What is cost segregation?

If you buy a second home and rent it out, cost seg can help you write off $100,000 or more in tax deductions. Here's how.

Cost segregation separates the parts of a home that wear out faster than the building itself. Appliances, floating floors and light fixtures can be five-year property. A pool, a pickleball court and landscaping are 15-year property. The structure is 39 years for a short-term rental, or 27.5 years for a long-term rental. As a rule of thumb, 10 to 40 percent of a home's price can be deducted, depending on the design and makeup of the house.

Take a $1 million home. Land is about 20 percent, and land doesn't depreciate. That leaves $800,000 to depreciate. A cost seg study might find about a quarter of it. $200,000 in 5 and 15-year property. With 100 percent bonus depreciation, that $200,000 is deducted in year one. The other $600,000 is the building. Over 39 years, that's about $10,000 in year one. So your year one deduction is about $210,000. Every house is different. Your numbers come from your own house.

You may ask, why is this legal? The tax code provides for it, and the courts confirmed it in 1997. Congress expanded it because an active home generates revenue for local communities. The IRS accepted cost seg in 1999. Bonus depreciation started at 30 percent in 2002, went to 100 percent in 2017, and was made permanent in 2025.

Who does it fit? Often high-income W-2 earners with the capital or an asset to start, who want a second home that covers its cost. It's real work, sized for a part-time gig. Estimate your deductions today. Visit unlevered.io. Cost seg made simple.