Cost segregation study/bonus depreciation question
Lane BakerPro Member
Member since 2019 · 10 posts · 9 votesCost segregation study/bonus depreciation question
Most Popular Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesQuote from @Lane Baker:
I bought 2 properties back in 2020 and 2021. Duplex was purchased for 355,000 and the single family was purchased for 385,000. Both properties have an interest rate below 2.5% and both cash flow. They are located in Tacoma Washington. I've been depreciating the properties every year since I bought them. I think I'm leaving money on the table. I want to execute a cost seg on both. How does it work? Can I use bonus depreciation? What is the current percentage I can bonus depreciate? It's unfamiliar territory for me. I'm seeping out of my comfort zone with this one. Any advice or insight helps. Thanks.
Here is a post to get you an introduction:
https://www.biggerpockets.com/forums/51/topics/1075919-five-...
23 Replies
- 10moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesThe answer is actually case-by-case. Cost segregation helps in some situations but not in other situations.
Quote from @Lane Baker:
I bought 2 properties back in 2020 and 2021. Duplex was purchased for 355,000 and the single family was purchased for 385,000. Both properties have an interest rate below 2.5% and both cash flow. They are located in Tacoma Washington. I've been depreciating the properties every year since I bought them. I think I'm leaving money on the table. I want to execute a cost seg on both. How does it work? Can I use bonus depreciation? What is the current percentage I can bonus depreciate? It's unfamiliar territory for me. I'm seeping out of my comfort zone with this one. Any advice or insight helps. Thanks.
Here is a post to get you an introduction:
https://www.biggerpockets.com/forums/51/topics/1075919-five-...- Member since 2019 · 10 posts · 9 votes10mo
@Michael Plaks I appreciate it. Literally answered all of my questions. I have a clearer plan moving forward
- 10moJosh C.Pro MemberProperty Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
It’s 100% for properties bought this year. I have done several and have always been told you can only do them the year you put them into service. Unsure how’d you’d do them being so old, but maybe there is a work around.
Good luck and we’ve always got roughly 50% of the basis written off the same year we put them into service. So on a 400k property you get a 200k write off.
- 10moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Josh C.:
It’s 100% for properties bought this year. I have done several and have always been told you can only do them the year you put them into service. Unsure how’d you’d do them being so old, but maybe there is a work around.
Good luck and we’ve always got roughly 50% of the basis written off the same year we put them into service. So on a 400k property you get a 200k write off.
You can catch up with depreciation not taken in the past, including retroactive cost segregation.
But 50% allocated to bonus depreciation is way too high for most properties. Professional cost segregation firms will typically find 20-30% for regular houses or apartments, never 50%.
If you used DIY cost seg software, then you pushed it too far.
- 10moJosh C.Pro MemberProperty Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
@Michael Plaks
We’ve always hired companies to do it. These were on mid sized apartment buildings 20-60 unit types, not houses so that may be the difference. Also, in our area the lots are super cheap only 5% or so of the cost is land.
- Dr · VA · Member since 2025 · 154 posts · 34 votes10mo
If you are in a higher tax bracket, a cost segregation study can provide significant current-year tax benefits by accelerating depreciation deductions. However, it’s important to note that cost segregation is not “free money.” When the property is eventually sold, the depreciation recapture rules apply — meaning the previously accelerated depreciation will reduce your property’s tax basis and may result in additional taxable gain upon sale.
- Member since 2019 · 10 posts · 9 votes9mo
@Rohullah Sharifi at what annual income threshold makes since to execute a cost seg study?
- 10moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
You’re absolutely on the right track. A cost segregation study can be a great way to free up tax savings, even on properties you’ve owned for a few years.
Here’s how it works. The study breaks your property into parts with shorter depreciation lives, things like flooring, lighting, and appliances, so you can write those off faster instead of over 27.5 years.
Even though you bought in 2020 and 2021, you can still do this retroactively by filing Form 3115. That lets you catch up on the missed depreciation all at once in the current year instead of amending past returns.
