Cost Segregation for Hotels and Hospitality Properties

Find Out What This Is Worth in Your Situation

Every strategy on this page depends on your income, your entity structure, and your state. Book a call and we will tell you what applies to you and what it is worth.

Prefer to talk first? Call (631) 614-5762 or email team@aetaxadvisors.com.

Why Hotels Are Among the Best Property Types for Cost Segregation

Hotels and hospitality properties consistently rank among the most rewarding candidates for cost segregation studies. The reason is straightforward: hotels are packed with personal property, specialized equipment, and land improvements that can be reclassified from the default 39-year nonresidential recovery period into much shorter depreciation schedules under the Modified Accelerated Cost Recovery System (MACRS).

Under IRC Section 168(c), nonresidential real property, including hotels, is assigned a 39-year recovery period. Without a cost segregation study, the entire depreciable cost basis of a hotel is depreciated on a straight-line basis over those 39 years. That is an extremely slow way to recover your investment. A properly executed cost segregation study identifies the components within the building that qualify for 5-year, 7-year, or 15-year MACRS classes under IRC Section 168(e), pulling decades of depreciation forward into the early years of ownership.

High Reclassification Percentages: What Hotels Typically Yield

While most commercial properties see 15 to 30 percent of their depreciable basis reclassified, hotels routinely achieve 35 to 55 percent. Full-service hotels with restaurants, conference facilities, pools, spas, and extensive guest room furnishings tend to fall at the upper end of that range. Even limited-service properties with simpler buildouts frequently exceed 35 percent reclassification.

The high percentages stem from the sheer volume of non-structural components in a hotel. Every guest room contains furniture, fixtures, carpeting, window treatments, specialty lighting, and decorative finishes. Multiply that across 50, 100, or 200 rooms, and the total reclassifiable basis adds up quickly.

Common Reclassifiable Components in Hotels

An engineering-based cost segregation study examines every component of a hotel property. The following categories represent the most common areas where reclassification applies:

5-Year and 7-Year Personal Property (IRC Section 1245)

Furniture, Fixtures, and Equipment (FF&E): Guest room beds, dressers, desks, chairs, nightstands, lobby furniture, restaurant seating, conference tables
Decorative finishes: Accent walls, specialty wallcoverings, decorative millwork, artwork installations
Specialty lighting: Chandeliers, sconces, decorative fixtures, task lighting, under-cabinet lighting in kitchens
Kitchen and food service equipment: Commercial ovens, refrigeration units, dishwashers, prep stations, exhaust hoods, walk-in coolers
Laundry facilities: Commercial washers, dryers, folding stations, chemical dispensing systems
Telecommunications systems: Phone systems, Wi-Fi infrastructure, data cabling, in-room entertainment systems
Security systems: Surveillance cameras, access control systems, alarm panels, electronic door locks
Pool and spa equipment: Pumps, heaters, filtration systems, hot tub jets, pool covers
Signage: Exterior signs, directional signage, digital displays, monument signs
Carpeting and specialty flooring: Removable carpet, decorative tile, vinyl plank in guest rooms

15-Year Land Improvements (IRC Section 1250)

Parking lots and drives: Asphalt surfaces, curbing, striping, speed bumps
Landscaping: Trees, shrubs, irrigation systems, retaining walls, decorative planters
Site lighting: Parking lot light poles, walkway lighting, building-mounted exterior lights
Sidewalks and pathways: Concrete walkways, pavers, porte-cochere aprons
Fencing and gates: Perimeter fencing, pool enclosures, decorative gates
Storm drainage: Catch basins, drainage piping, retention areas

Dollar Example: $5 Million Hotel Property

Consider a $5 million hotel acquisition. Without a cost segregation study, the owner depreciates the full $5 million over 39 years, generating roughly $128,205 in annual depreciation. With a cost segregation study identifying 45 percent of the basis as reclassifiable personal property and land improvements, the results change dramatically:

Reclassified basis: $2,250,000 (45% of $5,000,000)
Year 1 bonus depreciation (100% under OBBBA): $2,250,000 in accelerated depreciation
Remaining 39-year basis: $2,750,000 depreciated at approximately $70,513 per year
Total Year 1 depreciation: $2,250,000 + $70,513 = $2,320,513
Estimated Year 1 federal tax savings (37% bracket): approximately $832,590

That is a substantial difference compared to the $47,436 in tax savings the owner would receive in Year 1 without the study. Use our cost segregation calculator to estimate results for your specific property.

OBBBA and Permanent 100% Bonus Depreciation

The One Big Beautiful Bill Act (OBBBA) made 100% bonus depreciation permanent under IRC Section 168(k). Before OBBBA, bonus depreciation was scheduled to phase down from 100% to 80%, then 60%, and eventually to zero. That phasedown created urgency and uncertainty for property owners considering cost segregation studies.

With OBBBA now in effect, hotel owners can claim 100% first-year bonus depreciation on all qualifying 5-year, 7-year, and 15-year personal property identified in a cost segregation study. There is no expiration date and no phasedown schedule. This makes the decision to pursue a cost segregation study simpler: the full tax benefit is available whenever you are ready to act.

Form 3115: Catching Up on Existing Properties

Hotel owners who acquired or placed their properties in service years ago have not missed the opportunity. IRS Form 3115, Application for Change in Accounting Method, allows property owners to switch from the standard 39-year depreciation method to the accelerated method identified in a cost segregation study. The resulting Section 481(a) adjustment captures all of the cumulative depreciation that should have been claimed in prior years and applies it in a single tax year.

