Cost Segregation
A cost segregation study may accelerate depreciation by reclassifying components of a property to shorter recovery periods. Whether it's worth the study cost depends on basis, hold period, and your tax profile.
At a glance
- Category
- Real Estate
- May be relevant for
- Owners of rental or commercial property
- Our approach
- Document review → proposal → implementation
- Service area
- Nationwide (office in Westlake Village, CA)
Whether this applies to you depends on your specific facts and circumstances.
Ask a CPA about your situationImportant: This page is for educational purposes only. It describes how this strategy may work under current law. Whether it is appropriate for you, and how to implement it correctly, depends entirely on your specific facts, timing, and documentation. This is not individualized tax advice. Speak with a licensed CPA before acting.
How it may work
Cost Segregation — a plain-English overview
The sections below describe how this strategy works under current tax law, what conditions may make it applicable, and what factors affect the outcome.
How depreciation acceleration works
Standard real property depreciates over 27.5 years (residential rental) or 39 years (commercial). A cost segregation study is an engineering-based analysis that identifies and reclassifies components of a building — fixtures, finishes, electrical for equipment, certain land improvements, and personal property — to 5-, 7-, or 15-year MACRS classes. Faster depreciation means larger deductions in earlier years, which may reduce income tax sooner.
The role of bonus depreciation
Components reclassified to 5- or 15-year property may qualify for bonus depreciation under §168(k). Bonus depreciation has been phasing down: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, before expiring absent legislation. The interaction between cost segregation and bonus depreciation creates time-sensitivity: a study performed while bonus is available may yield materially larger first-year deductions than the same study performed later.
Who may benefit — and who may not
A cost segregation study generates large depreciation deductions. Whether those deductions are useful depends on whether you can use them. Owners with positive taxable income from the property — or with other passive income to offset — may benefit. Real estate professionals who qualify under §469(c)(7) may be able to use the losses against ordinary income, which may be significant. However, passive-activity loss rules generally prevent passive investors from using excess real estate losses against ordinary W-2 income. The study cost is not trivial, and the benefit must exceed the cost to make sense.
Depreciation recapture on sale
Accelerated depreciation deductions are subject to recapture on sale. §1250 recapture on real property is taxed at a maximum 25% rate. §1245 recapture on personal property is taxed as ordinary income. This does not eliminate the benefit — the time value of money means that a deduction today is typically worth more than a deduction in year 20 — but it is part of the full economic picture and affects the hold-period analysis.
Document-first
What we'd review before recommending this strategy
We do not guess. We review the documents, propose, and implement. Here is what we'd want to see to evaluate whether this strategy may apply to you.
- Purchase price and allocated basis — the foundation of the depreciation schedule
- Date placed in service — affects bonus depreciation percentage available
- Property type — residential, commercial, or mixed-use
- Taxpayer's passive-activity classification and ability to use losses
- Real estate professional status under §469 — determines ordinary loss treatment
- Anticipated hold period — affects recapture exposure and present-value analysis
Who this may fit
Profiles where this strategy comes up most
These are the client situations where we most commonly evaluate this strategy. Whether it applies to you depends on your specific facts.
Common Questions
Questions about Cost Segregation
Educational answers to questions we often hear when discussing this strategy with clients.
Can a cost segregation study be done on a property purchased years ago?
Yes. A 'look-back' cost segregation study may be performed on property acquired in prior years, with a 'catch-up' depreciation deduction claimed in the current year on Form 3115 (change in accounting method). No amended returns are required. The bonus depreciation available will depend on the rate in effect at the time the components are reclassified.
Does every property warrant a study?
No. The cost of a professional engineering study (typically several thousand dollars depending on property size and complexity) must be weighed against the tax benefit. Lower-basis properties, properties with minimal personal property components, and situations where the losses cannot be used may not justify the cost. We model this before engaging a segregation firm.
Educational content only
This page describes Cost Segregation for general educational purposes under current tax law. It is not individualized tax, legal, or investment advice. Whether this strategy is appropriate for you — and how it should be structured, documented, and reported — depends entirely on your specific facts, timing, and circumstances. Tax law changes frequently. Always consult a licensed CPA before acting on any information here.
We do not guess. We review the documents, propose, and implement.
Ask a CPA
Wondering if Cost Segregation applies to you?
Tell us about your situation and we'll follow up within one business day. We review the actual documents and give you a direct answer — no obligation.
- Document-first review — we start with your actual returns and records
- Clear explanation of what may apply and why
- No obligation — honest if there isn't enough value to act on
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A discovery call is how we start. We review the documents and tell you honestly what may be worth pursuing.