How to Do a Cost Segregation Study (w/Examples) + FAQs

A cost segregation study is an IRS-approved, engineering-based tax strategy that lets property owners dramatically accelerate depreciation deductions by reclassifying building components from long-lived (27.5 or 39 years) to shorter-lived categories (5, 7, or 15 years). The result is a massive front-loaded tax deduction in the early years of ownership — rather than waiting nearly four decades to fully recover your investment.

Without a cost segregation study, a $2 million commercial building generates roughly $41,000 in depreciation per year under the standard 39-year straight-line method. With a properly executed study, that same building can produce hundreds of thousands of dollars in first-year deductions. According to one real-world case study, a $34.1 million apartment complex generated $3.44 million in tax savings in year one alone after cost segregation was applied with 100% bonus depreciation.

Here is what you will learn in this article:

💡 The exact step-by-step process for conducting a cost segregation study and what happens at each stage

📋 Which assets qualify for 5-year, 7-year, and 15-year depreciation — with real property examples

💰 Three real-world examples across different property types, showing the exact dollar savings generated

⚠️ The biggest mistakes to avoid that can trigger IRS audits and cost you far more than you saved

🔑 How the One Big Beautiful Bill Act (OBBBA) restored permanent 100% bonus depreciation starting January 19, 2025 — and what it means for your tax strategy right now

What the Law Actually Requires

The foundation of cost segregation is the Modified Accelerated Cost Recovery System (MACRS), which is the federal depreciation framework established under IRC Section 168. Under MACRS, all depreciable real property defaults to a 39-year life for commercial buildings and 27.5 years for residential rental property, both using the straight-line method. The problem this creates is immediate: if you purchase a $3 million office building, your depreciation deduction is only $76,923 per year. At a 37% tax rate, that saves you about $28,462 annually — a fraction of what the building might actually cost to operate, maintain, and improve.

The IRS recognizes, however, that not every component inside a building has a 39-year useful life. Carpeting wears out. Lighting gets replaced. Parking lots deteriorate. This recognition is what makes cost segregation legally permissible, and the IRS publicly endorses it through its own Cost Segregation Audit Techniques Guide, a 261-page document that outlines exactly how studies should be performed. Revenue Procedure 87-56 provides the official MACRS asset class tables that determine which property qualifies for shorter recovery periods.

The critical regulatory requirement is this: the study must be engineering-based, well-documented, and defensible under audit. The IRS does not accept rule-of-thumb estimates or software-only analyses as a substitute for a thorough professional study.

Who Qualifies for a Cost Segregation Study

Cost segregation studies benefit a wide range of property owners, but the strategy works best when specific conditions are met.

Property types that qualify

· Commercial buildings (office, retail, warehouses, manufacturing facilities)

· Residential rental properties (apartment complexes, single-family rentals, multifamily)

· Hotels and hospitality properties

· Mixed-use buildings

· Medical or dental offices

· Restaurants and food service facilities

· Any property that has been purchased, constructed, or significantly renovated since December 31, 1986

Who benefits most

· Property owners with a high tax rate (the higher the tax bracket, the greater the value of early deductions)

· Pass-through entity owners (LLCs, S-Corps, partnerships) whose income flows to individual tax returns

· Real Estate Professionals (REPs) as defined by the IRS — those who spend more than 50% of their personal service hours in real estate activities and at least 750 hours per year — because they can use depreciation losses to offset active W-2 income and business profits, not just rental income

· Business owners who own the building where they operate, creating an immediate offset to operating income

· Investors who already own properties and have never done a study — the “look-back” study addresses this specifically

Minimum property value threshold:

As a general rule of thumb, cost segregation makes financial sense for properties valued at $500,000 or more, though the sweet spot is $1 million and above. Below $500,000, the study fee may not be justified by the additional deductions, though this depends on your tax rate and the bonus depreciation available.

The passive activity loss (PAL) trap to understand first:

If your rental activity is classified as passive under IRC Section 469, accelerated depreciation losses can only offset other passive income. If your household income exceeds $150,000, your passive loss allowance may be reduced to zero, meaning the big first-year deductions from a cost segregation study could be completely unusable in the year generated. However, those passive losses are never lost — they carry forward indefinitely to offset future passive income, or are released in full when you sell the property. Only REP-status taxpayers and those using the short-term rental loophole (where material participation rules apply) can immediately apply these losses against W-2 or business income.

The 4 Asset Classes in a Cost Segregation Study

The entire purpose of a cost segregation study is to break a property down into four distinct depreciation buckets. Understanding what goes in each bucket is essential.

