Is Cost Segregation Worth It for Your Property?
Practical decision rules based on 1,000+ completed studies analyzing over $1 billion in real estate. We'll show you exactly when the ROI makes sense—and when to skip it.
After completing 1,000+ studies analyzing over $1 billion in commercial real estate, we've identified clear patterns for when cost segregation delivers outsized returns—and when it's not worth the effort.
This page distills years of Matthew's field experience and our team's proprietary data into simple rules you can apply in 5 minutes. These are the same criteria institutional investors use to screen acquisitions—now democratized for individual property owners.
⚡ 100% Bonus Depreciation Reinstated (July 2025): New legislation permanently restored 100% bonus depreciation for qualifying assets. This means cost segregation ROI just increased dramatically—you can now deduct reclassified components in full during year one instead of spreading them over 5–15 years. The decision framework below is even more compelling with this restored benefit.
The Core Question
Cost segregation is "worth it" when the tax savings generated exceed the cost of the study, plus your time and effort. For most investors, if the first-year tax savings are at least 10x the study cost, it's a clear yes. Our data shows typical returns of 15x–50x in year one alone.
The 4 Core Decision Factors
Based on 1,000+ completed studies, these four variables determine 90% of the ROI outcome:
1. Depreciable Basis Threshold
If your building basis (Purchase Price minus Land) is under $250k–$300k, the study cost often consumes too much of the benefit. We've seen exceptions—particularly for high-reclassification properties like restaurants or properties with recent substantial renovations—but this is a reliable screening threshold based on our 1,000+ study database.
Sweet spot from our data: Properties with $500k+ depreciable basis consistently deliver 20x–40x ROI in year one across all property types. Below $200k, cost segregation rarely makes economic sense unless the property has exceptional reclassification potential (40%+ range).
2. Tax Appetite (Can You Actually Use the Deductions?)
Deductions are only valuable if you can use them. This is the most common miscalculation we see. Our data across 1,000+ studies shows clear patterns:
- W2 high earners with Real Estate Professional Status (REPS): Can offset active W2 income. Requires 750+ hours annually in real property trades and more time in real estate than any other work (IRC §469(c)(7)). This is the highest-value application of cost segregation.
- Short-term rental operators: Properties rented <7 days average often escape passive activity limitations entirely, making deductions immediately usable against all income types.
- Passive investors with existing income: Can offset up to $25,000 in passive losses (phases out at higher incomes), then carry forward unused losses to future years.
- Low/no taxable income: Cost seg provides minimal current-year cash value—deductions just build up loss carryforwards.
If you're already carrying forward $200k in passive losses, adding another $80k from cost seg may not create immediate cash flow—though it positions you well for future gains.
3. Property Type Matters More Than You Think
After studying thousands of properties, we've observed clear patterns. Properties with more "stuff" inside yield dramatically higher savings:
| Property Type | Avg. Reclassification | Typical ROI Multiple |
|---|---|---|
| Restaurant (Full Service) | 38% (32%–44%) | 30x–60x 50x–120x* |
| Hotel (Full Service) | 37% (32%–42%) | 25x–50x 45x–100x* |
| Multifamily (High-Rise) | 35% (30%–40%) | 20x–40x 35x–80x* |
| Office (with Tenant Fit-Outs) | 32% (26%–38%) | 18x–35x 30x–70x* |
| Single-Family Rental | 29% (24%–34%) | 12x–25x 20x–50x* |
| Warehouse (Shell) | 22% (15%–28%) | 10x–20x 18x–40x* |
*ROI multiples calculated as (First-Year Tax Savings ÷ Study Cost). Strikethrough = historical MACRS-only returns. Green = with 100% bonus depreciation (reinstated July 2025). Based on aggregated data from our database of 1,000+ completed studies. Modern CFO pricing ($499+) would approximately double these ROI multiples compared to traditional firm pricing.
4. Hold Period (Time Horizon Matters)
If you plan to sell within 12–18 months, depreciation recapture may negate much of the benefit. Cost segregation works best for hold periods of 3–5+ years, where you can compound the time-value benefit of accelerated cash flow.
Our most successful case studies involve investors who reinvested the year-one tax savings back into the property or additional acquisitions—compounding the initial benefit.
Strong ROI Indicators (From Our 1,000+ Study Database)
- Depreciable basis > $500k (20x–40x ROI typical)
- High tax bracket (32%+ federal + state)
- REPS qualification or STR strategy (can use deductions immediately)
- High-reclassification property type (restaurants 32%–44%, hotels 32%–42%)
- Hold period 3–5+ years (time value compounds)
- Recent acquisition or substantial renovation
- Good documentation (blueprints, invoices available)
Weak ROI Indicators (Skip Cost Seg)
- Depreciable basis < $200k (study cost eats benefit)
- Low/no current taxable income (deductions go unused)
- Large existing passive loss carryforward with no path to use it
- Simple shell warehouse with minimal interiors (15%–22% range)
- Planning to sell in < 12–18 months (recapture negates benefit)
- Land-heavy property (>40% land = smaller depreciable basis)
- Zero documentation available (increases study cost)
Matthew's Field Experience Rule
"After completing over 1,000 studies, I can usually predict the ROI in the first 30 seconds of a property walk. If I see tenant improvements, specialty systems, or heavy site work, I know we're looking at 25x+ returns. If it's a bare shell with 50% land value, it's borderline. The pattern recognition is that consistent."
The democratization advantage: You don't need to hire an engineer to make this screening call. Our calculator embeds Matthew's 1,000+ study pattern recognition into AI that runs in 60 seconds. Get the institutional-investor screening process without the institutional price tag.
The "Estimate First" Strategy (Proven Across 1,000+ Studies)
Smart investors never pay for a full study until they know the ROI clears their hurdle rate. Based on analyzing thousands of successful (and unsuccessful) cost segregation implementations, here's the proven workflow:
- Run the free calculator (60 seconds) → See if potential savings exceed 10x your expected study cost. This is your go/no-go decision point.
- If ROI > 10x: Request quotes from 2–3 cost seg firms → Compare scope, pricing, and engineer credentials. Ask for sample reports.
- Verify engineering credentials: Ensure the firm has licensed engineers (not just CPAs) and provides audit defense. Check their methodology aligns with IRS Audit Techniques Guide.
- Engage the firm: Full engineering study with site visits, component documentation, and IRS-compliant reporting.
- File with your tax return: Claim accelerated depreciation. For prior-year properties, file Form 3115 for catch-up depreciation—no amended returns needed.
If the calculator shows $50k in savings and studies cost $5k, it's a clear win. If it shows $6k savings for a $5k study, you skip it. This screening workflow has prevented our users from wasting money on marginal-ROI studies that wouldn't pay off.
Ready to See Your Savings?
Get an instant estimate using our free calculator. If the ROI makes sense, we'll deliver an IRS-compliant study at 50% of what traditional firms charge—with full transparency and Matthew's personal review of every number.
Continue Reading
Learn more about cost segregation with these related guides:
- → How Much Does Cost Segregation Save? — See actual savings ranges by property type from our database
- → How the Calculator Works — Understand our AI methodology and accuracy
- → Why Our Studies Cost 50% Less — Learn about our pricing and democratization philosophy
Disclaimer: ROI estimates and property type ranges are based on aggregated historical data from 1,000+ completed engineering-based cost segregation studies. Individual results vary based on specific property characteristics, tax situation, and other factors. This information is for educational purposes and does not constitute tax, legal, or financial advice. Consult with qualified professionals regarding your specific situation.