Cost Segregation
What Is a Cost Segregation Study? How It Works
Cost segregation is how investors speed up depreciation on a rental or commercial building. Below: who a study is worth it for, the risks, and a free cost segregation calculator.
Educational only. This is not tax advice.
Last reviewed: November 10, 2026By Steve W.
Try the calculatorHow much can a study save?
A cost segregation study can move a slice of a building's cost into shorter 5-, 7-, or 15-year classes. With 100% bonus depreciation on qualifying property acquired after January 19, 2025, that slice can often be deducted in the first year — if you have tax to offset. Use the cost segregation calculator for a range, not a promise.
Cost Segregation Calculator (estimate)
Estimated first-year deduction
$253,091
Range $205,964 – $347,345
Estimated federal tax savings
$75,404
Range $60,323 – $105,565
Estimated extra deduction vs. no study
$235,636
Range $188,509 – $329,891
A typical professional study often costs $3,000–$12,000.
Estimate only — assumptions
- Depreciable basis: $960,000 (price minus land).
- Estimate only. Not tax advice.
- Reclassification ranges are industry estimates, not IRS figures.
- The building part uses a simple mid-month / half-year approximation (27.5 years residential, 39 years commercial).
- Passive-loss limits may block you from using the deduction this year.
- Depreciation can be recaptured when you sell.
- Look-back studies and state taxes are not modeled.
What is cost segregation?
Cost segregation is a way to speed up depreciation on an investment property. Instead of treating the whole building as one 27.5-year (residential rental) or 39-year (commercial) asset, a cost segregation study pulls out components that belong in shorter 5-, 7-, or 15-year classes.
That does not create a new deduction. It changes when you take deductions you were already entitled to. This accelerated depreciation can cut this year's tax bill and improve cash flow — if you can use the loss.
One thing never changes: land is never depreciated.
Engineered Tax Services says on its cost segregation services page, accessed November 10, 2026:
“Trusted by the IRS.”
MisleadingThe IRS does not endorse or “trust” any cost segregation firm.
What's true
- The IRS publishes a Cost Segregation Audit Techniques Guide, and a well-documented study is easier for an examiner to review.
- The strategy itself is legitimate.
What's missing
- The IRS does not endorse or “trust” a particular firm.
- The Guide itself says it is not official law and cannot be relied on as authority.
- “Only licensed engineering firm specializing in tax strategies” is marketing, not an IRS finding.
Why it matters to your wallet: You, not the slogan, own the return. If the classifications are thin, you own the audit.
Sources
- Engineered Tax Services, cost segregation services page
- IRS Publication 5653 (Feb 6, 2025)
See your own numbers first.
How a cost segregation study works
A study is the formal report, usually prepared by a firm with engineering and tax expertise — not a one-line percentage. Typical steps:
- 1
Feasibility check
An estimate of the likely benefit and the fee.
- 2
Documents
Closing statement, depreciation schedule, drawings, and invoices if you have them. Incomplete records do not automatically kill a study, but better records are better support.
- 3
Property review
A quality study typically includes a site visit (photos, measurements, component lists). The IRS has not published a single required method, but its Audit Techniques Guide says a quality study includes a site visit and documented engineering take-offs. Be cautious of “rule of thumb” reports that just apply an industry percentage.
- 4
Classification
Each component goes into the right recovery period, with costs reconciled to the building's depreciable basis.
- 5
Written report
Your CPA uses it on the return (and in a look-back, often with Form 3115). Professionally prepared studies commonly take 4–8 weeks. Fees commonly fall in the $3,000–$12,000 range, though cheaper software reports exist for small rentals (see the Fact Check below).
Engineer vs. DIY: you can list obvious personal property yourself, but the IRS views bare “rule of thumb” percentage studies with caution.
How much a cost segregation study costs
What drives the fee, what you get at each price, and when a cheap report is a false saving.
/cost-segregation/study-cost
Best cost segregation companies
We will only review firms we would actually recommend. Every claim checked and dated.
/cost-segregation/best-companies
5-, 7-, and 15-year property vs. 27.5- and 39-year buildings
| Class | Recovery period | Typical examples | Eligible for bonus depreciation? |
|---|---|---|---|
| 5-year property | 5 years | Appliances, carpet, some decorative finishes, specialty electrical tied to equipment | Generally yes, if it is qualified property |
| 7-year property | 7 years | Furniture, fixtures, some specialty equipment | Generally yes |
| 15-year property | 15 years | Parking lots, sidewalks, landscaping, fencing, site lighting; some interior qualified improvement property | Generally yes |
| Residential rental building | 27.5 years | The structure itself — walls, roof, foundation, base building systems | No |
| Commercial / nonresidential building | 39 years | The structure itself | No |
Land is not depreciable. Bonus depreciation does not apply to the 27.5- or 39-year building. It applies to the shorter-life property the study identifies, at the rate that matches the acquisition and placed-in-service dates.
