Is a Cost Segregation Study Worth It?

A cost segregation study does not create deductions. It moves them earlier. Whether that is worth paying for depends on five things: how much depreciable basis you have, how long you will hold the property, your tax rate, what happens when you sell, and whether you can use the deduction now. Here is how to think through each.

1. Depreciable basis

The deduction a study creates scales with the building cost, not the land. Providers commonly cite roughly $500,000 to $1 million of depreciable basis as the point where a study tends to justify its fee, with lower thresholds for renovations and new construction where the records are good. That is a rule of thumb, not a test.

The property type matters too. Reported reclassification ranges run from the teens for plain offices and warehouses to 30% or more for hotels, restaurants and short-term rentals. Those are benchmarks other providers publish; your building’s share depends on what is in it.

2. The bonus rate, which depends on your contract date

For property acquired under a written binding contract after January 19, 2025, 100% bonus depreciation applies to every component a study moves into 5-, 7- or 15-year property. For a contract signed on or before that date, the TCJA phase-down applies by the year placed in service: 40% in 2025, 20% in 2026 and 0% after 2026. The same building can be worth studying under one contract date and marginal under the other. See bonus depreciation in 2026.

3. An illustrative example

Take a hypothetical office bought for $2,400,000 under a contract signed in March 2026, with $480,000 of land, placed in service in May 2026, owned by someone at a 37% federal rate. Its depreciable basis is $1,920,000.

	Without a study	With a study (illustrative range)
First-year depreciation	$31,000	$333,000 to $579,000
Added first-year deduction		$302,000 to $548,000
Federal tax effect at 37%, if usable		$112,000 to $203,000

Change one fact: the contract was signed in November 2024. The bonus rate falls to 20%, and the added first-year deduction falls to roughly $93,000 to $169,000. These figures come from our calculator, using published benchmark ranges for offices; they are illustrative, not a forecast for any building.

4. Hold period and recapture

When you sell at a gain, the depreciation you took on 5-, 7- and 15-year property is generally taxed as ordinary income under §1245. Depreciation on the building itself is taxed at up to 25% as unrecaptured §1250 gain. A study shifts depreciation into the first category, so a quick sale can hand back much of the benefit. The longer you hold, the more the early deductions are worth relative to the recapture. A like-kind exchange can defer the gain, subject to its own rules.

5. Whether you can use the deduction

A deduction you cannot use this year is a deduction later. Three limits are worth checking with your CPA before you order a study:

• Passive-loss rules (§469). Rental losses are usually passive and offset only passive income. Real estate professionals who materially participate, and owners of short-term rentals with average stays of 7 days or less who materially participate, can be outside that rule. See short-term rental cost segregation.
• Excess business loss limit. For 2026, business losses above $256,000 ($512,000 married filing jointly) cannot offset other income in the year; the excess becomes a net operating loss.
• State tax. Many states do not follow federal bonus depreciation, so the state benefit can be much smaller. Pennsylvania, for example, adds federal bonus depreciation back for its corporate net income tax.

When a study usually is not worth it

When the basis is small and there is no renovation, when you expect to sell within a year or two, when losses will stay suspended for years, or when you bought the building from a related party, which rules out bonus depreciation on it. A good provider says so in the assessment.

Sources

• IRS Notice 2026-11, additional first-year depreciation: https://www.irs.gov/pub/irs-drop/n-26-11.pdf
• 26 U.S.C. §1245 (Cornell LII): https://www.law.cornell.edu/uscode/text/26/1245
• 26 U.S.C. §469 (Cornell LII): https://www.law.cornell.edu/uscode/text/26/469
• Rev. Proc. 2025-32, 2026 inflation adjustments: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
• CPA Practice Advisor, evaluating whether a study is worth it (2025-05-19): https://www.cpapracticeadvisor.com/2025/05/19/how-to-help-clients-evaluate-whether-a-cost-segregation-study-is-worth-it/161241/
• Cost Seg Smart, 2026 reclassification benchmarks (vendor-published): https://costsegsmart.com/research/benchmarks-2026/