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.

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 for Rental Property: IRS-Approved Accelerated Depreciation & Deductions (2026)

Rental property cost segregation studies allow for tax deductions using accelerated depreciation. Investors should discuss with their CPA.

May 14, 2026

4 min read

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TLDR: If you're building a portfolio of rentals, cost segregation for rental property is an IRS-approved way to accelerate rental property depreciation. This is often what people mean by accelerated depreciation on rental property or improving timing for tax deductions for rental property or rental income and deductions . Passive loss rules usually apply; real estate professional status is an advanced path a CPA can evaluate. We deliver engineering-based studies, and your CPA files the results.

Many successful rental investors today build rental income, equity, and long-term wealth. On the tax side, that usually means landlord tax planning centered on landlord tax deductions, deductions for rental property, and rental property and tax deductions, especially rental depreciation and rental home depreciation, and understanding how those items interact with your wages and rental income deductions.

A cost segregation study for rental property documents component costs that support those positions under IRS rental property depreciation rules (useful lives, bonus eligibility, and basis). Investors also track rental property expense deductions for capital improvements alongside operating expenses.

This guide focuses on rental property 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.

Rental Property Cost Segregation: Tax Benefits and Tax Advantages

Cost segregation for rental property 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 rental property owners, the impact is higher early-year deductions that improve cash-flow timing and tax depreciation for rental property in the early years of ownership.

Residential property defaults to straight-line depreciation over 27.5 years. Accelerated depreciation on rental property through cost segregation and bonus depreciation moves a portion of the property's basis into shorter life buckets so more depreciation is recognized earlier. Investors sometimes ask about tax write offs for rental property. A cost seg study changes the timing of depreciation, which your CPA applies on the return.

This changes when tax deductions land. For landlords comparing tax benefits of rental property and tax advantages of rental property across holdings, the question is whether those timing benefits are usable given passive rules and your broader tax strategy.

Some experienced landlords pursue real estate professional (REP) status or grouping elections to change how rental activities interact for passive purposes. These tests are strict (hours, material participation, facts-and-circumstances) and require intentional effort. If you are building a portfolio and expect scale, ask your CPA whether REP status could affect your plan. Many owners hold the property title in an LLC; LLC rental property tax deductions still follow the property's facts, basis, and use as income-producing real estate. The entity itself does not have an impact on the tax benefits of the property.

Landlord tax deductions and timing: cost segregation is most attractive when

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.

Steps To A Cost Segregation Study for Rental Property

A checklist for a cost segregation study for residential rental property.

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 cost segregation study for rental property depth for each property. Our team is happy to help you choose the right option for your property.
- 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: Rental Property 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 rental income and deductions timing.

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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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There are many factors that impact how a cost segregation study may impact your taxes. Tax savings are provided for estimate purposes only. I have read and agree with the.

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