Cost segregation the year after property is in service?

Greenville, North Carolina
Tax, SDIRAs & Cost Segregation
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Cost segregation the year after property is in service?

Anthony BaileyPro Member
Member since 2025 · 8 posts · 7 votes

I plan to get Real Estate Professional status in 2026.  It's too late in 2025 to get the 750 hours needed.  I found a property I like but both sides of a multifamily are already rented.  Therefore the property would be 'in service' in 2025.  Can I do the cost segregation in 2026 when I get REP status or does it have to be 2025 when it goes in service?

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G. Brian DavisPro Member
Investor · Hatboro, PA · Member since 2016 · 2k+ posts · 849 votes
10mo

Hi @Anthony Bailey nice to meet you here on BP! it is based on the year the property is placed in service. However, Even though the property is in service in 2025, you could still do a cost segregation study in 2026 and make a Section 481(a) adjustment to catch up missed depreciation......

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  • G. Brian DavisPro Member
    Investor · Hatboro, PA · Member since 2016 · 2k+ posts · 849 votes
    10mo

    Hi @Anthony Bailey nice to meet you here on BP! it is based on the year the property is placed in service. However, Even though the property is in service in 2025, you could still do a cost segregation study in 2026 and make a Section 481(a) adjustment to catch up missed depreciation......

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    • Michael PlaksPro Member
      Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
      10mo
      Quote from @G. Brian Davis:

      Hi @Anthony Bailey nice to meet you here on BP! it is based on the year the property is placed in service. However, Even though the property is in service in 2025, you could still do a cost segregation study in 2026 and make a Section 481(a) adjustment to catch up missed depreciation......

      Anthony,
      as a tax professional, I'm confirming what Brian said.

      You will need to use the procedure he mentioned which involves completing Form 3115, as opposed to filing an amended return for 2025. Amending will not do the trick. Timing of conducting cost segregation study also matters.
      1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    10mo

    @Anthony Bailey,

    Great question, and nice to meet you!

    Like others have mentioned above, for tax purposes, you can only take bonus depreciation or accelerated depreciation (from a cost segregation study) in the year the property is placed in service, meaning when it’s first available for rent, even if it’s already tenant-occupied. So if the property goes into service in 2025, the cost seg must be applied on your 2025 tax return.

    However, since you plan to qualify for Real Estate Professional Status (REPS) in 2026, you can do a cost segregation study in 2026 and apply a catch-up depreciation adjustment (Form 3115, Change in Accounting Method) to claim what you missed in prior years. That lets you take the accumulated depreciation in 2026 when you qualify for REPS; it’s often the cleanest way to line up the tax benefits. Like Michael said, the timing of conducting the cost seg study also matters. Running the study in 2026 gives you some flexibility to make improvements or adjustments that can qualify for shorter-life assets, like upgraded appliances, flooring, cabinetry, or other tangible components. These improvements can increase the portion of the property that depreciates faster under cost segregation. So yes, you can wait until 2026 to run the study and still capture those deductions.

    And like Edgar mentioned, to help get REPS in 2026, start tracking house, keep detailed logs of real estate activities, and consider grouping your real estate efforts (like property management, acquisitions, or improvements) to maximize your hours.

    Also make sure you're working with a trusted Cost Segregation company and CPA who can help you apply it.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    10mo

    Good question and great answers so far. You can technically do the cost segregation study in 2026, but the key factor is when you claim the bonus depreciation. The IRS only allows bonus depreciation in the year the property is placed in service, which would be 2025 in your case.

  • So if you want to take advantage of bonus depreciation, it would have to be claimed on your 2025 return. However, if you qualify as a Real Estate Professional in 2026, the passive loss rules could change how much of that depreciation you can actually use.

    One option is to do the cost segregation now, claim the depreciation in 2025, and carry forward any unused losses until you qualify for REPS in 2026. Another option is to wait until 2026, do a cost seg, and then a 3115 to catch up on depreciation that wasn't taken in 2025.

