Does cost seg pencil for your property?

Net benefit over 7-yr hold

$36,131

Cost seg generates $119,273 more depreciation over your 7-yr hold than straight-line 27.5-yr alone. At your 37% marginal rate, that’s $44,131 of cumulative tax savings, minus the $8,000 study cost. BUT: at sale, the accelerated depreciation gets RECAPTURED at ordinary income rates — potentially $44,131 of recapture tax owed. Cost seg defers, doesn’t eliminate. The benefit is the time value of money on the deferred tax.

X-axis is years. Big year-1 spike with cost seg = bonus depreciation on 5/15-yr assets. Years 2-5 still elevated as remaining 5-yr depreciates. After year 15, converges back to no-seg pace as the accelerated assets are exhausted. (Simplified straight-line within each class — actual MACRS uses half-year/mid-quarter convention but the totals are within a few percent.)

The strategy — when cost seg actually pencils

The basic mechanic: a third-party engineering firm reclassifies portions of your building basis from 27.5-yr (residential) or 39-yr (commercial) into 5-yr personal property, 15-yr land improvements, etc. Bonus depreciation lets you write off 100% (2026, post-OBBBA) of those reclassified assets in year 1.

When it pencils:

• Building basis $500k+ (study cost amortized across larger benefit)
• High marginal tax rate (32%+ federal)
• Long planned hold (7+ years to amortize the recapture trap on sale)
• Active investor (REPS or STR + material participation) who can use accelerated losses against W-2 income
• You have positive rental income to absorb the deduction (paper-loss rentals already shelter income — cost seg adds limited value)

The recapture trap: cost seg moves depreciation FORWARD in time; at sale it gets recaptured. §1245 (5/7-yr personal property — carpet, appliances, fixtures) recaptures at ORDINARY rates up to the depreciation taken — potentially 37%+ federal. §1250 real property (27.5/39-yr building, 15-yr land improvements) gets "unrecaptured §1250 gain" treatment capped at 25% federal on the straight-line portion; any depreciation taken in EXCESS of straight-line (e.g. bonus depreciation on 15-yr land improvements) recaptures at ordinary rates under §1250(b). With 100% bonus restored, the §1245 exposure is enormous on short holds — cost seg can be net negative if you sell in 2-4 years without 1031.

1031 exchange interaction: a 1031 defers the recapture (along with cap gains). Cost seg + 1031 chain = accelerated benefit + indefinite deferral. The holy grail strategy.

Bonus depreciation rates:

• 2024: 60% (pre-OBBBA schedule)
• 2025: 40% (pre-OBBBA) — or 100% if acquired & placed in service after 1/19/2025
• 2026 and forward: 100% (permanent under OBBBA, signed July 2025)
• Note: property under a binding contract dated before 1/20/2025 stays on the old phase-down schedule

Watch out for:

• "Shrink-wrap" or DIY studies — won’t survive an IRS audit
• Aggressive land allocations (under 15%) — audit flag
• Studies on personal residences (only investment / business property qualifies)
• Cost seg on a property you might 1031 in 2-3 years — recapture vs deferral math may not pencil

See rental tax basics guide and rental tax shelter calc for the §469 passive loss interaction. Always consult a CPA before commissioning a cost seg study — the math depends on your specific tax situation.