Asset Class	Depreciation Period	Depreciation Method	Common Examples
Personal Property	5 years	200% DB / MACRS	Carpet, countertops, specialty lighting, cabinetry, dedicated electrical outlets, breakroom sinks, fire extinguishers, decorative molding
Personal Property	7 years	200% DB / MACRS	Office furniture, certain fixtures
Land Improvements	15 years	150% DB / MACRS	Parking lots, landscaping, sidewalks, drainage pipes, outdoor swimming pools, fencing, bollards, signs, tennis courts
Real Property / Building Shell	27.5 or 39 years	Straight-line	Foundation, structural walls, roof, core HVAC, plumbing to the building, elevators

Note: Land itself is never depreciable and must always be carved out of the cost basis before any depreciation is calculated. If you purchase an office building for $2 million and the land is worth $600,000, only the remaining $1.4 million is eligible for any depreciation at all.

The 5- and 7-year assets are classified under IRC Section 1245, while most structural components fall under Section 1250. This distinction becomes critical when you eventually sell the property (more on that in the Depreciation Recapture section below).

Qualified Improvement Property (QIP) — improvements to the interior of a nonresidential building made after the building was placed in service — has a 15-year life and qualifies for bonus depreciation. This is important for commercial tenants and business owners who renovate leased or owned spaces.

The Bonus Depreciation Game-Changer (2025 and Beyond)

Cost segregation becomes exponentially more powerful when combined with bonus depreciation under IRC Section 168(k). Bonus depreciation allows property owners to write off the entire cost of qualifying short-lived assets (those with a recovery period of 20 years or less) in the year they are placed in service, rather than spreading the deduction over 5, 7, or 15 years.

Here is the critical legislative history you need to understand:

Year	Bonus Depreciation Rate (TCJA)	Rate Under OBBBA
2022	100%	—
2023	80%	—
2024	60%	—
2025 (after Jan. 19)	40%	100% (permanent)
2026	20%	100% (permanent)
2027+	0%	100% (permanent)

The Tax Cuts and Jobs Act of 2017 set bonus depreciation at 100% through 2022, then phased it down 20% per year. By 2025, it was down to just 40%. However, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restored 100% bonus depreciation for all qualified property placed in service on or after January 19, 2025. This is not a temporary extension — it is now permanent under the new law. The IRS issued Notice 2026-11 on January 14, 2026, providing interim guidance on how the permanent 100% rate applies.

What this means practically: if your cost segregation study identifies $400,000 of 5- and 15-year property in a $2 million commercial building, you can potentially deduct the entire $400,000 in year one rather than spreading it over 5 or 15 years. That is a $148,000 tax savings at a 37% rate, from a single study.

Step-by-Step: How to Conduct a Cost Segregation Study

Step 1: Assess Eligibility and Run a Feasibility Analysis

Before spending a dollar on a study, you need to determine whether the potential savings justify the cost. Properties over $1 million (excluding land) tend to produce the best return on investment, though properties down to $500,000 can still make sense depending on the tax situation.

Key questions to answer at this stage:

· What is the total cost basis of the property (excluding land)?

· What is your effective tax rate?

· Is the rental activity passive or active (REP status)?

· When was the property placed in service?

· Have improvements been made that were not previously segregated?

Many cost segregation firms offer free preliminary analyses or ROI calculators at no charge. Use them before committing to a full study.

Step 2: Hire the Right Professional

This is where many property owners make a critical mistake. The IRS Cost Segregation Audit Techniques Guide explicitly states that “a study by a construction engineer is more reliable than one conducted by someone with only financial or accounting expertise.” A quality study requires a combination of tax law knowledge, engineering expertise, and construction cost understanding.

The three types of qualified professionals are:

1.   Cost Segregation Specialist Firms — dedicated firms that combine CPAs, engineers, and construction experts under one roof. These firms often produce the most defensible studies and are the preferred choice for complex properties.

2.  CPAs with Engineering Partners — a CPA who specializes in real estate tax often partners with an outside engineering firm to perform the physical analysis component.

3.  Certified Cost Segregation Professionals (CCSPs) — professionals certified by the American Society of Cost Segregation Professionals (ASCSP), a credentialing body that validates deep knowledge of cost segregation methodologies.

Avoid generic accounting software tools or DIY platforms that skip the on-site inspection. These tools often miss eligible assets, misclassify components, and produce studies that cannot withstand IRS scrutiny.