    The benefit of waiting until 2026 is that it gives you a window to make adjustments or improvements to the property, such as upgraded appliances, flooring, or other tangible components, which can qualify as shorter-life assets under cost segregation. This can help you maximize your deductions.

    A CPA can help model out which approach gives you the best benefit based on your income and goals.

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    10mo

    You'll want to do the cost segregation study in 2026 as opposed to 2025 if you're planning on being a real estate professional. you'd just have to do a 3115 with the 481(a) adjustment. 

    That said, I'd recommend working with your cpa to ensure you do qualify for real estate professional status in 2026 prior to doing the cost segregation study. 

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  • Fulton Abraham Sanchez
    CPA| New Clients Welcome| 50 States · Member since 2016 · 430 posts · 93 votes
    10mo

    Hi @Anthony Bailey 

    Good thinking ahead on REP, most people try to “retrofit” it at tax time and it’s too late.

    A couple key points:

    Placed-in-service year vs. cost seg year
    The property being placed in service in 2025 doesn’t lock you into doing the cost segregation in 2025. You can do a cost seg in a later year and “catch up” depreciation using Form 3115 (change in accounting method). That’s a normal path when people don’t do the study in year 1.

    Why that matters for you
    Since you’re planning to qualify as a Real Estate Professional in 2026 (and presumably materially participate in that rental activity in 2026), doing the cost seg in 2026 lines up better — that’s the year you can actually use the big deduction against other income. If you did it in 2025 but didn’t meet REP/material participation, a lot of that loss could get trapped as passive.

    Caveat: bonus depreciation phase-down
    One thing to keep in mind is that bonus depreciation is phasing down. So the year you actually take the catch-up can affect the size of the benefit. That’s why people model it out instead of guessing.

    Do it clean
    If you take the “later-year” route, it’s usually done with a proper cost seg study + Form 3115 + Sec. 481(a) adjustment, nothing exotic, just needs to be done right.

    So short answer: yes, you can buy in 2025 and do the cost seg in 2026 when you actually qualify, that often makes more sense for REP timing than forcing it in 2025. Just make sure 2026 is a year you truly hit the 750 hours and material participation on that activity, or the loss still won’t flow through.

    Good luck!

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  • Anthony BaileyPro Member
    OP
    Member since 2025 · 8 posts · 7 votes
    8mo
    Quote from @Edgar Estrada:

    @Anthony Bailey

    Great insights from both Brian and Michael — they’re spot-on. You can absolutely do the cost segregation in 2026 and use a Section 481(a) adjustment (via Form 3115) to catch up on missed depreciation instead of amending your 2025 return.

    That timing actually lines up nicely with your plan to qualify for Real Estate Professional Status in 2026, since that’s when you could fully leverage those passive losses.

    If you’re prepping for REP status, start tracking your hours now so it’s easy to document later. We built a free REPS Status tracker sheet to help investors do just that — happy to DM you the link if you’re interested.


     Yes, can you please DM me the REP tracker sheet?  Thank you

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  • Edgar Estrada
    Rental Property Investor · San Antonio, TX · Member since 2016 · 66 posts · 10 votes
    8mo

    Of course @Anthony Bailey. Will DM you shortly. 

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  • Sagiv O.
    Real Estate Investor · Austin, TX · Member since 2017 · 69 posts · 16 votes
    8mo

    Yes, you can do the cost segregation study in 2026 for a property placed in service in 2025.

    - Perform the study in 2026 and file Form 3115 (change in accounting method) with your 2026 return.

    - This creates a Dection 481(a) catch-up adjustment, deducting the "missed" 2025 accelerated depreciation (including bonus) all in 2026.

    - With REP status in 2026, the resulting large rental loss becomes non-passive and can offset your ordinary income that year.

    Bonus depreciation percentage is locked based on the 2025 placed-in-service date.

