How to use a real estate cost segregation study to save during tax time: A six-step checklist for property managers

Knowing how to deduct depreciation from taxable rental income is one thing, but knowing how to maximize those deductions takes savings to another level. With a real estate cost segregation study, you can help clients unlock thousands of dollars in additional cash flow each year and keep more of what their properties earn.

In this article, we’ll explain what a cost segregation study is, how it can reduce your clients’ income tax bills, and the practical steps to put it to work in your property management business.

Pro tip: We’ve also created a summary PDF that covers each step in the cost segregation study process. Download it at the top of this page.

Overview of Real Estate Cost Segregation

Before exploring how to conduct a real estate cost segregation study, it’s important to understand what the process involves and why it matters for property managers. Let’s start with a clear definition and the core idea behind it.

What Is Cost Segregation?

Cost segregation is a tax strategy that accelerates depreciation deductions by separating a property into different components. This allows you to depreciate certain components more quickly, according to rules set by the IRS.

For example, instead of depreciating an entire building over the standard 27.5 years for residential properties or 39 years for commercial properties, you might be able to depreciate certain components—such as flooring, cabinetry, or appliances—over 5, 7, or 15 years.

Benefits of Cost Segregation for Property Managers

By depreciating parts of a rental property faster, you can help clients take advantage of tax deductions sooner, lowering their taxable income and increasing their cash flow and ROI. Furthermore, this frees up cash to invest in additional properties and grow their rental portfolio.

Over time, cost segregation can boost your property management earnings, too, by increasing client satisfaction and the number of rental properties you manage.

Depreciation and Its Impact on Real Estate Investments

Simply put, deducting property depreciation from your clients’ taxable income can help them recover their investment costs faster.

For example, instead of depreciating a rental property over the standard 27.5 years, you could depreciate some of its components over 5, 7, or 15 years, cutting your client’s tax bill each year. This would boost their cash flow and accelerate the speed at which they break even.

Understanding the Basics of Depreciation

There are a few different types of depreciation to untangle if you want to start using them for deductions.

Types of Depreciation in Real Estate

In real estate, there are three main types of depreciation:

• Straight-line depreciation: This is the most common method. It involves depreciating a building evenly over its useful life (27.5 years for residential or 39 years for commercial).
• Accelerated depreciation: This method involves frontloading deductions in the early years of ownership, such as when using cost segregation.
• Bonus depreciation: This is a special allowance that lets owners deduct a large portion of eligible property costs in the first year. Review current tax laws to determine the available bonus depreciation options.

The Role of the IRS and Tax Codes

The IRS enforces the tax code by which rental owners can depreciate property. As a result, you must check the tax code for the latest depreciation regulations. To see the IRS’ exact criteria, take a look at Section 1250, which defines depreciable property.

How Depreciation Affects Tax Liabilities and Cash Flow

Depreciation lowers your taxable income, which reduces your tax liability. With fewer taxes to pay, property owners can keep more of their rental income and boost cash flow. They can then reinvest these savings into property improvements or additional investments.

That said, if the owner sells the property, the portion of the gain attributable to depreciation may be taxed at a higher rate through depreciation recapture (up to 25%). In other words, depreciation provides greater short-term than long-term tax benefits.

Now here’s how to approach cost segregation for your landlord clients:

Step 1: Prepare for a Cost Segregation Study

First, get your client’s property information and finances in order.

Evaluate Eligibility for a Cost Segregation Study

Most rental properties qualify for a cost segregation study, but that doesn’t always mean it’s the right move. Generally, the higher the rental income and tax liability, the more valuable a study becomes. Since there’s more taxable income to reduce. In these cases, the potential tax savings often outweigh the upfront cost of the study, making it a worthwhile strategy.

Choose the Right Time to Conduct a Study

The best time to conduct a cost segregation study is in the year you purchase, build, or renovate a property. This lets you maximize the immediate tax benefits by frontloading the depreciation deductions. However, you may also be able to perform a “look-back” study on property you purchased years ago to claim missed depreciation.

