Cost Segregation
Cost segregation is a tax strategy that reclassifies building components into shorter depreciation categories (5, 7, 15 years instead of 27.5), enabling accelerated deductions and bonus depreciation.
A standard residential property is depreciated over 27.5 years. Cost segregation studies identify components that can be depreciated much faster: personal property (furniture, appliances, carpet — 5-year life), land improvements (parking lots, landscaping, fencing — 15-year life), and remaining building structure (27.5 years).
By reclassifying 15–30% of a property's value into 5-year and 15-year categories, cost segregation dramatically front-loads depreciation deductions. Combined with bonus depreciation (40% in 2026), this can create very large first-year deductions.
For a $500,000 STR property: standard Year 1 depreciation = ~$14,545 (500k × 80% / 27.5). With cost segregation: potentially $50,000–$80,000 in Year 1 deductions. The tax savings at a 32% federal bracket = $11,360–$20,800 in Year 1 tax reduction.
Cost segregation studies typically cost $5,000–$15,000 for residential properties. The break-even analysis is simple: if the study generates $50,000+ in additional first-year deductions at a 32% tax rate, that's $16,000 in tax savings against a $10,000 study cost — immediate positive ROI.
Formula
Year 1 Deduction = (5yr Basis × Bonus Rate) + (15yr Basis × Bonus Rate) + (Remaining 27.5yr Basis ÷ 27.5)Calculate It
Quick Calculator
Year 1 Bonus Deduction = 5yr Basis × Bonus Rate + 15yr Basis × Bonus Rate
Year 1 Cost Seg Deduction
$64,545 vs $14,545 standard
Worked Example
A $500,000 property with 15% personal property and 10% land improvements at 40% bonus depreciation: 5yr bonus = $30,000, 15yr bonus = $20,000, remaining = $14,545. Total Year 1 = $64,545 vs $14,545 standard.
Related Terms
Related Calculators
Frequently Asked Questions
Is cost segregation worth it for an Airbnb?+
Generally yes, for properties valued at $500,000+. The cost of the study ($5,000–$15,000) is typically recovered many times over through tax savings. For a $750,000 property at a 32% tax rate, a $75,000 additional first-year deduction generates $24,000 in tax savings — against a $10,000 study cost.
What is bonus depreciation in 2026?+
Bonus depreciation allows you to immediately deduct a percentage of qualifying asset costs in the year placed in service. In 2026, the rate is 40% (phasing down from 100% in 2022 by 20% per year). Assets in 5-year and 15-year classes qualify. Consult your CPA for the current rate and rules.
Can I do cost segregation myself?+
No — a cost segregation study requires a qualified engineer or CPA firm to physically inspect the property and document each component. The IRS requires detailed documentation to support the reclassification. Using an unqualified study can trigger audits. Use a CPA or engineering firm with specific cost segregation experience.
What is the recapture tax on cost segregation?+
When you sell a property where you took accelerated depreciation, you may owe "depreciation recapture" tax at 25% on the accumulated depreciation (compared to 15–20% long-term capital gains rate on appreciation). 1031 exchanges can defer this recapture. Discuss the exit strategy implications with your CPA before implementing cost segregation.
Does cost segregation apply to STR properties specifically?+
Yes — and STR properties may have additional advantages. Some STR investors qualify for "real estate professional" status or material participation rules that allow STR depreciation losses to offset other active income, amplifying the tax benefit of cost segregation. This is a complex area of tax law requiring professional guidance.