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100% bonus depreciation is now permanent under the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025. For qualified property acquired and placed in service after January 19, 2025, investors can deduct the full cost of shorter-life assets in year one, a major reason cost segregation is getting so much attention. The savings can be real. But a study isn't the right move for every property.
Knowing when to skip a study saves you thousands in fees and helps you avoid tax outcomes that cost more than they save.
This article covers five situations where a study often doesn't pencil out, the specific cases where the return is genuinely negative, and a decision framework you can run before spending a dollar.
How the Cost Segregation Math Works
Cost segregation services reclassify building components into shorter depreciation schedules, 5-, 7-, and 15-year property instead of 27.5 or 39 years. How much reclassifies varies by property type; studies commonly move roughly 20–35% of depreciable basis into those shorter lives, though the figure depends on the building. With 100% bonus depreciation, those components are deductible in year one.
Studies also cost money. As of 2026, Rapid Reports start at around $950, and Fully Engineered Studies generally run from $2,320 to $10,000+, depending on property size and complexity. (Pricing changes periodically; request a current quote before you budget.) The tax benefit has to clear that cost to make sense.
One caveat before the math: a deduction only helps if you can actually use it. If your rental losses are passive and you have no passive income to offset, and you don't qualify under Real Estate Professional Status or the short-term rental rules, the benefit may be suspended until you sell.
Here's the math on a $400,000 property:
- Purchase price: $400,000
- Land value allocation (20%): $80,000
- Depreciable basis: $320,000
- Typical reclassification (25%): $80,000
- First-year bonus depreciation: $80,000
- Tax savings at 37%: $29,600
- Study cost: $3,500
- Net benefit: $26,100
This works. Drop the property to $250,000, though, and the equation tightens. A $50,000 reclassification produces $18,500 in tax savings; after a $3,500 fee, you net about $15,000. Still positive, but the margin shrinks.
The general rule: properties under $500,000 in depreciable basis deserve careful analysis. They can still benefit, the ROI just needs scrutiny.
Five Situations Where a Study Often Doesn't Pay Off
Not every investment property warrants a study. These five raise a flag.
1. Low-basis properties (under $500K depreciable basis)
Study fees don't scale down proportionally with property value. A $300,000 property costs less to analyze than a $1 million property, but not proportionally less, so the fee eats a larger share of a smaller benefit.
2. Land-heavy purchases
Land is not depreciable, so a high land allocation leaves less basis to work with. Illustratively, when land is more than about 40% of the purchase price, the reclassification pool shrinks fast. A $1 million property with $500,000 in land value has only $500,000 to depreciate, half the benefit before you begin.
3. Very small or simple residential properties
A small, plain single-family rental has fewer specialized components to reclassify, no commercial-grade electrical, specialized HVAC, or tenant improvements, so the dollar amount of acceleration can be modest relative to the fee.
Important nuance: new construction is not a disqualifier. New builds often make excellent candidates because complete construction-cost records make the engineering cleaner and more defensible, and multifamily and larger residential assets frequently reclassify well. The deciding factors are basis size and complexity, not the age of the building.
4. Short holds without a 1031 plan
Accelerated depreciation is a timing strategy, not permanent tax elimination. A short hold compresses the deferral window, and recapture comes due sooner (more on the mechanics below).
5. Low-tax-bracket investors
A deduction is worth your marginal rate. A $100,000 deduction saves $37,000 at 37% but only $22,000 at 22%, while the study fee stays the same. Investors in the 12% or 22% bracket capture proportionally less.
What if I'm in a low bracket now but expect higher income later?
This is common. Accelerating deductions in a low-income year wastes their value; the deduction saves 22 cents on the dollar today when it could save 37 cents next year. Consider waiting until your income rises, or use a look-back study with Form 3115 to claim missed depreciation in a higher-income year through a Section 481(a) adjustment.
The Low-Basis Problem, Explained
Depreciable basis equals your purchase price plus improvements, minus land value. Only improvements depreciate; land does not.
Low-basis properties generate fewer reclassification dollars to offset a fee that stays relatively fixed. The figures below all assume depreciable basis (land already removed) and a 37% bracket:
The $300,000 property still shows positive ROI. But look at the fee as a share of the investment: $3,500 is about 1.17% of a $300,000 property, while $8,000 is only 0.53% of a $1.5 million property. On smaller properties, complications like a high land allocation or very simple construction can tip the result negative — which is exactly what the next section covers.
Short Holds and Depreciation Recapture
Recapture is how the IRS collects tax on depreciation you accelerated, and it applies when you sell at a gain. Sell at or below your adjusted basis and there's no recapture; roll into a like-kind exchange and it's deferred (more below).
The rates matter:
- Section 1245 property (personal property): recaptured at ordinary income rates, up to 37%.
- Section 1250 property (real property): the depreciation portion is unrecaptured Section 1250 gain, taxed at a maximum of 25%.
A 2-year hold, compared to doing nothing:
- Purchase: $800,000 commercial property
- Depreciable basis: $640,000
- Cost seg reclassification: $160,000 into 5- and 15-year property
- Year 1 bonus depreciation on that $160,000: full deduction
- Year 1 tax savings at 37%: ~$59,200
- Study cost: $6,000
On sale after two years, that $160,000 of Section 1245 property is recaptured as ordinary income (up to 37%), roughly $59,200. The year-one savings and the sale-year recapture largely cancel, leaving you out the $6,000 fee.
