MACRS sorts every asset into a class life under IRC section 168(e), using the asset classes originally laid out in Rev. Proc. 87-56 and summarized in IRS Pub 946. A building bought as one lump sum is really a bundle of assets from several classes, and a cost segregation study is the exercise of documenting which dollars belong to which class.
What lands in each class
5-year property. Tangible personal property that serves the business use of the building rather than its structure: carpet and most non-permanent floor coverings, appliances, removable cabinetry and countertops, decorative lighting and millwork, window treatments, and electrical or plumbing runs dedicated to specific equipment, such as the outlet bank behind a row of exam chairs or the water line feeding a commercial ice maker.
7-year property. Office furniture and fixtures, plus certain equipment without a specified class life. In most studies this is the smallest bucket.
15-year land improvements. Everything built on the land that is not the building: parking lots and striping, sidewalks, curbs, fencing, retaining walls, landscaping and irrigation, exterior site lighting, and site utilities.
27.5- or 39-year property. The structural shell and everything serving the building as a building: foundation, framing, roof, exterior walls, windows, general HVAC, general electrical and plumbing, elevators.
Why the split exists
The distinction traces to IRC section 1245 tangible personal property versus section 1250 real property, and courts have held that components qualifying as personal property under the old investment tax credit rules also qualify for shorter MACRS lives. Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997), is the landmark case, and the IRS Cost Segregation Audit Techniques Guide discusses it at length. For borderline items the controlling questions are usually permanence and whether the item serves the equipment or the structure.
A worked example
A $2,000,000 medical office with $350,000 allocated to land leaves $1,650,000 to classify. A study might allocate $280,000 to 5-year property (cabinetry, carpet, dedicated electrical and plumbing for exam equipment), $45,000 to 7-year furniture and fixtures, and $190,000 to 15-year site improvements (parking, sidewalks, landscaping). The remaining $1,135,000 stays at 39 years. Because all 3 short-life buckets have recovery periods of 20 years or less, the $515,000 total qualifies for bonus depreciation under IRC section 168(k), at 100% for property acquired after January 19, 2025.
Edge cases
The same physical item can land in different classes depending on use: general building outlets are 39-year, while a dedicated circuit for a specific machine is 5-year. Short-term rentals where the majority of stays run under 30 days are 39-year nonresidential property under the transient-use rule in Pub 946, not 27.5-year, which changes the long-life bucket but not the short-life ones. And land itself is never depreciable, so nothing in the study touches the land allocation.