What Is Cost Segregation?
A cost segregation study breaks a property into its component parts so the shorter-lived ones can be depreciated faster.
Normally a residential rental is written off over 27.5 years as a single lump. But the building isn't really one thing — the appliances, carpets, light fittings, fencing, paving and landscaping all have much shorter useful lives than the structure.
A study, usually done by engineers, goes through the property and reclassifies those items into 5, 7 and 15-year categories. Typically it moves somewhere between 18% and 33% of the depreciable basis.
Why anyone bothers
Deductions are worth more sooner than later. Pulling years of depreciation forward into the present can produce a large first-year deduction, particularly when combined with bonus depreciation.
Worked example — illustrative figures
On a $400,000 building basis, a study might reclassify $90,000 into short-life categories — deductible far sooner than it otherwise would have been.
Why it often isn't worth it
Three reasons, and they're the ones the sales pitch tends to skip:
A study costs money, typically several thousand dollars.
A big deduction is only useful if you can use it. Rental losses are often passive, meaning they can't reduce the tax on your salary — they wait. Accelerating depreciation into a year where the loss just gets suspended achieves nothing now.
It comes back when you sell. Accelerating depreciation lowers your basis, so more returns as recapture. The accelerated slice comes back at your ordinary income rate rather than the 25% cap that applies to the building.
Where to read more
Whether it pays off for your situation is the real question, and we work through it in does a cost segregation study actually pay off. Our calculator gives you a straight answer, including when that answer is no.
Informational purposes only — estimates for discussion, not tax, legal, or financial advice. No professional-client relationship is created. Consult a qualified CPA about your situation.