Simplified IRS Form 3115 Preparation

Any type of income-producing property placed into service after 1986 qualifies for cost segregation, making this tax strategy widely applicable across the real estate spectrum. We frequently work with both residential properties, including single-family rentals, multi-family buildings, and short-term rentals like Airbnb properties, as well as commercial projects ranging from office buildings and retail centers to industrial facilities and medical offices.

The key requirement is that the property must be used for business or investment purposes rather than as a personal residence. This includes properties you actively manage as rentals, those held for investment appreciation, and buildings used in your trade or business.

Properties acquired through various means including purchases, 1031 exchanges, inheritances, or new construction all qualify, as long as they meet the income-producing requirement and were placed in service after 1986.

We pride ourselves on offering affordable cost segregation studies tailored to every budget and property type. Our self-directed Rapid Report, designed for smaller residential properties up to 4 units with a depreciable basis under $800,000 and capital improvements under $50,000, is available for $950.

For properties that don't meet these criteria and/or require more detailed analysis, our Fully Engineered Study starts at $2,500 for residential properties and $3,025 for commercial properties. The final fee varies based on square footage, property type, and complexity of the analysis required. Rush service pricing for pending tax deadlines may apply and are subject to capacity availability.

Both services include full IRS audit protection and are performed by qualified engineers following IRS guidelines. To understand exactly what a cost segregation study on your investment property would cost, we provide free proposals that include fee quotes along with estimated depreciation benefits, allowing you to evaluate the return on investment before committing to the study.

Compare our cost segregation study services or request a free proposal for your property here.

The optimal time to perform a cost segregation study is within the tax year that the building is purchased, constructed, or substantially renovated. This timing allows you to maximize first-year depreciation benefits without needing to file additional forms with the IRS. When you conduct the study in the same year as acquisition or placement in service, you simply use the accelerated depreciation schedule from the start, avoiding the need for Form 3115 to change accounting methods.

However, this doesn't mean you've missed the opportunity if you've owned the property for several years. Look-back studies can capture missed depreciation from prior years through a Section 481(a) adjustment, bringing all that accumulated benefit into the current tax year. The key is completing the study before filing your tax return for the year you want to claim the benefits. For specific tax deadlines, we maintain strict cut-off dates to ensure quality delivery.

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You can perform a look-back cost segregation study on properties acquired as far back as 1987, when the current depreciation rules under MACRS went into effect. Through filing Form 3115 for an automatic accounting method change, you can claim all the accumulated missed depreciation as a Section 481(a) adjustment in the current tax year without amending any prior-year tax returns.

This means if you've been depreciating a property using straight-line depreciation for several years, you can still capture the benefits of accelerated depreciation you would have received had you performed cost segregation from the beginning. However, there are diminishing returns the longer you've owned and depreciated a property. Properties owned for more than 15 years may have limited remaining benefits, especially if they've already been substantially depreciated. The cost-benefit analysis becomes less favorable as the remaining depreciable life decreases, though high-value properties or those with significant improvements may still justify the study cost.

If you're planning to sell your property in the near future, the decision to pursue cost segregation requires careful consideration of depreciation recapture rules. When you sell a property after taking accelerated depreciation, you'll face recapture tax on the difference between accelerated and straight-line depreciation at ordinary income rates, which can be as high as 37%.

This recapture can significantly reduce or eliminate the benefits of cost segregation if the sale occurs too soon. We generally recommend holding a property for at least 3-5 years after performing cost segregation to ensure the time value of money and tax deferral benefits outweigh the eventual recapture tax. The exact break-even point depends on your tax rates, the amount of accelerated depreciation, and your cost of capital.

However, if you're planning a 1031 like-kind exchange rather than a taxable sale, cost segregation becomes much more attractive. In a 1031 exchange, you defer the recapture tax by rolling the basis into your replacement property, allowing you to continue benefiting from accelerated depreciation without immediate tax consequences. Even if you're selling within 2-3 years, cost segregation might still make sense if you're in a high tax bracket now but expect lower rates at sale, or if the property has minimal personal property that would be subject to higher recapture rates.

As a high W-2 earner, your ability to use rental property losses from cost segregation to offset wages depends on specific IRS rules regarding passive activities. Generally, rental activities are considered passive, and passive losses cannot offset active income like W-2 wages unless you qualify for specific exceptions.

The most comprehensive exception is achieving Real Estate Professional status, which requires spending more than 750 hours annually and more than half your total working time in real estate activities, plus materially participating in your rental properties. This is often difficult for high W-2 earners with full-time jobs to achieve. However, a more accessible option for many is the short-term rental exception (also known as the short-term rental loophole).

If your property has an average guest stay of 7 days or less, it's not considered a passive rental under IRS rules. By materially participating in the property's operation, which can be achieved through various tests including working 100-plus hours annually with no one else participating more, you can treat the income and losses as active, allowing offset against your W-2 income. The $25,000 active participation exception for long-term rentals phases out completely at $150,000 of modified adjusted gross income, making it unavailable to most high earners.

Even if you can't immediately use the losses against W-2 income, cost segregation still provides value by creating suspended passive losses that offset future passive income, reduce taxable rental income in profitable years, and become fully deductible when you sell the property. We strongly recommend consulting with a qualified tax advisor to determine your specific eligibility and develop the optimal strategy for your situation.

The One Big Beautiful Bill Act, signed into law on January 19, 2025, has reinstated permanent 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025, fundamentally changing the landscape for real estate investors. For properties placed in service before January 19, 2025, unfortunately, the prior phase-down schedule remains in effect, meaning these properties receive 60% bonus depreciation if placed in service in 2024, or 40% if placed in service between January 1 and January 19, 2025.

The new 100% rate cannot be applied retroactively to these properties due to the specific effective date provisions in the legislation. However, for properties placed in service after January 19, 2025, the reinstated permanent 100% bonus depreciation applies to all qualified property identified in your cost segregation study, including 5-, 7-, and 15-year property classifications. This permanence eliminates concerns about future phase-downs and makes long-term tax planning more predictable.

RE Cost Seg is committed to ensuring all our clients receive maximum value from this law change. All new studies for properties placed in service after January 19, 2025, automatically apply the 100% rate. For studies we completed earlier in 2025 before the law was signed, we provide complimentary updates to the depreciation schedules if your property qualifies for the higher rate. Simply contact our team to request your free updated schedules.

This permanent reinstatement makes cost segregation studies even more valuable, as you can now accelerate the full cost of short-life property into the year placed in service without worrying about diminishing benefits in future years.

Yes, you can absolutely perform a cost segregation study in 2025 for a property placed in service in 2024. The cost segregation study is a valuable tool that provides your CPA with the necessary documentation to optimize property depreciation, and it's a one-time analysis that remains valid indefinitely. There's no requirement that the study be completed in the same calendar year as the property acquisition or placement in service. As long as the study is completed before you file your tax return for the year you want to claim the benefits, you can apply the accelerated depreciation.

The report will analyze the property as of its placed-in-service date in 2024 and provide depreciation schedules starting from that date. Your CPA will use this information when preparing your 2024 return, regardless of when in 2025 the study is actually completed, provided all deadlines are met.