Step 3: Gather Property Documentation

Your specialist will need a specific set of documents to perform an accurate study. The more complete your documentation, the more accurate — and more favorable — the results. Gather the following:

· Purchase agreements and closing statements (to establish cost basis)

· Construction drawings, blueprints, and architectural plans

· Construction contracts and subcontractor invoices

· Prior depreciation schedules (if the property was previously owned)

· Property appraisals

· Any renovation or improvement records with associated costs

If original construction records are unavailable (common with older properties), the specialist can use alternative methods, including contractor interviews, cost estimation databases, and IRS-approved pricing guides to reconstruct costs.

Step 4: The Physical Site Inspection

A quality cost segregation study always includes an on-site inspection. During the inspection, the engineer performs a forensic analysis of the property, room by room, system by system. They document every component — from the flooring type in each unit to the electrical panel configuration — and assign a construction cost to each.

The engineer is looking for three things during the inspection:

· Removable Assets without damaging the structure (personal property qualifying for 5- or 7-year depreciation)

· Land improvements outside the building footprint that serve a function beyond mere aesthetics

· Areas of the building where systems (like electrical wiring) serve both structural needs and personal property needs, requiring cost allocation between the two

The IRS specifically requires that the study use appropriate documentation and include a property visit as part of the 13 principal elements of a quality study outlined in the Audit Techniques Guide.

Step 5: Asset Classification and Cost Allocation

This is the most technically complex step. The engineer and tax professional work together to classify each identified component into its proper MACRS asset class and assign it a value. The IRS approves several methodologies for this process:

· Detailed Engineering Approach (most preferred): Uses construction drawings and actual cost records to assign specific costs to each asset

· Engineering Cost Estimate Approach: Uses standard industry pricing guides (such as RS Means) when actual cost data is not available

· Survey or Letter Approach: Relies on contractor or architect interviews to establish costs

· Residual Estimation Approach: Determines building-specific costs and allocates remaining costs to personal property

The most defensible studies use the detailed engineering approach, which the IRS favors above all others because it produces accurate, well-documented, and auditable results.

The engineer also separates direct costs (materials and labor directly attributable to specific assets) from indirect costs (soft costs like architectural fees, permits, and financing costs that must be allocated proportionally across all asset classes).

Step 6: The Formal Cost Segregation Report

When the analysis is complete, the study firm prepares a formal written report. According to the IRS Audit Techniques Guide, a quality report must contain:

1.   Executive summary and summary letter

2.  Narrative description of the property and methodology

3.  Schedule of assets with assigned depreciation lives

4.  Schedule of direct and indirect costs

5.   Engineering procedures and procedures used

6.  Statement of assumptions and limiting conditions

7.   Certificate signed by the preparer

8.  Supporting exhibits (photos, blueprints, cost schedules)

The report is then handed to your CPA, who incorporates the reclassified asset schedule into your tax return. The depreciation deductions are reported on IRS Form 4562 (Depreciation and Amortization).

Step 7: File Your Tax Return with the New Schedule

Once the study is complete and the report delivered, your CPA integrates the results into your tax return. For new acquisitions in the current tax year, the reclassified depreciation simply replaces the default straight-line schedule on your return.

Critical timing rule: The study must be complete before your tax filing deadline, including extensions. For partnerships and S-Corps, that is March 15 (or September 15 with extension). For individuals and C-Corps, the deadline is April 15 (or October 15 with extension).

The Look-Back Study: Catching Up on Past Properties

What if you bought a property years ago and never did a cost segregation study? You do not need to amend prior returns. Instead, you file IRS Form 3115 (Application for Change in Accounting Method) to claim all the missed accelerated depreciation in a single lump sum in the current tax year. This is made possible by the IRC Section 481(a) adjustment, which allows the IRS to recompute your taxable income as if the new depreciation method had been used from the beginning.

Here is how the 481(a) catch-up works in practice: suppose you purchased a $1.2 million office building in 2018 and have been depreciating the full building over 39 years (about $25,000/year). A look-back study determines that $300,000 of that building should have been classified as 5- and 15-year property. Over the past six years, you should have taken far more depreciation. The difference — the total amount you could have taken versus what you actually took — is your 481(a) adjustment, and it flows as a lump-sum deduction onto your current year return without touching any prior return.

Any property placed in service after December 31, 1986, is eligible for a retroactive look-back study. The IRS allows automatic consent for most accounting method changes under this provision, meaning you do not need to wait for IRS approval before filing.

