Cost segregation in 2026: when the numbers actually work
Bonus depreciation is phasing down (40% in 2025, 20% in 2026, 0% in 2027). Cost-seg ROI is shrinking too — but for properties over $500K basis, it still clears the math at high marginal rates.
A cost segregation study reclassifies parts of a building (carpet, fixtures, parking lots, landscaping) into 5-, 7-, or 15-year depreciation buckets instead of the default 27.5 or 39 years. Combined with bonus depreciation, this front-loads deductions to year 1 — the biggest single tax move available to most rental property investors.
The shrinking math: TCJA bonus depreciation was 100% through 2022. It's phasing down at 20% per year — 60% (2024), 40% (2025), 20% (2026), 0% (2027). On a $500K building with 25% reclassification ($125K), bonus depreciation at 20% in 2026 gives you $25K of year-1 deduction beyond what straight-line would. At a 35% combined marginal rate, that's ~$8,750 of year-1 tax savings.
The breakeven: the study itself runs $3K–$10K traditional, $1K–$2K for DIY software, or $2,500 typical on our platform. At 35% marginal rate, the study pays for itself in year 1 if reclassification produces ≥$10K of accelerated deduction — which is the case for almost any property over $400K basis.
Where it really matters: the STR loophole. If you operate a short-term rental (average stay ≤7 days) AND materially participate, the losses become non-passive and can offset W-2 income. Cost segregation in year 1 of an STR purchase, at a 37% marginal rate, can produce $30K–$60K of tax savings on a single $700K acquisition. This is the highest-leverage tax move available to high-W-2 households entering real estate.
What to watch: 2027 brings the end of bonus depreciation entirely unless extended. There is bipartisan legislative pressure to restore some level; watch the 2026 budget cycle. If extension passes, the calculus changes; if not, accelerate any planned cost-seg studies into 2026.