Real Estate Investor KnowledgeBase
Print

Cost Segregation Cash Flow Play

cost segregation cash flowBy Jason Watson, CPA
Posted Monday, July 7, 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-

With Cost Seg No Cost Seg
Year Depreciation Tax Savings Invested Depreciation Tax Savings Invested
1 100,000 24,000 25,920 12,821 3,077 3,323
2 10,256 2,462 30,652 12,821 3,077 6,912
3 10,256 2,462 35,763 12,821 3,077 10,788
4 10,256 2,462 41,282 12,821 3,077 14,974
5 10,256 2,462 47,243 12,821 3,077 19,495
6 10,256 2,462 53,681 12,821 3,077 24,378
7 10,256 2,462 60,634 12,821 3,077 29,651
8 10,256 2,462 68,143 12,821 3,077 35,346
9 10,256 2,462 76,253 12,821 3,077 41,497
10 10,256 2,462 85,012 12,821 3,077 48,140

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.

Jason Watson, CPA, is a partner and the CEO of WCG CPAs & Advisors, a boutique yet progressive tax, accounting and rental property consultation firm with over 80 team members headquartered in Colorado serving real estate investors worldwide.

Jason Watson CPA LinkedIn     Jason Watson CPA Email

I Just Got A Rental, What Do I Do? 2025 Edition

Rental BookThis KB article is an excerpt from our 420+ page book (some picture pages, but no scatch and sniff) which was updated May 25, 2025, and is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles online, click on the fancy buttons below or visit our webpage which provides more information.

$19.95 $15.95 $12.95

Talk to a Real Estate CPA About Your Rental Property

Please use the form below to tell us a little about yourself, and what you have going on with your investments and wealth-building objectives. WCG CPAs & Advisors are real estate CPAs, tax strategists and rental property consultants, and we look forward to talking to you!

The tax advisors, business consultants and rental property experts at WCG CPAs & Advisors are not salespeople; we are not putting lipstick on a pig expecting you to love it. Our job remains being professionally detached, giving you information and letting you decide within our ethical guidelines and your risk profiles.

We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. As Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea. In other words, let’s not automatically convert “you can” into “you must.”

Let’s chat so you can be smart about it.

We typically schedule a 20-minute complimentary quick chat with one of our Partners or our amazing Senior Tax Professionals to determine if we are a good fit for each other, and how an engagement with our team looks. Tax returns only? Business advisory? Tax strategy and planning? Rental property support?

accounting services for small business

Text WCG Offices

Need to get in touch through a quick text?  We’ll respond back within a day and get going!

accounting services for small business

Call Our Amazing Team

If you need to speak to a tax professional now, give us a call and we'll get you connected.

Previous Pushing Your DIY Cost Seg Envelope
Next Opted Out of Bonus Depreciation
Table of Contents