What exactly is cost segregation, and is it legal?
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Cost segregation is an IRS-recognized tax strategy that reclassifies components of a building from 27.5-year (residential) depreciation into shorter-lived asset classes — primarily 5-year personal property and 15-year land improvements. The IRS published its own Cost Segregation Audit Technique Guide in 2004 and has continued to update it, confirming the legitimacy of properly prepared studies. It is used by large real estate investors, institutional owners, and individuals alike.
What is 100% bonus depreciation, and why does it matter?
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Bonus depreciation allows you to deduct the allowable cost of qualifying property in the year it is placed in service, rather than spreading it over its recovery period — subject to the rules for your dates and your overall tax situation. The Tax Cuts and Jobs Act of 2017 established 100% bonus depreciation, which then phased down to 80% (2023), 60% (2024), and 40% (Jan 1–18, 2025). The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for property acquired and placed in service on or after January 19, 2025. Cost segregation may reclassify components into those shorter classes; whether a Year 1 amount is usable on your return is decided by your CPA, not by the study alone.
I bought my property a few years ago. Is it too late?
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No. A Form 3115 look-back study allows you to retroactively apply cost segregation to a property you have owned for any number of years. All missed depreciation from prior years is captured in a single Section 481(a) adjustment applied to your current-year return — you do not need to amend prior returns. This is an automatic accounting method change under Revenue Procedure 2015-13, meaning no IRS advance approval is required. Your CPA files Form 3115 with your current return and the catch-up deduction is applied that year.
Does this trigger an IRS audit?
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A properly prepared cost segregation study, following IRS audit technique guidelines and ASCSP methodology, is a well-documented and defensible tax position. The IRS has recognized cost segregation as a legitimate strategy since the Hospital Corporation of America tax court case in 1997. Studies that are prepared with engineering-level documentation, proper asset class citations, and complete component schedules are routinely accepted without issue. Studies purchased from discount providers that use blanket percentage allocations without property-specific analysis carry substantially more risk.
What happens when I sell the property — depreciation recapture?
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Depreciation recapture is a real consideration. When you sell the property, accelerated depreciation on 5- and 15-year property is generally recaptured at ordinary income rates under Section 1245, while depreciation on the building portion is taxed at up to 25% (unrecaptured Section 1250 gain). This does not eliminate the strategy's value — the benefit is deferral and arbitrage. You receive the deduction today at your current marginal rate, and recapture occurs later, potentially at a lower rate or offset by a 1031 exchange. Many owners plan for this with their CPA in advance. We discuss recapture implications as part of your property analysis.
How much does a cost segregation study cost?
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Study fees vary based on property size, complexity, purchase price, and whether a look-back is involved. Because every property is different — different construction type, different FF&E inventory, different land basis, different property age — we do not publish standard pricing. Your free analysis call will include a specific fee proposal based on your property. For many properties at $300,000 or more, owners and CPAs find the study cost is justified by the acceleration potential — but that depends on whether your CPA confirms the depreciation is usable under your facts, not on the study alone.
Do I need to use a specific CPA, or can I work with my existing accountant?
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You keep your existing CPA. We prepare the cost segregation report and all supporting documentation — including the Form 3115 package for look-backs — in a format designed for direct handoff to your accountant. We will coordinate directly with your CPA to answer any questions about the study's methodology and implementation. You do not need to change any of your existing tax relationships.
What is the minimum property value to make a study worthwhile?
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As a general rule, properties purchased at $250,000 or more are where an engineering study is most often worth reviewing with your CPA. Below that threshold, the math can still work depending on your tax bracket, component mix, and whether any accelerated depreciation is usable — but we'll tell you honestly during your free analysis if it doesn't pencil out. We'd rather you skip the study than do one that doesn't make financial sense.
Does my property need to meet the 7-day average rental rule?
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The short-stay exception (Treas. Reg. 1.469-1T(e)(3)(ii)) can keep an activity with average customer use of 7 days or less from being treated as a rental activity under the passive-activity rules. That does not automatically make accelerated depreciation usable against W-2 or other income. Material participation is still required for nonpassive treatment, and personal use, basis, at-risk, excess-business-loss, and state rules can still limit the result. Cost segregation only classifies recovery periods — your CPA decides usability based on your facts and rental history.
Can I share the analysis with my CPA before deciding?
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Absolutely — and we encourage it. The free guide available on this page is specifically formatted for you to hand to your tax professional. It explains what cost segregation reclassifies, the methodology, the IRS basis, and the questions your CPA uses to decide usability on your return. Most CPAs familiar with real estate tax will recognize it immediately. If yours isn't familiar with cost segregation, we're happy to get on a call with them directly to walk through any questions.
