What is a cost segregation study?+
A cost segregation study is an engineering-based tax analysis that breaks your real estate purchase into faster-depreciating components. Instead of depreciating the whole building over 27.5 years (residential) or 39 years (commercial), you reclassify carpet, appliances, cabinets, fixtures, landscaping, parking, etc., as 5-, 7-, or 15-year property. Those shorter lives — combined with bonus depreciation — front-load deductions into the first year you own the property.
How much can I reclassify on a small multifamily?+
For typical 2-30 unit multifamily, engineers reclassify 18-28% of the depreciable basis into 5/7/15-year buckets. Newer or higher-finish buildings sit at the top of that range. Vintage stock with minimal site work sits at the bottom. Single-family rentals are usually 15-22%. The calculator defaults to 25%, which is the multifamily middle.
What is bonus depreciation in 2026?+
Following the One Big Beautiful Bill Act (mid-2025), bonus depreciation was restored to 100% for property placed in service after January 19, 2025. That means the full amount of reclassified 5/7/15-year property can be expensed in year one. Before this fix, bonus was phasing down (80% in 2023, 60% in 2024, 40% in 2025). This is a major win for active real estate investors.
Will I actually be able to use the loss?+
Depends on your status. Real Estate Professionals (REPS) and short-term rental (STR) operators with material participation can use rental losses against W-2 or active business income — that's the big play. Passive investors (most LPs and W-2 buy-and-holders) can only offset against passive income from other rentals. If you have no passive income, the loss carries forward until you sell or generate passive income.
What happens at sale — depreciation recapture?+
Yes. Section 1245 property (the 5/7/15-year stuff you reclassified) recaptures at ordinary income rates up to a 25% cap. Section 1250 (building) recaptures at 25%. So you defer tax now and pay later. The play works because (a) you compound the saved cash, (b) you can 1031 into the next property and defer indefinitely, (c) basis steps up at death. The arbitrage only fails if you sell for cash without rolling.
What does a study actually cost?+
DIY-style calculators are free for estimates. A full engineered study for a small multifamily (under $2M basis) runs $2,500-$6,000. For deals over $5M, expect $7,500-$15,000. Rule of thumb: only commission a study if the projected tax savings clear 10-15x the study cost. For sub-$500k basis, the math often doesn't work — use a 'rule of thumb' allocation instead.
How do I allocate land vs. building?+
You can't depreciate land. Most investors use the county tax assessor's allocation (e.g., assessor says land is 22% of total assessed value → apply 22% to your purchase price as land). Alternatives: appraisal allocation, or replacement cost method. Coastal/urban markets often hit 30-50% land; secondary markets sit at 15-25%. The lower your land allocation, the higher your depreciable basis.
Does cost seg work on a property I bought 3 years ago?+
Yes — this is called a 'look-back' or 481(a) catch-up study. You commission the study now, file Form 3115 with your next return, and claim the missed depreciation as a one-shot adjustment in the current year. You don't have to amend prior returns. This is one of the most underused strategies in real estate. If you've held a property for under 7 years and never did cost seg, run the numbers.
What's the catch?+
Three real ones: (1) Recapture at sale is at ordinary rates for 1245 property — so you're trading current-year deductions for future-year ordinary income. (2) If you can't use the loss (passive investor with no passive income), the deductions sit suspended for years. (3) Audit risk: IRS scrutinizes aggressive reclassification, especially if you don't have an engineered study to back it up. DIY estimates are fine for planning — for filing, get the study.
Should every investor do cost seg?+
No. Skip it if (a) the basis is too small (under $300-500k, study cost eats the benefit), (b) you're a passive investor with no passive income to absorb the loss, (c) you're planning to sell within 1-2 years (recapture timing kills the math), (d) you bought via a 1031 and the basis is already minimal. Do it if you have REPS or STR status, a basis above $500k, and you plan to hold or 1031 forward.