Cost Segregation Studies for Hotels

A cost segregation study is a tax planning strategy that accelerates depreciation by identifying building components that qualify for shorter recovery periods. Instead of depreciating an entire hotel building over 39 years, certain assets can be reclassified to 5-, 7-, or 15-year property, improving near-term cash flow.

The hospitality industry requires a constant influx of capital. From routine maintenance to elegant upgrades – it can feel like there’s no end to the costs incurred to keep your hotel competitive, modern, and profitable.

Cost Segregation is a tax strategy that can provide this much-needed capital.

By performing a cost segregation study on a hotel, certain assets will be reclassified into shorter depreciation categories. This accelerates depreciation deductions, taking advantage of the time value of money. A dollar today is worth more than a dollar tomorrow – why not get that dollar today?  

This cash can be reinvested into growing your hotel, upgrading amenities, or investing in energy-efficient systems. This will elevate the guest experience and increase guest loyalty, resulting in greater overall profitability.

A cost segregation study can be performed at multiple points in a hotel’s lifecycle, including:

• After acquisition
• Following new construction
• Before or after renovations or PIPs
• As a look-back study on properties placed in service in prior years

Timing impacts strategy, but opportunities often exist even years after a property is placed in service.

Cost segregation can be performed on virtually any hotel. From a cost-effective budget motel to a vast luxury property, the large variety of assets make nearly any hotel a solid cost segregation candidate. Successful cost segregation studies are performed for chain hotels, boutique hotels, destination resorts, and everything in between.  

Hotels often have unique features that boost the cost seg benefit. Resort hotels may own ski lifts and ice rinks, golf courses and health spas. The multiple bars, restaurants, ballrooms, and recreation areas found in full-service hotels all contribute to a successful cost seg.

While each property is unique, hotels often see accelerated depreciation from guest room components, bathrooms, kitchens, laundry facilities, electrical systems serving specific areas, and site improvements. Actual results depend on construction details and documentation.  Again, specialty features in full-service hotels will further boost yield.

Renovations and PIPs can create opportunities to write off the remaining value of replaced assets rather than continuing to depreciate property that no longer exists. When cost segregation is coordinated with renovation planning, it can improve accuracy and reduce missed deductions.

Yes. Hotels with frequent room refreshes often benefit from more precise asset tracking, which supports future partial asset dispositions. This helps prevent owners from depreciating assets that have already been removed or replaced.

Cost segregation identifies assets that may qualify for bonus depreciation, an additional incentive above and beyond accelerated depreciation.  Under the new tax law, the bonus depreciation rate is 100%, meaning that the cost of eligible assets may be written off entirely.  This significantly strengthens the results of a hotel cost segregation study. 

In many cases, yes — and timing and planning matter. A properly structured study can improve cash flow during ownership and support asset disposition planning. Coordination with tax advisors is essential to evaluate recapture and transaction considerations.

Yes. Branded hotels often follow stricter construction standards and renovation schedules, which can influence asset classification and depreciation timing. Independent hotels may offer more flexibility, but both can benefit when the study is aligned with operational realities and future plans.

All cost segregation studies must be performed according to the IRS’ Cost Segregation Audit Techniques Guide, which explicitly recommends an engineer-performed study. Only a trained engineer has the technical and tax knowledge required to complete a quality study that is both thorough and defensible.   

That said, not all cost segregation providers are created equal. Be sure to do your homework before selecting a provider.

Risk depends on methodology, not property type. Hotels are asset-dense, which makes engineering-based analysis and IRS-aligned documentation crucial — selecting the right provider is indeed key. However, performing a cost segregation study on your hotel does not increase the likelihood of an audit. 

The fees for cost segregation in a hotel will vary based on:   

• Property size, type, location 
• Property history/complexity 
• What property information is readily available 

The usual return on investment for a cost segregation report is well over 10 to 1, and most taxpayers find that the fee is well outweighed by the benefit.