Who a study is for, and when it's worth it
There is no IRS minimum price. The question is whether the likely tax benefit beats the fee, and whether you can use the deduction.
Industry rules of thumb (not law): many firms start paying attention around $500,000 of depreciable basis; some CPA firms use higher filters ($750,000 or $1 million). Remodels can qualify at lower amounts.
Often a better fit when
- You just bought, built, or substantially renovated a property
- You are in a higher tax bracket
- You will hold the property for several years
Often not worth it when
- The building is small next to a $3,000–$12,000 fee
- You have little tax to offset
- You plan to sell right away
- You are a W-2-only owner stuck with a passive loss you cannot use this year
Real estate professional status and some short-term rentals are exceptions — that is a fact-specific CPA question.
Thinking about a study?
Cost segregation by property type
Residential rental
1–4 unit rentals qualify, but the study fee can eat a larger share of the benefit. Reclassification is often toward the lower end of industry ranges. Run the calculator before you pay for a report.
Multifamily
Often a stronger candidate than a single rental, because there is more personal property and site work. Industry estimates commonly used for apartments are about 20–35% of depreciable basis.
Rental property in general
If you own income-producing real estate — a house you rent, a duplex, or a small commercial building — the same idea applies. The split is always: land (no depreciation), the building (27.5 or 39 years), and the shorter-life pieces a study identifies.
Commercial
Offices and warehouses often reclassify less (industry estimates often 10–25%) than restaurants, hotels, or specialized buildings (often higher, still not a guarantee). The building itself stays on 39 years.
Short-term rentals and Airbnb
If the average guest stay is short enough (generally 7 days or less, or 30 days with significant personal services) and you materially participate in running the property, a short-term rental may not be treated as a passive “rental activity.” In that case, cost segregation deductions might offset wages or other active income. That is the strategy people call the short-term rental loophole. It has strict tests and documentation rules, and not every Airbnb qualifies. We are covering it in a separate guide.
Cost segregation for short-term rentals and Airbnb
The short-term rental tests, the paperwork, and who really qualifies.
/cost-segregation/short-term-rentals
Depreciation recapture and audit risk
Cost segregation is a deferral. When you sell, depreciation you took can be recaptured.
- Personal property treated as section 1245 property (typical 5- and 7-year items) can be recaptured as ordinary income.
- The building (section 1250 real property) is generally subject to unrecaptured section 1250 gain, taxed at a maximum 25% rate — not a flat 25%, and not the same as ordinary income.
- So neither “all recapture is 25%” nor “all recapture is ordinary” is right. See IRS Publication 544 and a tax pro for the mix on your sale.
- A 1031 exchange can defer gain. A longer hold often makes the tradeoff more attractive: Baker Tilly has said benefits often outweigh extra recapture tax when the property is held more than three to five years. That is the firm's view, not a law.
Audit risk: a study does not automatically trigger an audit, and it is not illegal. Aggressive or thinly documented studies are what get examined. The IRS Audit Techniques Guide tells examiners what a quality study looks like. Keep the report.
Already own the building? Look-back studies and Form 3115
If you placed the property in service in a prior year and have been depreciating it as one long-life asset, a look-back study can often catch up the missed depreciation on this year's return — without amending old returns — by filing Form 3115 (change in accounting method) and taking a section 481(a) adjustment.
The bonus depreciation rate is the rate that applied to the original acquisition and placed-in-service dates, not automatically today's 100%. Eligibility and filing details are a CPA job.
Bonus depreciation, briefly
Qualified property acquired after January 19, 2025 is generally eligible for permanent 100% bonus depreciation (IRS IR-2026-06, January 14, 2026; Notice 2026-11). The building itself does not qualify. The 5-, 7-, and 15-year property a study finds generally does.
Property acquired on or before January 19, 2025 stays on the old phase-down: 40% if placed in service in 2025, 20% in 2026, then none. “Acquired” can follow a binding contract, which may be earlier than closing.
