Cost Segregation. Is it worth it?
Investor · Reading, MA · Member since 2015 · 2 posts · 2 votes
Cost Segregation. Is it worth it?
Most Popular Reply
Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votesRobert, yes a cost segregation study can still be worth evaluating on the replacement property, but the 1031 carryover basis makes the analysis more nuanced than a normal $5M purchase.
In a 1031 exchange, your old adjusted basis generally carries into the replacement property, and any additional basis created by new money or additional consideration is treated separately as excess basis. For depreciation purposes, the carryover-basis portion generally continues under the prior depreciation framework, while the excess-basis portion is generally treated as newly placed-in-service property.
So I would not assume you can simply cost-seg the entire $5M purchase price as though everything were brand-new basis.
What I’d want modeled is:
- Your carryover basis from the four relinquished properties
- Depreciation already taken
- The amount of new/excess basis in the 30-unit acquisition,
- How much of that basis is attributable to land versus depreciable property,
- And whether accelerating additional depreciation actually creates a usable tax benefit for you.
There is also an election available under the depreciation rules that can change how the carryover and excess basis are handled for depreciation purposes, so this is one where I’d have the CPA and cost-seg engineer coordinate rather than ordering a study in isolation.
On a roughly $5M, 30-unit multifamily acquisition, I would absolutely run the cost-seg analysis. I just wouldn’t judge whether it’s worthwhile based on purchase price alone.
Happy to connect and share some of our resources that might be helpful!
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19 Replies
- 1moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesThere is only way to answer your question responsibly: analyze your specific assets, both the existing one and the new acquisition, and you overall tax situation. Which is not quick and not free.
Quote from @Robert Granara:
I'm trying to execute a 1031. Buying a 30 unit multi family in New England for approx. $5m. I"m carrying over assets I've owned and depreciated for 16-22 years (4 different properties). From my preliminary research I see I will only have partial depreciation due to the carry over on the new purchase. Is it worthwhile to pay for the engineering for a cost segregation study for the new property?There
Any other answer, including free estimates by cost segregation companies, will be nothing but a GUESS.
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https://www.biggerpockets.com/forums/51/topics/1268789-expla...- Specialist · United States · Member since 2025 · 45 posts · 31 votes1mo
@Michael Plaks Re: "Any other answer, including free estimates by cost segregation companies, will be nothing but a GUESS." This is your opinion, not a fact. Most reputable cost segregation firms work with prospective clients and their tax professionals to determine (calculate) the carryover and new (excess) basis upfront. It is NOT guesswork and is a critical step in providing an accurate preliminary analysis (estimate) and final result.
- 1moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Account Closed:
@Michael Plaks Re: "Any other answer, including free estimates by cost segregation companies, will be nothing but a GUESS." This is your opinion, not a fact. Most reputable cost segregation firms work with prospective clients and their tax professionals to determine (calculate) the carryover and new (excess) basis upfront. It is NOT guesswork and is a critical step in providing an accurate preliminary analysis (estimate) and final result.
This is absolutely a fact, given the OP's complex situation of multiple deeply appreciated assets brought into a 1031 exchange. Estimates are ok in straightforward situations such as buying a new property but not here. Which is also my opinion, just like yours. ;)
- Specialist · United States · Member since 2025 · 45 posts · 31 votes1mo
OK, let's try this again so you and the other readers of this post will hopefully understand. Most reputable cost segregation firms work directly with the client and the client's tax professional to calculate the carryover and new (excess) basis prior to providing an estimate for a cost segregation study. Again, there is no guesswork when it comes to these basis calculations because we MUST determine upfront whether or not it makes sense to provide the estimate.
- 1moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Account Closed:
OK, let's try this again so you and the other readers of this post will hopefully understand. Most reputable cost segregation firms work directly with the client and the client's tax professional to calculate the carryover and new (excess) basis prior to providing an estimate for a cost segregation study. Again, there is no guesswork when it comes to these basis calculations because we MUST determine upfront whether or not it makes sense to provide the estimate.
No, Stanley, I do understand. I understand that you aggressively market your company's service. And you distort reality to fit your marketing goals. And dare to suggest that tax professionals with 30 years of experience "do not understand."
Yes, good cost seg companies coordinate with CPAs - when investor is already committed to the process and the cost seg company is hired. I'm talking about those free no-obligation preliminary estimates that are based only on basis and tax bracket. For simple situations, it is usually in the ballpark.
