What is the difference between 179D and Cost Segregation?

Most building owners can use both 179D and Cost Segregation on new construction. Taking both will maximize the total tax benefits for the building. However, some costs are eligible under 179D but not under Cost Segregation.

  • 179D relates specifically to costs for interior lighting, HVAC, and envelope (i.e., roof, windows, exterior doors, insulation).
  • These items are generally not covered under Cost Segregation, with exceptions. For example, Cost Segregation covers outdoor and decorative lighting, but not lighting needed for interior building operations.
  • Cost Segregation does not cover most HVAC equipment but includes a few specialized HVAC technologies, such as geothermal systems.

Some common items covered under Cost Segregation but not 179D are listed here:

  • Earthwork and site work
  • Landscaping
  • Appliances
  • Flooring/Carpeting
  • Interior doors and drywall
  • Painting/wall coverings
  • Carpentry/millwork
  • Furniture
  • Sound/speaker systems
  • Certain types of cabling/wiring
  • Fire systems and related items (i.e., fire alarm, fire extinguishers)
  • Signage

Some other differences between 179D and Cost Segregation:

  • Cost Segregation is primarily based on the costs of the eligible items, whereas the 179D benefit depends on a few factors: square footage, building efficiency, and the cost of the eligible work
  • Qualification methods: 179D requires an energy analysis of the building, whereas Cost Segregation requires a detailed analysis of costs
  • 179D allows for the qualified costs to be immediately deducted/expensed, whereas Cost Segregation has different periods (Cost Segregation eligible costs are typically depreciated over 5, 7, or 15-year periods)

For new construction buildings where the owner plans to keep the building, combining 179D and Cost Segregation makes a lot of sense, as a significant portion of the costs can be moved to quicker depreciation periods.

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