This is not an amended return. Form 3115 is filed with the current-year tax return, and the IRS has provided automatic consent procedures for this type of accounting method change under Revenue Procedure 2015-13 (as modified). For hotels that have been in service for five, ten, or even twenty years, the catch-up depreciation can be substantial.

PIP Renovations and Cost Segregation Opportunities

Property Improvement Plans (PIPs) are a routine part of hotel ownership, particularly for franchise-affiliated properties. Franchisors such as Marriott, Hilton, IHG, and Wyndham require periodic renovations to maintain brand standards. These PIP renovations often involve millions of dollars in spending on guest room refreshes, lobby redesigns, restaurant upgrades, technology overhauls, and exterior improvements.

Each PIP renovation is a fresh opportunity for cost segregation. The renovation budget is analyzed independently from the original building cost, and the same reclassification categories apply. FF&E purchased during a PIP, new flooring, updated lighting, replacement kitchen equipment, and upgraded technology infrastructure can all be placed into shorter recovery periods. For hotel owners facing a $2 million PIP, a cost segregation study on the renovation alone can generate hundreds of thousands of dollars in accelerated depreciation.

It is also important to consider the disposition of replaced components. When old FF&E, flooring, or fixtures are removed during a PIP, the remaining undepreciated basis of those items can be written off as a partial asset disposition under Treasury Regulation 1.168(i)-8. This creates an additional deduction on top of the accelerated depreciation on the new components.

Franchise vs. Independent Hotel Considerations

Both franchise and independent hotels benefit from cost segregation, but the composition of reclassifiable components may differ.

Franchise hotels often come with brand-mandated FF&E specifications, signage packages, proprietary technology systems (PMS, POS, guest Wi-Fi), and standardized room configurations. These well-documented specifications make it straightforward to identify and value reclassifiable components. Franchise agreements may also require specific renovation cycles, creating recurring cost segregation opportunities with each PIP.

Independent hotels may feature custom architectural elements, bespoke furnishings, unique design installations, and specialized amenities. While these can be more complex to evaluate, they often yield equally strong, if not higher, reclassification percentages. Boutique and luxury independent hotels tend to have particularly high concentrations of decorative finishes, specialty lighting, and high-end FF&E.

Regardless of franchise affiliation, the engineering-based study methodology evaluates each property on its individual characteristics. The brand name on the building does not change the underlying tax classification of a commercial dishwasher, a parking lot, or a guest room desk.

Integrating Cost Segregation Into Your Hotel Tax Strategy

Cost segregation is one component of a broader real estate tax planning strategy for hotel owners. When combined with other planning tools, the tax savings compound. Hotel owners should also consider short-term rental tax strategies (hotels with average guest stays of 7 days or fewer may qualify for certain passive activity exceptions under IRC Section 469), entity structuring to maximize deduction utilization, and exit and disposition planning to manage depreciation recapture under IRC Section 1245 and Section 1250 when the time comes to sell.

Frequently Asked Questions

Why are hotels considered ideal candidates for cost segregation?

Hotels contain a high concentration of personal property and land improvements relative to their total cost basis. Components such as furniture, fixtures, kitchen equipment, laundry facilities, specialty lighting, pool equipment, and decorative finishes can often be reclassified from the default 39-year recovery period into 5-year, 7-year, or 15-year MACRS classes. This typically results in 35 to 55 percent of the building's depreciable basis being accelerated into shorter recovery periods.

What percentage of a hotel's cost basis can typically be reclassified?

Hotels typically see 35 to 55 percent of their depreciable cost basis reclassified into shorter recovery periods. Full-service hotels with restaurants, pools, conference centers, and extensive FF&E tend to fall at the higher end. Limited-service hotels with simpler buildouts generally fall toward the lower end of that range.

Can a cost segregation study be performed on a hotel that was purchased or placed in service years ago?

Yes. Property owners can file IRS Form 3115, Application for Change in Accounting Method, to claim the cumulative missed depreciation from all prior years in a single tax year. This is known as a Section 481(a) adjustment, and it does not require amending prior returns.

How does the One Big Beautiful Bill Act (OBBBA) affect hotel cost segregation?

The One Big Beautiful Bill Act made 100% bonus depreciation permanent under IRC Section 168(k). This means that all qualifying personal property (5-year and 7-year) and qualified improvement property identified through a cost segregation study can be fully expensed in Year 1, with no phasedown schedule to worry about.

Does a Property Improvement Plan (PIP) renovation qualify for cost segregation?

Yes. PIP renovations required by hotel franchisors often involve substantial spending on FF&E, lobby redesigns, room upgrades, technology systems, and exterior improvements. A cost segregation study applied to the PIP renovation budget can reclassify a significant portion of those costs into shorter recovery periods, delivering immediate tax savings on the renovation investment.

Is there a difference in cost segregation results between franchise and independent hotels?

Both franchise and independent hotels benefit from cost segregation, but the specific components and percentages may differ. Franchise hotels often have brand-mandated FF&E standards, signage packages, and technology systems that create clear reclassification opportunities. Independent hotels may have custom finishes, unique design elements, and specialty installations that also qualify. The engineering-based study evaluates each property on its own merits regardless of franchise affiliation.

Ready to Put This Strategy to Work?

AE Tax Advisors builds custom tax strategies for business owners and real estate investors. Schedule a free discovery call to see how much you could save.

Schedule Your Discovery Call

This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.