Cost segregation is an engineering-based study that breaks a property's purchase price into components and reassigns them to shorter depreciation schedules. Instead of depreciating the whole building over 27.5 or 39 years, land improvements, fixtures, and personal property move to 5, 7, and 15-year lives, which front-loads a much larger deduction into the first year.
My BnB Accelerator, LLC is a real estate acquisition firm, not a CPA firm. This is a plain English explanation of the mechanics so you can have an informed conversation with a qualified professional. It is not tax advice. See our partner firm, AE Tax Advisors.
How a study reallocates basis
| Component | Life | Examples |
|---|---|---|
| Personal property | 5 years | Appliances, carpeting, decorative lighting, furniture |
| Certain fixtures | 7 years | Specific equipment and fittings |
| Land improvements | 15 years | Driveways, landscaping, fencing, exterior lighting, pools |
| Structure | 27.5 or 39 years | Foundation, framing, roof, walls |
A typical short-term rental study reclassifies somewhere between 20 and 35 percent of purchase price into the shorter lives. On a $900,000 property that is roughly $180,000 to $315,000 moved out of the 39-year bucket.
Why bonus depreciation matters to the outcome
Reclassifying basis accelerates deductions on its own, but bonus depreciation is what converts a large share of it into an immediate first-year deduction rather than a schedule. The applicable percentage is set by statute and has changed across recent years, so the deduction from an identical study differs by placed-in-service year. Confirm the current-year percentage before modelling anything.
When a study is and is not worth it
- Worth it when the property is a short-term rental you materially participate in, you have income to offset, and purchase price is high enough that study cost is small against the benefit.
- Usually not worth it when the loss would be passive and suspend anyway, when you plan to sell within a couple of years and recapture would erase the benefit, or when the property is inexpensive enough that the fee eats the gain.
- Available retroactively. A look-back study on a property bought in an earlier year can catch up missed depreciation without amending returns. See look-back cost segregation.
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Frequently asked questions
How much does a cost segregation study cost?
Fees for a residential short-term rental commonly run in the low thousands, varying with property size, complexity, and whether the provider performs a site visit. The fee should be small relative to the tax benefit; if it is not, the property is probably too inexpensive to justify a study.
Does cost segregation trigger an audit?
A properly performed engineering-based study following IRS guidance is a well-established method, not an audit flag in itself. What draws scrutiny is an unsupported allocation, a study without documentation, or a taxpayer claiming material participation they cannot evidence.
Can I do cost segregation on a property I already own?
Yes. A look-back study lets you claim the depreciation you should have taken in prior years, generally caught up in the current year through an accounting method change rather than by amending prior returns.
What happens to cost segregation when I sell?
Accelerated depreciation reduces your basis, so more gain is recognised on sale, and depreciation recapture applies. Cost segregation is a deferral and a timing advantage, not permanent forgiveness. Planning the exit matters as much as planning the purchase.