Cost Segregation Estimation

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Cost Segregation Estimation

Tiffany A.
New to Real Estate · Long Island, NY · Member since 2025 · 13 posts · 4 votes

Hi, a big part of my overall plan to get into STR is to take advantage of bonus deprecation since my husband has a high tax rate. In trying to find the right property and market I'm struggling to figure out how to best estimate the cost segregation. Am I better trying to estimate a property or is there not enough variance for that to make a difference. My math (with some AI help) came up with this table of "real" savings (in year 1) on a hypothetical 1,000,000 purchase.

This tells me there is a HUGE impact to these numbers but I'm not sure how effectively estimate them for potential properties:

Any thoughts from those more experienced is appreciated.
 

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
9mo

Let's talk about your table.  I think your horizontal axis is not helpful. The range is skewed to the low end.  It should extend much higher.

If you were buying a suburban rental on a quarter acre in the midwest, land cost would be about 15% of total cost.  Obviously, if you are on the East or West coast, that percentage would be much higher, potentially 50% or more of the cost.  Also, if the plot of land is much bigger, the percentage would go up.  So, if this is a 2000SF house on 20 acres, the land could easily be more than 50% of the total cost.

The vertical axis should have less variation.  In our latest cost seg, 5-year class life was 22.5% of improvements and 15-class life was 8.4% of improvements, so about 30% of the improvement values were eligible for bonus depreciation.  When I say improvements, that is Total Cost minus Land Value.

Finally, let's talk about the math in the table. Fifteen percent of 900K is $135K. I presume you were trying to get your tax savings by assuming you are in the 45% tax bracket.  I'd recommend you talk to your CPA to verify rather than use a straight percentage.  

Remember, you should also be able to write off a lot of legit business expenses.  My wife and I have shifted a lot of our costs from post-tax to pre-tax.  Our cell phone bills, printer expenses, a lot of mileage on our cars, meals, etc are now classified as business expenses and get paid for with pre-tax dollars.  This is critical.  If you and I both have a $100 cell phone bill, I paid $100 for it.  You had to earn $181 dollars to pay for it because you also paid for the income tax to the governement. ($181 at a 45% tax bracket is a net $100 after tax).

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    9mo

    Let's talk about your table.  I think your horizontal axis is not helpful. The range is skewed to the low end.  It should extend much higher.

    If you were buying a suburban rental on a quarter acre in the midwest, land cost would be about 15% of total cost.  Obviously, if you are on the East or West coast, that percentage would be much higher, potentially 50% or more of the cost.  Also, if the plot of land is much bigger, the percentage would go up.  So, if this is a 2000SF house on 20 acres, the land could easily be more than 50% of the total cost.

    The vertical axis should have less variation.  In our latest cost seg, 5-year class life was 22.5% of improvements and 15-class life was 8.4% of improvements, so about 30% of the improvement values were eligible for bonus depreciation.  When I say improvements, that is Total Cost minus Land Value.

    Finally, let's talk about the math in the table. Fifteen percent of 900K is $135K. I presume you were trying to get your tax savings by assuming you are in the 45% tax bracket.  I'd recommend you talk to your CPA to verify rather than use a straight percentage.  

    Remember, you should also be able to write off a lot of legit business expenses.  My wife and I have shifted a lot of our costs from post-tax to pre-tax.  Our cell phone bills, printer expenses, a lot of mileage on our cars, meals, etc are now classified as business expenses and get paid for with pre-tax dollars.  This is critical.  If you and I both have a $100 cell phone bill, I paid $100 for it.  You had to earn $181 dollars to pay for it because you also paid for the income tax to the governement. ($181 at a 45% tax bracket is a net $100 after tax).

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  • David Cherkowsky
    Investor · Alexandria, VA · Member since 2023 · 92 posts · 52 votes
    9mo

    Hi Tiffany, do you have a market you are purchasing into? Like Greg said, the land value is going to be highly dependent on where you're buying. You can sharpen the pencil on this if you already know that answer.

    And you likely already looked into all this, but one thing to consider is your ability to materially participate if you buy a long distance rental. Material participation is required to be able to write off the deduction from the STR (and therefore the cost seg) against your/your husband's W2 income. Something to consider when deciding on a market.