Three Real-World Scenarios

Scenario 1: Apartment Complex (Residential Rental)

A real estate investor purchases a 15-unit apartment building for $1,000,000 in 2024. Under the standard 27.5-year straight-line method, annual depreciation is $18,182, generating roughly $6,363 in tax savings at a 35% rate.

Decision Point	Tax Outcome
No cost segregation — straight-line over 27.5 years	First-year depreciation: $18,182 / Tax savings: ~$6,363
Cost segregation study conducted in 2024	$325,000 reclassified to 5- and 15-year property
80% bonus depreciation applied (2024 rate)	$260,000 deducted in year one alone
After-study first-year tax savings at 35%	$113,750 vs. $6,363 without the study
Net benefit after $8,000 study cost	$105,750 in additional first-year tax savings

Source: Alternate Tax Solutions case study. With 100% bonus depreciation restored after January 19, 2025, the savings would be even greater for newly acquired properties.

Scenario 2: Commercial Office Building

A business owner purchases a $1,000,000 office building (land allocated at $200,000, building basis $800,000). Without cost segregation, the building depreciates over 39 years at $20,512 per year, saving approximately $7,500 annually at a 37% tax rate.

Decision Point	Tax Outcome
No cost segregation — 39-year straight-line	Annual depreciation: $20,512 / Annual tax savings: $7,590
Cost segregation identifies $100K of 5-year fixtures	$100,000 fully deducted in year one with 100% bonus depreciation
Plus $100K of 7-year assets, $100K of 15-year land improvements	Additional $200,000 potentially deducted in year one
Remaining $400K still on 39-year schedule	$10,256/year depreciation on remaining building shell
First-year federal tax savings at 37% rate	~$111,000 vs. $7,590 without the study

Source: Warren Averett cost segregation example.

Scenario 3: Large Apartment Complex with 100% Bonus Depreciation

A real estate investment group acquires a 248-unit, 12-floor apartment complex in January 2019 for $34,112,436 (excluding land). After conducting a cost segregation study and applying 100% bonus depreciation, the results were:

Asset Category	Amount Reclassified	Depreciation Life
Personal property (carpet, fixtures, appliances)	$7,219,874	5 years
Land improvements (parking, landscaping, lighting)	$2,341,478	15 years
Remaining building structure	$24,479,084	39 years
First-year tax savings generated	$3,440,123	—
NPV of savings over 10 years	$2,622,984	—
Future value of reinvested savings	$16,157,801	—

Source: CSSI Services apartment complex case study.

Cost of a Cost Segregation Study

Study fees vary based on the property’s value, complexity, and geographic location. Here is the typical fee range:

Property Value	Typical Study Cost
Under $500K	$3,000 – $5,000
$500K – $1M	$5,000 – $8,000
$1M – $3M	$7,000 – $15,000
$3M – $10M	$20,000 – $40,000
Over $10M	$40,000 – $60,000+

The cost of the study itself is deductible as a business expense in the year it is incurred, which partially offsets the fee. Most studies generate a return of 10x to 30x the study cost in tax savings over the holding period. For a $1 million commercial property, a $10,000 study that generates $80,000 in first-year deductions — saving $29,600 at 37% — represents a nearly 3x ROI in year one alone.

Depreciation Recapture: The Tax You’ll Owe When You Sell

One of the most misunderstood aspects of cost segregation is what happens when you eventually sell the property. The IRS requires you to recapture previously accelerated depreciation, and this recapture is taxed at a higher rate than regular capital gains. This is not a reason to avoid cost segregation — the math almost always still favors the strategy — but you must plan for it.

The recapture rules work differently depending on the asset type:

· Section 1250 property (building structure): Recaptured at a maximum rate of 25%, which is still lower than the 37% ordinary income rate that applied when you took the deduction. This is known as unrecaptured Section 1250 gain.

· Section 1245 property (personal property and certain land improvements): Recaptured at your full ordinary income rate, which can be as high as 37%. This applies to the 5-year and 7-year assets identified in your cost segregation study.

The key insight: depreciation recapture is only triggered when you sell at a gain. And the time value of money typically makes accelerating deductions worthwhile even with future recapture. Taking a $100,000 deduction today (saving $37,000 in taxes at 37%) and paying $37,000 in recapture tax in 10 years is still financially superior because of inflation and investment returns on those tax savings in the meantime.

