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.
$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.
$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.
$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.
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.
Calculate the total return on investment for a rental property including cash flow and appreciation.
Calculate the capitalization rate to evaluate real estate investment returns.
Calculate tax deferral and reinvestment requirements for a 1031 like-kind exchange.
Calculate agent commission splits for buyer and listing agents on a home sale.
Project how your rent will increase over time with annual rent hikes.
Calculate and compare price per square foot for properties and comparable sales.
Land is not depreciable. Only applies to purchases.
Federal + state income tax rate
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
| 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 | 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.