Cost segregation/ real estate professional status
Member since 2025 · 1 post · 4 votes
Cost segregation/ real estate professional status
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Attorney · Spanish Fork, UT · Member since 2025 · 77 posts · 97 votes
1yHi Oliver, what the cost seg company is likely getting at is that if you do a cost seg on a property the losses generated by the cost seg will be passive losses and thus can only offset other passive income (as opposed to active income such as w2 income), unless you are somehow able to get shift the losses from the cost seg to qualify as active losses. There are two primary means to have the losses from the cost seg qualify as active losses.
First, you can qualify as a real estate professional. This would allow the losses from depreciation on any or all of your investment properties, including those losses generated a cost seg, to offset other active income. Qualifying as a real estate professional can be an uphill battle, in particular if you are working a full-time W-2 job. One of the workarounds here is that if you are married and one spouse is a high W-2 income earner, as long as you are filing taxes jointly, the other spouse can qualify as a real estate professional to offset W-2 income of the high income earning spouse.
Second, you could fit into what is often referred to as the "short-term rental loophole". This involved renting a property out as a short-term rental and also meeting the "material participation" test for that specific property. If you can meet these requirements then you can do a cost seg on that specific property and have those losses offset other active income. As you can see, the short-term rental loophole is more limited in scope because it only allows the depreciation/cost seg on that specific property to offset active income. However, the material participation test is generally much easier to hit than qualifying for real estate professional status, especially if you have a full-time W-2 job.
In summary, if the intent is to use losses generated by the cost seg to offset active income, then the cost seg company is correct in that you either need to qualify as a real estate professional, or fit into the short-term rental loophole in order for the losses from the cost seg offset the desired active income. If, however, you're simply planning on using the losses from the cost seg to offset passive income, you do not need to need to be a real estate professional or fit into the short-term rental loophole.
Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.
19 Replies
- Attorney · Spanish Fork, UT · Member since 2025 · 77 posts · 97 votes1y
Hi Oliver, what the cost seg company is likely getting at is that if you do a cost seg on a property the losses generated by the cost seg will be passive losses and thus can only offset other passive income (as opposed to active income such as w2 income), unless you are somehow able to get shift the losses from the cost seg to qualify as active losses. There are two primary means to have the losses from the cost seg qualify as active losses.
First, you can qualify as a real estate professional. This would allow the losses from depreciation on any or all of your investment properties, including those losses generated a cost seg, to offset other active income. Qualifying as a real estate professional can be an uphill battle, in particular if you are working a full-time W-2 job. One of the workarounds here is that if you are married and one spouse is a high W-2 income earner, as long as you are filing taxes jointly, the other spouse can qualify as a real estate professional to offset W-2 income of the high income earning spouse.
Second, you could fit into what is often referred to as the "short-term rental loophole". This involved renting a property out as a short-term rental and also meeting the "material participation" test for that specific property. If you can meet these requirements then you can do a cost seg on that specific property and have those losses offset other active income. As you can see, the short-term rental loophole is more limited in scope because it only allows the depreciation/cost seg on that specific property to offset active income. However, the material participation test is generally much easier to hit than qualifying for real estate professional status, especially if you have a full-time W-2 job.In summary, if the intent is to use losses generated by the cost seg to offset active income, then the cost seg company is correct in that you either need to qualify as a real estate professional, or fit into the short-term rental loophole in order for the losses from the cost seg offset the desired active income. If, however, you're simply planning on using the losses from the cost seg to offset passive income, you do not need to need to be a real estate professional or fit into the short-term rental loophole.
Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.
- 1yJulio GonzalezPro MemberSpecialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
As @Ryan Coon has mentioned, a cost seg study may be viable if you qualify for the STR loophole.
With this strategy, you don't need to qualify as REPS to be able to take your real-estate losses. You can qualify for this by:
- Having tenants for 7 days or less at a time.
