Is cost segregation worth it? A break-even test for rental owners

Cost segregation is usually worth it when the rental has a depreciable basis above about $150,000, you can use the losses this year or soon, and you plan to keep the property for several years. It’s usually not worth it when you’ll sell within a year or two, or when the extra deductions will sit unused until the sale. Between those two cases it comes down to arithmetic, worked through below.

What the study changes

A study moves part of your building’s cost from a 27.5-year schedule onto 5- and 15-year schedules. With 100% bonus depreciation, which applies to property acquired and placed in service after January 19, 2025, those parts can be deducted in the first year. The total depreciation you claim over the life of the property doesn’t change. What changes is when you claim it, and the tax rate that applies when some of it is recaptured at sale.

The benefit depends on getting deductions earlier and having a use for them when they arrive.

The factors that decide it

Depreciable basis. This is the purchase price minus land, plus capitalized closing costs and improvements. A larger basis means a larger reclassified amount, while the fee for a home doesn’t grow as fast. Below about $150,000 of basis, the dollar benefit gets thin.

Land share. Land isn’t depreciable. A $500,000 home with 40% land has $300,000 to work with, and the same home with 15% land has $425,000. See how to set land value.

Your tax bracket. A $70,000 deduction is worth $16,800 to someone in the 24% bracket and $25,900 to someone in the 37% bracket. In the 12% bracket it’s worth $8,400, and recapture at sale may be taxed at a higher rate than you saved.

Whether you can use the losses. This is the factor people skip. Rental losses are passive by default, so they offset passive income and carry forward if you have none. There are three common ways to use them against wages or business income:

• The $25,000 allowance for owners who actively participate. It shrinks by 50 cents for every dollar of modified adjusted gross income above $100,000 and is gone at $150,000. Married filing separately has its own, tighter limits.
• Real estate professional status. You need more than 750 hours a year in real property trades or businesses, more than half your working time in them, and material participation in the rentals. Most owners with full-time jobs outside real estate can’t qualify, though a spouse sometimes can.
• The short-term rental route. If the average guest stay is 7 days or less and you materially participate, the activity isn’t treated as a passive rental. You don’t need professional status. Our guide to the short-term rental tax loophole covers the hour tests.

If none of these apply and you have no other passive income, the extra deductions become suspended losses. They carry forward, and they’re released when you sell the whole property in a taxable sale. That still has some value, but much less.

Holding period and recapture. When you sell, depreciation on the 5-year parts is taxed as ordinary income, and depreciation on the building is taxed at up to 25%. Recapture only applies to the extent you have a gain. A 1031 exchange can defer it, and heirs who receive the property at death get a stepped-up basis that wipes it out. The details are in depreciation recapture on a rental.

Time value of money. A dollar of tax saved this year can pay down a loan or fund the next purchase now. A dollar of tax owed seven years from now costs less in today’s terms, which is what the discounting below measures.

An illustrative 7-year NPV comparison

This is an illustration with stated assumptions, not a client result.

• $400,000 single-family rental, $80,000 land, $320,000 depreciable basis.
• Bought after January 19, 2025 and placed in service in January. Mid-month convention gives 11.5 months of building depreciation in year one.
• The study reclassifies 30%, or $96,000, all taken as 100% bonus in year one.
• The owner can use the losses (for example through the short-term rental route) and is in the 32% bracket every year.
• Sold in December of year 7 with enough gain that all depreciation is recaptured. Building depreciation without the study is taxed at 25% at sale. To stay conservative, all $96,000 of reclassified depreciation is taxed at 32% at sale, even though some of the 15-year portion would get the 25% rate.
• Fee of $895 paid up front and not deducted. Cash flows discounted at 6% a year.

Depreciation each year. Without a study, year one is $320,000 × 11.5 ÷ 12 ÷ 27.5 = $11,152, years 2 through 6 are $320,000 ÷ 27.5 = $11,636, and year 7 is $11,152 again (sale in December). With a study, year one is $96,000 plus $224,000 × 11.5 ÷ 12 ÷ 27.5 = $7,806, for $103,806. Years 2 through 6 are $8,145, and year 7 is $7,806.

At sale. Over seven years, the $96,000 would have produced $24,145 of building depreciation without the study, taxed at 25%, which is $6,036. With the study, the $96,000 is recaptured at 32%, which is $30,720. The study adds $24,684 of tax at sale.

Year	Change in deduction	Tax effect at 32%	Discount factor at 6%	Present value
0 (fee)		−$895	1.0000	−$895
1	+$92,655	+$29,649	0.9434	+$27,971
2	−$3,491	−$1,117	0.8900	−$994
3	−$3,491	−$1,117	0.8396	−$938
4	−$3,491	−$1,117	0.7921	−$885
5	−$3,491	−$1,117	0.7473	−$835
6	−$3,491	−$1,117	0.7050	−$788
7 (incl. sale)	−$3,345	−$25,754	0.6651	−$17,128
Total		−$2,585		+$5,509

Look at the two totals. Undiscounted, the study costs this owner about $2,585, because recapture at 32% replaces some tax that would have been 25%, and the fee is gone. Discounted at 6%, the same cash flows are worth about +$5,509 today. The benefit is entirely the use of roughly $29,600 for seven years.

That’s under conservative assumptions. The result improves if the owner holds longer, exchanges into another property, keeps the home until death, or is in a higher bracket now than at sale. It gets worse with a short hold. Using the same assumptions with a sale in December of year 2, the present value comes out to about +$271, which is break-even after the fee.

A decision checklist

Answer these in order:

1. Is the depreciable basis (price minus land, plus improvements) above roughly $150,000?
2. Can you use the losses this year, through passive income, the $25,000 allowance, professional status or the short-term rental route?
3. Are you in the 22% bracket or higher in the year the deduction lands?
4. Do you expect to hold for at least three years, or to exchange instead of selling?
5. Does the first-year tax effect exceed the fee by a wide margin?

If you answer yes to all five, a study almost certainly pays. A “no” on question 2 or 4 is usually enough on its own to skip the study.

When to skip it

Skip it, or wait, in these cases:

• You plan to sell within about two years. The example above shows the margin is close to zero.
• Your losses will be suspended for years and you have no passive income to absorb them. You’d be paying a fee to create a carryforward.
• You’re in the 10% or 12% bracket and expect to be higher at sale.
• Land is most of the value, as with a small cottage on an expensive lot, and the basis is small.
• You’re about to retire and drop into a much lower bracket next year. A look-back study can catch up missed depreciation in a later year, so you don’t lose the option by waiting.

What to do next

Run your own property through the rental property depreciation calculator, and ask your CPA which of the three routes for using losses applies to you. If the numbers hold up, a free proposal gives you the fee and an estimate before you commit. For bonus rules on your purchase date, see bonus depreciation in 2026.

This is general information, not tax advice. Your CPA should confirm how it applies to you.