Cost Segregation Frequently Asked Questions

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here are some FAQs you might find helpful for cost segregation studies-

What is a cost segregation study?
It’s a tax strategy that separates building components into shorter-life categories (5, 7, or 15 years) to accelerate depreciation.

Is cost segregation considered an abusive tax shelter?
No. It’s based on court decisions and IRS guidance. Properly done, it’s a fully legal tax strategy not deemed abusive or evasive.

Why would I want to accelerate depreciation?
Faster depreciation reduces your taxable income in the early years of owning a rental property, improving cash flow. Improved or accelerated cash flow can then be redeployed.

What’s the difference between Section 1245 and 1250 property?
Section 1245 is personal property (faster depreciation, subject to recapture), while Section 1250 is real property / structural (slower depreciation).

Can I do a cost seg study myself through an online service?
Yes for most single family homes and similar rental properties. Don’t believe the audit risk hype- a tax return is not prepared with some “DIY Cost Seg” box checked. We recommend CostSegEZ.com.

What is bonus depreciation?
It allows you to immediately deduct 100% (phasing down to 0% by 2027) of qualified property with life under 20 years. It is currently 40% for the 2025 tax year, but will likely change with the new tax code.

Can short-term rentals benefit from cost seg?
Yes, STRs with 7-day average guest stay and material participation can use accelerated depreciation (bonus) and even Section 179 expensing effectively well.

Does cost segregation work for residential rentals?
Absolutely. Even single-family homes can benefit, especially when paired with REPS or STR strategies.

What’s Form 3115 used for?
It’s required to retroactively apply cost segregation (change in accounting method) and calculate Section 481(a) adjustment which is fancy accounting speak to bring depreciation current as if it always was done correctly and deduct accordingly.

Can I apply cost segregation study to Rental properties purchased in prior years?
Yes, very common. By using a look-back study and Form 3115, you can catch up missed depreciation without amending tax returns. There is tax arbitrage with this approach given each tax year might have different circumstances with income, rental property use and material participation.

When does cost segregation not make sense?
When passive activity loss limits prevent you from using accelerated depreciation or when you plan to sell soon. Accelerated depreciation and state matters can mess things up too since nearly 20 states do not allow for bonus depreciation.

Can I use cost seg in a year with a net tax loss across all rental properties?
You can, but benefits may be limited if losses are suspended due to passive rules. Better in REPS or STR loophole environments.

What’s a partial asset disposition (PAD)?
PAD allows you to deduct as a loss the undepreciated value of components you remove during renovations or major system repairs (think HVAC and commercial buildings).

Will I pay more in taxes later because of depreciation recapture?
Possibly. When you sell a rental property, Section 1245 recapture is taxed at ordinary income tax rates whereas Section 1245 recapture is limited to 25%.

How much can I save with cost segregation?
Savings vary by property, but 20% to 40% of the purchase price is often reclassified, leading to significant accelerated depreciation. It depends on building value as a portion of the price, and typical home stats such as size, age, bedrooms, bathrooms, etc.

Do I need to amend old returns to do a retroactive cost seg?
No. Use Form 3115 to make a change in accounting method instead. Amending might be necessary to use Section 179 expensing in favor of bonus depreciation.

How often can I do cost segregation?
Once per property, typically. You can reclassify again after major renovations or improvements.

Do states follow federal cost seg rules?
Not always. Some states disallow bonus depreciation or limit accelerated methods including Section 179 expensing.

Does cost seg apply to improvements or only new purchases?
It applies to both. Renovations can be analyzed separately for faster depreciation.

What are the risks of DIY cost segregation?
Improper asset classification and weak documentation (shocker).