Cost Segregation Study FAQ

Short answers to common questions, with links to fuller pages. These are general educational answers. Verify current law and your own facts with a qualified professional.

The basics

What is a cost segregation study?

It is an analysis that divides a property's cost into groups with different tax recovery periods, such as 5, 7, and 15 years for certain components and 27.5 or 39 years for the building. It changes the timing of deductions, not the total. See What a Cost Segregation Study Actually Does.

Does a study create new deductions?

No. It moves depreciation earlier. The total depreciation over the life of the property is limited by the cost basis. See What a Cost Segregation Study Actually Does.

Is a study worth it for every rental?

No. It depends on the building basis, whether you can use the deductions, your hold period, and the fee. See Is a Cost Segregation Study Worth It? and When a Cost Segregation Study May Not Make Sense.

Costs and quality

How much does a study cost?

Fees vary widely by property size, complexity, and method. Smaller residential studies are often quoted in the low thousands of dollars, and larger properties cost more. Get written quotes. See Cost Segregation Study Fees: General Ranges.

What is the difference between engineering-based and software-only studies?

Engineering-based studies generally involve a site visit and detailed cost analysis. Software-only approaches use models with limited inputs. See Engineering-Based Versus Software-Only Studies.

Will a study trigger an audit?

There is no reliable basis for saying so, and no study makes a return immune from examination. A well-documented study helps you respond to questions. See Audit Defense and Documentation for Cost Segregation.

What should a report contain?

Property identification, methodology, cost sources, classification reasoning, an asset schedule, and exhibits. See What a Cost Segregation Report Should Contain.

Timing

Is it too late if I already own the property?

Often it is not. A change in accounting method filed with Form 3115 can generally catch up on missed depreciation, subject to current rules. See Catch-Up Depreciation With Form 3115.

What is a Section 481(a) adjustment?

It is the catch-up amount that bridges the old and new depreciation methods. See The Section 481(a) Adjustment Explained Simply.

Do I amend prior returns to catch up?

Usually a method change is used rather than amended returns, but it depends on facts. See Method Change Versus Amended Return for Missed Depreciation.

When should I order a study in the purchase year?

Many owners order within a few months so the return can incorporate it. See A Month-by-Month Planning Calendar for the Purchase Year.

Bonus depreciation

What is the bonus depreciation percentage now?

As generally understood, 2025 legislation restored 100 percent bonus for qualifying property acquired after a January 2025 date. Rules and dates are technical and may change, so verify. See Bonus Depreciation: Rules as Currently Understood (Verify).

Does bonus apply to used property?

It can under certain conditions. See Used Property and Bonus Depreciation Eligibility.

How is Section 179 different?

It is an elective expensing provision with dollar and income limits. See Section 179 Versus Bonus Depreciation for the Study Decision.

Does my state follow federal bonus depreciation?

Many states do not, at least in part. Check your state. See State Conformity to Federal Bonus Depreciation.

Usability and limits

Can I use the deductions against my job income?

Only if you fall within an exception to the passive loss rules, such as real estate professional status, or a short-term rental where you materially participate. See The Passive Activity Loss Rules and Cost Segregation.

What is real estate professional status?

A designation requiring more than 750 hours in real property businesses and more than half of your working time there, along with material participation in the rentals. See Real Estate Professional Status and Study Decisions.

Are short-term rentals automatically nonpassive?

No. A short average stay may remove the activity from the rental definition, but you must still materially participate. See The Short-Term Rental Rules Explained Carefully.

What happens to losses I cannot use?

They are generally suspended and carried forward. See Suspended Losses and Carryforwards.

Sale and recapture

What is depreciation recapture?

Gain from a sale attributable to depreciation may be taxed at ordinary rates or at a special maximum rate. See Depreciation Recapture on Sale: What Comes Back.

Can a 1031 exchange avoid recapture?

It may defer gain on real property, with caution for personal property components. See Section 1031 Exchanges and Depreciation Recapture.

What is unrecaptured Section 1250 gain?

The part of the gain on real property attributable to depreciation, taxed at a special maximum rate. See Unrecaptured Section 1250 Gain in Plain Terms.

Getting started

Where do I begin?

Use the Cost Segregation Decision Checklist and bring the results to your tax professional. See Questions to Ask Your CPA Before Ordering a Study.

Can AE Tax Advisors help?

You can book a discovery conversation using the link at the bottom of any page. It is educational and does not commit you to a study.