Summary of What This Blog Covers:
- What Cost Segregation Is and Why It Matters for Real Estate Investors
This blog breaks down how cost segregation works, explaining how investors can accelerate depreciation on certain components of a property (like flooring, HVAC, and lighting) and legally reduce their taxable income faster than the standard IRS depreciation schedule allows. - How to Know if Cost Segregation Is Right for Your Portfolio
Learn the conditions that make cost segregation ideal: owning a property worth $500,000+, planning to hold long-term, or needing to offset high taxable income. The blog also covers common misconceptions about cost segregation and clarifies why it’s a smart strategy even for smaller investors, not just large corporations. - The Process of Implementing Cost Segregation, Step by Step
From initial consultation through the detailed engineering report and IRS Form 3115 filing, this blog outlines how Insogna CPA helps clients execute cost segregation smoothly while staying fully compliant with the IRS and maximizing return on investment. - How Cost Segregation Fits Into a Larger Wealth-Building Tax Strategy
Readers will discover how this strategy works alongside other tools like capital gains tax planning, 1031 exchanges, bonus depreciation, and entity structuring. With support from certified public accountants, chartered professional accountants, and enrolled agents at Insogna CPA, investors can unlock multi-layered tax advantages across their real estate portfolio.
Own Rental Property? This IRS-Approved Tax Hack Could Save You Thousands. Here’s What You Need to Know:
We’ve been in this game together long enough that I can be honest with you. You’re crushing it with your properties whether that’s long-term rentals, short-term Airbnb-style units, or commercial investments, but when it comes to your taxes?
Let’s just say there’s probably room to do better. Much better.
Because if you’re still depreciating your entire property over 27.5 or 39 years, year after year, you’re giving the IRS way more than you need to. And honestly? It’s probably costing you opportunities to scale.
That’s where cost segregation comes in. This IRS-sanctioned strategy lets you take advantage of the fact that not every part of your property ages at the same rate, and it’s one of the most effective tools to unlock tax savings today.
As a leading CPA firm in Austin, Texas, we at Insogna CPA specialize in helping real estate investors, developers, and entrepreneurs like you use cost segregation to reduce taxable income, increase short-term cash flow, and build a better financial plan for the long haul.
Let’s get into it.
Depreciation: The Standard Method (And Why It’s Slowing You Down)
First, let’s talk about the method everyone uses but few truly understand.
When you purchase a property, the IRS allows you to recover the cost of the structure (not the land) over time:
- Residential rental properties: 27.5 years
- Commercial properties: 39 years
This “straight-line depreciation” method allows you to deduct a portion of the property value each year on your IRS Form 1040 or 1040 ES.
For example:
- Buy a $1 million residential rental
- Allocate $800,000 to the building
- Depreciate it over 27.5 years = ~$29,090/year in deductions
It’s slow, steady, and safe but it’s also underwhelming. Especially if you’re trying to reduce your tax liability and reinvest earnings now, not 27 years from now.
Enter Cost Segregation: The Fast Track to Tax Savings
Cost segregation is an IRS-approved method that allows property owners to break down their building into different components, each with its own depreciation schedule.
Think about it: the carpet in your rental won’t last 27 years. Neither will the appliances, cabinets, light fixtures, HVAC systems, or landscaping.
So instead of depreciating everything on one 27.5- or 39-year timeline, cost segregation reclassifies parts of your property into:
- 5-year property (appliances, carpets, decorative lighting)
- 7-year property (office furniture, fixtures)
- 15-year property (driveways, fencing, landscaping)
This allows you to accelerate a large portion of your depreciation into the early years of ownership.
How Much Can Cost Segregation Save You? Let’s Look at the Numbers
Let’s walk through a real example.
You buy a $2 million commercial building:
- Allocate $400,000 to land (non-depreciable)
- $1.6 million to the structure
Standard Depreciation:
- $1.6M ÷ 39 years = ~$41,025/year in deductions
With Cost Segregation:
- $500,000 identified as short-life assets
- Deducted over 5 to 15 years
- Potentially $150,000 or more in year-one depreciation
That $150K write-off could:
- Offset high-income earnings
- Eliminate tax owed for the year
- Allow you to reinvest in another property
- Cover improvements, marketing, or even pay down principal
Multiply that across a growing portfolio, and cost segregation becomes a compounding advantage.
When Cost Segregation Makes the Most Sense
While cost segregation is powerful, it’s not always the right move. It works best for investors who:
- Own properties worth $500,000 or more
- Recently purchased, renovated, or constructed real estate
- Expect high income in the current or upcoming year
- Plan to hold the property long-term (5+ years)
- Are looking to reduce self-employment tax or pass-through income tax
- Want to offset capital gains tax from other investments
If you’re self-employed, receiving pass-through income via an LLC or S-Corp, or planning a 1031 exchange, this strategy can be a game-changer.