- Materially participate, typically with the test: You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
Here's a helpful article that covers material participation and other options if you don't have REPS https://www.biggerpockets.com/forums/51/topics/1198185-how-c...
- 1ySean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votesTax benefit of cost seg depends on the property, your participation, and tax profile. Would recommend doing cost-benefit analysis before you make a decision.
Quote from @Oliver Cordova:
I was consulting with cost segregation company. This is what she told my CPA
'if you do not fit the qualifications to be considered a real estate professional, then passive income limitations would not allow you to access the deductions'
I have never heard or read anything as such. I remeber hearing if you make too much on your W2 then it might not benefit you from cost segregation.
Any advice would be greatly appreciated.
There isn't enough info here to make a recommendation.
.
.
.*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
- 1ySean GrahamBusiness MemberInvestor , CPA · Detroit, MI · Member since 2016 · 582 posts · 248 votes
Quote from @Oliver Cordova:
I was consulting with cost segregation company. This is what she told my CPA
'if you do not fit the qualifications to be considered a real estate professional, then passive income limitations would not allow you to access the deductions'
I have never heard or read anything as such. I remeber hearing if you make too much on your W2 then it might not benefit you from cost segregation.
Any advice would be greatly appreciated.
Does your straight line depreciation losses cover all of your rental property profits? If not, cost segregation would be worth considering. Also worth considering if you plan to exit a different property soon and will have capital gains.
Maven Cost Segregation Tax Advisors555 Reviews - 1yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@Oliver Cordova The statement from the cost segregation company is mostly correct, but it needs clarification.
If you do not qualify as a Real Estate Professional (REP) and your rental activities are passive, then cost segregation losses (accelerated depreciation) are treated as passive losses. Under IRS rules, passive losses can only offset passive income, not W-2 or other active income—unless you qualify for one of the exceptions.
Here’s how it breaks down:
1. Without REP Status:
- Cost seg losses become passive losses.
- If you have little to no passive income (from rentals or other sources), those losses carry forward to future years.
- You can use them later when you sell a property or generate more passive income.
2. With REP Status + Material Participation:
- Losses from rentals are considered non-passive.
- This means you can use cost seg losses to offset W-2 or active income, which is where the big tax savings come in.
3. STR Loophole Alternative:
- If you don’t qualify as a REP, but your property qualifies as a short-term rental (average stay under 7 days) and you meet material participation tests, you can still treat losses as non-passive, even without REP status.
So, your understanding is also valid—high W-2 earners who don’t qualify as REP often can't use cost seg losses immediately, but those losses aren’t lost; they just carry forward.
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.
INVESTOR FRIENDLY CPA®5241 Reviews - Specialist · Sarasota, FL · Member since 2024 · 33 posts · 8 votes1y
If you’re not a real estate professional under IRS rules, your rental losses, including accelerated depreciation from cost segregation, are usually considered passive. Passive losses can only offset passive income (like net rental income or gains from other passive investments), not W-2 or active business income.
That’s why your CPA and the cost seg provider mentioned limitations. However, it doesn't mean you can’t benefit. It just means you’ll want to confirm that you (1) have passive income to offset or (2) may qualify for special exceptions like the $25K active participation rule (subject to income phaseouts).
I recommend getting a free estimate and reviewing it with your CPA. Confirm you can use the deductions, and that the ROI makes sense for your situation.
Brian Kiczula | CostSegRx
Cost Segregation SpecialistNote: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice.
- Investor · Member since 2026 · 21 posts · 29 votes7mo
The analysis is correct. In what I understand, the deductions are generally passive unless you qualify as a REP or meet the STR material participation tests. Also, navigating these rules correctly is precisely why the detailed breakdown from an engineered study is so important.
- Accountant · Long Island, NY · Member since 2021 · 182 posts · 144 votes7mo
Agree with all the points above. Also - consider the benefits of a "lazy 1031 exchange" in the event you sell a rental property for a gain.
