What Properties Are Eligible for a Cost Segregation Study?
Rental homes, Airbnbs, vacation rentals, apartment complexes, hotels, restaurants, industrial buildings, and more. In general, if a property is depreciable (used for business or rental income), it can qualify for a cost segregation study.
What is a Cost Segregation Study?
A Cost Segregation Study breaks a property down into components with shorter depreciation lives, which lets you front-load depreciation. This can create significant tax savings in the early years and helps you keep more cash available to reinvest. A dollar today is worth more than a dollar tomorrow.
When Should I Get a Cost Segregation Study Done?
The most impactful time to get a cost segregation study done is the first year you buy the property and place it in service. For example, if you bought a rental home in February 2025 and began renting it in March, you'd ideally have the study completed before you file your 2025 tax return (including extensions).
The next best time is year two, then year three, and so on. We often see studies still be very beneficial even 10 years later on residential rentals, since the building is normally depreciated over 27.5 years.
Here's why: standard depreciation spreads deductions out slowly over time, while a cost segregation study moves more depreciation to the front. The longer you wait, the fewer years are left to "pull forward," so there's typically less benefit than if you had done it earlier.
If you already filed prior-year returns, a study can still be implemented. Your CPA may use a catch-up adjustment (often a 481(a) adjustment) rather than amending multiple returns.
What is Bonus Depreciation?
Bonus depreciation lets you front-load depreciation by taking a large percentage of qualified shorter-life property in year 1. In a cost segregation study, this usually applies to the 5-year and 15-year components (and sometimes other shorter-life components) that are carved out of the building.
Due to the Big Beautiful Bill which Congress passed in July of 2025, 100% bonus depreciation was brought back for most qualified property acquired and placed in service after January 19, 2025. In other words, if your cost seg study found $125,000 of 5- and 15-year property, you may be able to deduct the full $125,000 in the first year, instead of spreading it out over 5 and 15 years. (There are also elections that can reduce bonus in certain situations.)
This can make cost segregation studies much more powerful in the early years, because it accelerates deductions and improves cash flow sooner.
Can It Offset W-2 Income?
Generally, no—rental losses are usually passive and can only offset passive income. Some taxpayers may qualify for the $25,000 active-participation allowance (subject to income limits). If you or your spouse qualifies as a Real Estate Professional and materially participates, losses may be non-passive and can offset W-2 income.
How to Qualify as a Real Estate Professional (REP)
According to the IRS (Publication 925), you generally qualify as a Real Estate Professional for the year if you meet both requirements:
- More than half of your personal services performed in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate, and
- You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.
Source: IRS Publication 925 (Passive Activity and At-Risk Rules)
What Would Cost Segregation Numbers Actually Look Like?
Here's an example of a residential, single-family rental home we did a cost segregation study for.
Example Study Results
- Date Purchased/Placed in Service: March 2025
- Total Cost: $770,000
- Land: $125,000
- Depreciable Basis: $645,000
- 5- and 15-Year Property: $174,150
- 2025 Depreciation: $174,150 (100% bonus)
With a tax bracket of 32%, this means you'd save approximately $55,728 in federal tax savings in year one.
How Much Depreciation is Typical for a Rental Property?
While every property is different, we find that most rental properties have anywhere from 24–33% of 5- and 15-year property that, with 100% bonus depreciation, can be depreciated in year one. If your total cost was $500,000 and the land is worth $75,000, your depreciable basis would be $425,000. If 28% of the basis was found to be 5- and 15-year property, with 100% bonus depreciation you'd be looking at $119,000 in accelerated depreciation in year one.
How Much Does a Cost Segregation Study Cost?
Because of how much money cost segs can save, firms don't have a problem charging a lot—but we like to keep the savings in your pocket. An engineer-based, complete Cost Segregation Study at COST APEX INC costs just $1,200.