Cost segregation is performed by a qualified engineer who identifies which building components can be depreciated over 5, 7, or 15 years instead of 27.5 years. Combining cost segregation with bonus depreciation creates very large first-year deductions.
Typical cost segregation breakdown (residential rental property):
- 5-year property: carpet, appliances, window coverings (~5–10% of value)
- 7-year property: furniture, fixtures, specialized equipment
- 15-year property: landscaping, fencing, sidewalks, parking lots
- 27.5-year property: the remaining structure
Cost segregation studies typically cost $5,000–$15,000 but can generate $30,000–$150,000+ in accelerated first-year deductions for a $500,000+ property.
Related Terms
MACRS Depreciation
IRS tax deduction allowing investors to deduct the cost of a building over 27.5 years (residential) or 39 years (commercial).
Bonus Depreciation
Accelerated IRS deduction allowing investors to write off a large percentage of qualifying property components in year one.
Real Estate Professional Status
IRS designation that allows unlimited rental loss deductions against ordinary income if you meet strict time requirements.