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  • Reyjie Sobebe
    Member since 2025 · 29 posts · 7 votes
    8mo

    Yes, you can absolutely do the cost segregation after the year the property is placed in service. Cost seg doesn’t have to be done in 2025; you can complete it in 2026 and “catch up” the accelerated depreciation using a Form 3115 (change in accounting method), which pulls all the missed depreciation into the year you file it. The key nuance is that REPS only matters in the year the loss is claimed, not the year the property went into service so doing the study in 2026 when you qualify can still allow the losses to offset active income (assuming you materially participate). This is a very common and clean approach. I personally like having hours and documentation airtight before triggering a big loss, which is why I used automated tools are helpful they keep the timing, participation, and audit trail aligned so the strategy actually holds up.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    8mo

    It is possible to get a cost segregation study on a property in the year after it is placed into service.

    A complex form, Form 3115, change in accounting method, needs to be completed which mentions that depreciation was incorrectly calculated in the past and that you are now calculated it correctly(from the cost seg).

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  • Rohullah Sharifi
    Dr · VA · Member since 2025 · 154 posts · 34 votes
    8mo

    if the property is purchased and was ready to rent, which you need to proof it, or else, you qualify for 2026.

    0Reply
  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
    8mo
    Quote from @Anthony Bailey:

    I plan to get Real Estate Professional status in 2026.  It's too late in 2025 to get the 750 hours needed.  I found a property I like but both sides of a multifamily are already rented.  Therefore the property would be 'in service' in 2025.  Can I do the cost segregation in 2026 when I get REP status or does it have to be 2025 when it goes in service?

     Hi Anthony, Rep Status is a yearly designation and is not based upon the "year of occupancy" like a cost seg study is calculated. Therefore, if I were in your shoes, and you anticipate having rep status in 2026 and you will be making more money in 2026, I would wait until 2026 to do the cost segregation study and I/CSSI do these for clients. You must weigh the cost of doing a 3115 Change of Accounting form with its 481a adjustment against the benefit you will have with the rep status for the cost seg study in 2026. If you have additional questions, let me know. 

    [email protected]303-475-4459
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  • Sean GrahamBusiness Member
    Investor , CPA · Detroit, MI · Member since 2016 · 582 posts · 248 votes
    8mo

    Hi Anthony, owner of Maven Cost Segregation here.
    Yes, you can perform a cost segregation study in 2026 for a property placed in service in 2025. You would file IRS Form 3115 to "catch up" on the accelerated depreciation. This timing is ideal, as achieving Real Estate Professional (REP) status in 2026 will allow you to fully utilize the significant bonus depreciation deductions from the study to offset active income without passive activity loss limitations.

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  • Account Closed
    Investor · Hinton, WV · Member since 2026 · 10 posts · 5 votes
    7mo

    A major strategic advantage of cost segregation is that it can be done retroactively. When I executed this, I hired an engineered study for this.

    0Reply
  • Max Segal
    Specialist · Chicago, IL · Member since 2025 · 15 posts · 4 votes
    7mo

    Can be done after the fact, no problem! 

    0Reply
  • Account Closed
    Investor · Hinton, WV · Member since 2026 · 15 posts · 9 votes
    6mo

    You don’t have to complete the cost segregation study in the same year the property is placed in service. If it goes in service in 2025, you can still do the study in 2026 and generally capture the catch-up depreciation through Form 3115. The key issue is how the losses are treated even without REP status in 2025, they would typically be passive and potentially limited, whereas qualifying in 2026 could make the benefit more usable. I would coordinate closely with your CPA on the timing strategy and projections. I’ve also seen investors note  Cost Segregation Guys have strong 5-star feedback, (I've worked with them too) which may be worth looking into if you decide to move forward.

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  • Xavier Milsoni
    Member since 2026 · 26 posts · 3 votes
    1mo

    You don’t necessarily have to complete the cost seg study in the year the property goes into service. The important distinction is that the property’s depreciation method is established when it’s placed in service, while a later cost-seg study can generally be implemented as a change in accounting method, typically using Form 3115 and a §481(a) adjustment. The IRS specifically addresses cost-seg reclassifications this way.

