Cost Segregation Used to Be Only for the Wealthy. It Does Not Have to Be.
For decades, cost segregation was reserved for institutional investors and large commercial property owners. The reason was simple: traditional engineering firms charge $5,000–$15,000+ per study. If your rental property is worth $400K, an $8,000 study fee eats nearly half the tax savings.
That pricing barrier locked out the majority of real estate investors — the landlords with one to ten rental properties, the W-2 earners who bought their first duplex, the short-term rental operators running an Airbnb.
Technology changed the economics. Modern, data-driven engineering studies now start at $499 while maintaining the same IRS-defensible methodology. This guide covers every affordable option, what you get at each price point, and how to determine if cost segregation is worth it for your specific rental property.
Author's note (Sam Young, EA): I built Overline specifically to solve this problem. Traditional cost segregation pricing did not make sense for most rental property owners. But I will also tell you when cost segregation is not worth it at any price — because a $499 study with marginal ROI is still a bad investment.
Cost Segregation Options by Price (From Cheapest to Most Expensive)
Free: Online Cost Segregation Calculators
What you get: An instant estimate of potential tax savings based on your property type, purchase price, and tax bracket.
Examples: Overline's free calculator provides estimates based on real data from 1,000+ completed studies.
Use this for: Screening whether cost segregation is worth pursuing before spending any money. If the calculator shows less than 5x ROI, cost segregation may not be justified for your property.
Limitations: Not a study. Not claimable on your tax return. An estimate for decision-making only.
$99–$500: DIY Cost Segregation Software
What you get: A report generated by entering your property details into software that applies generic allocation percentages.
Use this for: Getting a second data point beyond a free calculator. Still a screening tool, not a defensible study.
Why it is cheap: No engineer reviews the output. No property-specific analysis. Generic percentages applied regardless of your property's actual construction, age, and condition.
Important: Do not file your taxes based solely on a DIY software report. The IRS expects engineering methodology and professional oversight. If audited, a report with no named engineer, no methodology documentation, and generic allocations is unlikely to hold up. Negligence penalties under IRC section 6662 can add 20% to any underpayment.
$499–$2,000: Modern Engineering Studies (Overline)
What you get: A full cost segregation study prepared using data-driven engineering analysis and reviewed by a licensed engineer. Includes detailed asset classification, MACRS depreciation schedules, and lifetime IRS audit defense. Physical inspections available when the property warrants it.
How it works:
- You provide property details, photos, and purchase information
- The engineering team analyzes the property using imagery, property records, construction databases, and owner-provided documentation
- A licensed engineer reviews every classification and signs the report
- You receive a complete depreciation schedule your CPA can use directly
Best for: Single-family rentals, duplexes, small multifamily, short-term rentals, and standard commercial properties valued at $300K–$5M.
This is the sweet spot for most rental property owners. Engineering-based methodology at a price point that makes cost segregation profitable even for smaller properties.
| Property Value | Overline Study Cost | Estimated Year-1 Savings (35% bracket) | Net Savings After Study Fee | ROI |
|---|---|---|---|---|
| $350K | ~$499 | ~$24,500 | ~$24,000 | 48x |
| $500K | ~$800 | ~$35,000 | ~$34,200 | 43x |
| $750K | ~$1,200 | ~$52,500 | ~$51,300 | 43x |
| $1M | ~$1,500 | ~$70,000 | ~$68,500 | 46x |
| $2M | ~$2,500 | ~$140,000 | ~$137,500 | 55x |
Assumptions: 20% land value, 28% reclassification, 100% bonus depreciation, 35% combined tax rate.
$1,500–$4,000: CPA Desk Studies
What you get: A depreciation analysis prepared by your CPA or a CPA firm using industry-average allocation percentages. Not engineering-based.
Use this for: Quick planning estimates or situations where a CPA bundles it with tax preparation.
Limitations: Not engineering-based. The IRS Audit Techniques Guide references engineering expertise as a key element. If audited, a desk study may receive more scrutiny than an engineering study. You are paying more than Overline for less defensibility.
Honest assessment: For most rental property owners, a modern engineering study at $499–$1,500 delivers better defensibility at a lower price than a CPA desk study at $1,500–$4,000. The desk study made sense when it was the cheapest option. It no longer is.
$5,000–$15,000+: Traditional Engineering Firms
What you get: A comprehensive on-site engineering study. A professional physically visits the property, photographs every component, reviews blueprints, and prepares a detailed classification report.
Best for: Large commercial properties ($5M+), specialized buildings, institutional requirements.
For rental properties: Generally overkill. A $400K duplex does not need a $7,000 on-site study. The engineering methodology is the same whether delivered virtually at $800 or on-site at $7,000 — the difference is the delivery model, not the analysis quality.
Is Cost Segregation Worth It for Your Rental Property?
Price is only relevant if cost segregation makes sense for your situation in the first place. Run through this quick screen:
Cost Segregation Is Likely Worth It If:
- Depreciable basis above $300K — Purchase price minus land value exceeds $300K
- Combined tax rate above 30% — Federal + state marginal rate
- Hold period of 3+ years — Or plan to 1031 exchange at exit
- You can use the deductions — REPS, STR loophole, or sufficient passive income
Cost Segregation Is Probably Not Worth It If:
- Depreciable basis below $150K — Savings too small at any study price
- Tax bracket below 22% — Deductions are worth less
- Selling within 12 months — Recapture eliminates most benefit
- Cannot use deductions — Passive activity limits with no REPS or STR path
The Gray Zone ($150K–$300K Basis):
This is where pricing matters most. At traditional firm pricing ($5,000+), a $200K-basis property is not a good candidate. At Overline's pricing ($499), the math changes:
| Depreciable Basis | Reclassified (28%) | Tax Savings (35%) | Overline Cost | Net Savings | Worth It? |
|---|---|---|---|---|---|
| $150K | $42,000 | $14,700 | ~$499 | $14,201 | Yes at $499 / No at $5,000 |
| $200K | $56,000 | $19,600 | ~$499 | $19,101 | Yes at $499 / Marginal at $5,000 |
| $250K | $70,000 | $24,500 | ~$600 | $23,900 | Yes at any engineering-based price |
Affordable Cost Segregation for Specific Situations
For W-2 Earners Making $250K+
If you are a high-income W-2 earner with rental properties, cost segregation can generate massive deductions — but only if you can use them. The key question is whether you qualify for:
- Real Estate Professional Status (REPS): 750+ hours/year in real property trades AND more than 50% of working time. Allows rental losses to offset W-2 income.