Gather Required Documentation

A successful cost segregation study will require documents related to:

• Property details: Address, property type, year built, square footage
• Acquisition and renovation costs: Closing documents, invoices, contractor receipts
• Construction blueprints and plans: Architectural drawings, engineering records
• Inspection reports: Appraisals, condition assessments

Step 2: Select a Qualified Cost Segregation Professional

While you can perform your own cost segregation study, it’s generally not recommended. Instead, hire an expert to do the work for you.

Credentials to Look for in a Specialist

A cost segregation study requires tax, real estate, and engineering expertise. Seek out a specialist or company with experience in all of the above. Then check online reviews from their past clients to verify their reputation.

Questions to Ask Potential Consultants

To evaluate a cost segregation consultant, ask questions that reveal both their experience and their approach to compliance and client support, including:

“How many studies have you completed in the last year?”

Frequent, recent experience shows the consultant stays current with IRS rules and industry best practices.

“What’s your process for ensuring IRS compliance?”

They should be able to explain how they document findings and follow the IRS Cost Segregation Audit Techniques Guide.

“Can you provide examples of tax savings for similar properties?”

Ask for case studies or sample reports that show how their work has helped clients with properties comparable to yours.

“Do you collaborate with accountants or tax advisors?”

Coordination ensures the study results translate accurately into your clients’ tax filings.

Fee Structures and Services

Make sure you understand the cost segregation service’s fee structure. For example, do you pay a flat fee or a percentage of the tax savings? You also want to confirm the exact services included and the project timeline to avoid misunderstanding and potential disputes.

Step 3: Conduct the Cost Segregation Study

After you’ve hired a cost segregation specialist, the study can begin.

Onsite Inspection and Data Collection

First, the specialist will collect property documents from you and perform a physical property walkthrough. This lets them gather evidence of the building’s materials, systems, and finishes as well as their condition.

Identifying and Classifying Assets for Depreciation

The key property components to be classified in a cost segregation study include:

• Structural components: These include the walls, roof, HVAC systems, plumbing, etc. and are generally depreciated over the life of the building.
• Personal property: These include items not part of the building’s structure, such as furniture, fixtures, and equipment. They can often be depreciated over 5 to 7 years.
• Land improvements: These include sidewalks, landscaping, parking lots, and other changes outside the main building structure and are often depreciated over 15 years.

Step 4: Analyze the Results of the Study

Once the cost segregation study is complete, you’ll receive a detailed report from your specialist to look over.

Review the Cost Segregation Report

The report will outline which property components were reclassified into shorter depreciation categories, along with the calculations to support those reclassifications. Make sure the report is detailed, well-documented, and IRS-compliant.

Understand Reclassification Recommendations

Not all reclassifications have the same impact. For example, moving carpeting or appliances into a 5-year depreciation schedule may have a much bigger effect than reclassifying sidewalks into a 15-year schedule. Work with your consultant to weigh the most impactful changes.

Project Future Tax Savings

The report should also include estimates of annual and total tax savings of the property’s life. Share these projections with your client to highlight the value of the study. This not only strengthens your relationship with them but also reinforces your role as a trusted partner.

Step 5: Implement the Study Findings

With the study results in hand, it’s time to put them into practice.

Update Depreciation Schedules

Work with your client (or their accountant) to update depreciation schedules in their financial records. This ensures that the reclassified assets start generating accelerated deductions.

File Amended Tax Returns

If the study applies to properties acquired in prior years, your client may be eligible to file amended returns to capture missed depreciation. This can result in significant refunds from previous overpayments, so encourage clients to consider this option.

Collaborate with Accountants and Tax Advisors

Cost segregation studies work best when property managers, tax professionals all work together. By keeping communication open, you can ensure your client takes full advantage of every tax benefit while staying compliant with IRS rules.

Step 6: Monitor and Update Depreciation Strategy

A cost segregation study isn’t just a one-and-done project. To maximize benefits, you’ll need to revisit the strategy periodically.

Regularly Review Asset Depreciation

As property assets reach the end of their shorter depreciation schedules, review your client’s books to ensure these changes are recorded. This helps keep depreciation deductions accurate and up to date.

Adjust Strategies for Property Improvements or Changes

Whenever a property is upgraded or renovated, you may be able to perform supplemental cost segregation analysis. This lets you capture additional deductions tied to new investments.

