- What is a cost segregation study and how does it work?
- Which components of my STR qualify for accelerated depreciation?
- What is bonus depreciation and how much applies in 2025?
- How much does a cost segregation study cost, and when does it pay off?
- What is depreciation recapture and how does it affect my sale?
- How does cost segregation interact with the STR tax loophole?
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What is a cost segregation study for a rental property?
A cost segregation study is an engineering-based analysis that identifies and reclassifies components of your property from the standard 27.5-year residential depreciation schedule to shorter-lived asset categories — typically 5-year (appliances, carpeting, fixtures), 7-year (certain equipment), and 15-year (land improvements like driveways and fencing). The reclassified components can then be depreciated much faster, generating larger deductions in earlier years.
What is bonus depreciation and how does it apply to STR properties in 2025?
Bonus depreciation under IRC §168(k) allows immediate expensing of qualifying property rather than depreciating it over its normal recovery period. It applies to 5-, 7-, and 15-year property (the categories identified in a cost segregation study). The bonus depreciation percentage is 40% in 2025, meaning 40% of qualifying reclassified components can be deducted immediately in the year placed in service.
How much does a cost segregation study cost?
A cost segregation study typically costs $3,000–$15,000 depending on the property's value, size, and complexity. The study is generally cost-effective for properties with a purchase price or improvement cost of $500,000 or more. The study fee itself is a deductible business expense. For STR operators using the loophole strategy to offset W-2 income, the break-even can be much lower because the deductions directly offset highly-taxed income.
What is depreciation recapture and how does it affect my STR sale?
Depreciation recapture requires you to pay tax on depreciation deductions taken when you sell the property. For commercial and residential property, unrecaptured §1250 gain is taxed at a maximum rate of 25% — higher than the standard 15–20% long-term capital gains rate. Cost segregation accelerates depreciation now but creates larger recapture exposure when you sell. It is primarily a timing strategy — shifting tax from today to the future.
Can I do a cost segregation study on a property I've owned for several years?
Yes. A "look-back" cost segregation study can be applied to properties placed in service in prior years using an IRS procedure called a change in accounting method (Form 3115). You can catch up on the missed accelerated depreciation in a single year without amending prior returns. This is a valuable option for existing STR owners who didn't do a study at acquisition.
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