Two things make a short hold worse than break-even:
- Rate conversion. Without cost seg, that basis would have produced only modest straight-line depreciation, recaptured as unrecaptured Section 1250 gain at a 25% maximum. Cost seg converts a slice of future 25%-taxed gain into 37%-taxed ordinary recapture.
- Time value is your only real gain. Deferring the tax for two years is worth something, but often not enough to clear the fee plus the higher recapture rate.
The guideline: plan to hold long enough, often 5 to 10 years, to let the deferral outweigh the fee and the recapture rate.
What happens to my depreciation in a 1031 exchange?
A properly structured 1031 exchange defers recapture along with capital gain through carryover basis, so you don't trigger recapture at the exchange. Since the TCJA, Section 1031 covers only real property. Most cost-segregated building components still qualify as real property under the 1031 regulations, but Section 1245 recapture can be triggered to the extent the replacement property doesn't include comparable accelerated components. Model this with your advisor before exchanging.
Decision Framework: Should You Get a Study?
Each "no" is a caution flag.
- Is your depreciable basis above $500,000?
If no → proceed carefully; calculate expected ROI before committing. - Are you in the 32%+ federal bracket?
If no → the benefit is reduced; run the numbers at your actual rate. - Will you hold 7+ years, or use a 1031 strategy?
If no → recapture erodes short-term benefits. - Is the property type favorable? (Commercial, multifamily, hospitality, medical, or a complex residential asset.)
If no → very small or simple properties reclassify less. - Do you have income to offset? (REPS, material participation in short-term rentals, or passive income.)
If no → passive-loss rules may defer your benefit until you sell.
Answering "no" to two or more questions suggests a study may not be optimal for this property.
Not sure where you land? A free feasibility analysis shows your expected benefit before you commit.
When the ROI Is Actually Negative
The cases above are usually "think twice." These are the situations where a study can genuinely lose money:
- Tax-exempt or tax-deferred owners. Property held inside a self-directed IRA or 401(k), or by a tax-exempt entity, generally gets no current benefit, unless the property is leveraged and generating UBTI, where depreciation can offset the taxable portion.
- A sale at a loss. If you expect to sell below adjusted basis, there's no gain to shelter on the way out and you've paid for a study you didn't need.
- Very low basis + high land + simple construction. When the depreciable pool is small (say, under ~$150,000) and the building is plain, the fee can exceed the discounted value of the benefit.
- Passive investors with no offset and no exit. If your losses are passive, you have no passive income, you don't qualify under REPS or the STR rules, and you have no near-term sale, the deduction can sit suspended indefinitely.
- Reliance on 100% bonus for the wrong year. 100% bonus applies to property acquired and placed in service after January 19, 2025. Property placed in service earlier still falls under the old phase-down (60% for 2024; 40% for early 2025), so a study built on a 100% assumption can overstate the benefit.
Two more factors to model: state tax conformity (many states don't conform to federal bonus depreciation, so your state benefit may be smaller than the federal number) and Section 179, which can be a simpler alternative for some smaller assets.
When Partial or Desktop Studies Make Sense
Borderline cases don't always need full engineering. Lighter-touch options exist.
Rapid Reports (from ~$950): self-directed studies for simpler residential properties. Owners complete a questionnaire; remote engineering review based on owner-supplied documentation, with no site visit required. Good for straightforward single-family or small multifamily rentals.
Fully Engineered Studies (from ~$2,320): comprehensive analysis with detailed engineering documentation, suited to commercial properties and complex residential assets, and providing the strongest audit support.
The trade-off is precision versus cost. Simple properties do fine with a Rapid Report; assets with specialized systems need full engineering to capture every qualifying component.
Can I just use cost seg software myself?
A properly executed engineering-based study, whether from R.E. Cost Seg or another qualified firm, produces the documentation the IRS looks for. The IRS Cost Segregation Audit Techniques Guide favors detailed engineering analysis, and DIY software estimates often lack the supporting records to defend a position if it's questioned. If you may sell, refinance, or face review, the engineering documentation is what backs your depreciation.
Making the Call
Cost segregation delivers substantial benefits for the right properties, and real downside for the wrong ones.
Key takeaways:
- Below ~$500,000 in depreciable basis, the fee is a larger share of the benefit, model the ROI before committing.
- Land above ~40% of purchase price and holds under ~5 years can shrink or erase the benefit.
- At 12% or 22%, a $100,000 deduction saves $22,000 instead of $37,000, the fee doesn't change.
- Recapture applies on a gain: Section 1245 at ordinary rates up to 37%, unrecaptured Section 1250 at a 25% cap and a short hold can convert 25% gain into 37% recapture.
- A study is genuinely net-negative for tax-exempt/IRA-held property, expected sales at a loss, and passive investors with no offset and no exit.
An honest firm will tell you when a study isn't worth it, before you pay for one.
Want to know whether a study fits your property? Request a free proposal. You'll get an expected-benefit estimate up front, even if the answer is "not right now."
