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Table Of Contents
By 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-