Cost Segregation Cash Flow Play

By Jason Watson, CPA
Posted Monday, September 29, 2025

As alluded to in other areas, a cost segregation study and the subsequent accelerated depreciation including Section 179 expensing is like JG Wentworth where you want your money, and you want it now. Bad reference?

Let’s say it this way- if you take two rental properties, both short-term rentals, and one had a cost segregation study done and the other did not, at the end of 39 years, your tax deduction for depreciation is identical. The same. There aren’t any special tax deductions provided by a cost seg. So, why do real estate investors and rental properties think this is crack?

It’s all about getting your cash sooner, and re-deploying it to earn more money (or paring down debt).

Let’s assume a $700,000 rental property purchase with a building value of $500,000, which in fancy accounting speak is your depreciable basis. Who wants more assumptions? Sure, let’s assume $100,000 in accelerated depreciation and a marginal tax rate of 24%, and your cost of equity is 8% (or your average rate of return for redeploying your cash).

Next, let’s ponder this table-

Cost Segregation Case Study

Mid-point rates of return aside including first-year depreciation conventions, and other nerdy math, this table suggests that spending $1,000ish on a cost segregation study will yield an extra $37,000 in your pocket after 10 years ($85,012 less $48,140).

If your cost of equity or rate of return on re-deployed cash increased to 10%, then this difference is $45,000. What about 37% marginal tax bracket and 10% cost of equity? Our numbers increase to $152,000 and $83,00, or about a $70,000 delta.

Some might say, wow, ok, that really isn’t a big needle push for me. Others might say, yeah, where do I sign? Everyone is different, with different objectives.

Keep in mind that-

• This assumes you can actually deduct your accelerated depreciation either with rental profits from other rental properties, short-term rental loophole or real estate professional status.
• Your desired rate of return might not be fully adjusted for the risk of a big fat tax deduction associated with accelerated depreciation. In other words, your desired rate of return investing into Amazon or Google might be different than a rental property purely based on risk. An 8% return on Amazon might be risk-adjusted to 12% on a rental property when faced with a choice. As a quickie sidebar, cost of equity usually reflects your desired rate of return when considering two investments, and is common in finance and investment real estate.
• When you grab that big sexy depreciation deduction in year 1, your subsequent years are more painful. Look at the table again- depreciation goes down on a year-by-year basis since you grabbed a bunch in year 1. WCG CPAs & Advisors recently had a client with a $14M building and had a massive $8M depreciation deduction (very special case)- he loved life in year 1, but had sizeable tax bills in subsequent years.
• To expand on the concept just mentioned, if your marginal tax rate increases in later years, you might want some depreciation in your back pocket. An ace up your sleeve so-to-speak. The table above assumes a stable tax footprint which might not be your situation. Then again, most people worry about next time, next time.

Planning To Sell Soon?

Old school mentality suggested that if you plan to sell your rental property within 5 years, then do not perform a cost segregation study. We say “old school” because in many ways this assumed your cost seg cost was $5,000 or more. Today, with do-it-yourself cost segregation, the math is better.

Basically, it comes down to this- cost segregation’s only job is to convert a portion of IRC Section 1250 property into IRC Section 1245 property, and then allow you to accelerate depreciation with bonus depreciation or use Section 179 expensing. As such, how much is the extra cash today that you will have to pay back upon sale in a year or two, worth to you?

In most situations, WCG CPAs & Advisors encourages you to complete the cost segregation study and take your tax deduction (assuming your facts allow you to) today. Quick math- spend $1,000 on a cost seg. Save $37,000 on $100,000 in accelerated depreciation. Earn 8% on $37,000 each year, or over $6,000. Spend $1,000 to get $6,000? Might make sense, Yes?

One more thing to keep in mind- let’s say your income is unusually high this year. You received a big bonus or a large RSU payout, and things will come back down to earth the following year. The year of high income is a good time to pair with a cost segregation study and accelerated depreciation. Your tax deduction is at a 37% marginal tax bracket (play along please), and upon sale your marginal tax bracket is now 24%. This is a 13% tax arbitrage based on timing and good tax planning. 13% applied to a $100,000 depreciation tax deduction is real money (plus the interest on that savings for several months).