A short hold is the biggest single value killer in cost segregation. The strategy pulls forward deductions you would otherwise take over 27.5 or 39 years, and its profit is what you earn on the deferred tax in the meantime. Sell quickly and there is no meantime: Section 1245 recapture taxes the accelerated portion back at ordinary rates, often the same rates that made the deduction valuable, leaving a thin timing benefit minus a real study fee.
What happens at sale
Gain attributable to the 5, 7, and 15-year property identified by the study is ordinary income under IRC section 1245, up to the full depreciation taken on those assets. Straight-line depreciation on the building itself is taxed as unrecaptured Section 1250 gain at up to 25%. The IRS Cost Segregation Audit Techniques Guide expects the study's asset-level detail to drive this allocation when you sell, so the same document that accelerated your deductions also itemizes your recapture.
A 2-year hold, worked
You buy a $2,000,000 retail building in January 2026. A study reclassifies 25%, or $500,000, into 5 and 15-year property, all taken as 100% bonus depreciation under IRC 168(k). At a 37% marginal rate, the year 1 deduction defers $185,000 of tax. You sell in early 2028 with the components still carrying value near their allocated cost: roughly $500,000 of Section 1245 recapture returns at 37%, about $185,000 of tax. The round trip earns you only 2 years of returns on the deferred $185,000, perhaps $20,000 to $30,000 at ordinary portfolio returns, against the study fee and the added filing complexity. If your marginal rate is higher in the sale year than the deduction year, the trade loses money outright.
When a short hold can still work
- A planned 1031 exchange. Exchanging into like-kind real estate defers the gain and the recapture along with it under IRC 1031, letting the deferral keep running in the replacement property.
- Passive income you need to shelter now. If the loss offsets passive income that would otherwise be taxed this year, the benefit is immediate and real even on a short hold.
- Rate arbitrage. Deducting in an unusually high-income year and recapturing in a low one converts timing into permanent savings.
- Suspended losses. If your losses would suspend anyway, the sale releases them under IRC 469(g) and they offset the recapture, softening the downside.
If a sale inside 2 to 3 years is likely and no 1031 is planned, the default answer is skip the study. Amadae's cost segregation screen models the hold period directly, showing the projected benefit net of estimated recapture before you spend anything on an engineering study.