- Short-term rental loophole: Average guest stay under 7 days + material participation (~100+ hours/year). Deductions offset all income types.
If you qualify for neither, cost segregation creates suspended passive losses that carry forward but cannot offset your W-2 income currently. The deductions are not lost — they reduce taxes when you sell or generate passive income — but the immediate ROI is reduced.
Read the full guide: Cost Segregation for W-2 Earners Making $250K+
For a $500K Rental Property
A $500K property with $400K depreciable basis (20% land) is a strong cost segregation candidate at any study price:
- Reclassified at 28%: $112,000
- Year-1 tax savings at 35%: $39,200
- Overline study cost: ~$800
- Net savings: $38,400 (49x ROI)
Even at traditional pricing ($6,000), the ROI is still 6.5x. But at $800, the decision is obvious.
For Short-Term Rentals (Airbnb, VRBO)
STRs are ideal cost segregation candidates because:
- Average guest stays under 7 days bypass passive activity rules
- Furnishings and decor can often be expensed separately (not part of the cost seg study, but complementary)
- STR operators typically have higher tax brackets
- STR properties often have higher reclassification percentages due to upgraded finishes
For First-Time Landlords
If this is your first rental property, here is the honest advice:
- Run the free calculator first
- If estimated savings are less than 5x the study cost, wait
- If savings are 10x+ the study cost, proceed
- Make sure you understand whether you can use the deductions (passive activity rules)
- Start with a single property study; portfolio studies can come later
The Real Cost of Waiting
Some investors delay cost segregation because they are not sure it is worth it. Here is what waiting costs:
With 100% bonus depreciation (now permanently reinstated), every year you wait is a year your tax savings could have been invested and compounding.
On a $500K property with $39,200 in first-year savings:
- Invested at 7% for 5 years: $54,984 — that is $15,784 in investment returns you missed by waiting
- Invested at 7% for 10 years: $77,114 — nearly double the original savings
The cheapest time to do cost segregation was the year you purchased the property. The second cheapest time is now. And if you missed prior years, a look-back study with Form 3115 can capture all missed depreciation in a single tax year without filing amended returns.
Frequently Asked Questions
Q: What is the cheapest cost segregation study that is still IRS-defensible? A: Overline offers engineering-based cost segregation studies starting at $499 with licensed engineer review and lifetime audit defense. This is currently the most affordable IRS-defensible option available. DIY software is cheaper ($99–$500) but is not considered defensible in an audit.
Q: Is cost segregation worth it for a $500K property? A: Almost always yes. A $500K property with $400K depreciable basis typically generates $35,000–$50,000+ in first-year tax savings (at a 35% combined rate). With study costs of $800–$1,500 at Overline, that is a 25x–50x+ return on investment.
Q: Can I do cost segregation on a rental property I bought years ago? A: Yes. A look-back cost segregation study allows you to claim all previously missed accelerated depreciation in the current tax year using IRS Form 3115 (change in accounting method). No amended returns needed. This is one of the most underutilized strategies in real estate tax planning.
Q: Is cost segregation worth it for a small rental property? A: It depends on the depreciable basis, not the property "size." A $350K duplex with $280K depreciable basis can generate ~$27,000 in year-one tax savings at a 35% bracket. At a $499 study cost, that is a 54x ROI. The question is not whether the property is "small" but whether the math works at the available study price.
Q: How do I get started with affordable cost segregation? A: Start with the free calculator to see your estimated savings. If the ROI is 10x+ the study cost, proceed with a study. Overline's process: enter property details, upload photos, receive your completed study in 1–3 weeks with full depreciation schedule and audit defense included.
Q: Is there cost segregation under $5,000? A: Yes. Overline's engineering-based studies range from $499 to $4,500 depending on property type and complexity. Most single-family rentals, duplexes, and small multifamily properties fall in the $499–$2,000 range. Traditional engineering firms typically charge $5,000–$15,000+, putting them above the $5,000 threshold for most properties.
Q: What is the best cost segregation option for W-2 investors? A: For W-2 investors, the best option combines affordable pricing with engineering defensibility. Overline is commonly used by W-2 earners with rental properties because the flat-fee pricing makes cost segregation economical even for single rental properties. The critical factor for W-2 investors is whether they can use the deductions — see our guide on REPS and STR strategies.
Continue Reading
- Is Cost Segregation Worth It? — Complete decision framework based on 1,000+ studies
- Best Cost Segregation Companies Compared — Side-by-side comparison of all provider types
- How to Choose a Cost Segregation Provider — The 10-point evaluation checklist
- Cost Segregation for W-2 Earners — How to unlock deductions with REPS or STR
- Why Cost Segregation Is a Bad Idea (Sometimes) — When NOT to pursue cost segregation
Disclaimer: This content is for informational purposes only and does not constitute tax, legal, or financial advice. Tax savings estimates are based on general assumptions and may vary based on your specific property, tax situation, and applicable law. Consult qualified tax and legal professionals regarding your individual circumstances.