Keep Up with Changes in Tax Regulations

Tax laws are constantly evolving, and depreciation rules can shift from year to year. Staying informed (or partnering with tax advisors who do) ensures your clients always remain compliant while maximizing available deductions.

Software to Run Studies Faster and Keep Your Books in Check

Even with the clear benefits of a cost segregation study, devoted already strained team resources to conducting one could be a tough call. The right software lifts that burden, so that managing the process becomes simple and efficient. Purpose-built platforms such as Buldium can:

• act as a central repository to store all your important documents and records for each property, lease, maintenance project, transaction, and other important factors that can inform your study.
• consolidate communication with owners in a convenient portal that both makes it easy to post and access records and creates self-service options for owners to get the details they need without having to constantly reach out to your team.
• provide easy-to-use accounting and tax filing tools that keeps your records organized and lets you prep important forms such as 1099s in batches with a few clicks—and well ahead of tax season.

By tapping into these features, you’ll cut down on all the prep work and back and forth communication that goes into a cost segregation study and won’t have to choose between running one and focusing on other important tasks.

Bringing It All Together: Turning Tax Savings into Growth

Helping clients take advantage of a real estate cost segregation study reduces their tax burden, which helps you build long-term trust and positions you as a proactive partner in their success. When you can show owners exactly how much faster they can recover their investment costs, you add measurable value to every property you manage.

With clear steps, the right professional guidance, and software that supports your financial reporting and documentation, you can turn tax strategy into a lasting business advantage.

Key Takeaways

• Cost segregation accelerates depreciation to unlock faster tax deductions and stronger cash flow.
• Property managers play a key role in coordinating the process and ensuring IRS compliance.
• Partnering with experienced specialists maximizes value and minimizes risk.
• Updating depreciation schedules and maintaining accurate records delivers long-term benefits for clients.
• Buildium makes it easier to manage renovation projects, expenses, and tax reporting in one platform.

If you’re ready to put your plan into action, start by building your software toolkit. Buildium makes finding the right tools for the job easy with a no‑risk 14‑day free trial and live, guided demo so you can start coordinating all your property management tasks on a single platform.

Frequently Asked Questions

What is the 80/20 rule for depreciation?

The 80/20 rule is a general guideline suggesting that about 20% of a property’s value represents the land, while the remaining 80% represents the building and improvements that can be depreciated. It’s not an IRS regulation, but a common starting point for estimating depreciation. Since every property is different, it’s best to verify your allocation with documentation or an appraisal to support the ratio if audited.

How long does it take to do a cost segregation study?

Most cost segregation studies take around 45 to 60 days to complete, depending on the size of the property and the complexity of its construction. Larger properties or those with extensive renovations may require more time to collect records and conduct the on-site review. Starting early in the tax year helps ensure the results are ready for your client’s next return.

What is a real estate cost segregation study, and how does it benefit property managers?

A cost segregation study identifies and reclassifies parts of a building into shorter depreciation schedules, allowing owners to deduct expenses faster. For property managers, it’s a chance to add value by helping clients reduce taxable income and increase cash flow—funds that can then be reinvested in new properties or improvements. It also strengthens your role as a trusted financial advisor.

How can a cost segregation study maximize depreciation on my property?

The study separates building components such as fixtures, flooring, or landscaping into shorter depreciation categories. Accelerating these deductions lets property owners recover costs sooner, improving near-term cash flow and return on investment. Over time, this strategy can free up capital for upgrades or portfolio growth.

What are the steps involved in conducting a cost segregation study?

A typical cost segregation study involves preparing documentation, hiring a qualified specialist, conducting an on-site inspection, analyzing and classifying assets, and applying the results to updated tax schedules. Once the study is complete, property managers can help coordinate with accountants to capture the deductions accurately and maintain compliance.

Are there specific types of properties that benefit most from cost segregation studies?

Properties with high rental income, substantial renovation costs, or new construction usually gain the most value from a cost segregation study. Multifamily and mixed-use buildings often qualify, but even smaller residential portfolios can benefit if the property has significant improvements or fixtures that can be depreciated faster.