What is cost segregation and how does it work?

Cost Segregation is an IRS-approved tax planning strategy that can provide companies or individuals who have acquired, constructed, or renovated real estate assets with increased cash flow by accelerating the deductions from depreciation and reducing income taxes. A cost segregation study is an engineering-based analysis of real estate assets to identify the costs of components that can be depreciated more quickly for tax purposes. Typically, real estate assets are depreciated over 27.5 or 39 years for federal and state income tax purposes. However, the tax code allows certain assets to be depreciated over 5, 7, or 15 years - these assets are also eligible for year 1 "bonus" depreciation acceleration. So as much as 20% to 50% of the cost of your property may become year 1 depreciation. By identifying and accelerating depreciation deductions, cost segregation decreases federal and state income taxes and increases cash flow to the owner of the real estate asset. You can learn more about how cost segregation works here .

What types of properties qualify for cost seg?

Most income-producing properties qualify including: short term rentals, apartments, condos, office buildings, retail centers, warehouses, manufacturing facilities, hotels, and medical facilities. Properties must be used for business or income-producing purposes, not be a personal residence.

Can I prepare a cost segregation study myself?

The IRS has an Audit Technique Guide, where it describes the best practices for a cost segregation report that will be accepted by the IRS during an audit. The IRS explicitly states that a cost segregation expert should conduct the study and create the report , and that significant construction and engineering experience is required (See page 35).

How much can I expect to save?

Savings vary based on property type, value, and your tax situation. Typically, our clients see first-year tax savings up to 10% of their purchase price. Our clients also typically see first-year tax savings of 5x the cost of their study. Every situation varies, but applied correctly cost seg can be a really lucrative and efficient strategy. We are happy to provide you a personalized quote of your benefits and costs and based on your specific situation, or feel free to use our free estimate tool .

How much does this cost?

DIY studies start at $595 per property. Engineer-Reviewed studies are $895 per property. Fully Engineered studies for larger residential and commercial properties typically start around $2,500.

What types of property does Cost Seg EZ work for?

DIY cost segregation studies are available for residential properties (excluding condos) with a purchase price < $1 million and minimal post acquisition improvements. Engineer Reviewed cost segregation studies are available for all residential properties (including condos) with a purchase price < $1 million and post acquisition improvements up to $100,000. We also offer Fully Engineered cost segregation studies for all property types and sizes. Get a personalized proposal here .

Will a cost seg study trigger an IRS audit?

Cost segregation studies do not increase your audit risk when done properly. Cost segregation is an IRS-approved strategy, and we've never had a study rejected by the IRS. Our studies follow the IRS guidelines and we lead the industry with engineering-based best practices. A poor quality or inaccurate study is what can increase the risk of an audit or cause issues during an audit.

Do you provide audit protection?

Yes, we provide lifetime audit protection. If the IRS questions any aspect of our cost segregation study, we handle the defense at no additional cost.

When should I do my cost seg?

Ideally in the same tax year as your acquisition, construction, or renovation — but look-back studies (studies done years later) are very common and can still deliver very attractive tax savings. With a look-back study you do a catch-up without amending prior returns.

How do I determine my depreciable basis?

The depreciable basis of your property is generally the purchase price, less land value (which is not depreciable for tax purposes), plus any post-purchase improvements to the property. There are a number of ways to estimate the land value, including: an appraisal, using a ratio based on the property tax assessment, or researching vacant land sale comps. If you have questions, feel free to reach out to us.

What is my bonus depreciation %?

Bonus depreciation percentage varies by tax year and property acquisition date. Check current IRS guidance for the tax year you are filing.

How does your savings estimator work?

Our estimator leverages over 20 years of experience to estimate the cost seg reclassification percentage for different property types. With this information, we apply the various depreciation schedules by tax category to provide an estimate of your year 1 and first 5 year depreciation compared to traditional straight line methodologies.

Cost Segregation in Real Estate: Accelerated Depreciation & Deductions (2026)

Q: Will a cost seg study trigger an IRS audit?

Cost segregation studies do not increase your audit risk when done properly. Cost segregation is an IRS-approved strategy, and we've never had a study rejected by the IRS. Our studies follow the IRS guidelines and we lead the industry with engineering-based best practices. A poor quality or inaccurate study is what can increase the risk of an audit or cause issues during an audit.

Q: Do you provide audit protection?

Yes, we provide lifetime audit protection. If the IRS questions any aspect of our cost segregation study, we handle the defense at no additional cost.

Q: When should I do my cost seg?

Ideally in the same tax year as your acquisition, construction, or renovation — but look-back studies (studies done years later) are very common and can still deliver very attractive tax savings. With a look-back study you do a catch-up without amending prior returns.

Q: How do I determine my depreciable basis?

The depreciable basis of your property is generally the purchase price, less land value (which is not depreciable for tax purposes), plus any post-purchase improvements to the property. There are a number of ways to estimate the land value, including: an appraisal, using a ratio based on the property tax assessment, or researching vacant land sale comps. If you have questions, feel free to reach out to us.

Engineering-based cost segregation studies for investment real estate allow you to front-load eligible depreciation in an IRS-approved way.

