What is cost segregation?

Cost segregation is a tax strategy that breaks a property into components — land improvements, fixtures, and personal property — that depreciate over 5, 7, or 15 years instead of the standard 27.5 or 39. Front-loading that depreciation creates larger deductions in the early years of ownership, lowering taxable income while you hold the property.

Is a cost segregation study worth it?

It depends on the property value, your tax rate, how long you plan to hold, and whether passive activity rules let you actually use the deductions. A study that costs a few thousand dollars needs to unlock materially more than that in near-term tax savings to pencil out. The analyzer runs your specific numbers and gives a verdict rather than assuming every property benefits — many smaller or short-hold properties do not.

How much does a cost segregation study cost?

Engineered studies typically run from about $2,000 to $10,000 depending on property size and complexity. The analyzer compares that study cost against the tax savings it would generate to show your ROI and payback period, so you can decide before you commission one.

Can I run a cost segregation analysis online myself?

Yes — this free online tool estimates your accelerated depreciation, tax savings, and study ROI so you can screen a property in minutes. It is a decision tool, not a substitute for the engineered study itself: if the numbers pencil out, an IRS-defensible study is performed by a firm that documents each component.

Do passive activity rules limit cost segregation deductions?

Often, yes. If your rental losses are passive, they can only offset passive income unless you qualify as a real estate professional or the property is a short-term rental. The analyzer screens for these Passive Activity Limitation rules, because a large paper deduction you cannot deduct this year changes whether a study is worth paying for.

What happens to the deductions when I sell?

Accelerated depreciation is subject to recapture at sale — the IRS taxes back the depreciation you claimed. The analyzer models this recapture so your ROI reflects the real, after-sale benefit rather than only the up-front deduction.

Cost Segregation Analyzer

Should you pay for a cost segregation study? Estimate tax savings, study ROI, and whether you can actually use the deductions.

Property

Purchase Price

Land Value

Typically 15-25% for residential, 10-20% for commercial. Check your county assessment for land vs. building split.

Property Type

Year Placed in Service

Sets bonus depreciation. OBBBA restored 100% for property placed in service after Jan 19, 2025 (permanent). 2023: 80%, 2024: 60%, 2025+: 100% (Jan 1–19, 2025 is 40%).

Tax Situation

Federal Tax Rate

Your marginal federal tax bracket (22%, 24%, 32%, 35%, 37%).

State Tax Rate

State income tax rate. 0% for TX, FL, NV, etc.

I qualify as a Real Estate Professional (REPS)

This is a short-term rental (avg stay ≤ 7 days)

Reclassification Estimates

5-Year Property

Carpets, appliances, fixtures, cabinetry, decorative features. Typical: 15-25% for residential.

15-Year Property

Landscaping, parking lots, sidewalks, fencing, site utilities. Typical: 5-15%.

Bonus Depreciation

Applied to 5-year and 15-year property in Year 1. Auto-set based on year placed in service.

Study & Hold Period

Estimated Study Cost

Residential: $3,000-$7,000. Commercial: $5,000-$15,000+.

Hold Period (years)

How long you plan to hold before selling or 1031 exchanging. Affects recapture calculation.

Discount Rate

Your cost of capital, used to value deferring tax now vs. paying recapture at sale. 8% is a common default.

First-Year Tax Deferred

$25,671

Cash you keep in Year 1 from accelerated depreciation vs. standard straight-line. This is deferral — recapture may claw some back at sale.

Study ROI

5.1x

First-year tax savings divided by study cost. Above 2x is strong, below 1x means the study doesn't pay for itself in Year 1.

Net Value of Deferral (NPV)

$13,781

Present value of deducting now and paying ordinary-rate recapture at sale in year 10, discounted at 8%. A 1031 exchange or holding to death removes recapture and raises this toward the full first-year amount.

Warnings

This result assumes you qualify as a Real Estate Professional (REPS).

These accelerated deductions only offset W-2 or other ordinary income if you hold REPS status (or the property is a short-term rental you materially participate in). Most part-time and W-2 investors do not qualify for REPS — without it, the deductions are suspended as passive losses until you sell.

Not sure you qualify? Check the REPS Qualifier first, or uncheck "I qualify as a Real Estate Professional" to see your result as a passive investor.

Selling triggers recapture at ordinary rates — plan the exit.

If you sell after 10 years, the accelerated 5- and 15-year depreciation is recaptured as ordinary income — about $25,671. In nominal terms that gives back most of the upfront deduction; the real win is the time value of deferring it (NPV ≈ $13,781).

A 1031 exchange or holding to death eliminates recapture entirely and makes the deferral permanent. Factor your exit plan into the decision.