In complex situations like the OP described, knowing the basis and tax bracket is NOT ENOUGH. There are too many moving parts, and a responsible estimate in such situations cannot be done by cost seg providers, only by accountants.
- Specialist · United States · Member since 2025 · 45 posts · 31 votes1mo
Quote from @Michael Plaks:
Quote from @Stanley Odum:
OK, let's try this again so you and the other readers of this post will hopefully understand. Most reputable cost segregation firms work directly with the client and the client's tax professional to calculate the carryover and new (excess) basis prior to providing an estimate for a cost segregation study. Again, there is no guesswork when it comes to these basis calculations because we MUST determine upfront whether or not it makes sense to provide the estimate.
No, Stanley, I do understand. I understand that you aggressively market your company's service. And you distort reality to fit your marketing goals. And dare to suggest that tax professionals with 30 years of experience "do not understand."
Yes, good cost seg companies coordinate with CPAs - when investor is already committed to the process and the cost seg company is hired. I'm talking about those free no-obligation preliminary estimates that are based only on basis and tax bracket. For simple situations, it is usually in the ballpark.
In complex situations like the OP described, knowing the basis and tax bracket is NOT ENOUGH. There are too many moving parts, and a responsible estimate in such situations cannot be done by cost seg providers, only by accountants.
Michael, in no way, shape, or form do I want to distort the truth to promote our services. If I have done so, please cite your sources so I can correct my mistakes and give you full credit. I don't agree with "...and a responsible estimate in such situations cannot be done by cost seg providers, only by accountants." Better version: "...should not be done by cost seg providers alone but with the guidance of a licensed tax practitioner." Note that I greatly appreciate and respect most of your opinions and posts on this forum, regardless of your obvious disdain for cost segregation providers who disagree with you and call you to the table if/when necessary. To all the folks reading this, I apologize for boring you with our sparring. "Iron sharpens iron, and one man sharpens another (Proverbs 27:17 ESV)."
- 1moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Robert, yes a cost segregation study can still be worth evaluating on the replacement property, but the 1031 carryover basis makes the analysis more nuanced than a normal $5M purchase.
In a 1031 exchange, your old adjusted basis generally carries into the replacement property, and any additional basis created by new money or additional consideration is treated separately as excess basis. For depreciation purposes, the carryover-basis portion generally continues under the prior depreciation framework, while the excess-basis portion is generally treated as newly placed-in-service property.
So I would not assume you can simply cost-seg the entire $5M purchase price as though everything were brand-new basis.
What I’d want modeled is:
- Your carryover basis from the four relinquished properties
- Depreciation already taken
- The amount of new/excess basis in the 30-unit acquisition,
- How much of that basis is attributable to land versus depreciable property,
- And whether accelerating additional depreciation actually creates a usable tax benefit for you.
There is also an election available under the depreciation rules that can change how the carryover and excess basis are handled for depreciation purposes, so this is one where I’d have the CPA and cost-seg engineer coordinate rather than ordering a study in isolation.
On a roughly $5M, 30-unit multifamily acquisition, I would absolutely run the cost-seg analysis. I just wouldn’t judge whether it’s worthwhile based on purchase price alone.
Happy to connect and share some of our resources that might be helpful!
INVESTOR FRIENDLY CPA®5241 Reviews - 1moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
The piece that trips people up on an exchange like this is that the $5M price tag isn't the number a study actually gets to work with. The basis you carried over from those four properties keeps running on its old depreciation schedule, and only the additional basis you're bringing into the 30-unit gets treated as newly placed in service, so somebody has to compute both pieces before anyone can quote you a benefit. There's also an election that changes how those two buckets are handled for depreciation purposes, which is why the study firm and whoever prepares your return should be talking to each other instead of working in isolation. On a deal this size it's usually worth running the numbers, but I'd be skeptical of any free estimate that never asked what your carryover basis and prior depreciation look like, and I'd want the analysis to include whether accelerated deductions would even be usable on your return this year. It all depends on your specific facts, so work through it with your own CPA before you commit to anything.
