Cost segregation is a strategy that breaks down a rental property’s total cost into separate categories — like land improvements, building parts, appliances, fixtures — so you can depreciate certain parts faster than the standard 27.5 years (residential) or 39 years (commercial).

Instead of waiting decades to claim the whole deduction, you speed up tax write-offs now by putting more into shorter depreciation buckets — like 5, 7, or 15 years.

The main goal: front-load bigger depreciation deductions in the first few years of owning the property.

This lowers your taxable rental income and can create big paper losses — which either offset other rental profits or, if you qualify as a Real Estate Professional (REPS) or use the short-term rental loophole, can reduce your overall taxable income.

More deductions now = more cash flow in your pocket instead of Uncle Sam’s.

Cost segregation is especially worth it for:

• Higher-value single-family rentals
  
  
• Multifamily buildings
  
  
• Vacation rentals with big improvements
  
  
• Commercial buildings
  
  
• Any property you plan to hold for a while

If your property cost is under $200k, it might be too small to justify a paid study — but even then, you can do a DIY version or bonus depreciation on certain items. The bigger and newer your property, the more you can usually carve out.

Cost segregation often pairs with bonus depreciation, which lets you immediately deduct 80% (2023) of qualifying short-life assets upfront instead of spreading them out.

For example, the landscaping, appliances, or carpet might be carved out into a 5-year bucket and then written off all at once in the first year. This is where landlords see huge up-front savings — sometimes tens of thousands off taxable income in year one.

Yes — you’re not creating new deductions out of thin air, you’re just accelerating them to get cash flow savings sooner. When you sell, you’ll pay depreciation recapture tax on the amount you claimed — but that’s taxed at a maximum of 25%, which is usually lower than the ordinary income tax rate you save today. Plus, your dollars today are worth more than dollars later — and you can reinvest the tax savings now.

A formal engineering-based cost segregation study usually runs from $3,000–$8,000 depending on the property’s size and complexity.

For bigger buildings, the savings usually dwarf the cost. For smaller landlords, there are simpler DIY or software-guided options — or you might just separate out obvious items (like appliances, land improvements) with your tax pro’s help.

Cost segregation is 100% legal and supported by IRS guidance — if it’s done properly. The biggest risks come from sloppy or unsubstantiated estimates.

That’s why serious investors get a reputable provider to do a formal study — they document every piece, provide a full report, and stand by the math if the IRS ever asks.

If you just guesstimate numbers with no backup, that’s when problems pop up.

If you own a cheap rental, plan to sell in a couple of years, or can’t use the extra deductions due to passive loss limitations, it might not make sense. You don’t want to front-load losses you can’t use, then pay recapture tax later anyway.

For landlords with lower income or older properties, a regular straight-line depreciation schedule might be fine. Good cost seg planning depends on your whole tax picture — not just your rentals.