What is a cost segregation study?

An engineering-based analysis that identifies and reclassifies components of a building into shorter depreciation categories. Items like carpeting, specialized electrical, plumbing fixtures, parking lots, and landscaping can be depreciated over 5, 7, or 15 years instead of 27.5 or 39 years, generating larger tax deductions sooner. Studies are performed by specialized consultants ($5K-$25K typical fee).

Who benefits from cost segregation?

Any owner of commercial or residential rental property worth $500K+ in depreciable basis can benefit. Especially valuable for properties with significant interior build-out (restaurants, hotels, medical facilities), investors using bonus depreciation to offset other income, and real estate professionals (qualifying for active loss treatment under IRC §469).

What is bonus depreciation?

Bonus depreciation allows large percentage deduction of eligible assets in the first year placed in service. Under TCJA, bonus was 100% for 2018-2022, phased down 20% per year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027. Applies to 5-year, 7-year, and 15-year property identified through cost segregation.

Is cost segregation worth the cost?

Generally yes for properties with $500K+ depreciable basis. Studies cost $5K-$25K typically and produce 5-20x return in year-1 tax savings. For properties under $500K, the math is tighter and often not worth the fee. Run rough calculations before commissioning a study.

What happens at sale?

Accelerated depreciation gets "recaptured" at sale — taxed at up to 25% federal rate for real property recapture, higher rates for personal property. Cost seg trades current deductions for future recapture. The net benefit comes from time-value-of-money (current $1 worth more than future $1). 1031 exchanges can defer recapture along with all other gains.

Cost Segregation Calculator

Cost segregation is a tax strategy that accelerates depreciation deductions on commercial and residential rental properties. Instead of depreciating the entire building over 27.5 or 39 years, a cost seg study reclassifies certain components (electrical, plumbing, fixtures, land improvements) into 5-year, 7-year, and 15-year categories. Combined with bonus depreciation, this can generate massive year-1 tax deductions. Enter your property details to see estimated savings.

Cost segregation is one of the most powerful tax strategies available to commercial and residential rental property owners. The standard depreciation rule treats a residential rental as a single asset depreciated over 27.5 years (39 years for commercial), producing only ~3.6% of the building cost as annual depreciation. Cost segregation breaks that single asset into its components and depreciates each on its proper IRS-defined schedule — many components qualify for 5, 7, or 15-year schedules, dramatically accelerating deductions.

A cost segregation study is an engineering-based analysis (typically performed by specialized consultants for $5,000-$25,000+) that identifies which building components qualify for shorter depreciation lives. Carpeting, specialty electrical, plumbing fixtures, parking lots, landscaping, and many interior finishes can be reclassified. Combined with bonus depreciation rules (currently 20% for 2026 placed-in-service property, phasing down to 0% by 2027 under current law), the year-1 tax deduction can be 5-15x the standard depreciation amount.

This calculator estimates the tax savings from a cost segregation study based on industry-typical reclassification percentages for each property type. The output is an approximation — an actual engineering study produces specific component-level breakdowns. For property owners with $500K+ in depreciable basis and significant other income to offset, cost segregation often produces $50K-$500K+ of year-1 tax deductions and corresponding tax savings.

Inputs

Property Type

Project Type

Total Cost / Purchase Price

Land Value

Land is not depreciable. Only applies to purchases.

Building Square Footage

Year Placed in Service

Combined Tax Rate

Federal + state income tax rate

Bonus Depreciation

Results

Year-1 Tax Savings (With Cost Seg)

$39,066

Year-1 Savings (Without)

$10,182

Additional Year-1 Savings

$28,884

3.6% of basis

5-Year NPV of Savings

$101,932

Reclassification Breakdown

5-Year Property$160,000 (20.0%)

7-Year Property$52,000 (6.5%)

15-Year Property$80,000 (10.0%)

27.5-Year Property$508,000 (63.5%)

Year-1 Tax Savings Comparison

5-Year Depreciation by Asset Class

Asset Reclassification Breakdown

5-Year Depreciation Schedule (With Cost Seg)