Malabute & Company CPAs525 Reviews - 1moBonnie Griffin KaakePro MemberReal Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votesHi Robert, We have done over 70,000 engineering-based cost segregation studies over the last 23+ years, including those on 1031 exchanges and our pre-analyses/estimates give you very accurate ranges of what you can expect in tax benefits and cashflow. AND, there is no cost for putting together this estimate for you including the details associated with the 1031 exchange. Then, you and your CPA/tax professional can decide if it is worth doing given the detail we provide in the estimate. Any additional questions, let's talk.
Quote from @Robert Granara:
I'm trying to execute a 1031. Buying a 30 unit multi family in New England for approx. $5m. I"m carrying over assets I've owned and depreciated for 16-22 years (4 different properties). From my preliminary research I see I will only have partial depreciation due to the carry over on the new purchase. Is it worthwhile to pay for the engineering for a cost segregation study for the new property?
- 1moAaron WeikleBusiness MemberMember since 2026 · 76 posts · 23 votes
The 1031 carryover complicates the math but doesn't kill the case for cost segregation. It actually makes the analysis more interesting. What's actually happening is your basis in the replacement property is reduced by the deferred gain from the relinquished properties. So yes, you're starting with a lower depreciable basis than a straight purchase. But cost segregation doesn't care about the total basis so much as ‘how' that basis is allocated. A study reclassifies portions of the building from 39 year (commercial) or 27.5 year (residential) straight-line into 5, 7, and 15 year MACRS property. This includes land improvements, fixtures, certain electrical and plumbing components of course. On a 5 million acquisition and even after basis reduction, you might have 3.2 to 3.8 million of depreciable basis. Reclassifying 20–30% of that into short-life assets is a real number. Bonus depreciation is the other piece. At current rates (60% for 2024 assets placed in service), any 5 and 15 year property identified by the study gets a big first year deduction rather than being spread over 27.5 years. That accelerates cash value even when your total depreciable basis is compressed. The study itself on a 30 unit multifamily typically runs $5,000–$10,000. If you're in the 37% bracket and the study identifies $400K in reclassifiable assets, the first year tax benefit can hit $90K or more depending on bonus rates and your passive activity situation. The ROI clears easily on those numbers. Where it gets complicated is passive loss rules, your AGI, and whether you qualify as a real estate professional matter a lot here. Run the numbers with your CPA before commissioning the study, definitely not after.
- 1moMichael TempelBusiness MemberReal Estate Broker · MN · Member since 2026 · 7 posts · 0 votes
Yes :-). I am coming from a large syndication scenario. Imagine doing this on a 3 million dollar renovation with a large building and 15 plus investors. Huge way to produce immediate profit or benefits for investors.
of course there are times where it doesn't make sense, but in most cases we have done this.
ROI Multifamily - Real Estate Consultant · Houston, TX · Member since 2026 · 6 posts · 3 votes4w
On a 1031 into a $5M multifamily, purchase price is the wrong starting point for cost seg math.
Your adjusted basis from the four old properties generally carries over. That carryover piece keeps its old depreciation history. New money or excess basis is what looks more like newly placed-in-service property. A study can still be useful on the replacement building, but the accelerated write-off is limited to the basis that actually qualifies, not the full $5M sticker.
Have the CPA and the engineer work off the same schedule: carryover basis, excess basis, land allocation, and whether you can use the resulting loss this year. If most of your basis is old carryover with little excess, the study fee may not clear. If you put significant new cash in, it often does.
- 3wBryan MartinBusiness MemberAccountant · Springfield, IL · Member since 2022 · 189 posts · 100 votes
Without knowing all of the details, my initial guess is yes, since the purchase price is $5M, but that’s simply a guess. Too many other factors at play to give a firm answer. Things I’d look into:
Basis of building (impacted by 1031 and Land Allocation)
Your tax bracket (bonus depreciation is worth 3.7x more when you’re in the 37% bracket compared to 10%)
Does your state accept bonus depreciation?
Like I said, at $5M, I would venture yes, but I don’t have any answers to the above, so it’s just a guess.
- 2wDivin KanyamaBusiness MemberAccountant · Seattle, WA · Member since 2025 · 316 posts · 107 votes
@Robert Granara , Yes, it may still be worthwhile—especially if the $5 million replacement property creates meaningful excess basis. A 1031 carries over the old adjusted basis, while additional investment can create new depreciable basis. Cost segregation may accelerate depreciation on eligible components, but the value depends on whether you can use the deductions.