    2Reply
  • Tiffany A.
    OP
    New to Real Estate · Long Island, NY · Member since 2025 · 13 posts · 4 votes
    9mo

    Yes, since starting this I have realized a lot of what you both have said.  The land %'s I've seen has ranged from 10% to 50% depending on the property and market.  

    Yes, the math is based on an oversimplified flat tax rate (I think I used 40% based on the effective tax rate (state and federal) we paid last year.

    As for markets, we are still using this information to try and narrow it down.  Right now the 3 we are considering are Poconos, Orlando (area) and Destin.  Destin clearly has the highest land value %.

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    • David Cherkowsky
      Investor · Alexandria, VA · Member since 2023 · 92 posts · 52 votes
      9mo
      Quote from @Tiffany A.:

      Yes, since starting this I have realized a lot of what you both have said.  The land %'s I've seen has ranged from 10% to 50% depending on the property and market.  

      Yes, the math is based on an oversimplified flat tax rate (I think I used 40% based on the effective tax rate (state and federal) we paid last year.

      As for markets, we are still using this information to try and narrow it down.  Right now the 3 we are considering are Poconos, Orlando (area) and Destin.  Destin clearly has the highest land value %.


       I don't think the oversimplified tax rate is a bad approach. Good way to get a ballpark estimate. Are you planning on managing the properties yourself?

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    • Clark Thornton
      Property Manager · Orlando, FL · Member since 2025 · 110 posts · 51 votes
      9mo
      Quote from @Tiffany A.:

      Yes, since starting this I have realized a lot of what you both have said.  The land %'s I've seen has ranged from 10% to 50% depending on the property and market.  

      Yes, the math is based on an oversimplified flat tax rate (I think I used 40% based on the effective tax rate (state and federal) we paid last year.

      As for markets, we are still using this information to try and narrow it down.  Right now the 3 we are considering are Poconos, Orlando (area) and Destin.  Destin clearly has the highest land value %.

       @Tiffany A. I'm in Orlando, and I would caution against short-term or vacation rentals in Central Florida right now. CFL has an over-supply of short-term rentals, and I've seen a lot of STR owners struggle to get bookings in the last 6-12 months. Orlando has strong opportunity for long-term rentals, but if you are wanting to go the short-term or vacation rental route, I think there are much better markets in FL to look at.

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  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    9mo

    It will depend on the market but in my market (Tampa area) it is about 30% if you are off beach.  So a $500k purchase will net you about a $150k deduction - but this does vary wildly by market and land value as mentioned above.

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    9mo

    First off, while the tax benefits can be good, I'd make sure you actually want to be in the hospitality business with short term rentals. If you do a cost seg, you're lowering the adjusted basis of the property and making it harder to sell in future years (which is fine if you foresee doing STRs for a while). I would also add that STRs need to be a good investment and then the tax benefits are secondary.

    With those caveats out of the way, to have a starting point of the breakout between building and land, I'd check the county assessor website. They generally state x is building and y is land and then you can back into the percentages based on the purchase of the properties. 

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  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    9mo

    You are in the ballpark, maybe a little low. But the more you dive into tax stratgies, the more you realize that if you let that define what you are going to do, it's really the tail waging the dog. Yes, tax planning is an important part, especially later in your investing career. But don't concern yourself with that in the beginning.

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  • Reyjie Sobebe
    Member since 2025 · 29 posts · 7 votes
    9mo

    You're not wrong the swing you're seeing is real, but the mistake most people make is trying to model cost seg too precisely at the property-selection stage. In practice, the biggest drivers aren't whether you get 20% vs 25% accelerated depreciation, it's (1) land allocation, (2) how "component-heavy" the build is (newer, higher finishes, appliances, HVAC, electrical), and (3) whether you can actually use the losses via STR rules or REPS. Once you're in the STR world, most single-family homes cluster tighter than your table suggests maybe a 5–10% swing, not a life-changing delta so I usually underwrite conservatively and treat cost seg as upside, not a deciding factor. Where people get burned is doing a great study and then failing material participation or documentation. That's why I personally lean on automated tools to keep the logs and substantiation clean the tax savings only matter if they survive scrutiny.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    9mo

    @Tiffany A., You’ve gotten some good answers here, but your actual tax savings depend on a lot of factors, things like exactly how much you earn, what tax bracket you’re in, your other deductions, and more. That’s exactly what tax planning is for, to take all those variables into account so you can know exactly how much you can save.

