TAX

Cost Segregation Studies: Accelerate Your Depreciation

Updated March 2026

What It Does

Normal depreciation spreads the building's value over 27.5 years. A cost segregation study breaks the property into components with shorter depreciation lives: appliances and carpet (5 years), certain fixtures and landscaping (7-15 years). Instead of deducting \$5,800/year on a \$160K building, you might deduct \$25-40K in year one. That's a massive tax shield.

The Cost

A cost segregation study runs \$3,000-7,000 depending on property value and complexity. For a single \$200K rental, expect \$3-4K. For a portfolio of 5 properties, some firms offer bulk pricing around \$2K per property. The study is itself tax-deductible as a business expense.

When It's Worth It

Generally worth it on properties valued above \$150K where you're in the 24%+ tax bracket. A \$200K property might yield \$20K in accelerated first-year deductions. At 24% tax rate, that's \$4,800 in real tax savings — more than paying for the study. Below \$150K or in lower tax brackets, the savings may not justify the cost. Also most valuable in the year of purchase.

The Catch

Accelerated depreciation means less depreciation in future years — you're front-loading, not creating new deductions. And depreciation recapture at sale is 25% regardless of what rate you deducted at. The real value is in the time-value of money: a \$5K tax savings today is worth more than \$5K spread over 27 years. If you plan to hold long-term and eventually 1031 exchange, cost seg is almost always a net positive.