Cost segregation for hotels and resorts

Hotels reclassify more of their basis in a cost segregation study than almost any other property type — commonly 25–40%, against 20–30% for multifamily and less for warehouses or office. The reason is what a hotel actually is: a 39-year building wrapped around an enormous quantity of 5- and 7-year property. Furniture, fixtures and equipment in every guestroom, commercial kitchens and laundries, banquet and fitness amenities, decorative millwork and lighting, and resort-scale site work all leave the 39-year class once a study documents them.

Why hotels reclassify so much

A hotel is a hybrid: part real estate, part operating business. MACRS treats the building shell as 39-year nonresidential real property — Section 168(e)(2)(A)(ii) expressly excludes transient lodging from the residential 27.5-year class — but the operating business inside it runs on personal property. The Cost Segregation Audit Techniques Guide devotes specific attention to the casino and hotel industries for exactly this reason: the component analysis is rich, and the stakes are high.

Four things drive the hospitality percentage above other asset classes:

• FF&E density. Every guestroom carries beds, case goods, seating, televisions, lamps, drapery, and carpet — repeated hundreds of times. All of it is Section 1245 personal property.
• Food service. Kitchens, walk-in coolers, bars, and banquet operations are equipment-heavy, and much of the plumbing, electrical, and ventilation serving them follows the equipment rather than the building.
• Amenities. Pools, spas, fitness centers, golf and tennis facilities, and porte-cochères contribute both personal property and 15-year land improvements.
• Site work. Resorts especially carry extensive parking, landscaping, exterior lighting, signage, and water features — classic 15-year property.

Recovery periods come from MACRS as laid out in Pub 946; hospitality FF&E generally falls in asset class 57.0 (distributive trades and services) at 5 years, with some assets at 7.

What lands in each class

Typical component classification in a full-service hotel study:

The contested territory is, as always, the building systems. Electrical distribution is allocated between the load that serves equipment (reclassifiable) and the load that serves the building (39-year); the same logic applies to plumbing and HVAC. A kitchen exhaust hood and its dedicated makeup air unit can follow the kitchen; the central plant conditioning the lobby cannot. Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997) — the case that legitimized modern component studies — turned on exactly these distinctions, and the ATG's "whether the property is a structural component" analysis governs where the line falls.

An illustrative allocation

Illustrative allocation of depreciable basis for a $30M full-service hotel acquisition, land excluded:

5-year property22%

7-year property5%

15-year property9%

39-year property64%

Illustrative allocation; actual results vary with service level, amenity load, and site area. Limited-service properties trend lower; resorts higher.

On those numbers, $10.8M of a $30M basis becomes bonus-eligible. With 100% bonus depreciation restored for property acquired after January 19, 2025, and a 37% marginal rate, the first-year federal deferral approaches $4M. Limited-service and select-service properties allocate less — no banquet kitchen, thinner amenities — but still routinely clear 20–25%. How hospitality compares across the spectrum is mapped in cost segregation by property type, and the interaction with bonus rules in cost segregation and bonus depreciation.

Flow-through FF&E versus building systems

The analytical heart of a hotel study is separating property that serves the business from property that serves the building. Three recurring examples:

• Kitchen ventilation. Exhaust hoods, grease ducts, and dedicated makeup air serving cooking equipment are generally reclassifiable as serving the equipment; general kitchen HVAC is a structural component.
• Electrical. Studies allocate panels and feeders by load: circuits dedicated to laundry equipment, kitchen lines, and guestroom PTAC-adjacent equipment can follow the equipment. General lighting and receptacle power stay at 39 years. Decorative lighting — chandeliers, sconces, cove lighting whose purpose is ambiance rather than illumination — has long been treated as personal property under the ATG's framework.
• Plumbing. Lines serving kitchen equipment, bars, and laundry can be allocated to the equipment; guestroom bathrooms are unambiguously structural.

Brand standards, PIPs, and partial dispositions

Franchised hotels live on a renovation clock. Property improvement plans (PIPs) imposed at brand conversion or license renewal strip out soft goods every 5–7 years and case goods every 10–14. This churn is where a cost segregation study earns its keep twice.

First, the replacement assets are themselves 5- and 7-year bonus-eligible property, and interior build-out work that is not structural can be qualified improvement property — 15-year recovery, bonus-eligible — so long as the property remains nonresidential.

Second, the retired assets support a partial disposition election under Treas. Reg. §1.168(i)-8. When the PIP hauls three hundred rooms of carpet and case goods to the dumpster, the owner may deduct the remaining undepreciated basis of those components in the year of disposition rather than carrying ghost basis for decades. The election is annual and made on the return for the disposition year; it requires knowing what the retired components cost, which is exactly the asset-level detail a good study provides. Owners who bought a hotel and immediately renovated should sequence the study before the demolition, so the retired basis is documented while it still exists. A look-back study on an earlier-acquired hotel takes the catch-up as a Section 481(a) adjustment via Form 3115.

The condo-hotel wrinkle

Condo-hotels — individually owned units enrolled in a hotel rental program — complicate every step of the analysis:

• Whose basis? Each unit owner depreciates only the unit they bought. Shared amenities (lobby, pool, restaurant) may be owned by the association or the operator, leaving them outside any unit owner's depreciable basis, which caps the reclassifiable percentage well below whole-hotel norms.
• Which recovery period? A unit rented on a transient basis is nonresidential 39-year property; a unit leased long-term can be residential 27.5-year property. Mixed rental histories require year-by-year attention, since the character of the property follows its use.
• Passive limits. Because average guest stays are under seven days, the activity is generally not a "rental activity" under the Section 469 regulations — which cuts both ways. Owners who materially participate may deduct losses currently, but a passive investor in a rental program usually cannot, and short-stay treatment forecloses the real estate professional route that works for conventional rentals.

For most individual condo-hotel unit owners, a full engineering study is overkill; the fee against a single unit's basis rarely clears. Developers and bulk owners are a different matter.

When a hotel study does not pay

The neutrality caveats are the standard ones, sharpened by hospitality's economics:

• Suspended losses. Hotel losses hitting passive investors under Section 469 defer, not deduct. The study's technical quality cannot fix the owner's tax posture.
• Short holds. The 5- and 7-year buckets are Section 1245 property; recapture at sale is ordinary income. A buyer flipping in two years may hand much of the benefit back at a worse rate.
• Thin margins on small assets. An exterior-corridor motel with modest basis may not support an engineering fee, though hospitality's high reclassification percentage lowers the break-even relative to other classes.
• Aggressive allocations invite exams. The ATG flags hospitality specifically. Studies that push general HVAC, primary electrical, or bathroom plumbing into short-life classes without load analysis are the ones that lose on audit.

What the IRS looks at

Expect scrutiny on three fronts: the electrical and plumbing allocation methodology (percentage-of-load studies should be documented, not asserted), the line between decorative and primary lighting, and land versus land improvement allocations on resort sites. The Audit Techniques Guide tells examiners to test whether the study reconciles to total project costs and whether the preparer inspected the property. A study that ties to the closing statement, allocates by documented load, and cites the ATG's own industry matrices is the study that survives. See asset classes and recovery periods for the underlying class-life framework.