Rental Owners’ Guide to Cost Segregation Savings

Maximize your rental property returns with cost segregation—a tax strategy that accelerates depreciation and boosts cash flow. Whether you own short-term or long-term rentals, this approach can help you reduce taxes and reinvest more money back into your properties.

What Is Cost Segregation?

Cost segregation is an IRS-approved study that breaks your property into individual components with shorter “useful lives.” Instead of depreciating the entire building over 27.5 years, items like furniture, appliances, flooring, and land improvements (such as parking pads or fencing) can be depreciated over 5, 7, or 15 years.

This speeds up your deductions, putting more cash in your pocket much earlier—money you can use for upgrades or new acquisitions.

In 2025, assets acquired after January 19 and placed in service qualify for 100% bonus depreciation if their recovery period is 20 years or less. Assets placed in service earlier in 2025 may qualify for 40% bonus depreciation under transitional rules.

Why It Matters for Rental Owners

Without cost segregation, residential rentals depreciate slowly over 27.5 years—meaning you miss out on valuable early-year tax savings. A cost segregation study identifies assets eligible for faster write-offs, often creating a significant first-year deduction.

For short-term rentals with average stays of 7 days or less, the benefits can go even further. If you materially participate, accelerated depreciation may offset nonpassive income, creating even greater tax advantages.

Real-World Examples

Example 1: Long-Term Rental Duplex

• Purchase Price: $600,000

• Land Allocation: $120,000

• Depreciable Basis: $480,000

A cost segregation study reclassifies 25% ($120,000) as 5-, 7-, or 15-year assets, fully deductible in 2025 with bonus depreciation. Add $13,091 from the remaining building basis, and your first-year deduction is ~$133,091—compared to ~$17,455 without a study.Additional savings: ~$115,600.

Example 2: Furnished Short-Term Rental

• Total Cost: $950,000

• Land: $150,000

• Depreciable Basis: $800,000

The study reallocates 30% ($240,000) to short-life assets, fully deductible in 2025. The remaining $560,000 produces ~$20,364 in standard depreciation. Total first-year deduction: ~$260,364, compared to ~$29,091 without a study.Additional savings: ~$231,273.

Key Benefits

• Accelerated Depreciation: Move assets into shorter recovery periods—often fully deductible in 2025.

• Increased Cash Flow: Larger deductions reduce your tax bill, freeing up funds for upgrades or future purchases.

• Strategic Tax Planning: Short-term rental owners may use accelerated deductions to offset nonpassive income with proper participation.

Tips to Maximize Your Results

• Time Your Purchases: Acquire and place assets in service after January 19, 2025, for 100% bonus depreciation—or take advantage of 40% under transitional rules.

• Get a Quality Study: Hire professionals who follow the IRS Cost Segregation Audit Techniques Guide to ensure defensible documentation.

• Use Look-Back Studies: For existing properties, file Form 3115 to claim missed depreciation now without amending prior returns.

• Track Participation: Short-term rental owners should document hours to qualify for nonpassive treatment.

• Plan for Recapture: Accelerated deductions may increase recapture taxes upon sale—work with a tax advisor to plan ahead.

Common Questions

Is this only for large investors?

No. Single-family homes, small multifamily properties, and furnished short-term rentals often see strong benefits—especially after renovations.

Can it help with existing properties?

Yes. Look-back studies allow you to capture missed depreciation in the current year.

What qualifies for faster depreciation?

Furniture, appliances, carpeting, specialty lighting, and land improvements like fencing or parking pads.

Is it IRS-compliant?

Yes—when performed by qualified professionals using engineering-based methods.

Next Steps

While we don’t perform cost segregation studies directly, our team at Host Extraordinaires can walk you through the process, model your potential savings, and connect you with trusted professionals who can complete a compliant study.

If you’re ready to strengthen your tax strategy and turn depreciation into real cash flow in 2025, we’re here to help.