Right now, bonus depreciation is at 100% for 2025. However, the percentage you get when you file a Form 3115 depends on the bonus depreciation rate in the year the property was actually placed in service. Since both properties you mentioned were placed in service in 2020 and 2021, when bonus depreciation was also 100%, doing a cost segregation study along with a 3115 catch-up adjustment could significantly increase your first-year depreciation deductions in the year you decide to execute this. The sooner, the better
It’s a smart move if you want to boost cash flow and lower taxes this year. Just make sure the study is done by a qualified firm and reviewed by a CPA that knows how to apply it. Happy to connect.
INVESTOR FRIENDLY CPA®5241 Reviews - 10moAaron ZimmermanBusiness MemberAccountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
A cost segregation study can be helpful assuming you can write off the losses against active income and the tax savings outweigh the costs of the cost segregation study. I'd recommend reaching out to a cpa that can assist with this prior to executing a cost segregation study.
One other note is that you don't need to complete the cost seg in 2025. You can do the cost segregation study in 2026 for 2025. When you do the study, you will have a depreciation catchup (481(a) adjustment) and need to file a 3115.
Brick House CPAs53 Reviews - CPA| New Clients Welcome| 50 States · Member since 2016 · 435 posts · 93 votes10mo
Hi @Lane Baker
Lane, good move digging into this
You can absolutely do a cost seg on properties you bought in 2020 and 2021 — it doesn’t have to be done in the year you placed them in service. Here’s the 30,000-ft view:
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What cost seg actually does
A study breaks the property into buckets — 5-, 7-, 15-year stuff (carpet, cabinets, certain exterior, land improvements) vs the 27.5-year building. The short-life stuff gets depreciated faster, so you front-load deductions. -
“But I already started depreciating…”
That’s fine. You don’t have to amend all the way back to 2020/2021. The usual route is to do the study now and file Form 3115 (change in accounting method). That lets you take a catch-up deduction (Sec. 481(a)) in the current year for what you “should have” taken earlier. It’s the IRS’s built-in way to fix this. IRS+1 -
Bonus depreciation question
Bonus applies in the year the asset is placed in service. Your duplex/SFH were placed in service back in 2020/2021 — those were great 100% bonus years — but you're discovering cost seg now. Since the placed-in-service year is in the past, doing cost seg now with a 3115 usually means a big catch-up, not fresh 100% bonus. The 2025 bonus rules everybody’s talking about apply to property placed in service now, not retro to your 2020 purchase. The Tax Adviser+1 -
Still worth it?
Often, yes — especially if 2025 is a high-income year and you want a chunky deduction right now. You’re basically pulling future depreciation into this year. -
Two things to watch:
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Make sure the rentals are truly rental activities for passive vs nonpassive rules — big losses don’t help if you can’t use them.
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Get the study done by someone who actually knows residential rentals, not just big commercial.
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So: yes, you can do it now, yes, you can catch up, but no, you generally don’t get to go back and grab the old-year bonus as if you’d done the study in 2020. That’s the part people are surprised by.
(When I work with investor clients in markets like Tacoma with those nice sub-2.5% rates, the play is usually: run the cost seg now, see how much the 481(a) deduction helps this year, and make sure they can actually use the loss before paying for the study.)
Good Luck,
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- Member since 2024 · 1 post · 0 votes10mo
A study breaks your property down into components (e.g., flooring, appliances, electrical, landscaping, etc.) and reclassifies certain portions from 27.5-year property to 5-, 7-, or 15-year property. That accelerates depreciation — meaning bigger deductions sooner. Whether this is a benefit (i.e., additional deductions) is case dependent, but segregation typically provides benefit compared to not segregating.
You can generally apply bonus depreciation, but the phase-outs apply (don't seem applicable here given the years placed in service).
Tax positioning is also relevant here. If your rentals are passive, the losses from additional depreciation will likely be passive too — so unless you or your spouse qualify as a real estate professional, you may need to carry those forward if your phased out of passive loss deductions or if you don't have passive income elsewhere.
The tricky part here:
1. The actual cost seg study - you could work with a firm / CPA, go a DIY route via an online self-service, or somewhere in between. This depends on your risk tolerance and confidence in defending the cost seg in an audit.
2. Treatment on tax filings - you'll likely either need a Form 3115 (change in accounting method) to “catch up” prior years’ missed depreciation in a single year or amendments for prior filings. You'll want to consult a CPA here.
