Cost Segregation CPA: We Run the Tax Math, ETS Performs the Study
Taxstra does not perform cost segregation studies. Engineered Tax Services (ETS), our engineering partner, performs them. We decide whether a study pays off for you, coordinate it with ETS, and put the result on your return.
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Quick Answer
A cost segregation study reclassifies building components from 27.5- or 39-year depreciation into 5-, 7-, and 15-year lives, front-loading deductions into your first years of ownership. With 100% bonus depreciation restored under OBBBA, the full reclassified amount is deductible in Year 1. Taxstra coordinates the study through Engineered Tax Services and integrates it into your return.
Worked examples
How the cost segregation math works, using illustrative numbers
Illustrative Example: How the Math Works on a $2.1M Medical Office Building (Illustration)
Profile: Hypothetical scenario: a physician investor with a $2.1M medical office building acquired in 2024, $520K W-2 income, filing jointly
Problem: The property is depreciated straight-line over 39 years, generating only $53,846/year in depreciation. With no cost segregation study, hundreds of thousands in accelerated depreciation sit unclaimed.
Strategy: Taxstra coordinates a cost segregation study through Engineered Tax Services. In this scenario, the engineering analysis reclassifies $680,000 of building components into 5-, 7-, and 15-year categories. A look-back cost seg is filed with Form 3115 to capture prior-year missed depreciation, applying the 60% bonus depreciation rate in effect for 2024 to eligible components. Note: under current law, the One Big Beautiful Bill Act (OBBBA) has permanently restored 100% bonus depreciation for property placed in service after January 19, 2025, meaning the same study conducted today would qualify for full 100% bonus, making the first-year deduction even larger.
Result: In this illustration: $680,000 in reclassified depreciation, a first-year deduction of $412,000 (including bonus depreciation on 5- and 15-year property), taxable income reduced from $520,000 to approximately $108,000, and combined federal and state tax savings of $187,000 in Year 1.
$187,000 illustrative Year 1 tax savings
What the study fee really costs
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.
A look-back study on a property owned for years
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.
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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 coordinate the study with ETS and put it on your return.)
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. You can see how they approach the work on the ETS cost segregation overview or browse their case studies with real study results by property type.
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 performs the study. Taxstra handles the tax side, from the go or no-go decision to the return.
ETS performs every study, carries professional liability insurance, and will support the studies it produces 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:
Ideal Candidates
- ✓Residential rental properties valued at $500,000 or more (single-family, duplex, multifamily)
- ✓Commercial properties including office buildings, retail centers, medical offices, and restaurants
- ✓Short-term rentals using the STR loophole strategy where accelerated depreciation creates non-passive losses
- ✓Self-storage facilities, hotels, and hospitality properties
- ✓Recently acquired properties where 100% bonus depreciation under OBBBA can be applied to the full reclassified amount
- ✓Properties owned for years that have never had a cost seg study, eligible for look-back via Form 3115
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:
| Property Type | Study Cost | Typical Reclassification |
|---|---|---|
| Single-Family Rental ($500K-$1M) | $5,000 - $7,500 | $100K - $250K |
| Multifamily ($1M - $5M) | $7,500 - $12,000 | $250K - $1.2M |
| Commercial Office ($1M - $5M) | $8,000 - $15,000 | $200K - $1M |
| Short-Term Rental ($300K - $1M) | $5,000 - $8,000 | $80K - $300K |
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 math is straightforward: engineering reclassification typically identifies 20% to 40% of total building cost as short-life property, and the tax savings on that reclassification are usually a large multiple of the study fee.
Estimate Your Cost Segregation Savings
Run your property through the Engineered Tax Services savings calculator for a quick estimate, then book your free 30-minute tax fit call to talk through next steps with our team.
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Calculator provided by Engineered Tax Services. Estimates are educational only and depend on an engineering-based study of your specific property; results are not individualized tax advice.
Disclosure: Taxstra may receive a referral fee if you engage Engineered Tax Services through links on this page. That relationship does not change your price, and it is not a recommendation for your specific situation.
Wondering what a study typically reclassifies for your specific building type? See our cost segregation guides by property type covering apartments, hotels, medical offices, restaurants, self-storage, warehouses, and 18 more.
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.
The look-back example at the top of this page shows how large that single catch-up deduction can be.
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.
100% Bonus Depreciation Is Back, Permanently
The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualified property placed in service after January 19, 2025. The TCJA phase-down schedule that would have reduced bonus depreciation to 40%, 20%, and eventually 0% has been superseded.
This means 100% of reclassified 5-, 7-, and 15-year property identified in a cost segregation study can be deducted in full in Year 1. There has never been a better time to conduct a cost seg study.
Taxstra can coordinate a study through ETS in 4 to 8 weeks, well within the timeline for your 2026 tax return. Read our 2026 Bonus Depreciation Guide for the full details on OBBBA and what it means for property owners.
