The cost-benefit test
A cost segregation study on a residential rental typically costs $5,000 to $15,000. For the study to make economic sense, it needs to generate enough additional depreciation to produce tax savings that exceed the fee — either in the current year or on a present-value basis over time. For properties valued below $300,000 to $400,000, the reclassifiable components are generally small enough that study costs can consume most or all of the benefit.
When it can work on smaller properties
Even for smaller rentals, the math can work under specific conditions: a high marginal tax rate (37% bracket), the ability to actually use the losses currently (REPS or STR with material participation), and lower study fees from firms that offer streamlined residential-only reports. Some study providers offer residential packages at $3,000-$5,000 for simpler properties. At a 37% rate, even $20,000 of reclassified components bonus-depreciated immediately saves $7,400 — enough to cover the fee with some benefit remaining.
Alternatives that capture partial benefit without a full study
You do not need a cost segregation study to use every available depreciation tool. Without a study: correctly separate and depreciate appliances and personal property at 5 years; deduct qualifying repairs immediately under the tangible property regulations; use Section 179 for some personal property; and document land improvements separately at 15 years. A knowledgeable CPA applying these rules correctly can capture significant acceleration without a formal study — particularly for smaller properties.
Frequently asked questions
At what property value does cost segregation typically make sense?
Roughly $500,000 or more for residential properties and $1M or more for commercial, though your tax rate and ability to use the losses matter equally.
Can I get some benefit of cost seg without a full study?
Yes — correctly treating appliances as 5-year property, qualifying repairs as expenses, and land improvements as 15-year property captures a meaningful portion of the benefit without a formal study.
Sources
- IRS Publication 946 — How to Depreciate Property
- IRS — Cost Segregation Audit Techniques Guide
- IRS Publication 527 — Residential Rental Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.