In real estate, cost segregation means splitting the price of a rental or commercial property into its parts, such as the structure, the interior finishes, and the yard, so the faster-wearing parts can be depreciated sooner. For a typical rental house, about 15% to 30% of the building's cost can often be moved into 5- and 15-year property.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.
Let's walk through a real-world style example
Meet a hypothetical investor who buys a single-family rental in 2026.
- Purchase price: $600,000
- Land value: $150,000
- Building value: $450,000
- Placed in service: January
- Acquired after January 19, 2025: Yes, so 100% bonus depreciation applies
Without a study, the whole $450,000 is depreciated over 27.5 years.
What a study might find inside the house
A specialist tours the home and assigns costs to the parts that qualify for shorter lives:
| Component | Category | Estimated cost |
|---|---|---|
| Kitchen appliances, washer, dryer | 5-year | $8,000 |
| Carpet, vinyl, and other removable flooring | 5-year | $14,000 |
| Cabinets and countertops | 5-year | $18,000 |
| Decorative light fixtures, ceiling fans | 5-year | $4,000 |
| Blinds and window coverings | 5-year | $2,000 |
| Electrical and plumbing serving appliances | 5-year | $9,000 |
| Subtotal: 5-year property | — | $55,000 |
| Driveway and walkways | 15-year | $12,000 |
| Fencing | 15-year | $8,000 |
| Landscaping and irrigation | 15-year | $10,000 |
| Patio and outdoor lighting | 15-year | $7,000 |
| Subtotal: 15-year property | — | $37,000 |
| Remaining building (27.5-year) | 27.5-year | $358,000 |
In total, $92,000, about 20% of the building, moves into shorter lives.
The first-year tax impact
| Deduction category | Without a study | With a study |
|---|---|---|
| 5- and 15-year property (100% bonus) | $0 | $92,000 |
| Regular building depreciation (year 1) | about $15,700 | about $12,500 |
| Total year-1 depreciation | about $15,700 | about $104,500 |
That's about $88,800 more in deductions in the first year. At a 24% tax rate, that's roughly $21,300 in tax deferred. At 35%, it's about $31,100.
Can this investor actually use the deduction?
This is the part most people miss. Rental losses are usually passive. Our investor can use the loss right away only if:
- They have other passive income, like profits from other rentals, or
- They qualify as a real estate professional, or
- The home is a short-term rental with average stays of 7 days or less and they materially participate, or
- They qualify for the up-to-$25,000 allowance (it phases out between $100,000 and $150,000 of modified AGI)
If not, the loss carries forward. It's still valuable, just later.
Is the study worth it here?
A study for a home like this might cost $2,000 to $5,000. If the investor can use the deductions, the return on that fee is strong. If the loss would sit unused for years, it may be smarter to wait or skip it.
Frequently asked questions
Does cost segregation work on a regular single-family rental?
Is the kitchen sink 5-year property?
Does the furniture count?
See what your property may qualify for
Run our 2-minute STR Qualification Quiz or model your Low / Mid / High cost segregation range.
Related guides
What Is Cost Segregation? A Plain-English Explanation
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Read guideCost Segregation Study Example: A $750,000 Apartment Building, Step by Step
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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.