Cost Segregation Pros & Cons

Dr · VA · Member since 2025 · 154 posts · 34 votes

An area of interest to many new and current investors. However, what I noticed its explanation to them the proper pros and cons e.g. the recapture issue that 99% of them don't know about it. what could better and simple ways could you recommend as Tax Prep & professional during the consultation to clients.

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Specialist · United States · Member since 2025 · 45 posts · 31 votes

I would echo @Drago Stanimirovic's comments and add that "taking losses for the sake of losses (only to carry forward losses resulting from accelerating/bonus depreciation that will never be fully absorbed) is short-sighted and should be avoided." Most cost segregation providers and tax professionals recommend holding properties for a minimum of three to five years after performing cost segregation studies. This allows taxpayers enough time to minimize the effects of depreciation recapture by taking advantage of the time value of money ("a dollar today is worth more than a dollar tomorrow") and "The Eighth Wonder of the World" (compound interest) by reinvesting the tax deferral at a given rate of return (e.g., 8 percent for commercial property) and possibly assign diminished value to or reduce the amount of gain allocated to short-lived assets (Section 1245 property) taxed at ordinary income tax rates by allocating more gain to the building's structural components (Section 1250 property) taxed at a more favorable tax rate (up to a maximum of 25 percent) upon sale. Disclaimer: This is not tax advice. Consult with a licensed tax practitioner.

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Drago Stanimirovic
New to Real Estate · Miami, FL · Member since 2024 · 1k+ posts · 457 votes
1y
You're absolutely right, Rohullah, cost segregation is often pitched as a no-brainer, but the recapture piece gets glossed over way too much.

A simple way I explain it to clients is: “It’s a way to get big tax savings now, but when you sell, the IRS wants a portion back. So it’s not free money, it’s more like a tax deferral strategy. It works best when you hold long or do a 1031 exchange.”

Keeping the focus on timing and exit strategy usually helps them grasp whether it fits their goals. Always good to walk them through both short- and long-term impact.
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Specialist · United States · Member since 2025 · 45 posts · 31 votes
1y
I would echo @Drago Stanimirovic's comments and add that "taking losses for the sake of losses (only to carry forward losses resulting from accelerating/bonus depreciation that will never be fully absorbed) is short-sighted and should be avoided." Most cost segregation providers and tax professionals recommend holding properties for a minimum of three to five years after performing cost segregation studies. This allows taxpayers enough time to minimize the effects of depreciation recapture by taking advantage of the time value of money ("a dollar today is worth more than a dollar tomorrow") and "The Eighth Wonder of the World" (compound interest) by reinvesting the tax deferral at a given rate of return (e.g., 8 percent for commercial property) and possibly assign diminished value to or reduce the amount of gain allocated to short-lived assets (Section 1245 property) taxed at ordinary income tax rates by allocating more gain to the building's structural components (Section 1250 property) taxed at a more favorable tax rate (up to a maximum of 25 percent) upon sale. Disclaimer: This is not tax advice. Consult with a licensed tax practitioner.
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Bonnie Griffin KaakePro Member
Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
1y
@Rohullah Sharifi
There are more pros than cons for cost segregation. If you could secure a loan without interest for as long as you own the property and when you paid it back you had to pay less than you received, why wouldn't you? That is what cost segregation offers you.
If you plan to sell within 2 or 3 years, you may not want to do it. If you currently pay no taxes, no need for cost seg until you do.
Cost segregation is all about the time value of money and the value of cash-flow now to reinvest. Another little secret that few know is that if you plan to leave your property to heirs, do cost segregation ASAP because you will never have to pay any of it back and your heirs can do another cost seg upon property transfer.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
1y
There are times when a cost segregation study makes sense and other times when it doesn't.

If your investments are passive and you can't utilize the added depreciation, I would not suggest getting it.

If your real estate activities are considered active or you sold a property where there is substantial gain, I would consider getting the cost segregation study.

Best of luck to you!
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