June 1, 2026

4 min read

Get Your Free Savings Estimate

TLDR: If you own income-producing real estate, cost segregation is an IRS-approved way to accelerate real estate tax depreciation. This is often what people mean by real estate accelerated depreciation or accelerated depreciation real estate, including bonus depreciation for real estate where eligible. Passive loss rules usually apply; real estate professional status is an advanced path a CPA can evaluate. We deliver engineering-based studies, and you or your CPA files the results.

Real estate investors—from buy-and-hold owners to syndicators and small commercial operators—rely on real estate tax depreciation to offset taxable income from property operations. Understanding how real estate depreciation works across your holdings is central to long-term tax planning and cash-flow management.

A real estate cost segregation study documents component costs that support those positions under IRS rules. These includ: useful lives, bonus eligibility, land allocation, and depreciable basis.

This guide focuses on real estate cost segregation: an IRS-approved way to front-load eligible depreciation with a clear, engineering-based report so you can reduce taxable income and improve cash flow.

Related guides: Rentals · Short-term rentals · 100% bonus depreciation · How cost segregation works

Real Estate Cost Segregation Overview

Cost segregation in real estate is an IRS-approved tax strategy for identifying building components that can be depreciated over shorter lives (for example, 5, 7, or 15 years) instead of only 27.5 years (residential) or 39 years (commercial). For property owners, the impact is higher early-year deductions that improve cash-flow timing and cost segregation real estate depreciation in the early years of ownership.

Residential real property depreciation defaults to straight-line over 27.5 years. Commercial buildings default to 39 years. Accelerated depreciation on real estate through cost segregation and bonus depreciation on real estate moves a portion of the property's basis into shorter life buckets so more depreciation is recognized earlier. A cost seg study changes the timing of real estate tax depreciation; your CPA applies the results on Form 4562 or Form 3115.

For investors comparing tax benefits across holdings, the question is whether those timing benefits are usable given passive activity rules and your broader tax strategy.

Some experienced investors pursue real estate professional (REP) status or grouping elections to change how real estate activities interact for passive purposes. These tests are strict (hours, material participation, facts-and-circumstances) and require intentional effort. If you are scaling a portfolio, ask your CPA whether REP status could affect your plan.

When cost segregation is most attractive:

Your purchase basis is at least $100,000. The higher the basis, the more tax savings you can achieve.
You have income to offset the paper losses from accelerated depreciation.
You plan to hold the property for several years.

Questions? Contact us or book a call below after your estimate.

Residential vs Commercial Real Estate Cost Segregation

Cost segregation for residential real estate applies to single-family rentals, small multifamily, and condos used for income. These assets typically follow the residential real property depreciation schedule, whcih is a 27.5-year building life. Cost Seg EZ's DIY tier is well suited to many simpler residential investment properties.

Cost segregation for commercial real estate covers retail, office, industrial, hospitality, and similar income-producing buildings on a 39-year schedule. Larger or more complex assets often benefit from a fully engineered cost segregation study real estate report.

Both paths use the same engineering-based methodology. Bonus depreciation for real estate depends on placed-in-service date, asset class, and current tax law. Not sure which applies? Use the free estimate below.

Steps to a Real Estate Cost Segregation Study

A checklist for a real estate cost segregation study engagement.

Confirm your acquisition details, placed-in-service date, purchase basis, land allocation, and capital improvements.
Review passive activity limitations with your CPA (especially if you have W-2 wages).
Use our Free Estimate to quantify potential reclassification and timing.
Choose a DIY, Engineer Reviewed, or Fully Engineered real estate cost segregation study for each property. Our team is happy to help you choose the right option for your real estate asset.
- We identify 5-, 7-, and 15-year property using accepted cost engineering methods.
- We quantify bonus-eligible personal property and land improvements where supported.
- We produce a cost segregation study in line with IRS guidance (including the Audit Technique Guide).
File taxes using Form 4562 / Form 3115 as directed by your CPA and retain documentation.

Example: Depreciation After a Cost Segregation Study

Purchase price for property	$1,000,000
% allocated to land (not depreciable)	20%
Depreciable basis	$800,000
Reclass %	~ 25%
Bonus depreciation eligible assets	~ $200,000
Year 1 tax savings at a 37% tax rate	~ $74,000

Higher depreciation → lower taxable income → improved cash flow

Process and Pricing

Step 1

Get FREE Estimate

Input some basic info about your property and get a FREE estimate of the potential tax savings, cash flow increase, and ROI from a cost segregation study

Takes 2 minutes

Step 2

Generate Report

When you're ready, input your property details and INSTANTLY generate your cost segregation study. We also offer review by our experienced engineering team

Takes 15 minutes and starts at ~$595

Step 3

Save Money!

After generating your cost segregation study, implement the results into your federal and state tax filings and save money on your income taxes!

First-year tax savings of ~8% of your purchase price

Free Estimate Calculator

See how a study could affect real estate tax depreciation and early-year deductions.

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Please select the applicable bonus depreciation percentage for the property. Click here for more information regarding bonus depreciation and the applicable percentages. If needed, please contact us or your tax advisor for assistance with this input.

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