What a cost segregation study does
By default, everything in a residential rental building except the land is depreciated over 27.5 years. In reality, a building is made of parts that wear out much faster: carpet, cabinets, appliances, certain electrical and plumbing serving specific equipment, parking lots, landscaping, site lighting and fencing. Tax rules allow those components to be depreciated over 5, 7 or 15 years.
A cost segregation study, usually prepared by engineers and tax specialists, identifies and values those components so they can be reclassified. Total depreciation over the life of the building does not change, but much more of it lands in the early years, when a dollar of deduction is worth the most.
How bonus depreciation changes the math
Short-life property — anything with a recovery period of 20 years or less — can qualify for bonus depreciation, which allows a large share of its cost to be deducted in the year it is placed in service. Federal law enacted in July 2025 restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, so for many recent acquisitions the entire reclassified amount can be deducted in year one.
Property acquired earlier may fall under the prior phase-down percentages, and some states do not follow federal bonus depreciation. The calculator lets you choose the bonus percentage so you can model your own situation.
How the calculator works
It compares year-one depreciation with and without a study, using simplified conventions:
- Depreciable basis is the purchase price minus the land share.
- Without a study, year-one depreciation is the full depreciable basis divided by 27.5.
- With a study, the reclassified share is split off. The bonus percentage of it is deducted immediately, and any remainder is depreciated at a first-year rate of 20%, roughly what 5-year property allows under the half-year convention.
- The rest of the building stays on the 27.5-year schedule.
- The difference is the additional first-year deduction. Multiplied by your marginal rate, it shows the potential tax value if you can use the deduction.
A worked example
An investor buys a $4,000,000 apartment building with 20% allocated to land, for a depreciable basis of $3,200,000. Without a study, year-one depreciation is about $116,400.
A study reclassifies 25% of the basis, or $800,000, to short-life property. With 100% bonus depreciation, all $800,000 is deducted in year one, plus about $87,300 on the remaining $2,400,000 of building — roughly $887,300 in total, or about $770,900 more than without the study. At a 37% marginal rate, that is a potential tax value of about $285,000, subject to the limits below.
Who can actually use the deductions
A large paper loss is only valuable if it can offset income. Rental losses are generally passive, and passive losses can usually offset only passive income, with unused amounts carried forward until you have passive income or sell the property. Investors who qualify as real estate professionals, and who materially participate, may be able to use losses against other income.
Passive investors in a syndication receive their share of the deductions on a Schedule K-1. Many use them to shelter the distributions from that deal and other passive income; others carry them forward. How much helps you this year depends on your own tax position, so model it with your CPA before counting on the savings.
The trade-off: recapture on the way out
Accelerating depreciation does not make it disappear. When the property is sold in a taxable sale, gain attributable to the reclassified short-life components is generally recaptured at ordinary income rates under Section 1245, and gain from the building’s straight-line depreciation is generally taxed at up to 25%. Investors typically accept that trade because the deduction arrives years earlier, and a 1031 exchange or a long hold can defer the recapture further.
