The IRS says a residential investment property has a useful life of 27.5 years. In plain terms, over nearly three decades of owning and operating a property, you'll probably have replaced most of its parts. Because of this, the IRS lets you take depreciation each year to help offset those eventual costs.
That's already a nice tax benefit. But while the structure of a property may last 27.5 years, many components, like kitchen appliances, flooring, or ceiling fans, wear out much faster. Recognizing this, the IRS allows you to segregate the property into different categories with shorter lifespans.
A Cost Segregation Study breaks the property into:
5-Year Property: items like appliances, carpet, and ceiling fans.
15-Year Property: land improvements like fencing, landscaping, and driveways.
27.5-Year Property: the core structure of the building.
With this breakdown, you can accelerate depreciation by frontloading deductions into the first few years instead of spreading them evenly over 27.5 years. This creates powerful, early tax savings.
On top of that, Congress sometimes passes laws to boost the economy through Bonus Depreciation. This lets you take all depreciation for 5- and 15-year property in Year 1. Thanks to recent legislation ("The Big Beautiful Bill"), properties placed in service in 2025 can take 100% Bonus Depreciation. That makes this year an especially strong opportunity to reduce taxes, improve cash flow, and reinvest capital where you need it most.
Case Study
Let's take a look at a Case Study for a Cost Segregation Study we did for a single family home property in Utah. Exact numbers have been rounded for ease of reading.
Property Details
Price: $600,000
Land: $120,000
Depreciable Basis: $480,000
Purchase Date: Early 2025, thus eligible for 100% Bonus Depreciation
After receiving all necessary documents and conducting a Cost Segregation Study on the property, we found:
Study Results
$70,000 in 5-Year Property
$60,000 in 15-Year Property
$350,000 of 27.5-Year Property
Because of 2025's Bonus Depreciation, the entirety of the 5- and 15-Year Property, $130,000, could be depreciated in 2025. Huge savings!
While this Case Study reflects numbers which are ultimately unique to this property, most residential properties end up having over 20% of their depreciable basis designated as 5- and 15-Year property, making them excellent options for helping with your taxes.
As for properties purchased and placed in service before 2025? While different years have different amounts of Bonus Depreciation, we find that investors can still reap major benefits from getting a Cost Segregation Study done in 2025.
Maximizing Your Depreciation Benefits
So you're able to take a ton of depreciation, but are you able to take advantage of it? Depreciation taken via a cost segregation study can offset passive income such as the rental income you get from the house. Additionally, if you or your spouse qualify as a "Real Estate Professional", you'd become eligible for it to offset all of your income.
What is Real Estate Professional Status?
Real Estate Professional status is a special IRS designation that allows individuals who are actively involved in real estate activities to treat their real estate losses as non-passive. This means they can offset these losses against all forms of income, not just passive rental income.
To qualify, you must spend more than 750 hours annually on real estate activities and ensure more than half of your total working hours are devoted to real estate. This can be a game-changer for maximizing the benefits of your cost segregation study.
Ready to Get Started?
Don't miss out on the significant tax savings available in 2025. Contact us today to discuss how a cost segregation study can benefit your investment properties.
