Cost segregation is an IRS-approved tax strategy that reclassifies portions of a real estate purchase into shorter-life asset classes (5, 7, and 15-year property) so investors can accelerate depreciation and dramatically reduce taxable income in the early years of ownership.
On a typical $1M rental property, a cost seg study can reclassify 20-35% of the basis into short-life property — that's $200,000-$350,000 of depreciation the investor can potentially deduct in year one under bonus depreciation rules, versus straight-line 27.5-year depreciation which would give roughly $36,000 in year one. The result: paper losses that can offset rental income, W-2 income (with real estate professional status), or passive income from other properties.
Cost seg is most impactful on new acquisitions ($500k+ basis) and on renovated properties where reclassifiable improvements are large. Studies typically cost $3,000-$10,000 and are performed by engineering firms specializing in tax compliance. DSCRloans.net partners with vetted cost segregation firms and offers a free savings review to estimate your first-year tax benefit before commissioning a study. Request a savings review.