Straight-line: simple and slow
Without cost segregation, a residential rental building is depreciated evenly over 27.5 years (39 years for commercial). A $500,000 building generates $18,182/year — a fixed, predictable amount. Every year is the same. There is no study cost, no complexity, and no additional professional fees. The downside: deductions arrive slowly, which reduces their present value compared to receiving them earlier.
Cost segregation: front-loaded deductions
A cost segregation study reclassifies portions of the building into 5-year, 7-year, and 15-year property. These shorter-lived components use faster depreciation schedules and may qualify for bonus depreciation — allowing a large portion of their cost to be deducted in the year placed in service. A $500,000 property might have $80,000 of 5-year components and $40,000 of 15-year components that can be accelerated, meaningfully increasing first-year deductions.
Which produces better results?
Cost segregation wins on a net present value basis when: your marginal tax rate is high, you can actually use the losses (passive income, REPS status, or non-passive STR), and the study fee is small relative to tax savings. It produces lower benefit or negative results when losses will be suspended indefinitely, or when the recapture at sale (Section 1245 ordinary rates on accelerated components) outweighs the early deduction benefit. Model both with your CPA before deciding.
Frequently asked questions
Is cost segregation always better than straight-line?
Not always — it produces larger early-year deductions but creates higher recapture at sale. It requires the ability to actually use the losses to deliver its full benefit.
Do I have to use cost segregation?
No. Straight-line depreciation over 27.5 or 39 years is the default and requires no additional study. Cost segregation is an optional accelerated strategy.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.