- Member since 2025 · 4 posts · 0 votes10mo
You’re definitely leaving money on the table. A cost segregation study can reclassify part of your property into 5, 7, and 15-year assets instead of 27.5, which massively speeds up depreciation. Even though you’ve already been depreciating since 2020/2021, you can still do a retroactive cost seg and catch up all the missed depreciation in one tax year through a 481(a) adjustment no need to amend prior returns.
Yes, bonus depreciation is still available. For 2025 it’s 60%, so you can bonus-depreciate a big chunk of whatever gets reclassified. On properties in the $350K–$400K range, it can easily mean tens of thousands in extra write-offs.
I used RE Cost Seg for mine (purchase price was ~$325K) and it dropped my taxable income a lot more than standard depreciation would have. It made my cash flow look way better on paper, especially with the low interest rate you have. If your properties already cash flow at under 2.5% interest, cost seg could amplify the returns even more.
Worth talking to a tax pro or cost seg company, it’s one of those things that feels intimidating but pays off fast.
- 10moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
Cost segregation study can be a great way to unlock tax savings, even for properties you’ve owned a while. It works by breaking down your property into parts with shorter depreciation lives, like flooring and appliances, so you can deduct those faster.
If you bought in 2020 or 2021, you can still do this now using Form 3115 to catch up on missed depreciation in one year instead of amending past returns. Since bonus depreciation was 100% back then, combining a cost seg study with a 3115 adjustment could give you a big first-year deduction boost.
Just make sure the study is done by a qualified firm and reviewed by a CPA who understands how to apply it.
Malabute & Company CPAs525 Reviews - Member since 2020 · 7 posts · 1 vote10mo
Hi @Lane Baker, lots of useful responses here. I also strongly suggest working with a tax advisor to first get a plan in place and ensure you can fully utilize the accelerated depreciation and that it makes sense for your situation. DIY cost seg options are something to look into for your price point.
- 10moSean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
Great thread here with a lot of different perspectives on when to get a cost seg and which type (self-service, virtual, onsite) is best for you and your property - enjoy! https://www.biggerpockets.com/forums/51/topics/1258422-cost-...
- Dr · VA · Member since 2025 · 154 posts · 34 votes10mo
I would recommend carefully considering several key points before deciding to move forward with a cost segregation study. First, evaluate your income bracket to determine whether the accelerated deductions will provide meaningful tax benefits. Second, understand that cost segregation is not “free money”—it is simply a method of accelerating depreciation, which reduces your basis over time. Finally, be aware that you may face depreciation recapture when selling the property, which can impact your overall tax outcome.
If you choose to proceed, we can assist you with the cost segregation process.
- Dr · VA · Member since 2025 · 154 posts · 34 votes9mo
If you are actively participating in the management of the property, this may help you qualify as a Real Estate Professional, which is required for your rental activities to be treated as non-passive. When rental income is considered non-passive, it can be used to offset other types of income, potentially increasing the tax benefit—depending on your overall income level and tax bracket.
However, it’s important to remember that cost segregation is not “free money.” While it can accelerate depreciation and create substantial short-term deductions, it also reduces your tax basis in the property. This means that depreciation recapture will apply when the property is eventually sold, potentially resulting in additional tax at that time.
Like any tax strategy, cost segregation carries both benefits and trade-offs. Evaluating the immediate tax savings versus the long-term recapture implications is essential to determining whether it aligns with your broader investment and tax planning goals.
- Investor · Hinton, WV · Member since 2026 · 15 posts · 9 votes7mo
Hi @Lane Baker, A cost segregation study reclassifies parts of your property like fixtures and landscaping into shorter 5 or 15-year categories. Since you've owned the properties since 2020/21, the study is done retroactively, and you claim all the missed catch-up depreciation in your current tax year. I have used costsegregation-guys for this, and their engineered report provided the clear documentation my CPA needed to file the catch-up deduction accurately....
- 7moGian PazziaBusiness MemberSpecialist · Pasadena, CA · Member since 2024 · 38 posts · 15 votes
If you’ve just been depreciating both properties straight-line over 27.5 years, you’re probably leaving some acceleration on the table. A cost segregation study reclassifies parts of the building (not the land) into shorter-life assets — typically 5-, 7-, and 15-year property. For residential rentals, it’s common to see 20–35% of the building basis moved into those shorter buckets.
