Almost any income-producing building can benefit from cost segregation, but results vary by property type. Hotels, short-term rentals, restaurants, medical offices, and multifamily with lots of finishes and site work tend to reclassify the most. Plain warehouses and buildings with little site work tend to reclassify the least.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.
What makes one property better than another?
Cost segregation finds the parts of a building that wear out faster: finishes, equipment, and site improvements. So the more of those a property has, the bigger the benefit. Four factors matter most:
- Finishes and fixtures. Flooring, cabinets, appliances, decorative lighting, and millwork all count as short-life property.
- Site work. Parking lots, sidewalks, landscaping, fencing, and outdoor lighting are 15-year property.
- Specialized equipment. Commercial kitchens, medical equipment wiring, and dedicated electrical for machines often qualify for shorter lives.
- Building value. A bigger building basis means bigger dollar savings, even at the same percentage.
Typical results by property type
These ranges are rough industry rules of thumb. Your actual result depends on the specific building.
| Property type | Typical short-life share of building cost | Why |
|---|---|---|
| Short-term rentals (furnished) | 20%–40% | Furniture, appliances, finishes, outdoor amenities |
| Hotels and motels | 25%–40% | Furnishings, decor, specialty systems |
| Restaurants | 25%–40% | Kitchen equipment, plumbing, electrical, decor |
| Medical and dental offices | 20%–35% | Specialty wiring and plumbing, cabinetry |
| Multifamily apartments | 15%–35% | Appliances, flooring, parking, amenities |
| Retail and strip centers | 15%–30% | Parking lots, signage, store finishes |
| Office buildings | 10%–25% | Finishes, site work, some electrical |
| Warehouses and industrial | 5%–20% | Mostly shell, but paving and dock equipment help |
Short-term rentals: a special case
Short-term rentals (STRs) get a lot of attention for two reasons:
- They're often furnished, so a large share of the cost is 5-year property.
- Different loss rules can apply. If the average guest stay is 7 days or less and you materially participate, the activity generally isn't treated as a "rental activity" under the passive loss rules. That can let the losses offset wages or other active income.
Also, an STR with average stays of 7 days or less is often treated as 39-year (nonresidential) property rather than 27.5-year residential property. That makes faster depreciation of the short-life parts even more valuable by comparison.
New construction and renovations
Cost segregation works especially well on:
- New construction, because detailed construction cost records make allocations accurate.
- Major renovations, because you can write off components you remove (a "partial asset disposition") and fast-track the new ones.
- Tenant improvements in commercial buildings, which may qualify as 15-year qualified improvement property.
When the benefit is small
- Buildings under roughly $300,000 in building value, where the study fee eats much of the savings
- Properties you plan to sell very soon
- Owners who can't use the losses because of passive activity limits
Frequently asked questions
Does cost segregation work on a single-family rental?
Can I use cost segregation on land I own?
Does the age of the building matter?
See what your property may qualify for
Run our 2-minute STR Qualification Quiz or model your Low / Mid / High cost segregation range.
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Read guideThis content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.