **The purchase documents.** As above, a signed allocation can limit what a later study can change. ### What to have in hand - Construction contracts, invoices, contractor pay applications, drawings and specifications for anything you built or remodeled. - For purchases: the purchase contract, settlement statement, any appraisal, any allocation schedule and any Form 8594. - The depreciation schedules behind your returns (Form 4562 and the detailed asset list), with placed-in-service dates. - Photos of the facilities, and a list of what each structure is actually used for. ### How DeepYield approaches cost segregation Here's how it works: 1. **Start with a look-back.** We do a review of your last two years of tax returns, done for you, including the depreciation schedules, to see whether a study may be worth considering for any property. 2. **A written scope first.** If it may be, we explain in writing what a study would involve and what it would cost before any work starts. You decide whether to go ahead. 3. **A report you and your CPA can review line by line.** If you have a CPA, they decide how to apply it. We support you and your CPA if questions come up. No one can promise how the IRS will view a return. DeepYield is a second set of eyes, not a replacement for your CPA. We look for every legitimate deduction and credit you qualify for, not just the obvious ones, whether the property is a farm, a ranch or a rental. **Who you'll work with:** Kyle Farmer and Shanyn Stewart are DeepYield's Principals. Shanyn is an Enrolled Agent, enrolled to practice before the Internal Revenue Service. A Houston-based team serving clients nationwide. **[Request your free two-year look-back →](https://deepyield.com/get-started/#inv-form)** ## Frequently asked questions ### What is a farm cost segregation study? A cost segregation study sorts the cost of a farm or ranch property into the right property classes (land, land improvements, buildings and equipment) so each part is depreciated over the recovery period the tax rules give it. On a farm, it starts with how the rules already classify farm structures, such as general-purpose farm buildings, single-purpose agricultural structures and grain bins. ### Are hog barns and poultry houses already shorter-life property? They can be. IRS Publication 225 lists single-purpose agricultural structures at 10 years under GDS and treats them as section 1245 property, but only if the structure is specifically designed, built and used to house, raise and feed a particular type of livestock, and used only for that purpose. General-purpose farm buildings are 20-year property. ### Can you do cost segregation on farmland? Land itself is never depreciable, according to IRS Publication 225. A study allocates the cost of a property between non-depreciable land and the improvements, buildings and equipment on it, which may be depreciable. ### Can a study be done on a building I already own? Sometimes. A study can be done on existing property, but once an asset has been treated the same way on two or more consecutively filed returns, reclassifying it is generally a change in accounting method that goes through Form 3115, not an amended return. Which route applies depends on your facts. ### Does cost segregation apply to rental property I own outside the farm? It can be considered. Rental and commercial buildings are long-life property (27.5 or 39 years), while appliances, carpets and furniture in a residential rental can be 5-year property and land improvements 15-year property, according to IRS Publication 946. Rental losses are generally passive, so whether added depreciation helps depends on your other income and your facts. ### How much could a cost segregation study be worth? We don't quote numbers before we've reviewed your facts. Results depend entirely on your property, records and tax situation, and some reviews find nothing to change. The IRS Cost Segregation Audit Techniques Guide cautions against studies that rely on industry averages instead of documentation. ### Does the IRS require a specific method for a study? No. The IRS Cost Segregation Audit Techniques Guide says the IRS has not set requirements or standards for preparing studies, but taxpayers still must substantiate their depreciation. The guide lists elements of a quality study, including a described methodology, appropriate documentation, a site visit, and a reconciliation of allocated costs to actual costs. ### Does my CPA need to be involved? If you have a CPA, yes. DeepYield is a second set of eyes, not a replacement for your CPA. Your CPA decides how a study is applied on your return, and the report is built so they can review it line by line. ## Sources - IRS Publication 5653 (2-2025), *Cost Segregation Audit Technique Guide*: ch. 1 (purpose, the not-an-official-pronouncement statement, background/definition, § 1245 vs § 1250), ch. 3 (D. "What approach is Required by the IRS?"; C.6 "Rule of Thumb" approach), ch. 4 (principal elements of a quality study; documentation; site visit; acquired property; purchase price allocation), ch. 6.B (change in accounting method; *Peco Foods*): [https://www.irs.gov/pub/irs-pdf/p5653.pdf](https://www.irs.gov/pub/irs-pdf/p5653.pdf) - IRS, *Audit Techniques Guides (ATGs)* (index page listing the Cost Segregation ATG, publication date 02/2025): [https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs](https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs) - IRS Publication 225 (2025), *Farmer's Tax Guide*: What's New (special depreciation allowance); ch. 4 and ch. 7 (election not to limit business interest expense: ADS for farming property with a recovery period of 10 years or more, no special allowance); ch. 7 (Table 7-1; land not depreciable; single-purpose structure definitions and use requirement), ch. 6 (lump-sum purchase; allocating basis by FMV; contract allocation), ch. 9 (section 1245 property; buildings and structural components; grain bins and silos; ordinary income on disposition): [https://www.irs.gov/publications/p225](https://www.irs.gov/publications/p225) - IRS Publication 946 (2025), *How To Depreciate Property* (What's New: special depreciation allowance; "How Do You Correct Depreciation Deductions?"; chapters 2 and 3, incl. What Is Qualified Property?; chapter 4 property classes under GDS: 5-, 7- and 15-year property, residential rental and nonresidential real property; land; section 1245/1250 definitions): [https://www.irs.gov/publications/p946](https://www.irs.gov/publications/p946) - IRS, "Treasury, IRS issue guidance on the additional first year depreciation deduction amended as part of the One, Big, Beautiful Bill" (IR-2026-06, Jan. 14, 2026): [https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill) - IRS Notice 2026-11, *Interim Guidance on Additional First Year Depreciation Deduction under § 168(k)*: [https://www.irs.gov/pub/irs-drop/n-26-11.pdf](https://www.irs.gov/pub/irs-drop/n-26-11.pdf) - Public Law 119-21, section 70301 (Full expensing for certain business property), 139 Stat. 72 (July 4, 2025), official text on govinfo.gov: [https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm](https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm) - IRS Publication 925, *Passive Activity and At-Risk Rules*: [https://www.irs.gov/publications/p925](https://www.irs.gov/publications/p925) - IRS Topic No. 425, *Passive activities – losses and credits*: [https://www.irs.gov/taxtopics/tc425](https://www.irs.gov/taxtopics/tc425) - About Form 3115, *Application for Change in Accounting Method*: [https://www.irs.gov/forms-pubs/about-form-3115](https://www.irs.gov/forms-pubs/about-form-3115) - About Form 8594, *Asset Acquisition Statement Under Section 1060*: [https://www.irs.gov/forms-pubs/about-form-8594](https://www.irs.gov/forms-pubs/about-form-8594) - About Form 4562, *Depreciation and Amortization*: [https://www.irs.gov/forms-pubs/about-form-4562](https://www.irs.gov/forms-pubs/about-form-4562) *Results depend on your specific facts. No outcome is guaranteed. This is general information, not tax advice; advice is provided only under a signed engagement.* DeepYield LLC · 4306 Yoakum Blvd, Suite 170, Houston, TX 77006 [![DeepYield Tax Strategies Logo](https://go.deepyield.com/hs-fs/hubfs/1080x1080px-1.png?width=1001&height=1001&name=1080x1080px-1.png "DeepYield Tax Strategies Logo")](https://deepyield.com/) - Home - Products - Pricing - Blog - Company --- Privacy Policy · Legal · © 2026. 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