Is Cost Segregation Worth It? When It Makes Sense in 2026

Depreciation can feel like a “phantom expense” for real estate investors: it reduces taxable income without affecting cash flow. But standard depreciation is slow. For decades, savvy landlords have used cost segregation to accelerate deductions, unlocking significant upfront tax savings.

Now, the rules are changing. Bonus depreciation is phasing out under the Tax Cuts and Jobs Act (TCJA), dropping to 20% in 2026. This raises a key question: Is cost segregation still worth it?

The answer isn’t one-size-fits-all. It depends on your tax bracket, hold period, and investment goals. While the ability to write off an entire building in year one is largely gone, the time value of money still makes accelerated depreciation powerful. This guide helps you decide if a cost segregation study fits your portfolio in 2026.

Key takeaways

• Bonus depreciation is fading: Drops to 40% in 2025, 20% in 2026. Each deduction now requires a careful cost-benefit analysis.
• Hold time matters: Cost segregation benefits investors holding properties at least 3–5 years.
• Property basis matters: Typically worthwhile if the building’s cost (excluding land) is $200k–$300k or more.
• Offset limitations: Without Real Estate Professional Status (REPS) or short-term rental strategies, passive losses can only offset passive income.
• Accurate data is crucial: Organized bookkeeping maximizes deductions and simplifies audits

Cost segregation in a post-100% bonus era

Standard residential depreciation spreads a building’s cost over 27.5 years. Cost segregation breaks your property into components, identifying assets like carpeting, cabinetry, landscaping, and specialty plumbing for shorter depreciation schedules—typically 5, 7, or 15 years.

Previously, 100% bonus depreciation on rental properties allowed investors to deduct these assets in year one. Now, the phase-out schedule is:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%

Even with only 20% bonus depreciation in 2026, reclassifying assets still accelerates deductions, front-loads tax savings, and frees cash for reinvestment.

When does cost segregation make sense?

Not every property—and not every investor—is a good candidate. You need to evaluate specific criteria to ensure the tax savings outweigh the fees paid to engineers or tax professionals.

Are you in a high tax bracket?

The value of landlord deductions rises with your marginal tax rate. For example, a $100,000 deduction saves:

• $37,000 in the 37% bracket
  
• $12,000 in the 12% bracket
  

Generally, 32%+ federal brackets see the most benefit.

Do you qualify as a Real Estate Professional (REPS)?

Passive Activity Loss rules usually restrict rental losses to passive income. REPS status allows accelerated depreciation to offset active income, which can be a game-changer for high earners.

Are you managing short-term rentals?

Properties with average stays of 7 days or less can classify income as non-passive if you materially participate, allowing cost segregation deductions to offset active income.

Does your property meet the basis threshold?

Experts recommend a minimum building cost basis of $200k. Below this, study costs may outweigh tax savings.

How much does a cost segregation study cost

The cost varies based on the property's size and the method used.

• Residential properties: A full engineering study typically costs between $2,000 and $5,000.
• Commercial properties: Prices often range from $10,000 to $15,000 or more due to increased complexity.

Calculating ROI

Look for a 10:1 to 20:1 return on investment. If a $3,000 study generates $45,000 in accelerated depreciation in the first year, the math works in your favor.

However, accuracy helps reduce costs. When you have pristine financial records, the study providers spend less time untangling your expenses. Baselane’s banking and bookkeeping platform automatically categorizes transactions, making it easier to hand over clean data to a tax professional. By keeping your rental property operating expenses organized, you reduce administrative friction and potential errors during the study.

DIY vs. Professional: Are Online Cost Segregation Studies Worth It?

As technology improves, lower-cost options have entered the market.

The algorithm approach

Online platforms use algorithms based on thousands of previous studies to estimate the breakdown of your building components. These reports typically cost between $400 and $1,000.

•   Pros: Highly affordable; fast turnaround.
•   Cons: Less defensible in an audit; may miss unique nuances of a specific property.

The engineer-based approach

A traditional study involves a site visit by a qualified professional who measures and documents every component, from the driveway to the electrical outlets.

•   Pros: Gold standard for audit defense; maximizes every possible deduction.
•   Cons: Higher upfront cost; takes longer to complete.

IRS requirements

Are cost segregation studies required to be done by an engineer? Technically, the IRS does not require a specific credential, but it does require a "quality study" that is accurate and substantiated. The IRS cost segregation study requirements emphasize that the methodology must be sound.

If you own a single-family rental with a basis under $500,000, an online study might be sufficient. For large multifamily complexes or commercial buildings, the risk of an inaccurate study outweighs the savings of going cheap. Always consult with a CPA to verify cost segregation study requirements for your specific situation.

The risks: Recapture and "bad" candidates

When does it make sense to do a cost segregation study? When you plan to hold the property. If you sell the property shortly after performing the study, you trigger "recapture."

The IRS will "recapture" the depreciation you claimed and tax it at a rate of up to 25% (plus ordinary income rates for the 5 and 7-year assets). If you sell within 1-3 years, you might end up paying back all the tax savings you gained, effectively rendering the study a waste of money.

Furthermore, if you have no taxable income to offset, accelerating deductions is pointless. You end up creating a Net Operating Loss (NOL) that carries forward. While carrying forward losses isn't bad, it defeats the purpose of the cost segregation time value of money strategy, which is to free up cash now.

How to prepare your portfolio for the study

If you determine that a cost segregation study good idea for your portfolio, preparation is key to maximizing the results.

Close on the property before year-end

To claim depreciation for a tax year, the property must be placed in service by December 31st.

Separate improvements from repairs

When you renovate, you must distinguish between capital improvements (which are depreciated) and repairs (which are expensed immediately). A clear Rental Property Expenses Spreadsheet or automated tool is critical here. Using a platform like Baselane allows you to tag transactions as "Capex" or "Repairs" in real-time. This clarity ensures your cost seg study doesn't accidentally depreciate an expense you could have fully written off as a rental property tax deduction.

Maintain separate accounts

Commingling funds is a recipe for disaster during a cost segregation analysis. Use a dedicated business bank account for each property or portfolio. Baselane offers separate accounts for different properties, ensuring that every dollar spent on the asset is tracked and attributable.

Consult your CPA early

Don't wait until April to ask if a cost segregation study is worth it. This conversation should happen ideally before you close on the property, or at least before the end of the tax year, to ensure you meet all requirements for a cost segregation study.

Conclusion

So, is cost segregation worth it in 2026? Despite the phase-out of bonus depreciation, the answer remains a strong "yes" for many investors. The ability to accelerate depreciation schedules for 5, 7, and 15-year assets still provides superior cash flow compared to the standard 27.5-year straight-line method. The key is ensuring you fit the profile: a mid-to-high tax bracket, a hold period of 5+ years, and a property basis that justifies the study cost.

Success in real estate tax strategy requires precision. You need accurate data to fuel your decisions. Baselane provides the financial clarity landlords need, offering automated bookkeeping, rent collection, and banking in one integrated platform. By keeping your finances audit-ready and your property data organized, you can approach advanced strategies like cost segregation with confidence.

Take control of your portfolio’s financial health. Get started with Baselane today to streamline your bookkeeping and maximize your tax potential.