Because you bought in 2020 and 2021, you can still do a “look-back” cost seg. You don’t amend prior returns — instead, you file Form 3115 (change in accounting method) and take a one-time §481(a) catch-up adjustment in the current year. That’s usually the cleanest way to implement it.
Under the One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation has been permanently restored for qualified property acquired and placed in service after January 19, 2025.
However — and this is the key nuance — for a look-back cost segregation, the applicable bonus rate generally ties to the original placed-in-service year, not the year you order the study.
That actually works in your favor:
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2020 was a 100% bonus year
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2021 was a 100% bonus year
So the 5-, 7-, and 15-year components identified in your study would generally still be eligible for 100% bonus treatment, assuming you didn’t previously elect out.
Bonus only applies to assets with a recovery life of 20 years or less — so the 5/7/15-year components qualify. The 27.5-year structural components do not.
For example, if a study reclassifies ~$150K combined across both properties into short-life assets, a large portion could be deducted immediately under the bonus rules tied to those original service years, with the remainder depreciated over 5, 7, or 15 years instead of 27.5. That significantly front-loads deductions and improves near-term cash flow.
The bigger question isn’t just eligibility — it’s usability:
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Do you have passive income to offset?
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Do you qualify as a real estate professional?
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What’s your hold period?
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Are you planning to 1031 later?
Remember: accelerating depreciation now increases depreciation recapture (up to 25%) when you sell — unless you 1031 and defer it.
For long-term holds with strong cash flow and high current tax brackets, a look-back cost seg on 2020–2021 acquisitions can still be very powerful — especially since those were 100% bonus years.
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- Investor · Hinton, WV · Member since 2026 · 15 posts · 9 votes7mo
I think you're sitting pretty with those rates and cash-flowing properties and you're right, there's probably more savings to unlock. A great move is to do a retroactive cost segregation since both have been rentals since 2020/21. Significantly, an engineering firm figures the accelerated depreciation you would've taken each year, then your CPA files a form with this year's return to claim it all as one catch-up. For 2024, bonus depreciation is at 80%, so if they find $50k in shorter-life assets, you're looking at a $40k deduction this year. I had cost segregation guys run mine and the reason I trust them is their report was clean and gave my CPA exactly what he needed. The catch-up more than covered the study cost. I know this stuff can feel overwhelming, but you're not late at all and this is how you unlock cash flow that's been sitting there. Just my experience, always open to hearing others.
- Investor · Hinton, WV · Member since 2026 · 15 posts · 9 votes7mo
I think you're sitting pretty with those rates and cash-flowing properties and you're right, there's probably more savings to unlock. A great move is to do a retroactive cost segregation since both have been rentals since 2020/21. Significantly, an engineering firm figures the accelerated depreciation you would've taken each year, then your CPA files a form with this year's return to claim it all as one catch-up. For 2024, bonus depreciation is at 80%, so if they find $50k in shorter-life assets, you're looking at a $40k deduction this year. I had cost segregation guys run mine and the reason I trust them is their report was clean and gave my CPA exactly what he needed. The catch-up more than covered the study cost. I know this stuff can feel overwhelming, but you're not late at all and this is how you unlock cash flow that's been sitting there. Just my experience, always open to hearing others.
- Real Estate Investor · Austin, TX · Member since 2017 · 79 posts · 17 votes7mo
@Fulton Abraham Sanchez and @Gian Pazzia both gave solid explanations of the Form 3115 / look-back route. A few things worth underlining for Lane:
The bonus depreciation rate that applies is tied to the year the property was placed in service — not when you order the study. Since both of yours were 2020 and 2021 (both 100% bonus years), you're in a good position there. That's genuinely better than if you had bought in 2023 or 2024 when rates were lower.
On @Lane Baker follow-up about income threshold: there's no single magic number, but the real question is whether your rental activity is passive or non-passive. For LTRs, if you're a W-2 earner without REP status, losses phase out completely above $150k MAGI. Below $100k you can use up to $25k per year in passive losses with active participation. Between those numbers it's phased out. If you're a higher earner, the losses carry forward and stack up until you sell or have passive income.
Bottom line: with two Tacoma properties at 2.5% rates that already cash flow, the tax benefit of cost seg is real but depends heavily on your ability to use the losses. Worth a 30-minute conversation with a CPA who can model the 481(a) catch-up against your actual income before you pay for the study.
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