If you are not a REP or target the STR "exception", you can treat the losses from the depreciation of a cost seg study to offset gain on the sale of existing passive rental properties.
- 6moGian PazziaBusiness MemberSpecialist · Pasadena, CA · Member since 2024 · 38 posts · 15 votes
Hi @Oliver Cordova.
That statement is oversimplified.
If you don’t qualify as a real estate professional under Internal Revenue Code Section 469, your rental losses are generally passive and can’t offset W-2 or other active income. Instead, they offset passive income, and any excess is suspended and carried forward.
However, if you actively participate and your MAGI is under $100,000, you may deduct up to $25,000 of rental losses against ordinary income (phasing out between $100,000–$150,000).
So you don’t lose the deductions, they're just limited or deferred.
- 6moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
The benefit of cost segregation depends on the specific property, your level of participation, and your overall tax profile. If your current straight-line depreciation already offsets your rental income, or if passive activity rules limit your ability to use additional losses, the impact may be minimal. It’s also important to consider future plans, such as an upcoming sale and potential capital gains. The right approach is to run a cost-benefit analysis tailored to your income, participation status, and exit strategy before making a decision.
Malabute & Company CPAs525 Reviews - Investor · Hinton, WV · Member since 2026 · 15 posts · 9 votes6mo
I’ve heard that explanation before, and it’s usually more nuanced than it sounds.
An engineered cost segregation study doesn't require REP status to be valid, it simply accelerates depreciation but whether you can use the losses immediately depends on how your activity is classified. If you're not REP (and don't meet STR material participation rules), the losses are typically passive and may be carried forward rather than offsetting W-2 income right away. So it's more about timing and utilization than eligibility.
I’ve seen many investors speak highly of Cost Segregation Guys and their consistent 5-star feedback (I’ve personally had a good experience as well).
- Real Estate Investor · Austin, TX · Member since 2017 · 69 posts · 16 votes6mo
@Oliver Cordova the cost seg company gave you an oversimplified version of a real rule.
@Ryan Coon, @Ashish Acharya have the full picture covered well above. The short version:
- **Without REPS:** Cost seg losses are passive. They’ll carry forward and get used eventually (passive income from other properties, or when you sell). They’re not lost — just deferred.
- **With REPS + material participation:** Losses become non-passive and can offset your W-2 or active income. This is where the big immediate tax savings come from.
- **STR loophole (no REPS needed):** If you rent short-term and materially participate in that specific property, you can treat losses as non-passive even without REPS. This is more accessible for investors who have a full-time job.
The thing the cost seg company may have been trying to say (but said poorly): *a cost seg study has the most immediate impact when you can use the losses now.* If your losses are going to just sit as carry-forwards for years, you might do the study but the ROI timeline is longer.
The higher your W-2 income, the more the STR loophole or REPS path matters. Worth having a specific conversation with your CPA about your income level and which path is realistically achievable for you.
- New to Real Estate · NJ · Member since 2020 · 10 posts · 6 votes6mo
Spot on, @Julio Gonzalez. If you work a full-time W-2 job like I do, hitting the 750-hour REPS requirement is a massive stretch that an auditor will immediately scrutinize. The STR loophole utilizing the 100-hour test that Julio mentioned is the exact strategy I'm leveraging for my own cost seg study this year.
- Cincinnati, OH · Member since 2026 · 23 posts · 9 votes4mo
The cost segregation company is correct — but the way it was explained leaves out the most important part of the picture, which is probably why it feels incomplete.
Here is what is actually happening.
Cost segregation accelerates your depreciation deductions. Those deductions flow through your rental activity. If your rental activity is passive — which it is by default for most W-2 investors — those larger deductions increase your passive loss balance. And if your income is above $150,000, that passive loss balance sits suspended on Form 8582 rather than flowing against your W-2 income immediately.
So the cost seg company is technically right that without a qualifying exception, the deductions do not immediately reduce your tax bill in the current year.