Strategies to minimize or defer recapture:

· 1031 Exchange: Rolling proceeds from a sale into a like-kind replacement property defers all depreciation recapture until the replacement property is eventually sold (or the 1031 chain ends)

· Installment Sale: Spreading the gain over multiple years can reduce the annual recapture by spreading it across lower tax brackets

· New cost segregation study on replacement property: A new study on the replacement property can generate fresh deductions that absorb some of the recapture tax

· Hold until death: A step-up in basis at death eliminates all accumulated depreciation, including recaptured amounts

Do’s and Don’ts

Do’s:

·         Do hire a qualified, engineering-based specialist. The IRS specifically favors studies prepared by individuals with construction and engineering expertise. A well-prepared, defensible study is your best protection against audit.

·         Do conduct the study as soon as possible after acquisition. The sooner you identify and reclassify assets, the sooner you start capturing accelerated deductions. Time value of money matters — a dollar of tax savings today is worth more than the same dollar five years from now.

·         Do analyze your passive activity loss status before commissioning the study. If you cannot use the losses immediately, make sure you have a strategy for when and how you will absorb them.

·         Do revisit the study after major renovations. Any significant capital improvement to the property — a kitchen renovation, HVAC replacement, parking lot repaving — should trigger a new study or study update to capture fresh deductions on the new components.

·         Do understand that the study fee is itself deductible. Report it as a business expense on Schedule E or your entity return in the year the study is completed.

Don’ts:

·         Don’t use DIY software for complex properties. DIY tools skip the on-site inspection, miss site-specific details, and produce studies that cannot withstand audit scrutiny. The few hundred dollars saved in study fees can cost tens of thousands in disallowed deductions and penalties.

·         Don’t over-classify assets aggressively. Over-segregation — reclassifying structural components as personal property — is a recognized audit trigger. If your study reclassifies more than 30-40% of a typical building to short-lived categories, that number should be well-supported by the engineering analysis.

·         Don’t ignore state tax implications. Many states do not conform to the federal bonus depreciation rules, meaning your state tax return may need to be filed with the original straight-line depreciation schedule. Your CPA needs to perform a state-by-state analysis if you own properties in multiple states.

·         Don’t neglect documentation after the study is complete. Keep the engineering report, all supporting documentation, and your fixed asset schedules permanently. The IRS has no statute of limitations on fraud, and depreciation schedules affect your adjusted basis for the life of the property.

·         Don’t assume the study is a one-time event. Tax laws change. The OBBBA permanently changed bonus depreciation in 2025. If you had a study done in 2023 at 80% bonus depreciation rates, revisiting that strategy with a qualified advisor now — under 100% bonus depreciation — may significantly increase your available deductions.

Pros and Cons of Cost Segregation

Pros:

·         Immediate and substantial cash flow improvement. Front-loading large deductions in the early years of ownership puts real money back in your pocket right now, whether you reinvest it, pay down debt, or fund the next acquisition. For a $3 million building, the additional first-year cash benefit can easily exceed $150,000.

·         Permanent tax savings on time value of money basis. Even though recapture eventually applies, the net present value of getting large deductions now versus spreading them over 39 years almost always favors the study.

·         Applies retroactively through the look-back study mechanism. You do not have to have purchased the property last year. Properties placed in service as far back as 1987 are eligible for a retroactive study using Form 3115.

·         Compounds powerfully with 100% bonus depreciation. With the OBBBA permanently restoring 100% bonus depreciation after January 19, 2025, the combination of cost segregation and bonus depreciation is now more powerful than at any point since 2022.

·         The study is IRS-sanctioned. This is not an aggressive tax scheme or gray-area strategy. The IRS publishes a 261-page guide telling you how to do it correctly. It is explicitly endorsed by the tax code.

Cons:

·         Upfront cost of the study. For smaller properties, the $5,000–$15,000 study fee can represent a significant upfront expense, even if it pays back multiples in tax savings.

·         Depreciation recapture at ordinary income rates for Section 1245 assets. When you sell, the 5- and 7-year assets are recaptured at ordinary income rates — potentially up to 37% — rather than the lower long-term capital gains rate of 20%.

·         Passive loss limitations can defer or permanently reduce the benefit. If you are not a Real Estate Professional and have no passive income to offset, a large chunk of the accelerated depreciation may sit in a suspended loss carryforward for years.

·         State tax non-conformity creates added compliance complexity. States like California, New Jersey, and New York do not conform to federal bonus depreciation rules, requiring separate depreciation schedules and potentially adding back deductions on state returns.

·         Requires ongoing record-keeping and coordination with your CPA. The depreciation schedule from a cost segregation study is significantly more complex than a simple straight-line schedule, with dozens of individual asset lines, different recovery periods, and different depreciation methods. Your CPA needs to track and maintain these schedules accurately every year.