Before paying for the full study, ask a reputable firm for a free feasibility analysis showing the estimated accelerated deductions, fee, and projected tax savings. Then have your CPA model the result using the final exchange basis, land allocation, passive losses, and expected holding period.
Ask your CPA: What are my carryover and excess basis, how much accelerated depreciation can I currently use, and what is the projected benefit after recapture?
Ask the cost-segregation firm: Is the study engineering-based and audit-defensible, how will it handle 1031 carryover basis, and what are the fee and estimated first-year tax savings?
- 5dJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
With a 1031 in the mix this gets more complicated than just running a study on the full $5M. The old basis from the four properties you traded out of carries over and generally keeps depreciating the way it already was, and only the new money you put in on top of that gets treated as newly placed in service, so the piece you can actually accelerate is usually a lot smaller than the purchase price makes it look. Before paying anyone I would map out the carryover basis, the depreciation already claimed, how much excess basis you are really adding, the land versus building split, and whether faster deductions actually produce a usable benefit for you. There is also an election that changes how the carryover and excess basis get handled, so it helps to have your CPA and the cost seg engineer coordinating rather than ordering a study on its own and sorting it out afterward. On a $5M 30-unit I would absolutely run the analysis, I just would not decide based on the price tag alone. The exact answer depends on your specific facts, so it is worth walking through with your own CPA or tax advisor.
Malabute & Company CPAs525 Reviews - Member since 2026 · 25 posts · 4 votes4d
On a 1031 into a $5M multifamily, purchase price is the wrong starting point for cost seg math.
Your adjusted basis from the four old properties generally carries over. That carryover piece keeps its old depreciation history. New money or excess basis is what looks more like newly placed-in-service property. A study can still be useful on the replacement building, but the accelerated write-off is limited to the basis that actually qualifies, not the full $5M sticker.
Before you pay for engineering, Id want one workbook that shows:
Carryover basis and depreciation already taken on the four relinquished properties.
Excess / new basis in the 30-unit (cash boot, extra debt, etc).
Land vs building split on the replacement.
Whether accelerated deductions are usable this year (passive activity, REPS, excess business loss, state conformity on bonus).
Hold period and recapture if you might sell or exchange again soon.
There is also a depreciation election that can change how carryover vs excess basis is handled, so the CPA and the engineer should share the same schedule instead of ordering a study in a vacuum.
A spreadsheet that separates carryover vs excess basis is enough for a go/no-go. Not advice for that New England deal. Run the usable-benefit math before the study fee.
- Real Estate Investor · Austin, TX · Member since 2017 · 85 posts · 19 votes3d
One thing I'd add from the practitioner side, since this is the exact spot where a lot of investors talk themselves out of the study: skipping it doesn't save you from the recapture you're worried about.
Depreciation reduces your basis whether you claim it or not — "allowed or allowable." When you sell, your gain is figured on basis reduced by the depreciation you were entitled to take. So the choice isn't really "bonus now vs. no recapture later." It's "bonus now vs. the same basis reduction with the deduction dribbled out over 27.5 years." And layered on top of a 1031, the point gets even sharper: the exchange defers the whole gain, including the unrecaptured §1250 piece, so the timing works in your favor either way.
Practically, what makes or breaks this for you is the workbook Chea and others described — carryover basis, excess basis, land split, and whether the accelerated deductions are actually usable this year (passive rules, §461(l), etc.). One thing I'd insist on if you move forward: make sure the engineer's report splits every asset by carryover vs. excess basis, not just by recovery period. That schedule is what your CPA needs for the depreciation election Ashish mentioned and for modeling which dollars actually qualify for 100% bonus.
Run it by your CPA with that schedule in hand before paying for the full engineering.
- CPA| New Clients Welcome| 50 States · Member since 2016 · 435 posts · 93 votes2d
@Robert Granara , hi. Yes, it can still be worthwhile, but the key is separating the carryover basis from the new/excess basis created in the 1031 exchange. A cost segregation study generally has the most value on the portion of the new property that represents additional basis, not simply the full $5M purchase price.
Before paying for the study, I’d have your CPA model the exchange basis, depreciation carryover, and expected accelerated deductions versus the engineering fee. On a 30-unit property, the numbers can absolutely justify it—but only after the 1031 basis is calculated correctly.
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