Year	5-Year	7-Year	15-Year	27.5-Year	Total	Tax Savings	Cumulative
1	$57,600.00	$16,344.64	$19,200.00	$18,472.73	$111,617.37	$39,066.08	$39,066.08
2	$40,960.00	$10,187.84	$6,080.00	$18,472.73	$75,700.57	$26,495.20	$65,561.28
3	$24,576.00	$7,275.84	$5,472.00	$18,472.73	$55,796.57	$19,528.80	$85,090.08
4	$14,745.60	$5,195.84	$4,928.00	$18,472.73	$43,342.17	$15,169.76	$100,259.83
5	$14,745.60	$3,714.88	$4,435.20	$18,472.73	$41,368.41	$14,478.94	$114,738.78

Asset Class Detail

Asset Class	Amount	% of Basis	Year-1 Depreciation	Year-1 Tax Savings
5-Year Property	$160,000.00	20.00%	$57,600.00	$20,160.00
7-Year Property	$52,000.00	6.50%	$16,344.64	$5,720.62
15-Year Property	$80,000.00	10.00%	$19,200.00	$6,720.00
27.5-Year Property	$508,000.00	63.50%	$18,472.73	$6,465.45

Depreciable Basis: $800,000 ($1,000,000 purchase price - $200,000 land value) · Bonus Depreciation: 20% · Tax Rate: 35%

Estimates based on industry benchmark reclassification rates. An actual engineering-based cost segregation study will provide exact figures for your property.

Last updated: May 27, 2026Reviewed by the CalcMountain editorial team

Formula

Depreciable basis: Depreciable Basis = Total Cost − Land Value Reclassification percentages by property type (typical): Multifamily: 25-35% to short-life Office: 20-30% Retail: 25-35% Industrial: 15-25% Hotel: 35-50% Restaurant: 35-45% Medical: 30-40% Allocation within reclassified portion (approximate): 5-year property (carpets, fixtures): 35-45% 7-year property (specialty equipment): 5-15% 15-year property (land improvements, parking): 40-55% Year-1 depreciation with bonus depreciation: Reclassified Basis × (1 − non-bonus%) + (Reclassified Basis × bonus%) Plus normal building depreciation on remaining basis. Tax savings: Tax Savings = Total Year-1 Deduction × Combined Tax Rate Example: $1M commercial purchase, $200K land. Multifamily property. 2026 placed-in-service. 35% combined tax rate. 20% bonus depreciation. Depreciable basis: $800K Reclassified to short-life (~30%): $240K Remaining building basis: $560K Year-1 deduction approximations: Bonus on $240K reclassified: $240K × 20% = $48K immediate Regular MACRS on rest: $240K × 80% × ~10% (5-year first year) + $560K × ~3.6% (27.5-year) ≈ $19K + $20K = $39K Total year-1 deduction: ~$87K Tax savings: $87K × 35% = $30,450 Without cost seg: $800K × 3.6% = $28,800 year-1 deduction. Tax savings: $10,080. Cost seg incremental year-1 tax savings: ~$20K. Over the building's life, total depreciation is the same — just accelerated. Time-value-of-money makes the acceleration worth tens of thousands. Pre-2023 with 100% bonus depreciation: same scenario produced $240K + $20K = $260K year-1 deduction, $91K tax savings. The 2023-2027 phase-out of bonus depreciation has significantly reduced (though not eliminated) cost seg value.

How to use this calculator

Enter the total purchase price or construction cost.
Enter land value (not depreciable). For purchases, typically use county assessor allocation or appraisal. Default rule of thumb: 15-25% of total cost.
Select property type. Higher-finish properties (hotels, restaurants, medical) typically have higher reclassification percentages.
Select the year the property was placed in service. This determines bonus depreciation rate.
Enter your combined federal + state marginal tax rate. Real estate investors often have 30-40% combined rates.
Bonus depreciation auto-fills based on year. Adjust if you have specific knowledge.
Review estimated year-1 deduction and tax savings.
For actual implementation: hire a qualified cost segregation specialist. The engineering study costs $5K-$25K but typically produces 5-20x return in tax savings for properties above $500K basis.

