A cost segregation study is the most powerful depreciation strategy available to rental property investors. A standard residential rental depreciates the entire building over 27.5 years. A cost segregation study breaks the building into its components and reclassifies items like appliances, carpet, cabinets, fencing, landscaping, and certain electrical and plumbing components into 5, 7, or 15 year categories. Those shorter life items can then be depreciated much faster, and when combined with bonus depreciation, a large chunk of the deduction can be front loaded into year one. For a $300,000 property, a typical cost segregation study might identify $45,000 to $70,000 of shorter life property. Studies cost $3,000 to $8,000 for single family rentals and $10,000 to $25,000 for small multifamily, so they only make sense on properties large enough to generate a multiple of the study cost in first year deductions. Most cost seg firms will run a free preliminary analysis before you commit. When combined with real estate professional status, a cost segregation study can generate a paper loss that wipes out a significant amount of other income.
Example
You buy a $350,000 duplex. Cost segregation study identifies $62,000 of 5 year, 7 year, and 15 year property. With 2026 bonus depreciation at 20%, first year deduction from the reclassified components is roughly $12,400 on top of normal depreciation.