Cost segregation can unlock significant tax savings for clients who own investment or business-use real estate—but not every property or situation justifies the effort.
As a CPA or tax advisor, you’re often the first person clients turn to with questions like, “Is this worth it for me?” Having a clear, practical framework for answering that question helps you guide them toward smarter tax decisions—and positions you as a strategic partner in the process.
What Is Cost Segregation?
Cost segregation is the practice of accelerating depreciation by identifying building components that qualify for shorter recovery periods—typically five, seven, or fifteen years instead of the standard 27.5 or 39 years. These components often include:
- Appliances and fixtures
- Carpets and flooring
- Secondary electrical systems
- Landscaping, fencing, and parking lots
A properly executed cost segregation study can front-load deductions and create significant tax savings in the early years of ownership. For high-income clients, this timing advantage translates into meaningful cash flow.
When It Makes Sense: 5 Factors to Evaluate
1. Client Profile
The strategy is most valuable for:
- Real estate investors with large portfolios or high income
- Short-term rental owners (especially those using the STR loophole)
- Business owners who own the building where they operate
For clients who qualify as real estate professionals or actively use part of the property in their trade or business, depreciation losses can offset active income—a key factor in maximizing impact.
2. Depreciable Basis
Start with this formula:
Purchase price + capital improvements – land value
As a general rule of thumb, cost segregation begins to make financial sense when the depreciable basis exceeds $250,000. However, we’ve seen high-income clients with properties as low as $100,000 (especially STRs) benefit from studies at lower thresholds due to their tax bracket and income goals.
3. Placed-in-Service Date
The timing of the acquisition matters—especially with bonus depreciation phasing out:
- 2024: 60%
- 2025: 40%
- 2026: 20%
The placed-in-service date determines what bonus rate applies. Even properties acquired mid-year can qualify for the full percentage, as long as they’re available for rent and meet IRS standards for service readiness (utilities on, rent-ready condition, actively marketed).
Retroactive studies are also possible for properties placed in service in previous years, though the opportunity to apply bonus depreciation may vary depending on timing.
A draft bill was released by the House Ways and Means Committee on May 9, 2025, proposing to reinstate 100% bonus depreciation retroactive to January 20, 2025. While it is still a draft, the situation is worth monitoring.
4. Tax Bracket and Income Strategy
The higher the client’s tax rate, the more value each dollar of depreciation provides. For example:
- A $200,000 depreciation deduction for a client in the 37% bracket could generate ~$74,000 in tax savings.
It’s also worth considering whether clients plan to carry forward passive losses or use them in the current year to offset active income. Understanding the client’s broader income picture is essential.
5. Lease Type and Usage
Lease type determines the standard depreciation schedule:
- Residential = 27.5 years
- Commercial = 39 years
- Short-term rentals often default to 39 years (as “nonresidential”)
The STR loophole, however, can reclassify STRs as non-passive for clients who materially participate—unlocking additional planning opportunities when paired with cost segregation.
Business owners using the property for their own operations (e.g., doctors, vets, or agency owners) can often allocate depreciation losses to active income, making the strategy especially compelling in those cases.
When It’s Not Worth It
While cost segregation is a powerful tool, it’s not a fit for every client. Situations where it may not make sense include:
- Properties with a depreciable basis under ~$250,000
- Clients with low income or no taxable liability to offset
- Late placed-in-service dates with no time to execute a study before year-end
- Clients planning to sell within a short timeframe, which may trigger depreciation recapture that offsets the initial benefit
Tools to Support the Decision
Several resources can help CPAs evaluate a client’s potential ROI, including:
- Internal calculators and pro formas
- Real-world case studies or tax projections
- Online cost segregation calculators, which provides a quick estimate based on property type, basis, and tax rate
If the numbers are compelling, a formal proposal from a cost segregation provider will typically include:
- Estimated year-one and lifetime depreciation
- Breakdown of 5-, 15-, and 27.5/39-year allocations
- A quote for the cost segregation study itself
There’s no obligation to proceed, but having that data in hand gives you and your client the ability to make an informed decision.
Final Thoughts
Cost segregation isn’t just a way to defer taxes—it’s a strategic planning tool that can create material cash flow benefits when applied correctly. And CPAs are in the best position to identify when those benefits align with a client’s broader financial picture.
By proactively raising the conversation—and using the right framework to assess fit—you build trust, deepen client relationships, and deliver high-impact advice that goes far beyond filing returns.
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Sean Graham is a registered CPA, real estate investor, and founder of Maven Cost Segregation. With a background in public accounting, tax strategy, and private equity, Sean helps real estate investors unlock major tax savings through cost segregation studies.
Through Maven Cost Segregation, Sean brings institutional-grade strategies to everyday investors—making it simple and affordable to accelerate depreciation and reduce taxable income.
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