Our team of Austin tax accountants, enrolled agents, and certified CPAs can help model different scenarios and find your break-even point on the cost of a study versus tax benefit.
Common Myths (and the Truth About Cost Segregation)
Myth 1: Cost segregation is only for large corporations.
Truth: It works just as well for individual property owners and small business investors with rental properties valued over $500K.
Myth 2: It increases your audit risk.
Truth: Not when done correctly. The IRS fully supports cost segregation when conducted by a qualified professional using engineering-based methodologies.
Myth 3: It’s only beneficial if done immediately after purchase.
Truth: You can apply cost segregation retroactively through a “lookback study” and file IRS Form 3115 to catch up missed depreciation. All without amending past returns.
Myth 4: It’s too expensive.
Truth: The ROI is often 5–10X the cost of the study. We’ll help you assess your savings before you spend a dollar.
The Process: What It Looks Like from Start to Finish
You don’t need to worry about the heavy lifting because that’s our job. Here’s how it works:
Step 1: Initial Consultation
We evaluate your property(ies), entity structure, and current tax profile. Whether you file with a 1040 form, are structured as an S-Corp, or report on a W2 form, we tailor the approach.
Step 2: Feasibility Review
We run initial estimates and savings projections to see if the numbers work. If the study’s cost doesn’t yield significant savings, we tell you up front.
Step 3: Cost Segregation Study
A team of engineers and tax pros performs a deep dive on the building. They’ll assess architectural drawings, renovation invoices, and site characteristics to identify reclassifiable assets.
Step 4: Report and Integration
The study results in a detailed report that meets IRS standards. We integrate this into your return, file Form 3115 if applicable, and update your depreciation schedule.
Step 5: Ongoing Support
We help manage the impact of these changes on your 1040 ES, 1099 NEC, 1099K, and overall cash flow forecasts so you’re not just saving now, but planning well for the future.
How This Fits Into a Larger Tax Plan
At Insogna CPA, cost segregation is just one tool in a much bigger box. We specialize in building tax strategies that align with:
- Long-term wealth creation
- Entity optimization (LLC, S-Corp, C-Corp)
- Quarterly tax forecasting
- Capital gains tax minimization
- 1031 exchange preparation and execution
- FBAR filing for foreign real estate or accounts
Whether you’re a non-resident alien investing in U.S. property, a self-employed business owner, or managing passive income across states, we bring multi-state compliance and tax efficiency to your entire operation.
Bonus Depreciation: Still Valuable in 2025
While bonus depreciation has been reduced from 100% to 60% in 2025, it still creates massive upside when paired with cost segregation. If you’re planning renovations or buying another property this year, now’s the time to act before the phasedown continues.
FAQs About Cost Segregation
Q: Will I have to pay more tax when I sell the property?
A: Possibly. It’s called depreciation recapture, but it’s often offset by reduced tax liability today. Plus, we help plan exits using tools like the 1031 exchange to defer gains and roll depreciation into your new asset.
Q: Can I do this for short-term rentals or Airbnbs?
A: Absolutely, especially if they’re owned personally or via an LLC. If you materially participate, the benefits can be even greater depending on your tax classification.
Q: Can I do this if I bought my property 3 years ago?
A: Yes, via a lookback study. We’ll file IRS Form 3115 and apply the depreciation retroactively without amending your prior returns.
Q: What if I own multiple properties?
A: Even better. We can batch studies to reduce costs and amplify deductions across your full portfolio.
Why Work With Insogna CPA?
We’re more than just a tax preparer near you. We’re your strategic financial partner. Here’s what sets us apart:
- One of the most referred CPA firms in Austin, Texas
- Deep expertise in real estate taxation, depreciation, and compliance
- A team of certified professional accountants, licensed CPAs, and chartered public accountants
- Full integration with QuickBooks, payroll, and back-office systems
- Proven success working with self-employed entrepreneurs, real estate syndicators, and high-net-worth clients
Let’s Find Out What Cost Segregation Can Do for You
If you’ve never had a cost segregation analysis done, odds are you’re overpaying in taxes possibly for years. But with the right plan, the right team, and the right strategy, you can change that starting this year.
Schedule your consultation with Insogna CPA today.
Let’s analyze your property, walk through the potential savings, and build a tax plan designed to reduce your burden and increase your ability to grow. Because tax strategy isn’t just about this year, it’s about building wealth smarter. And that’s what we’re here to do. One property at a time. One tax-saving move at a time. One long-term partnership at a time...