Taxpayers can elect out by class, or use a one-time transition election for the first tax year ending after January 19, 2025. Many states do not follow federal bonus depreciation.
Bonus depreciation after the 2025 law
A plain-English guide to the new 100% rules and the old phase-down.
Two more claims, checked
KBKG says on its cost segregation page, accessed November 10, 2026:
“On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure.”
Mostly TrueMany buildings have a short-life slice, but there is no IRS average and the range depends on property type.
What's true
- Many buildings do have a meaningful short-life slice.
- Baker Tilly (updated March 5, 2025) puts the common range at 10–40% of depreciable basis, depending on type.
What's missing
- There is no IRS average.
- Offices and warehouses often land at 10–25% in KBKG's own 2024 practitioner table; apartments often 20–35%.
- Land is excluded. A pitch that uses 35–40% on every property will overstate a lot of deals.
Why it matters to your wallet: An inflated percentage inflates the “savings” you are sold. Use a range, then a property-specific estimate.
Sources
- KBKG cost segregation page
- Baker Tilly, Cost segregation studies FAQs (Mar 5, 2025)
- KBKG practitioner deck (Oct 2024)
CostSegregation.com says on “What is Cost Segregation?”, accessed November 10, 2026:
“CostSegregation.com allows you to complete study in just 15 minutes! (studies starting at $495)”
MisleadingFast software reports exist, but a 15-minute form is not the quality study the IRS guide describes.
What's true
- Fast, low-cost software reports for smaller rentals exist.
- A feasibility estimate can be quick.
What's missing
- A 15-minute form is not the quality study described in the IRS Audit Techniques Guide.
- “Rule of thumb” percentage studies are to be viewed with caution.
- Quality work is documented, usually includes a site visit, and professionally prepared studies commonly take 4–8 weeks and cost $3,000–$12,000.
Why it matters to your wallet: A cheap report that cannot explain its numbers can cost you the deduction, plus interest and penalties — more expensive than doing it right.
Sources
- CostSegregation.com, “What is Cost Segregation?”
- IRS Publication 5653
- Baker Tilly FAQ
- Engineered Tax Services fee/timing range
Worked example: a $1.2 million apartment building
| Purchase price | $1,200,000 |
|---|---|
| Land (20%, not depreciable) | $240,000 |
| Depreciable basis | $960,000 |
| Property type | Multifamily, 27.5 years |
| Acquired after Jan 19, 2025 / placed in service | Yes / 2026 |
| Bonus depreciation | 100% |
| Reclassified (mid 25%) | $240,000 |
| Year-1 deduction without a study | ≈ $17,455 |
| Year-1 deduction with a study (mid) | ≈ $253,091 |
| Additional year-1 deduction | ≈ $235,636 |
| Estimated federal tax savings at 32% (mid) | ≈ $75,400 |
| Range (low 20% – high 35% reclassified) | ≈ $60,000 – $106,000 |
Want a real number for your building?
More cost segregation guides on the way
How much a cost segregation study costs
What drives the fee, what you get at each price, and when a cheap report is a false saving.
/cost-segregation/study-cost
Best cost segregation companies
We will only review firms we would actually recommend. Every claim checked and dated.
/cost-segregation/best-companies
Cost segregation for short-term rentals and Airbnb
The short-term rental tests, the paperwork, and who really qualifies.
/cost-segregation/short-term-rentals
Bonus depreciation after the 2025 law
A plain-English guide to the new 100% rules and the old phase-down.
Cost segregation FAQ
Sources
- IRS Publication 5653, Cost Segregation Audit Techniques Guide (rev. 2-6-2025)
- IRS IR-2026-06, January 14, 2026 (additional first-year depreciation guidance)
- IRS Notice 2026-11
- IRS Publication 544 (2025), Sales and Other Dispositions of Assets
- IRS Topic 409 (unrecaptured section 1250 gain, maximum 25% rate)
- IRS Publication 527 (Residential Rental Property)
- IRS Publication 946 (How To Depreciate Property)
- IRS Publication 925 (Passive Activity and At-Risk Rules)
Industry estimates (used for ranges and fees, not IRS figures):
- Baker Tilly, Cost segregation studies FAQs, updated March 5, 2025
- KBKG, cost segregation page and October 2024 practitioner deck
- Engineered Tax Services, cost segregation services page
- EisnerAmper, short-term rentals (September 2, 2026)
- CostSegregation.com, “What is Cost Segregation?”
Industry pages accessed November 10, 2026.
Educational only. This is not tax advice.