Without cost seg, real estate depreciates straight-line over the IRS default life:

• Residential rental: 27.5 years.
• Commercial: 39 years.
• Land: not depreciable.

On a $1M residential rental with $800K of depreciable basis (after subtracting land), straight-line depreciation produces about $29K per year. Real, but a fraction of what cost seg + bonus depreciation can do in year one.

An engineering study breaks the property into components and assigns each its proper depreciable life under IRS guidance:

• 5-year property: carpet, certain flooring, appliances, decorative lighting, certain wiring, and other Section 1245 personal property tied to the building's use.
• 7-year property: certain office equipment, furnishings, and specialized fixtures.
• 15-year property: land improvements including landscaping, fencing, paving, exterior lighting, parking, and walkways.
• 27.5-year (residential) or 39-year (commercial): remaining structural components (foundation, framing, exterior walls, roof structure).

• Larger year-one deductions. 5-year property depreciates faster than 27.5-year property under MACRS, even before bonus depreciation enters the picture.
• Bonus depreciation eligibility. Bonus applies to property with 20-year life or less. Cost seg creates exactly the property bucket eligible for the bonus rate.
• Improved NPV of the depreciation stream. Even if the total depreciation taken over the holding period is similar, taking it earlier is more valuable on a present-value basis.
• Tax sheltering of cash flow. For taxpayers who can use the losses (REPS or STR loophole), the paper losses shelter both rental cash flow and other income.

Typical pricing ranges (rough guides, real quotes vary):

• Single-family rental or small condo: $5K to $8K.
• Larger residential, small multi-family, single-family STR with significant amenities: $8K to $15K.
• Commercial property: $10K to $30K+ depending on size and complexity.
• "Lite" or estimation-only studies (no site visit): $1K to $3K, weaker audit defense.

The fee is deductible as a professional service expense and is small relative to the resulting first-year tax benefit on properties where the strategy applies.

• Property value $500K+. The fixed cost of a quality engineering study is hard to justify on smaller properties unless several are bundled.
• High marginal tax rate. The benefit scales with the taxpayer's bracket. At 37% federal + state, every $100K of accelerated deduction saves $40K+ in tax. At 12%, the savings are too small to justify the study cost on a single property.
• STR loophole qualifier or Real Estate Professional Status. Without one of these qualifications, the passive activity loss rules suspend the losses into future years for high-income filers. The deduction is not lost, but the time value drops significantly.
• Hold horizon of at least 5+ years. Recapture on early sale erodes the benefit. Long holds, or a planned 1031 exchange exit, preserve more of the value.

• Small properties under roughly $500K (study cost vs benefit math gets thin).
• Borrower in low federal brackets (12% or 22%), making the benefit per dollar of deduction smaller.
• Property held in a structure where the borrower cannot materially participate (passive-only syndication interest, deeply hands-off arrangement) and there is no REPS qualification in the household.
• Properties expected to sell in 1 to 3 years with no 1031 exchange planned, so recapture eats most of the benefit.
• Land-heavy properties where the depreciable basis is a small share of the price.

You do not have to do cost seg at purchase. The IRS allows a change in accounting method via Form 3115 that lets you apply cost seg to a property you already own and "catch up" the depreciation in the current year.

• File Form 3115 with the current-year return.
• No amended prior-year returns needed.
• The cumulative difference between depreciation taken and depreciation that would have been taken under the new method is the Section 481(a) adjustment.
• That adjustment is fully deductible in the year of change (if negative, i.e., catch-up depreciation).

Common scenario: an investor bought a $1M STR in 2022, has been depreciating straight-line on 27.5 years. In 2025, they engage a cost seg study and file Form 3115. The Section 481(a) adjustment captures three years of accelerated depreciation that should have been taken, deductible in 2025. This is one of the highest-leverage tax plays available to existing rental owners who never did cost seg at acquisition.

Note: bonus depreciation rate on retroactive studies applies based on the year the property was originally placed in service, not the year of the Form 3115 filing. This is a key detail and is a good reason not to wait.

Cost seg identifies the components. Bonus depreciation, when applied to those components, lets you deduct a percentage of them in year one instead of spreading the deduction over 5, 7, or 15 years.

Current bonus depreciation phaseout schedule:

Full discussion on our bonus depreciation page.

Accelerated depreciation is not free. At sale, the IRS recaptures it:

• Section 1250 unrecaptured depreciation (the structural portion) is taxed at up to 25% federally.
• Section 1245 personal property recapture (the 5/7/15-year cost-seg buckets) is taxed at ordinary income rates.
• 1031 exchange into another like-kind investment property defers all of it. See our 1031 exchange financing page for the exchange mechanics and financing strategy.
• Step-up at death wipes out the unrealized depreciation. Heirs receive a basis step-up to fair market value, eliminating recapture entirely on inherited property.

• Anyone planning to sell within a few years and not planning to 1031. Recapture will neutralize most of the benefit.
• Low-bracket taxpayers where every dollar of deduction saves only 12 to 22 cents.
• Owners of properties under $500K where the study fee crowds the benefit.
• Investors who cannot use the resulting losses (no REPS, no STR qualification, no other passive income to offset) and who do not have a long enough horizon for the carryforward to be valuable.