A cost segregation study takes your building's purchase price and splits it into components that depreciate faster than 27.5 years — carpet, appliances, land improvements, and certain electrical and plumbing serving specific equipment. The result: bigger deductions in the first years instead of the last ones, and with bonus depreciation, potentially a six-figure first-year paper loss on a fourplex.
The Default vs. The Reclassified Picture
Default: 100% of building basis depreciates over 27.5 years.
After cost segregation (typical allocation for a small residential building):
| Category | Life | Typical Share | Example Items |
|---|---|---|---|
| Building structure | 27.5 yrs | 75-85% | Walls, roof, general systems |
| Land improvements | 15 yrs | 3-8% | Fencing, paving, landscaping |
| Personal property | 5-7 yrs | 8-20% | Appliances, carpet, window treatments, dedicated HVAC serving a unit, cabinetry |
The Bonus Depreciation Multiplier
Cost segregation's power comes from combining reclassification with bonus depreciation, which has allowed immediate expensing of short-life property (phase-down schedules apply by year — 100% through 2022, stepping down through 2027 under current law; confirm the current percentage with your CPA).
Worked example — $450,000 fourplex, $337,500 building basis:
- Cost seg reclassifies 15% ($50,625) into 5/7/15-year property
- With 60% bonus depreciation (illustrative): ~$30,375 deducted in year one
- Remaining reclassified assets depreciate on their short schedules
- First-year deduction: roughly $22,000-$30,000 vs. $6,100 under straight-line — a 4-5x acceleration
What a Study Costs and When It Pays
- Full engineering-based study: $3,000-$7,000 for a small multifamily property
- Break-even: the accelerated deduction × your marginal rate should exceed the fee. At a 24% rate, you need roughly $13,000-$29,000 of accelerated deductions — usually achieved on buildings with basis above ~$200,000-$300,000
- Cheaper alternatives for smaller deals: a "cost seg-lite" report or applying the de minimis safe harbor ($2,500/item) and small building safe harbor (up to $10,000/year) may capture most of the benefit for free (see our repair vs. improvement guide)
When Cost Seg Makes Sense on 2-4 Units
Good candidates:
- Higher-basis buildings ($300K+ building basis)
- High marginal tax brackets (32%+) with passive-income capacity to absorb losses
- Properties with heavy personal-property loads (furnished units, extensive appliances)
- Investors planning to hold long enough to benefit before sale (or exchanging via 1031)
Poor candidates:
- Low-basis buildings where the fee exceeds the acceleration benefit
- Investors with MAGI above $150K who cannot use passive losses currently (though suspended losses survive for later)
- Short-term flips (recapture wipes the benefit)
The Recapture Trade-Off
Accelerated depreciation means accelerated recapture exposure at sale (up to 25% federal). Cost seg is a timing strategy: it moves deductions forward, and the piper is paid on exit — unless you defer via a 1031 exchange (see our 1031 guide).
The Process
- Your CPA models the projected benefit before you commission the study
- An engineering firm reviews blueprints, photos, and a site visit
- You receive a report allocating basis by component and life
- Your CPA files the depreciation change — for properties already in service, a Form 3115 (change in accounting method) captures missed prior depreciation as a lump-sum catch-up in the current year, no amended returns needed
Run the Numbers First
Model your building's basis and cash flow in the Multifamily Cash Flow & NOI Calculator, then have your CPA quantify the acceleration before paying for a study.
Educational content, not tax advice.