Mistakes to Avoid

1. Not verifying your specialist’s qualifications.
The IRS requires that studies be prepared by individuals with expertise and experience in construction, engineering, and tax. Using an unqualified firm whose report cannot withstand audit scrutiny can result in full disallowance of all accelerated deductions, plus penalties and interest. Look for ASCSP certification (CCSP designation) or a firm with licensed engineers on staff.

2. Skipping the site inspection.
The IRS Audit Techniques Guide specifically states that a quality study includes a physical visit to the property. Studies conducted without a site visit are a recognized audit red flag. An engineer who has never seen the property cannot accurately classify its components.

3. Failing to account for the passive activity rules before commissioning the study.
If your income exceeds $150,000 and you are not a Real Estate Professional, the large deductions generated by a cost segregation study may not be usable in the year generated. Knowing your passive loss status before the study tells you whether you need to plan around the limitation (via STR loophole, REP qualification, or self-rental structuring) or simply carry the losses forward.

4. Not addressing state tax non-conformity.
Bonus depreciation accelerated deductions that reduce your federal tax can increase your state tax in non-conforming states. Failing to account for this in your planning gives you a tax surprise in the other direction. Always ask your CPA to run a state-by-state analysis.

5. Treating the study as a one-time set-it-and-forget-it event.
Tax laws change frequently. After major improvements, renovations, or when laws shift (like the OBBBA restoration of 100% bonus depreciation), revisiting your depreciation strategy is essential. An update to an existing study costs far less than the original study and can unlock substantial new deductions.

6. Missing the look-back opportunity.
Thousands of property owners who purchased buildings years ago have never done a cost segregation study. Every year they go without one is another year of foregone accelerated deductions. A retroactive look-back study using Form 3115 can recapture all missed deductions in a single tax year — at no additional IRS permission required.

Frequently Asked Questions

Can I do a cost segregation study on a property I purchased years ago?
Yes. You can apply a retroactive look-back study to any property placed in service after December 31, 1986. You file Form 3115 to claim all missed depreciation as a lump-sum deduction in the current tax year, without amending prior returns.

Does a cost segregation study trigger an IRS audit?
No. When performed correctly by a qualified professional following IRS guidelines, a cost segregation study is an IRS-approved strategy. The IRS ATG explicitly supports well-documented studies. Poorly done studies or DIY efforts are more likely to draw scrutiny.

Can I do a cost segregation study on a residential rental property?
Yes. Residential rentals use a 27.5-year default life, not 39 years. Components like carpet, appliances, fixtures, and landscaping still qualify for 5- and 15-year lives, making cost segregation highly effective for apartments, single-family rentals, and multifamily buildings.

Is bonus depreciation the same as cost segregation?
No. Cost segregation is the process of identifying and reclassifying short-lived assets. Bonus depreciation is the tax rule allowing those reclassified assets to be fully deducted in year one. They are separate but used together. You need cost segregation to identify what qualifies for bonus depreciation.

Can I use the deductions from cost segregation to offset my W-2 income?
No — unless you qualify as a Real Estate Professional under IRS rules (more than 50% of personal service hours in real estate and at least 750 hours/year). Non-REPs can only use the losses against other passive income. The short-term rental loophole may also apply to materially participating STR owners.

Does cost segregation affect my property tax bill?
Yes, in some cases. By reducing the reported building value (and increasing land and personal property allocation), a cost segregation study may lower your local real estate transfer taxes and could reduce annual property tax assessments, depending on your jurisdiction.

What is the minimum property value that makes a cost segregation study worthwhile?
Yes, there is a general threshold. Properties worth $500,000 or more (excluding land) are typically good candidates. Below that, the study fee may not be justified by the tax savings. The sweet spot is $1 million and above, where the ROI is typically 10x or higher.

Can a cost segregation study be done on a property I’m still constructing?
Yes. Studies on properties under construction can actually be more accurate because original cost records and blueprints are readily available, making the engineering analysis more precise and comprehensive.

What happens to my passive loss carryforwards when I sell the property?
Yes, they are fully released. When you dispose of a property in a taxable sale, all suspended passive losses tied to that property are released and become fully deductible against any type of income in the year of sale — including active income and capital gains.

Should I do a new cost segregation study when I renovate a property?
Yes. Any major capital improvement — a new roof, HVAC replacement, interior buildout — can be the subject of a supplemental cost segregation study that identifies additional short-lived components in the new work, generating fresh accelerated deductions on the improvement costs.