When you purchase a rental property, the IRS allows you to recover the cost through depreciation deductions over the property's useful life. For most residential rentals, that's 27.5 years. A cost segregation study is an IRS-recognized strategy that may allow you to take larger deductions in the early years of ownership.
What Is a Cost Segregation Study?
A cost segregation study is an engineering-based analysis of your property that identifies components that may qualify for shorter depreciation periods than the building structure. Instead of depreciating everything over 27.5 years, certain items can potentially be reclassified into 5-year, 7-year, or 15-year categories.
Items that may qualify include furniture, appliances, flooring, landscaping, outdoor lighting, bathroom fixtures, kitchen cabinets, and smart home devices. The IRS provides guidance on asset classification in Publication 946 and the Cost Segregation Audit Techniques Guide.
Why It May Be Especially Relevant for STR Owners
Short-term rentals often contain more personal property (furniture, decor, appliances) than long-term rentals, which means a larger portion of the purchase price may qualify for accelerated depreciation. Additionally, STR owners who meet material participation requirements may be able to use the resulting losses against active income — though this depends on several IRS tests and should be evaluated by a tax professional.
An Illustrative Example
Consider a hypothetical STR property purchased for $500,000 with $100,000 allocated to land and a $400,000 depreciable basis. Without cost segregation, the annual depreciation deduction would be approximately $14,545 ($400,000 ÷ 27.5 years).
If a cost segregation study identified $120,000 in assets qualifying for accelerated depreciation, and 100% bonus depreciation applied (for property placed in service after January 19, 2025, per the OBBBA), the owner could potentially deduct that $120,000 in year one. The actual tax savings depend on the owner's tax bracket and specific circumstances — consult your CPA for projections based on your situation.
What Does a Cost Seg Study Typically Cost?
Industry sources report costs typically ranging from $3,000 to $7,000 for residential STR properties, depending on property size and complexity. For properties valued above $250,000, the potential tax savings often exceed the study cost, but this should be evaluated with your CPA on a case-by-case basis.
When to Consider One
Common timing includes right after purchase (to capture maximum first-year deductions), after major renovations, or retroactively through a "look-back" study that may allow amended returns for prior years. Your CPA can advise on the best timing for your situation.
Tracking Your Cost Seg Results
DeductFlow includes a cost segregation section where you can store your study results, track the associated depreciation, and keep the documentation alongside all your other STR tax records — organized and ready for your CPA.