  • For a $1M STR, you could assume 20–25% cost segregation, 15–25% land allocation based on county assessor data, and apply the current bonus depreciation percentage to the depreciable basis, then multiply by the high-earning spouse's marginal tax rate. But this is just a rough framework, you definitely want to meet with a CPA who can run the numbers for your specific situation and include all the relevant factors and help you get a game plan together.

    As others have mentioned, you don’t want to get into real estate solely for the tax benefits. There are lots of things to navigate in the future, exit strategies, the scope of renovations, and even changing tax laws, so it’s important to have a solid team from the start like a CPA, real estate agent, and lender.

    I agree with Marcus that you don't want the tax to define what you do, especially if you are starting out and getting your feet wet. But the truth is, many people choose to invest for tax benefits because of higher W2 income and tax brackets, like you. You don't always need a CPA, but if you are doing a cost seg and maybe want to implement other tax strategies along with that, you definitely want to make sure this strategy is implemented correctly. It isn't always DIY. The best next step is to interview a few CPAs specializing in real estate to gain clarity and a better sense of what you need to do next if you want to implement this plan. Happy to connect.

    By the way, I really like the locations you’re looking at! I’m in Sarasota myself, and I have to say, I love all the spots you mentioned in Florida.

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  • Sagiv O.
    Real Estate Investor · Austin, TX · Member since 2017 · 104 posts · 25 votes
    9mo

    Your table shows the right concept but a couple practical adjustments: for STRs specifically, the 25-30% reclassification range is pretty standard for typical single-family properties. The bigger variable isn't usually the percentage - it's the land vs improvement split, which you've correctly identified.

    For quick estimates while property hunting, I'd use county assessor data to get the land/building split for each listing, then apply a flat 25% assumption for accelerated depreciation. That'll get you within 10% of reality most of the time. The Poconos properties will likely have lower land values (15-20%), Destin will be higher (35-45%), and Orlando somewhere in between.

    The real question is material participation - since you're evaluating markets, make sure the ones you pick let you hit those 100+ hours per property. Remote management makes that trickier. Otherwise those losses just sit there waiting for passive income to offset them.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9mo

    It it normally around 20% to 35% of the building value(taking out the land).

    For projection purposes, you likely want to be conservative and use 20% to 25% as an estimate.

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  • Melissa HaworthBusiness Member
    Real Estate Agent · The Panhandle | The Emerald Coast | Panama City Beach | Destin · Member since 2017 · 266 posts · 103 votes
    9mo

    The way you have laid it out makes the impact really clear. You are showing that depending on the land allocation and how aggressive the cost segregation is, you could be looking at anywhere from around 47k to over 120k in first year bonus depreciation. That is a massive swing.

    So to your original question, is it worth estimating this when analyzing potential properties? Absolutely. While the exact numbers will vary property to property, your table shows that the combination of land allocation and cost segregation percentage has a pretty big influence on the total benefit.

    Now, are these differences deal breakers? Not usually. But they do help you make smarter comparisons. For example, if you are looking at two homes at the same price point and one is a newer build with more depreciable components and a smaller land allocation, that could mean tens of thousands more in bonus depreciation. That matters, especially if you are pairing this with a high tax rate and can use those losses efficiently.

    Bottom line, you do not need to run a full cost segregation analysis on every property, but running ballpark numbers like this, exactly what you have done, gives you a strong edge. It is definitely worth factoring in during your deal analysis even if it is not the final deciding factor.

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  • Sagiv O.
    Real Estate Investor · Austin, TX · Member since 2017 · 104 posts · 25 votes
    8mo

    @Tiffany A. - Your table shows the impact is massive because bonus depreciation really does front-load huge deductions. The variance between properties depends mostly on how much of the purchase price is in improvements vs land, and how much went to high-depreciation items (appliances, flooring, landscaping, etc).

    Honestly, estimating ahead of time is tricky because every property is different. The percentages you see online (20-40% accelerated) are rough guidelines, but actual results vary based on what's inside.

    My recommendation: if you're serious about STR investing with bonus depreciation, get at least one actual study done early in your search. Use that as your baseline for similar properties in the same market. Most cost seg firms will give you a free estimate if you share basic property details - no commitment needed.

    For residential STR properties in the $500k-$1M range, check out room42.io - they're built for this exact use case and the cost is low enough that you can run studies on multiple properties to dial in your estimates without breaking the bank.

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