When does it make sense to do a Cost Segregation?

Question

I'm new to investment and rental properties. This will be my first year filing taxes which will include 1 rental property.

i do my own taxes since it's straight forward with one W2 and now a investment property.

Would like to understand if a cost segregation is necessary in my case.

Single Family home ,Property value $600k ( rounding off for easier calculations) land value $50k . Property was in service( for rent ) since October 2024 but was vacant until Jan 2025.

i reached out to a CPA and was told I need to get a cost segregation study done in the first place which would cost around $5000 and also told it's not mandatory to get it done. But all the articles I read , says it's best to use cost segregation(which will eventually be recaptured when sold or do a 1031) Given it's vacant for 3 months in 2024 . Do I really to get a cost segregation done ?

Thanks much

Jason Malabute · Answer

Cost segregation can be a great tool, but before spending money on a study, it’s worth asking: would you even benefit from it? For example, do you make less than $150,000 in income? Or do you qualify as a real estate professional for tax purposes? If the answer is no to both, then any passive losses generated from cost segregation won’t offset your W-2 income. They’ll just be suspended until you have other passive income, sell the property, or qualify as a real estate professional in the future. In that case, it may not be worth paying for a study right now

Natalie Kolodij · Answer

Several notes: 1. $50k land value on a $600k property sounds very low / possibly incorrect

2. That price for a cost segregation study is on the high end for a single family home

3. "I would need to get a cost segregation study done in the first place" Need to get it done for what?

4. Without a cost segregation you depreciation the building value of your property across 27.5 or 39 years. It's not required in any way.

With a cost segregation study your building value will be broken out into many detailed components which will have lives of 5,7,15 and 27.5/39 year lives instead. Allowing you to accelerate some of the depreciation. (and utilize bonus depreciation on the assets with lives of 20 years or less)

5. Possibly most important: can you utilize any losses generated by the rental property? Or will you be subject to the passive loss limits?

Without a specific use for losses generated; utilizing a cost segregation study to generate large losses you can't use won't benefit you.

- Are you or your spouse an IRS real estate professional? - Is this a Short-term rental? - Do you have other passive income sources?

-Is your Adjusted gross income under $100k which would allow you to use some amount of passive losses?

Julio Gonzalez · Answer

Whether or not you would benefit from a cost segregation study depends on multiple factors. Here's an article with additional FAQs on cost segregation studies that you may find helpful. Feel free to reach out if you have any questions.

https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq

Dave Foster · Answer

@Pavan K., Spot on by @Natalie Kolodij. It feels good to have all that depreciation from a cost seg. But the reality is that unless you're a real estate professional or your property is a short term rental you won't benefit much each year. Before spending the money for a cost seg. I'd make sure just how much extra tax benefit will open up for you annually compared to the cost of the study.

You are exactly right - a cost seg will get deferred in a 1031 exchange as long as the property you are purchasing is roughly the same components of things that were cost segregated.

Pavan K. · Answer

1. $50k land value on a $600k property sounds very low / possibly incorrect. "

"This is a new suburb,mostly farmlands ,converted to residential zone . I did check county records for the land value."

2. That price for a cost segregation study is on the high end for a single family home.

" Noted. I'll shop around,when its time "

3. "I would need to get a cost segregation study done in the first place" Need to get it done for what?"

" I might have understood it incorrectly. The study needs to done for tax filing purposes?"

Unfortunately, we don't qualify for RE professional and this is a long term rental. Was hoping to find if cost segregation could offset or reduce tax liabilities on W2 income , which looks like it won't unless we are RE pros or it's a short term rental. Kind of in the higher tax bracket and finding ways to reduce our tax burden .

Rohullah Sharifi · Answer

Cost segregation is generally most advantageous for taxpayers in higher marginal tax brackets who intend to hold rental real estate as a long-term investment. The benefit is not “free money,” but rather a timing benefit achieved by accelerating depreciation deductions through the reclassification of certain building components into shorter-lived recovery periods (5-, 7-, and 15-year property under MACRS).

Upon disposition of the property, depreciation recapture must be considered. Accelerated depreciation reduces the adjusted tax basis, and amounts attributable to §1245 property are subject to ordinary income recapture, while §1250 depreciation on the remaining real property may be subject to unrecaptured §1250 gain taxed at a maximum 25% rate. As a result, cost segregation can increase taxable gain at sale, partially offsetting earlier tax benefits.

Accordingly, the economic benefit of a cost segregation study depends on the taxpayer’s holding period, current and expected future tax rates, disposition strategy (e.g., taxable sale vs. §1031 exchange), and time value of money. When properly evaluated, cost segregation can be highly effective as a tax deferral strategy, particularly when paired with bonus depreciation, but it should not be viewed as a permanent tax savings in all cases.

Rohullah Sharifi · Answer

1. STR is good to do cost seg and keep the property

2. LTR is good when you plan for long term renting it

3. being in high income category

4. if LTR, make sure you meet the "Material Participation Test" requirement

5. Or one spouse doesn't have W2 job, can be use as REP

Ashish Acharya · Answer

@Pavan K. A cost segregation study can accelerate depreciation, reducing taxable income, but its necessity depends on your financial situation. Since your rental property was placed in service in October 2024, first-year depreciation will be limited due to the partial-year convention, reducing the immediate tax benefit. If you have significant taxable income to offset, qualify as a Real Estate Professional (REPS), or use the Short-Term Rental (STR) loophole, a cost segregation study may be valuable, as it allows for bonus depreciation (60% in 2024, 40% in 2025).

However, if your AGI exceeds $150K, passive loss limitations may prevent rental losses from offsetting W-2 income unless you meet material participation rules. Additionally, the $5,000 study cost should be weighed against expected tax savings, especially since your property was vacant for part of 2024. If you plan to sell soon, depreciation recapture could reduce upfront benefits. Cost segregation makes the most sense for investors with high active income, long-term rental plans, and the ability to claim immediate deductions, but this can vary by company.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Sean Graham · Answer

@Pavan K. it could definitely benefit you in 2024 if that's when it was placed in-service. Assuming you can utilize the depreciation losses, then yes I'd recommend one.

The quote you are mentioning seems high to me!

When does it make sense to do a Cost Segregation?

When does it make sense to do a Cost Segregation?

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