Component Breakdown

Purchase price$300,000

Less land (20%)-$60,000

Depreciable basis$240,000

5-Year Property (5yr)$48,000 (20%)

15-Year Property (15yr)$24,000 (10%)

Building Structure (27.5yr)$168,000 (70%)

Depreciation Comparison (First 10 Years)

Year	Standard	Cost Seg	Tax Savings
1	$8,727	$78,109	$25,671
2	$8,727	$6,109	—
3	$8,727	$6,109	—
4	$8,727	$6,109	—
5	$8,727	$6,109	—
6	$8,727	$6,109	—
7	$8,727	$6,109	—
8	$8,727	$6,109	—
9	$8,727	$6,109	—
10	$8,727	$6,109	—
Total	$87,273	$133,091	$25,671

Study Investment & Deferral

Study cost$5,000

First-year tax deferred$25,671

Payback period3 months

Recapture if sold in year 10 (ordinary rate)-$25,671

Net present value of deferral (at 8%)$13,781

Cost seg deferstax, it doesn't erase it: the 5- and 15-year depreciation is recaptured at ordinary rates when you sell. The benefit is the time value of holding that cash now — and it becomes permanent if you 1031-exchange into the next property or hold to death (heirs get a stepped-up basis).

Next step: turn this estimate into deductions you can file

Your inputs project about $25,671 in first-year tax savings, with the study paying for itself in about 3 months. This is an estimate — an engineered cost segregation study is what turns it into IRS-defensible deductions you can actually file.

Get 10% off a study with RE Cost Seg

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Should You Pay for a Cost Segregation Study?

A cost segregation study can accelerate depreciation and cut your tax bill in the early years of owning a rental — but only when the numbers justify the cost. This free online cost segregation analyzer runs your property through the same comparison a professional would: standard depreciation versus an accelerated schedule, the study cost against the tax savings it unlocks, and whether passive activity rules let you actually use the deductions this year. Instead of assuming every property benefits, it returns a verdict on whether a study pencils out for your situation.

The analysis covers a component-level depreciation breakdown, study ROI and payback period, Passive Activity Limitation screening, and depreciation recapture at sale — so the ROI you see reflects the real, after-sale benefit rather than only the up-front deduction. If you own a rental through the BRRRR strategy, cost segregation is one of the largest tax levers available once the property is stabilized.

If the analyzer says a study is worth it, the next step is an engineered study that documents each component and holds up to IRS scrutiny. RE Cost Seg performs engineered studies for real estate investors(affiliate link). If the verdict says it isn't worth it for your property, you've just saved yourself the study fee — that's the point of running it first. Whether you can use the deductions at all often hinges on your status; the REPS Qualifier checks whether you meet the real estate professional test.

Frequently Asked Questions

What is cost segregation?: Cost segregation is a tax strategy that breaks a property into components — land improvements, fixtures, and personal property — that depreciate over 5, 7, or 15 years instead of the standard 27.5 or 39. Front-loading that depreciation creates larger deductions in the early years of ownership, lowering taxable income while you hold the property.
Is a cost segregation study worth it?: It depends on the property value, your tax rate, how long you plan to hold, and whether passive activity rules let you actually use the deductions. A study that costs a few thousand dollars needs to unlock materially more than that in near-term tax savings to pencil out. The analyzer runs your specific numbers and gives a verdict rather than assuming every property benefits — many smaller or short-hold properties do not.
How much does a cost segregation study cost?: Engineered studies typically run from about $2,000 to $10,000 depending on property size and complexity. The analyzer compares that study cost against the tax savings it would generate to show your ROI and payback period, so you can decide before you commission one.
Can I run a cost segregation analysis online myself?: Yes — this free online tool estimates your accelerated depreciation, tax savings, and study ROI so you can screen a property in minutes. It is a decision tool, not a substitute for the engineered study itself: if the numbers pencil out, an IRS-defensible study is performed by a firm that documents each component.
Do passive activity rules limit cost segregation deductions?: Often, yes. If your rental losses are passive, they can only offset passive income unless you qualify as a real estate professional or the property is a short-term rental. The analyzer screens for these Passive Activity Limitation rules, because a large paper deduction you cannot deduct this year changes whether a study is worth paying for.
What happens to the deductions when I sell?: Accelerated depreciation is subject to recapture at sale — the IRS taxes back the depreciation you claimed. The analyzer models this recapture so your ROI reflects the real, after-sale benefit rather than only the up-front deduction.

Disclaimer: This tool is for educational purposes only and does not constitute tax, legal, or financial advice. Depreciation, passive activity, and recapture rules are fact-specific. Consult a qualified tax professional before commissioning a study or claiming deductions. See our full disclaimer.