Worked examples

Multifamily acquisition — 2026

$2M purchase ($400K land), 100-unit apartment. 35% tax rate, 20% bonus dep. Depreciable basis: $1.6M Reclassified (30%): $480K Year-1 deduction (with phased-down bonus): ~$160K Tax savings: $56K Without cost seg: $58K deduction, $20K savings. Cost seg adds $36K of year-1 tax benefit. Cost seg study fee ($10-15K) easily justified.

Hotel — high reclassification rate

$5M new hotel construction. 40% tax rate, 20% bonus. Reclassified (45%): $2.25M Year-1 deduction: ~$700K (with substantial 5-year and 15-year acceleration) Tax savings: $280K Hotels have the highest reclassification rates due to specialized FF&E. Even with bonus depreciation phasing out, cost seg produces dramatic year-1 tax benefits.

Pre-2023 100% bonus — maximum benefit era

$1.5M property placed in service 2022. 35% tax rate. 100% bonus. Reclassified: $450K (30%) 100% bonus on all reclassified: $450K year-1 deduction Plus normal building: $40K Total year-1: $490K Tax savings: $171,500 Pre-2023 properties had extraordinary cost seg value. Many real estate investors who didn't use cost seg during the 100% bonus era left significant money on the table.

When to use this calculator

Use this calculator if you own or are considering acquiring commercial or residential rental property valued above $500K, or undertaking substantial renovations to existing investment properties. Cost segregation is rarely worth it for smaller properties (study fees consume the benefit).

Pair with rental-property, cap-rate, 1031-exchange, and real-estate-commission calculators. The strategy works best for high-income real estate investors with significant other income to offset via the accelerated deductions.

Critical practical notes:

1. **Engineering study required.** DIY cost segregation is not credible to the IRS. Hire qualified specialists ($5K-$25K typical fee for studies on $1M-$10M properties).

2. **Bonus depreciation is phasing out.** 100% in 2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027. The pre-2023 era was unusually generous; current rules are still beneficial but less powerful.

3. **Recapture at sale.** When the property is sold, accelerated depreciation is recaptured at higher tax rates (25% federal for real property recapture). Cost seg trades current tax savings for future tax recapture — generally still a win due to time-value-of-money, but the long-term math is less attractive than the year-1 benefit alone.

4. **Look-back studies available.** For properties placed in service in prior years, IRS allows "catch-up" cost seg studies via Form 3115 to recapture missed deductions in the current year without amending old returns.

5. **Passive activity loss rules.** Real estate losses (including from accelerated depreciation) can typically only offset passive income — not active wage/business income. Exception: real estate professionals (qualifying under IRC §469) can use against active income. Most regular investors are passive, limiting cost seg's ability to offset W-2 income.

6. **Pair with 1031 exchange.** Cost seg recapture at sale can be avoided by 1031 exchanging into a replacement property, deferring all tax including the recapture.

Common mistakes to avoid

Doing cost seg on small properties. Below ~$500K basis, study fees often consume the benefit. Run the math first.
Forgetting passive activity loss rules. Cost seg generates losses that may not be deductible against W-2 income unless real estate professional status applies.
Ignoring recapture at sale. Accelerated depreciation is recaptured at 25% rate when property sells. Plan exit strategy with this in mind.
DIY cost segregation. Self-prepared component allocations don't hold up to IRS audit. Use qualified engineering-based studies.
Missing look-back opportunities. Properties placed in service in prior years can still get cost seg studies via Form 3115. Don't assume "too late."
Forgetting the bonus depreciation phase-out. 20% bonus in 2026 is dramatically less than 100% in 2022. Cost seg still works but the math is much tighter.

Frequently Asked Questions

Sources & further reading

Publication 946 — How to Depreciate Property — U.S. Internal Revenue Service
Cost Segregation Audit Techniques Guide — U.S. Internal Revenue Service
Bonus Depreciation Rules — U.S. Internal Revenue Service

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