What is cost segregation?

How it works

Cost segregation does not bend the rules. It applies the recovery periods the tax code already assigns to each kind of property, at the component level instead of treating the whole building as one slow-depreciating asset.

1. 01

   Normally, the whole building depreciates slowly

   A residential rental depreciates over 27.5 years, a commercial building over 39. Left alone, you deduct a small slice of the building each year for decades.

2. 02

   A study separates the fast-depreciating parts

   An engineer identifies the components that legally belong in shorter classes: carpet and vinyl, cabinetry, appliances, decorative lighting, landscaping, fencing, and driveways. Depending on the property, that is often 20% to 35% of the basis.

3. 03

   Those parts take bonus depreciation

   The 5-, 7-, and 15-year components qualify for bonus depreciation under §168(k). OBBBA restored the rate to 100% for property placed in service after January 19, 2025, so those components can be written off in full in year one.

4. 04

   You deduct far more, now instead of later

   Cost segregation does not create new deductions out of nothing. It pulls deductions you would eventually get forward into the first year, when a high earner usually needs them most.

Who it helps most

The strategy is written into the code for people who invest in real estate. It pays off most for three kinds of owner.

• Owners of a residential rental or short-term rental. The bigger the basis and the more finish-heavy the property, the more a study finds. A furnished short-term rental typically reclassifies the most.
• High earners with a heavy tax year. A large bonus, an equity event, or simply a high W-2 is the moment the front-loaded deduction is worth the most. A short-term rental you materially participate in can produce losses that offset that active income.
• People who already own the property. You do not have to catch it in year one. A lookback study claims every year of missed depreciation on your current return through Form 3115 and a §481(a) adjustment, with no amended prior-year returns.

The honest trade-offs

A study is worth doing with your eyes open. Three things to weigh, none of which are hidden in the good version of this strategy.

• Recapture on sale. The depreciation you accelerate is taxed back when you sell, up to 25% on the real-property portion under §1250. Time value of money and a §1031 exchange often keep it in your favor, but it is a real cost to plan for.
• Smaller deductions later. Pulling deductions into year one means the later years are leaner. This is a timing strategy, and it works best when a dollar deducted this year is worth more to you than the same dollar spread over decades.
• It has to be a real engineered study. A percentage guess or an AI-generated PDF describes an inspection that never happened, and it falls apart when an examiner asks for the engineer of record and the photo evidence. Defensibility comes from method, not from a lower price.

Unlevered prepares and signs the engineering study. Your CPA reviews it, applies independent judgment, and remains the sole preparer of your return. These figures are not tax advice; your advisor confirms before you rely on any of them.

Common questions

What is cost segregation?

Cost segregation is an engineering-based tax study that breaks a building into its components and reclassifies the ones that qualify (like flooring, cabinetry, appliances, site improvements) from the standard 27.5- or 39-year life into 5-, 7-, or 15-year property. Those shorter-life components can then take bonus depreciation under IRC §168(k), which the 2025 tax law (OBBBA) restored to 100%. The result is a much larger depreciation deduction in year one instead of spreading it thinly over decades.

Is cost segregation worth it?

It is worth it when the front-loaded deduction is worth more to you now than spread over decades, which is usually the case in a high-income year or when you own a finish-heavy rental with a sizable basis. An engineering-based study on a property over roughly $500K typically finds 20% to 35% of the basis in shorter-life property. The fee is small next to the first-year deduction, but the honest test is your own tax situation, which is why your CPA confirms the numbers before you rely on them.

How much does a cost segregation study cost?

Unlevered publishes a flat fee upfront before you commit: a filing-ready study PDF for a single unit, a higher tier that adds interactive access and audit-defense support, and multi-unit pricing for larger properties. You see the exact price before you decide, and it is typically a small fraction of the first-year deduction the study produces.

Does cost segregation work on a short-term rental?

Yes, and short-term rentals are often the strongest case. A furnished short-term rental has a high share of shorter-life components, and if you materially participate in it and the average guest stay is seven days or fewer, the resulting losses can be non-passive and offset W-2 income without Real Estate Professional Status. Material participation and the seven-day test are specific rules your CPA confirms for your situation.

Can you do cost segregation on a condo or a property you already own?

Yes to both. A condominium carries a depreciable basis (the unit plus its interest in common elements, minus land), and a study documents it rather than guessing around it. For a property you have owned for years, a lookback study catches up the missed depreciation on your current return through Form 3115 and a §481(a) adjustment, without amending prior returns and without a statute-of-limitations cap.

What is depreciation recapture on sale?

When you sell, the IRS taxes back the depreciation you claimed. The portion tied to real property is taxed at up to 25% under §1250, and gain attributable to §1245 personal property is recaptured as ordinary income. Recapture is real and worth planning for, which is why an honest study names it up front. It often still favors the owner because of the time value of money and strategies like a §1031 exchange, but it is a trade-off, not a free lunch.