Cost Segregation

Does a cost segregation study pay off for your rental?

Enter your rental’s price, how much of it is land, and what a study would reclassify. We’ll estimate the extra depreciation you could deduct early, the tax it saves while you own the property, and how much could be taxed back when you sell.

Rentals are written off slowly
The IRS lets you deduct a residential rental building’s cost over 27.5 years through . Land is never depreciated, so only the building counts.
A study finds faster parts
A splits the building into pieces with shorter lives: 5-year items (carpet, appliances, fixtures) and 15-year land improvements (fencing, paving, landscaping).
More deductions now, some tax later
With , those short-life pieces can be deducted in year 1. When you sell, the extra deductions are taxed back as , so the main benefit is getting tax savings years earlier.

The default percentages are typical for a single-family rental. A cost segregation firm can estimate the split for your property. The rental tax basics guide explains depreciation from the start.

The property and your plans

What you paid, how long you expect to keep it, and your tax rate. A higher rate and a longer hold make a study worth more.

Purchase price

Land share of price

Years you’ll own it

Combined tax rate (fed + state)

What a study would find

How much of the building a study moves to shorter schedules, and what it costs. The defaults are typical for a single-family rental.

5-year property

% of bldg

15-year land improvements

% of bldg

Study cost

Use bonus depreciation?

100% for property bought and placed in service after Jan 19, 2025. Earlier deals follow the old 60% / 40% / 20% schedule (2024 / 2025 / 2026).

Net benefit over a 7-year hold

$36,131

A study generates $119,273 more depreciation over your 7-year hold than the standard 27.5-year schedule alone. At your 37% rate, that’s $44,131 of tax savings, minus the $8,000 study cost. At sale, the faster depreciation is taxed back at regular income rates: up to about $44,131 of recapture tax. So a study mostly moves tax to later years.

Building value (depreciable)

$640,000

80% of price; land is excluded

Moved to faster schedules

$160,000

$96,000 5-year + $64,000 15-year

Year-1 deduction with a study

$177,455

vs $23,273 without one

Depreciation over 7 yrs

$282,182

$119,273 more than without a study

Tax saved while you own it

$44,131

at a 37% combined tax rate

Net benefit after study cost

$36,131

study cost: $8,000

What this means

A study would let you deduct about $177,455 in the first year instead of $23,273. Over 7 years that’s $119,273 more in deductions, worth about $44,131 at your 37% rate. After the $8,000 study fee you come out $36,131 ahead while you own it. If you sell instead of doing a , up to about $44,131 could be taxed back, so most of the savings is tax paid later.

The recapture figure is a rough upper bound. The real tax is usually lower, because 5-year items are often worth little by the time you sell, and the straight-line part of the 15-year depreciation is taxed at no more than 25%. The deductions only lower your tax if they can offset income. Rental losses are usually “passive” and can’t offset wages unless you qualify as a real estate professional or run a short-term rental you actively work in. Check with the rental tax shelter calculator.

Depreciation each year, with and without a study

The yearly deduction you’d take under each approach over your hold.

With a study Without (27.5-year straight line)

The x-axis is years. The big first-year spike with a study is bonus depreciation on the 5-year and 15-year pieces. With bonus, later years run below the no-study pace because those pieces were written off up front; without bonus, years 1 to 5 are higher as the 5-year pieces depreciate, then fall below the no-study pace. (Simplified to equal amounts each year within each class; actual IRS schedules (MACRS) use half-year or mid-quarter conventions, but the totals are within a few percent.)

When a study pays off

A third-party engineering firm reclassifies parts of your building from 27.5-year (residential) or 39-year (commercial) property into 5-year personal property, 15-year land improvements, and so on. Bonus depreciation lets you write off 100% (2026, under the OBBBA) of those reclassified parts in year 1.

A study tends to pay off with:

Building value of $500,000 or more (the study cost is spread over a bigger benefit)
A high tax bracket (32% or more federal)
A long planned hold (7+ years, so the recapture at sale is far off)
An active investor who can use the losses against wage income: a , or a short-term rental owner who materially participates
Positive rental income to absorb the deduction (a rental already showing a paper loss gets less from a study)

At sale, the depreciation a study moved earlier gets taxed back. 5-year and 7-year personal property (carpet, appliances, fixtures) is property and is recaptured at regular income rates on the full depreciation taken, potentially 37% or more federal. The building and 15-year land improvements are property: the straight-line portion is “unrecaptured §1250 gain,” capped at 25% federal, and any depreciation taken faster than straight-line (such as bonus on 15-year land improvements) is recaptured at regular rates under . With 100% bonus restored, the §1245 exposure is large on short holds. A study can lose money if you sell within 2 to 4 years without a 1031 exchange.

A defers the recapture along with the capital gain. A study plus a chain of 1031 exchanges means faster deductions and deferral that can continue indefinitely.

Bonus depreciation rates by year:

2024: 60% (pre-OBBBA schedule)
2025: 40% (pre-OBBBA), or 100% if bought and placed in service after Jan 19, 2025
2026 and later: 100% (made permanent by the , signed July 2025)
Property under a binding contract dated before Jan 20, 2025 stays on the old phase-down schedule

Watch out for:

“Shrink-wrap” or DIY studies that won’t survive an IRS audit
Aggressive land allocations (under 15%), an audit flag
Studies on personal residences (only investment or business property qualifies)
A study on a property you might 1031 exchange in 2 to 3 years, where the recapture vs deferral math may not work

See the rental tax basics guide and the rental tax shelter calculator for how the passive loss rules () interact. Talk to a CPA before commissioning a study; the math depends on your tax situation.

Results are estimates based on your inputs and the assumptions on this page, not quotes or advice. A lender, servicer, or tax advisor will give you different numbers. Disclaimer

Something look off? Report it

Terms used on this page

A study changes when you take depreciation and when it’s taxed back. These are the terms involved.

Depreciation: A yearly tax deduction for wear and tear on a rental building. Residential rentals are depreciated over 27.5 years; land is never depreciated.
Cost segregation study: An engineering study that moves parts of a building onto shorter tax schedules (5-year and 15-year), so you deduct the same total depreciation sooner.
Building basis: The part of the purchase price that pays for the building rather than the land. Only this part can be depreciated. More
5-year property: Items inside the building with short useful lives, such as carpet, appliances, fixtures, and decorative lighting.
15-year land improvements: Improvements to the lot rather than the building: paving, sidewalks, fencing, landscaping, and drainage.
Bonus depreciation: Lets you deduct the full cost of qualifying shorter-life property in the first year. It’s 100% for property bought and placed in service after January 19, 2025.
Depreciation recapture: Tax on past depreciation when you sell. Building depreciation is taxed at up to 25% federal; 5-year and 7-year items at regular income rates.
1031 exchange: Selling a rental and buying another under IRS rules so that capital gains and depreciation recapture are deferred instead of taxed now.
Passive losses: Rental losses are normally “passive” and can only offset other passive income, not wages, unless you qualify as a real estate professional or use the short-term rental rules.

Keep learning

Next steps

Rental tax shelter: whether the losses can offset your wages
REPS calculator: test your hours against the 750-hour rule
1031 exchange calculator: defer recapture when you sell
Short-term rental: the other route to using losses