Real Estate Tax Strategy

Cost Segregation for Small Real Estate Investors

A cost segregation study reclassifies portions of a building from 27.5- or 39-year property into 5-, 7-, and 15-year property — accelerating depreciation and front-loading tax deductions. The savings can be real, but the math is narrower than the marketing suggests.

When the math works

Studies typically cost $3,000–$15,000 and become economically interesting around a $500K building basis. Below that, the deduction acceleration rarely justifies the fee.

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Bonus depreciation timing

Bonus depreciation is phasing down (60% in 2024, 40% in 2025, 20% in 2026). The earlier you place property in service, the more first-year deduction you capture on the accelerated components.

Passive loss rules still apply

If you're not a real estate professional and the property isn't a short-term rental, the accelerated loss may be suspended until you have passive income to offset it. The deduction isn't lost — it's deferred — but the timing impact matters.

When to do the study

Best done in the year the property is placed in service. Studies on properties owned for several years are still possible (catch-up via Form 3115), but the modeling is more complex.

What you actually get

A report from a qualified engineer breaking out building components by depreciation life. The study itself is the support — it doesn't change tax law, it documents the basis allocation.

Frequently asked questions

Can a single-family rental benefit from cost segregation?

Sometimes, but rarely for under-$500K properties because the fee eats most of the timing benefit. Multi-unit and small commercial properties are usually better candidates.

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