Cost Segregation · Brief · Working level
Cost segregation for grocery stores and retail
Grocery anchors reclassify 25–35% of basis on the strength of refrigeration alone; general retail runs lower. Refrigeration systems, checkout, decor, and signage drive the split — and tenant-versus-landlord ownership of improvements decides who benefits.
Retail is a two-speed asset class for cost segregation. A grocery anchor, dense with refrigeration and food-service equipment, reclassifies 25–35% of depreciable basis; a dry-goods box with drywall, shelving, and lighting runs closer to 15–25%. In both cases the parking field does quiet, reliable work in the 15-year class — and before anyone studies anything, the lease decides whether the landlord or the tenant actually owns the improvements being studied.
What drives the short-life share
Grocery refrigeration is a system, and nearly the whole system reclassifies: display cases and walk-ins obviously, but also the compressor racks, condensers, and the refrigerant piping connecting them, because all of it serves inventory preservation rather than the building — the function test at the heart of the Cost Segregation Audit Techniques Guide. Food prep, bakery, and deli equipment follow the restaurant pattern, pulling dedicated utilities with them. Front of store adds checkout lanes, point-of-sale systems, gondola shelving, decor packages, and interior signage. Recovery periods run through MACRS class 57.0 at 5 years (Pub 946).
Illustrative allocation for a $15M owned grocery-anchored store, land excluded:
| Component | Class | Share of basis |
|---|---|---|
| Refrigeration cases, walk-ins, racks, piping | 5-year §1245 | 12% |
| Food prep, bakery, deli equipment and utilities | 5-year §1245 | 5% |
| Checkout, POS, shelving, decor, interior signage | 5-year §1245 | 7% |
| Parking field, cart corrals, site lighting, pylon sign | 15-year land improvement | 10% |
| Shell, storefront, general HVAC, restrooms | 39-year nonresidential | 66% |
Illustrative only; non-food retail loses most of the first two rows. Both short-life classes take 100% bonus depreciation for property acquired after January 19, 2025.
Tenant vs. landlord: whose improvements are they?
Retail is a leasehold world, and depreciation follows ownership, not occupancy. Three configurations recur:
- Tenant builds at its own cost. The tenant depreciates the improvements. Interior, non-structural work on an existing nonresidential building is generally qualified improvement property — 15-year, bonus-eligible — and true personal property within the build-out segregates to 5 years.
- Landlord funds via a Section 110 qualified construction allowance (retail space, lease of 15 years or less, allowance spent on qualified long-term real property). The landlord owns and depreciates; the tenant excludes the allowance from income.
- Allowance outside Section 110. Ownership follows the lease's terms and the benefits-and-burdens facts; the tenant may have income and basis, or the landlord may capitalize. This is where studies get run on the wrong party's assets.
At lease termination, a landlord who takes back abandoned tenant improvements gets no basis windfall — but a tenant abandoning its own improvements can generally write off the remaining basis.
The trap: the anchor's assets in the landlord's study
Acquirers of grocery-anchored centers routinely include the refrigeration and equipment in their study because it is physically in the building. If the anchor tenant installed and owns those systems — the usual arrangement — they were never in the buyer's basis at all, and a study allocating purchase price to them overstates 5-year property while understating the building. On exam, the correction cascades. Reconcile the study to the purchase price allocation and the leases, not to the walk-through. Broader comparisons live in cost seg by property type.
Frequently asked questions
- How much of a grocery store can cost segregation reclassify?
- Grocery-anchored properties commonly reclassify 25% to 35% of depreciable basis — refrigeration cases, compressor racks, refrigeration piping, checkout systems, food-prep equipment, and decor are 5-year personal property, and parking fields are 15-year land improvements. General dry-goods retail without refrigeration typically runs 15% to 25%.
- Is store refrigeration a building system or personal property?
- Personal property, almost entirely. Display cases, walk-in boxes, compressor racks, and the refrigeration piping and condensers serving them exist to preserve inventory, not to serve the building, so they classify as 5-year Section 1245 property under the function-based analysis of the Cost Segregation Audit Techniques Guide. General store HVAC remains a 39-year structural component.
- Who takes depreciation on tenant improvements in retail — landlord or tenant?
- Whoever owns them, which the lease and Section 110 determine. If a landlord funds improvements through a qualified construction allowance for short-term retail leases, the landlord owns and depreciates them. A tenant who builds out at its own cost depreciates its improvements, often as 15-year qualified improvement property. Running a study on assets the other party owns produces deductions for no one.