Real estate investors are paying thousands for 'cost segregation studies,' a tax strategy to increase cash flow. Here's how they work and who can benefit.
Business Insider
February 15, 2026
AI-Generated Deep Dive Summary
Real estate investors are increasingly turning to cost segregation studies as a powerful tax strategy to boost cash flow and maximize deductions. These studies involve analyzing a property’s components—such as flooring, electrical systems, plumbing, and HVAC—to reclassify certain parts into shorter depreciation categories, allowing for faster write-offs. This can significantly reduce taxable income in the early years of ownership.
Depreciation is a key tax advantage for rental property owners, enabling them to deduct the cost of a building over its IRS-defined useful life (27.5 years for residential properties and 39 years for commercial buildings). However, a cost segregation study can accelerate this process by reclassifying components like electrical systems or plumbing into shorter categories, such as five, seven, or 15 years. For example, an investor who owns a $1 million commercial building could deduct about $25,600 annually under standard depreciation rules. With a cost seg study, they might deduct hundreds of thousands of dollars upfront through accelerated and bonus depreciation.
The benefits extend beyond immediate tax savings. Larger deductions in the first few years can put investors in a loss position, allowing them to shelter rental income from taxes for years. For higher-income investors or those who qualify as real estate professionals (REPS), these losses can even offset active income like W-2 wages, offering significant and immediate tax relief. However, cost segregation studies aren’t one-size-fits-all; they typically cost several thousand dollars and take one to two months to complete. While they’re most effective for commercial properties or large portfolios, smaller investors should evaluate whether the upfront cost is justified based on their property’s size and purchase price.
Experts recommend consulting with CPAs and cost segregation specialists to ensure proper execution and compliance. For instance, a $15 million commercial building might see $3 million in deductions if 20% of its value is reclassified into shorter depreciation categories. At a 37% federal tax rate, this could translate to over $1 million in federal tax savings. While success stories like these highlight the potential rewards, it’s crucial for investors to weigh the costs and consult professionals before proceeding.
In summary, cost segregation studies can be a game-changer for real estate investors looking to maximize tax benefits and scale their
Verticals
businessfinance
Originally published on Business Insider on 2/15/2026