Cost Segregation Studies That Pay for Themselves

What Is a Cost Segregation Study?

Most property owners depreciate their buildings over 27.5 or 39 years — leaving tens of thousands in deductions locked away for decades. A cost segregation study changes that. (New to the strategy? Start with our complete cost segregation study guide — this page covers how we deliver the study itself.)

When you purchase a rental or commercial property, the IRS requires you to depreciate the building over a fixed schedule: 27.5 years for residential rental property and 39 years for commercial property under IRC Section 168. That means a $1 million building generates roughly $36,000 in annual depreciation for residential — or just $25,641 for commercial.

A cost segregation study changes that math dramatically. It is an engineering-based analysis that identifies building components eligible for shorter depreciation lives. Items like electrical systems serving specific equipment, decorative finishes, parking lots, landscaping, and certain plumbing fixtures can be reclassified from 27.5- or 39-year property into 5-year, 7-year, or 15-year personal property and land improvement categories.

The result is front-loaded depreciation. Instead of spreading deductions evenly over decades, you accelerate a significant portion into the first few years of ownership. When combined with 100% bonus depreciation — permanently restored under the One Big Beautiful Bill Act (OBBBA) for property placed in service after January 19, 2025 — the effect is even more powerful: you can deduct the entire reclassified amount in the year the property is placed in service.

Cost segregation is not a loophole. It is explicitly authorized by the IRS, upheld by Tax Court in Hospital Corporation of America v. Commissioner (1997), and documented in the IRS Audit Techniques Guide for Cost Segregation. The key is having a qualified engineering firm — not just a CPA with a spreadsheet — perform the study.

Our Partnership with Engineered Tax Services

Taxstra does not perform cost segregation studies in-house. We partner with Engineered Tax Services (ETS), one of the largest and most respected cost seg firms in the country. ETS has completed over 30,000 studies across every property type and has a team of licensed professional engineers who perform detailed, on-site inspections.

Why does the partnership model work better for clients? Because cost segregation does not exist in a vacuum. The study produces raw depreciation reclassifications — but integrating those results into your tax return, coordinating with REPS qualification, maximizing the benefit of 100% bonus depreciation under OBBBA, and filing Form 3115 for look-back studies all require a CPA who understands the complete picture.

That is what Taxstra provides. We are the strategic layer on top of the engineering analysis. We determine when to order the study, which properties to prioritize, and how to integrate the results into your broader tax plan. ETS provides the engineering expertise. Taxstra provides the tax strategy. Together, we deliver a turnkey cost segregation solution.

Every study produced through our ETS partnership is IRS-compliant and audit-defensible. ETS carries professional liability insurance and will support any study they produce in the event of an IRS examination.

Who Qualifies for a Cost Segregation Study?

The short answer: almost any owner of business or investment real estate. But not every property justifies the cost of a study. Here is how we evaluate eligibility:

Properties under $500,000 can still benefit, particularly short-term rentals where the STR loophole converts passive losses into non-passive deductions. We evaluate every property individually. If the study will not generate enough benefit to justify its cost, we will tell you.

Important note: land cannot be depreciated. Only the building and its components qualify. We separate the land value from the building value as part of our analysis, typically using county assessor records or an independent appraisal.

Typical Costs and Return on Investment

Transparency matters. Here is what a cost segregation study actually costs and what you can expect in return:

These figures assume current bonus depreciation rates. Under the One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation has been permanently restored for property placed in service after January 19, 2025. That means 100% of reclassified 5-, 7-, and 15-year property can be deducted immediately in Year 1.

The study fee itself is deductible as a business expense in the year it is incurred. So a $10,000 study on a property that generates $300,000 in reclassified depreciation costs you roughly $7,000 after the tax benefit of the deduction — while generating $80,000 to $120,000 in first-year tax savings depending on your marginal rate.

We have never had a client for whom a qualifying cost segregation study did not pay for itself. The math works because engineering reclassification consistently identifies 20% to 40% of total building cost as short-life property — and the tax savings on that reclassification dwarf the study fee.

Look-Back Studies: Capture Years of Missed Depreciation

If you have owned a property for years without a cost segregation study, you are not out of luck. The IRS allows a look-back cost segregation study under Revenue Procedure 2023-15. This is a change in accounting method filed on Form 3115 that allows you to claim all prior-year missed depreciation in the current tax year.

No amended returns. No carryback limitations. All the depreciation you should have been taking — but were not — gets captured in a single Section 481(a) adjustment on this year's return.

For example, if you purchased a $1.5 million commercial property 8 years ago and a cost seg study reclassifies $400,000 into 5-year property, you have 8 years of missed accelerated depreciation. That $400,000 would have been fully depreciated by now using 5-year MACRS, but you have only been claiming 39-year straight-line. The difference — the Section 481(a) catch-up — can easily exceed $300,000 in a single deduction.

Look-back studies are one of the most powerful and underutilized tools in real estate tax planning. If you own investment or commercial property and have never had a cost seg study performed, this should be your first conversation with us.

Partial Dispositions: The Hidden Bonus of Cost Seg Studies

When you renovate a property — replacing a roof, HVAC system, or flooring — you are disposing of the old component and placing a new one in service. Under Treasury Regulation 1.168(i)-8, you can claim a partial disposition to write off the remaining undepreciated basis of the old component.

Without a cost segregation study, you do not know the original cost allocated to that specific component. You are stuck depreciating the old roof and the new roof simultaneously — paying tax on phantom income. A cost seg study gives you the component- level detail needed to claim partial dispositions and avoid this costly overlap.

We review every renovation and capital improvement against the cost seg study to identify partial disposition opportunities. This can add thousands in additional deductions every time you renovate — deductions most property owners never claim because they lack the data.

Our Process