“How do I know if I should get a cost seg study done? I have two long-term properties valued at $130K and $211K.”
Cost segregation is one of the most talked-about real-estate strategies of the decade — but only for the right properties. Before you pay for a study, you have to do the math. Here’s the math.
Quick answer: On a small property it’s usually not worth it. Subtract your land value, look at what’s left of the building, and ask whether the accelerated deduction beats the $1,000–$5,000+ cost of the study. It typically makes sense around $400K+ of building value — but you can group several smaller properties into one study to unlock a real deduction.
The IRS assigns residential rental property a 27.5-year recovery period — an arbitrary, fixed timeline. Whether you paid $100,000 or $10 million, and even if you paid all cash, you generally can’t deduct the building faster than that schedule allows. Year one, you only get roughly 1/27.5 of it.
A cost segregation study breaks the building into components with shorter lives so you can depreciate them faster. The foundation and main structure stay on the long clock, but a study carves out things like the roof, land improvements (irrigation, paving), plumbing, windows, cabinetry, and appliances onto 5-, 7-, or 15-year schedules — accelerating the deduction.
Land doesn’t depreciate, so it comes out first. On a $130,000 property with $30,000 of land, you’re only working with $100,000 of building. (In some states land values are tiny — Laura has seen $1,000–$2,000 — but even then a small building rarely produces enough deduction to justify a study.)
The cheapest studies run about $1,000 for a lower-end property and $5,000+ for commercial. If the accelerated deduction on $100,000 of building won’t clear that cost — and on small properties it usually won’t — the study isn’t worth it. As a rule of thumb, the math tends to work around $400,000 of building value, especially on newer builds. A very old house with a high land value? Often not worth it.
Here’s the pro tip. When you own multiple properties, you can group them into a single cost segregation study. Instead of a $130K, a $100K and a $100K property each falling short on their own, together they might form a $500,000 group treated as one — and now the accelerated deduction can actually beat the cost. For a small portfolio, grouping is frequently the difference between “not worth it” and “worth it.”
Official IRS reference: IRS — Cost Segregation Audit Techniques Guide
Rarely on its own. After subtracting land you may have ~$100,000 of building, which usually won’t generate enough deduction to beat the cost of the study.
As a general rule of thumb, around $400,000 of building value — especially for newer builds. Older homes with high land values are often not worth it.
Yes. Grouping several smaller properties into a single study can reach a combined value (e.g., $500,000) that finally justifies the cost.
Not while it’s your principal residence. You first have to convert it to a rental and establish the value at conversion. Even then, if the depreciable building value is well under ~$400,000, it usually won’t save enough to be worth it — though it depends on the rest of your return.
These answers come from our monthly open Q&A. Only newsletter members get the invite (real tax strategy for business owners, twice a week, no fluff).
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Disclaimer: This article is for educational purposes only and is not tax, legal, or financial advice. Every situation is different — talk to a qualified professional about your specific facts before making any decisions.
