What Is a Cost Segregation Study? STR Tax Savings Explained

When you buy a short-term rental, the IRS lets you depreciate the building over 27.5 years using straight-line depreciation. A cost segregation study goes further: it identifies building components that qualify for shorter depreciation lives — typically 5, 7, or 15 years — making them eligible for bonus depreciation and letting you front-load a large portion of the total deduction into year one.

How Depreciation Works Without Cost Segregation

Under the default 27.5-year straight-line method, a $600,000 depreciable basis (purchase price minus land) generates roughly $21,818 per year in depreciation. That deduction reduces your taxable income — but slowly, spread across nearly three decades.

For a household in the 35% federal bracket, $21,818 of annual depreciation produces about $7,636 per year in federal tax savings — meaningful, but far from the full potential.

What a Cost Segregation Study Does

A cost segregation study is an engineering analysis of your property. A qualified engineer or firm reviews architectural plans, invoices, and the physical property to reclassify components:

• 5/7-year personal property — Furniture, fixtures, appliances, carpeting, certain electrical outlets, and similar items that are not structural. These qualify for bonus depreciation in the year placed in service.
• 15-year land improvements — Landscaping, driveways, parking areas, outdoor lighting, fencing, and similar site improvements. These also qualify for bonus depreciation.
• 27.5-year residential real property — The structural shell (foundation, framing, roof, exterior walls, and systems integral to the building). This portion stays on straight-line.

For a typical STR, a study might reclassify 20–35% of building value into 5/7-year and 15-year categories. With 100% bonus depreciation available (see the OBBBA track article), that portion is deducted entirely in year one.

Illustrative Year-1 Impact

Year-one depreciation under this scenario (illustrative):

• 7-yr bonus: $640,000 × 20% × 100% = $128,000
• 15-yr bonus: $640,000 × 10% × 100% = $64,000
• 27.5-yr straight-line: $640,000 × 70% ÷ 27.5 = $16,291
• Furnishing bonus: $30,000 × 100% = $30,000
• Total year-1 deduction: ~$238,291

Compared to the default $23,273/yr (no cost seg), cost segregation produces roughly 10× the year-1 deduction in this example. At a 35% marginal rate, that's approximately $83,402 in federal tax savings in year one alone — versus ~$8,145 without it.

What Does a Cost Segregation Study Cost?

Studies typically run $5,000 to $15,000 depending on property size and complexity. Some firms charge a percentage of identified tax benefit. For most STR purchases above $400,000, the tax benefit far exceeds the study cost — but you should get quotes and model the ROI specifically for your property.

When Does It Make Sense?

Cost segregation is most valuable when:

• You have high ordinary income and are in the 32–37% federal bracket
• You qualify to deduct STR losses against ordinary income (see the material participation article)
• You acquired property after January 19, 2025 (100% bonus depreciation available)
• The depreciable basis is large enough that the study cost is a small fraction of the benefit

If you do not qualify under PAL rules, the depreciation deductions are suspended — not lost — until you have passive income or sell the property. The timing benefit of cost segregation still exists, but the immediate cash savings do not.

Try It in the Calculator

The STR Benefit Calculator models cost segregation allocations directly. In the Cost Seg & Depreciation section, you can adjust 7-year, 15-year, and 27.5-year allocations and see year-by-year depreciation schedules and estimated tax savings — using your own income, filing status, and state.