A building isn’t just four walls and a roof. It contains many components — like carpet, cabinetry, specialty electrical, and land improvements (sidewalks, fencing) — that may qualify for shorter tax recovery periods (e.g., 5, 7, or 15 years instead of 27.5 or 39 years).
The purpose of a cost segregation study is to identify and reclassify those shorter tax life components so you can accelerate depreciation deductions and improve cash flow. Depending on the year, qualifying assets may also be eligible for bonus depreciation, which further increases your year 1 depreciation and tax savings. Check what bonus depreciation you qualify for here.
Even without bonus depreciation, simply moving items to shorter lives will increase first-year deductions compared to straight-line 27.5 or 39 year schedules.
| Purchase price for a short term rental property | $1,000,000 |
| % of purchase price allocated to land (which is non-depreciable) | 20% |
| Depreciable basis | $800,000 |
| % of depreciable basis reclassified into shorter life categories with a cost seg | ≈ 25% |
| Assets eligible for Year 1 100% bonus depreciation with a cost seg | ≈ $200,000 |
| Year 1 tax savings at a 37% federal income tax rate with a cost seg | ≈ $74,000 |
Higher depreciation → lower taxable income → improved cash flow
Note: This estimate is provided for informational purposes; actual results will depend on the specific features of your property (e.g., quality of the property, condition, year of purchase, renovation work, location, etc.).
| Date Placed in Service | Bonus Depreciation % |
|---|---|
| 9/28/2017 thru 12/31/2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
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