    The bigger issue is your REP status, because that affects whether you can use the resulting depreciation losses against non-passive income. So I’d have your CPA model both years before buying. I’ve used R.E. Cost Seg for this and liked that they provide a five-year depreciation schedule and customised savings estimate upfront, with the study prepared by CPAs and engineers and audit support included.

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  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
    1mo

    @Anthony Bailey

    Your property is a multi-family LTR and therefore with your REP status for 2026, do the cost seg then and be sure it is engineering-based with an on-site property review and no cost audit defense for your ownership plus 3 years. 

    One thing that wasn't mentioned above but applies to those with STRs is that if the average number of rental days per year is 7 days or less and you put in 100 hours or more managing the property and more than anyone else, it is automatically an active investment without REP status. It would also be depreciated over 39 years, not 27.5 because it would then be considered a business. 

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  • Michael Eskenasy
    Investor · Pacific Northwest · Member since 2026 · 536 posts · 300 votes
    1mo

    Anthony — I think the thread has the mechanics mostly right, but there’s an important distinction here that could materially change the planning.

    You really have three separate clocks running:

    1. When the property is placed in service
    2. When you correct/reclassify the depreciation with the cost-seg study
    3. Whether the resulting loss is actually usable as nonpassive in that year

    Those are related, but they are not the same thing.

    For a property placed in service in 2025, doing the study in 2026 can absolutely be a legitimate path. Current IRS procedures specifically contemplate depreciable property placed in service in the immediately preceding tax year being changed to the proper depreciation method through Form 3115, with the §481(a) adjustment catching up the depreciation that should previously have been taken.

    So the interesting question isn’t really:

    “Can I do the cost seg in 2026?”

    It’s:

    “What happens to that deduction on my 2026 return?”

    And that is where I would be very careful about treating REPS = automatic ability to offset W-2/other nonpassive income.

    REPS is one gate.

    Material participation in the rental activity is another.

    You generally need both before a rental-real-estate activity that would otherwise be passive becomes nonpassive. If you own multiple rentals, the activity-grouping election can become extremely important too, because otherwise the material-participation analysis may apply separately to each property.

    There is another distinction worth making:

    If you create a large passive loss on the 2025 return and suspend it, qualifying as a real-estate professional in 2026 does not simply wave a wand and convert all of that old suspended passive loss into a 2026 deduction against wages.

    That is different from making a proper depreciation-method change in 2026 and generating a current-year §481(a) catch-up adjustment.

    Those two paths can have very different tax consequences even though economically they may look like “the same depreciation.”

    Also, one part of this older discussion needs updating: for qualifying property acquired and placed in service after January 19, 2025, current law restored 100% bonus depreciation. Obviously the entire residential building does not suddenly become bonus-eligible, but the shorter-life components identified through a legitimate cost-seg study may be eligible depending on the facts.

    So if this were my deal, before deciding when to order the study I’d have the CPA model two complete scenarios:

    Scenario A — Cost seg on the 2025 return

    • accelerated depreciation generated in 2025

    • amount currently deductible

    • amount suspended under §469

    • what happens to those suspended losses in 2026

    Scenario B — Regular depreciation in 2025, cost seg/Form 3115 in 2026

    • proper §481(a) catch-up

    • expected 2026 REPS qualification

    • material participation in the rental activity

    • grouping election, if relevant

    • actual amount usable against nonpassive income

    Then compare the tax dollars and timing, not just the depreciation schedules.

    One more thing: I would not buy the property based on “I plan to qualify for REPS next year.”

    I’d buy it because it is a good property without the tax strategy, and treat the tax strategy as an optimization.

    REPS is annual, fact-intensive, and documentation-heavy. If the economics only work because a six-figure deduction has to land in exactly the year you expect, you’ve turned a real-estate investment into a tax-status bet.

    The property should survive without the deduction.

    Then let the deduction make a good investment better.

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