Cost segregation ยท Real estate tax
Cost segregation studies
A cost segregation study breaks a building into its parts so more of it can be depreciated faster. Instead of writing off the whole building over 27.5 or 39 years, components like appliances, flooring, cabinetry, fixtures and site improvements can be depreciated over 5, 7 or 15 years, putting more tax savings into the early years of ownership. Combined with bonus depreciation and Section 179, much of that can be deducted right away. We prepare studies in-house and apply them to your books and tax return, all in one house.
How it works
Shorter lives for the parts of your building
Without a study, the whole building is depreciated on one long schedule. A study moves qualifying components onto shorter ones.
5- and 7-year property
Appliances, carpet and some flooring, cabinetry, furniture, decorative lighting and other personal property inside the building.
15-year property
Land improvements like paving, driveways, sidewalks, fencing, landscaping and outdoor lighting.
27.5- or 39-year property
The building structure itself: 27.5 years for residential rentals and 39 years for commercial property.
Accelerated depreciation
Bonus depreciation and Section 179
A study is what makes accelerated depreciation possible. Once components are moved onto 5-, 7- and 15-year lives, two rules can let you deduct much of that cost right away instead of over years.
Bonus depreciation
Lets you deduct a large share of 5-, 7- and 15-year property in the year it's placed in service. Under current law, 100% bonus depreciation applies to qualifying property acquired after January 19, 2025. Property acquired earlier may qualify at a lower percentage.
Section 179 expensing
Lets you expense qualifying equipment and certain improvements to nonresidential buildings, like roofs, HVAC, fire protection and security systems. It can also cover furniture, appliances and equipment in short-term and vacation rentals. It's limited by your business income, and long-term residential rentals have more restrictions.
Qualified improvement property
Interior improvements to nonresidential buildings can be 15-year property, which makes them eligible for bonus depreciation. Restaurant and retail buildouts often fall here.
We look at which rules apply to your property and how much to take now versus later, factoring in your income, state rules and a future sale. California doesn't follow federal bonus depreciation, so your state deduction can differ.
Is it worth it?
When a study tends to pay off
We'll tell you in the free consultation whether the savings justify a study for your property.
- You bought or built a rental or commercial property
- You did a major renovation or furnished a short-term rental
- You own a vacation rental with lots of furnishings and finishes
- You bought a property in a past year and never had a study done
- You have taxable income you'd like to offset with depreciation
Our process
From first call to a lower tax bill
Free consultation
We look at the property, purchase price and your tax picture, and estimate whether a study makes sense.
Gather the details
Closing statement, renovation and furnishing invoices, and photos or a walkthrough of the property.
In-house study
We prepare the study and a depreciation schedule for every component.
Applied to your return
The results go straight into your books and tax return, including any catch-up for prior years.
Own rental property?
Cost segregation works best alongside books kept by property. See our real estate & rental property accounting and tax planning & preparation.
Case study
$1.2M off a developer's tax bill in one year
How cost segregation, a deferred gain on a property sale and corrected past returns lowered a real estate developer and investor's tax bill by about $1.2 million.
Case study
$1.7M in missed depreciation, found during tax prep
How we traced nine years of ownership changes in a real estate partnership, corrected every partner's basis and recovered about $1.7M of missed depreciation in one year.
Questions
Common questions
Is a cost segregation study worth it for my property?
It depends on the property's cost, what's inside it and your tax situation. In a free consultation we estimate the extra depreciation and tell you whether the savings justify a study.
Can I do a study on a property I bought years ago?
Often, yes. The depreciation you missed in earlier years can usually be caught up in the current year with an accounting method change (Form 3115), without amending past returns.
Does it work for short-term and vacation rentals?
Yes. Furnished rentals often have a lot of shorter-life property. Short-term rentals can also be taxed differently from long-term rentals, so we look at how yours is classified before recommending a study.
What about bonus depreciation?
Yes. Components moved to 5-, 7- and 15-year lives can qualify for bonus depreciation. Under current law, 100% bonus applies to qualifying property acquired after January 19, 2025, and earlier acquisitions may qualify at a lower percentage. California doesn't follow federal bonus depreciation.
Can I use Section 179?
Often, for equipment and certain nonresidential building improvements like roofs, HVAC, fire protection and security systems. It can also cover furniture, appliances and equipment in short-term and vacation rentals. It's limited by your business income, and long-term residential rentals have more restrictions. We'll tell you whether bonus depreciation, Section 179 or both make sense for your property.
What happens when I sell?
Faster depreciation now can mean depreciation recapture when you sell. We factor that into the decision and your tax planning.
What does it cost?
Studies are quoted after a free consultation, based on the property and the work involved.
Ready to talk?
Your first consultation is free. Send us a note or email alexa@heteraccountancy.com.