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.
Ready for a Cost Segregation Study?
Two moving parts, handled: Engineered Tax Services performs the engineering-based study, and Taxstra implements it on your tax return, including Form 3115 and the Section 481(a) adjustment for properties you already own.
Disclosure: Taxstra may receive a referral fee if you engage Engineered Tax Services through links on this page. That relationship does not change your price, and it is not a recommendation for your specific situation.
Our Process
Free 30-Minute Consultation
Start with a free 30-minute consultation to discuss your goals and learn about working with Taxstra.
ETS Engineering Study
Our partners at Engineered Tax Services assign a licensed engineer to your property. They perform a site inspection (or desktop analysis), classify every component, and produce an IRS-compliant engineering report.
Tax Integration
Taxstra integrates the cost seg results into your tax return. For existing properties, we file Form 3115 to claim all prior-year missed depreciation in the current year. For new acquisitions, we apply the reclassification from day one.
Ongoing Optimization
With 100% bonus depreciation now permanently restored under OBBBA, the immediate benefit of cost segregation is at its peak. We continue to monitor for future legislative changes, track partial disposition opportunities, and evaluate new property improvements. When you renovate or acquire new properties, we coordinate additional studies to maximize every deduction.
Frequently Asked Questions
What is a cost segregation study?
A cost segregation study is an engineering-based analysis that reclassifies components of a building into shorter depreciation categories, typically 5, 7, and 15 years instead of the standard 27.5 years (residential) or 39 years (commercial). This front-loads depreciation deductions into earlier tax years, reducing current-year taxable income significantly.
How much does a cost segregation study cost?
A typical cost segregation study costs between $5,000 and $15,000, depending on the property size, complexity, and location. For most qualifying properties valued above $500,000, the accelerated depreciation identified is typically many times the study fee, which is why a qualifying study usually pays for itself in the first year.
Who is Engineered Tax Services (ETS)?
Engineered Tax Services is one of the largest and most respected cost segregation firms in the United States. ETS employs licensed engineers who perform on-site inspections and produce IRS-compliant reports. Taxstra partners with ETS to coordinate studies for our clients, ensuring seamless integration with your tax return and overall strategy.
Can I do a cost segregation study on a property I already own?
Yes. Under IRS Revenue Procedure 2023-15, you can perform a cost segregation study on any property you currently own and claim the missed depreciation in the current tax year using a change in accounting method (Form 3115). This is called a look-back study, and it allows you to capture all prior-year missed depreciation in a single year, with no amended returns required.
What types of properties qualify for cost segregation?
Virtually any building used for business or investment purposes qualifies. This includes single-family rentals, multifamily apartment buildings, commercial office space, retail buildings, medical offices, restaurants, self-storage facilities, and hotels. The property should generally be valued at $500,000 or more for the study to be cost-effective, though some smaller properties also benefit.
Does cost segregation work with bonus depreciation in 2026?
Yes, and the benefit has never been stronger. The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for property placed in service after January 19, 2025. Cost segregation combined with 100% bonus depreciation allows you to deduct the full reclassified amount in Year 1, making this the most powerful time in history to conduct a cost seg study.
Will a cost segregation study trigger an IRS audit?
No. Cost segregation is explicitly authorized by the IRS and has been upheld in Tax Court (Hospital Corporation of America v. Commissioner, 1997). When performed by a qualified engineering firm like ETS, the study produces a detailed, audit-defensible report that meets all IRS requirements under the Audit Techniques Guide for Cost Segregation.
How long does a cost segregation study take?
A typical study takes 4 to 8 weeks from engagement to final report delivery. The process includes a site inspection (or desktop analysis for certain properties), engineering classification, report preparation, and CPA review. Taxstra coordinates the entire timeline to ensure the study is completed before your tax filing deadline.
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Separate the study from the tax implementation.
- Who it fits
- Property owners evaluating a study or needing its findings incorporated into their tax work.
- What to scope
- Taxstra coordinates the agreed CPA analysis and return implementation. The engineering study is performed by a separate study provider.
- What to prepare
- Closing statement, ownership details, acquisition and placed-in-service dates, improvement records, prior depreciation schedules, and any proposed sale timeline.
- Who does what
- Confirm the study fee, CPA implementation fee, records needed, and provider timeline separately. The projected deduction is not the same as usable current-year tax savings.
A free 30-minute conversation with our team about your situation, service fit, and next steps. Your proposal specifies fees, timing, and ongoing support.
Explore the cost segregation estimate and assumptionsTalk it through with our team
A free 30-minute call with our team about your needs, how we can help, and whether we are a good fit. Tax advice, document reviews, and analysis require a paid engagement.Your tax plan and specific advice come after you engage. The call is about fit and next steps.
Tax planning slots are limited before year-end.
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