What they did not tell you is that those suspended losses are not gone. They are preserved, and they are released in two specific situations.
First, when you sell the property in a taxable sale, all suspended losses from that property are released in the year of sale and offset your gain. A larger suspended balance from cost seg means a larger offset at the exact moment you face your biggest tax event.
Second, if you ever establish Real Estate Professional Status or qualify for the short-term rental non-passive exception, the entire suspended balance is released in the year the exception is established. Cost seg done now multiplies the value of a future exception.
The real question worth asking is not whether cost seg works without REPS. It is whether your situation has a path to an exception — and whether building a larger suspended balance now creates more value when that moment arrives.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes4mo
Quote from @Nigel Jackson:
The cost segregation company is correct — but the way it was explained leaves out the most important part of the picture, which is probably why it feels incomplete.
Here is what is actually happening.
Cost segregation accelerates your depreciation deductions. Those deductions flow through your rental activity. If your rental activity is passive — which it is by default for most W-2 investors — those larger deductions increase your passive loss balance. And if your income is above $150,000, that passive loss balance sits suspended on Form 8582 rather than flowing against your W-2 income immediately.
So the cost seg company is technically right that without a qualifying exception, the deductions do not immediately reduce your tax bill in the current year.
What they did not tell you is that those suspended losses are not gone. They are preserved, and they are released in two specific situations.
First, when you sell the property in a taxable sale, all suspended losses from that property are released in the year of sale and offset your gain. A larger suspended balance from cost seg means a larger offset at the exact moment you face your biggest tax event.
Second, if you ever establish Real Estate Professional Status or qualify for the short-term rental non-passive exception, the entire suspended balance is released in the year the exception is established. Cost seg done now multiplies the value of a future exception.
The real question worth asking is not whether cost seg works without REPS. It is whether your situation has a path to an exception — and whether building a larger suspended balance now creates more value when that moment arrives.
If an activity becomes non-passive through REPS or STR loophole it does NOT release prior suspended passive losses.
It allows non-passive losses from that point forward.
Prior disallowed passive losses now fall under former passive activities and remain passive in nature only offsetting passive income, except they are allowed to generate non-passive income generated by the same activity. - Cincinnati, OH · Member since 2026 · 23 posts · 9 votes4mo
Great catch, this is so important and impactful!
Quote from @Natalie Kolodij:
Quote from @Nigel Jackson:
The cost segregation company is correct — but the way it was explained leaves out the most important part of the picture, which is probably why it feels incomplete.
Here is what is actually happening.
Cost segregation accelerates your depreciation deductions. Those deductions flow through your rental activity. If your rental activity is passive — which it is by default for most W-2 investors — those larger deductions increase your passive loss balance. And if your income is above $150,000, that passive loss balance sits suspended on Form 8582 rather than flowing against your W-2 income immediately.
So the cost seg company is technically right that without a qualifying exception, the deductions do not immediately reduce your tax bill in the current year.
What they did not tell you is that those suspended losses are not gone. They are preserved, and they are released in two specific situations.
First, when you sell the property in a taxable sale, all suspended losses from that property are released in the year of sale and offset your gain. A larger suspended balance from cost seg means a larger offset at the exact moment you face your biggest tax event.
Second, if you ever establish Real Estate Professional Status or qualify for the short-term rental non-passive exception, the entire suspended balance is released in the year the exception is established. Cost seg done now multiplies the value of a future exception.
The real question worth asking is not whether cost seg works without REPS. It is whether your situation has a path to an exception — and whether building a larger suspended balance now creates more value when that moment arrives.
If an activity becomes non-passive through REPS or STR loophole it does NOT release prior suspended passive losses.
It allows non-passive losses from that point forward.
Prior disallowed passive losses now fall under former passive activities and remain passive in nature only offsetting passive income, except they are allowed to generate non-passive income generated by the same activity.
- Member since 2024 · 1 post · 0 votes4mo
Thank you all appreciate all response very helpful. Great community here.
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