The Honest Answer: It Depends on Your Property and Tax Situation
Cost segregation is one of the most powerful tax strategies available to real estate investors. But it's not right for everyone.
After completing 1,000+ studies analyzing over $1 billion in real estate, we've identified exactly when cost segregation delivers exceptional ROI—and when the math doesn't justify the investment. This framework helps you make that decision in minutes, not weeks.
The short version: If your property has $300k+ in depreciable basis and you're in a 30%+ tax bracket, cost segregation is almost certainly worth it. But there are important nuances that can dramatically shift the equation.
Author's note (Sam Young, EA): I've guided hundreds of investors through this exact decision. The framework below distills patterns from our full database. It's the same logic we use internally when advising clients—including the cases where we tell people NOT to pursue a study.
The Quick Decision Matrix
Before diving into details, here's a fast screen based on our data:
| Your Situation | Is It Worth It? | Expected ROI |
|---|---|---|
| Property $500k+, 35%+ tax bracket, hold 3+ years | Almost always yes | 15x–40x+ |
| Property $300k–$500k, 30%+ bracket | Usually yes | 8x–20x |
| Property under $300k depreciable basis | Marginal — run the calculator first | 3x–8x |
| Tax-exempt entity or 0% bracket | No — no tax to offset | 0x |
| Selling within 12 months | Probably not — recapture reduces benefit | 1x–3x |
| REPS + high W-2 income + rental properties | Absolutely yes — highest ROI scenario | 25x–50x+ |
| STR with < 7-day average stay | Strong yes — no passive activity limits | 20x–40x+ |
Not sure where you fall? Run the free calculator for a property-specific estimate in 60 seconds.
The 5 Factors That Determine Your ROI
Factor 1: Depreciable Basis (The Foundation)
What it is: Purchase price minus land value. This is the total amount eligible for depreciation.
Why it matters: Cost segregation reclassifies a percentage of your depreciable basis to shorter schedules. A bigger basis means bigger absolute savings.
| Depreciable Basis | Typical Tax Savings (Year 1, 35% bracket) | Verdict |
|---|---|---|
| $1M+ | $70,000 – $150,000+ | Strong candidate |
| $500k – $1M | $35,000 – $70,000 | Good candidate |
| $300k – $500k | $20,000 – $35,000 | Worth evaluating |
| Under $300k | Under $20,000 | Marginal — study fee reduces net benefit |
Key insight: With Overline's pricing starting at $499 (roughly 50% of traditional firms), the minimum threshold where cost segregation makes sense drops significantly. A property that wouldn't justify an $8,000 traditional study might easily justify a $2,000–$4,000 Overline study.
Factor 2: Your Tax Rate (The Multiplier)
Cost segregation creates deductions, not credits. The value of those deductions depends entirely on your marginal tax rate.
| Combined Tax Rate | Savings per $100k Reclassified | Impact |
|---|---|---|
| 47%+ (37% federal + 10% state) | $47,000+ | Maximum benefit |
| 35%–45% | $35,000–$45,000 | Strong benefit |
| 24%–34% | $24,000–$34,000 | Moderate benefit |
| Below 22% | Under $22,000 | Reduced benefit — still worth calculating |
| 0% (tax-exempt) | $0 | Not applicable |
Pro tip: If your income fluctuates, time your cost segregation study for a high-income year to maximize the deduction's value. This is especially powerful for business owners, salespeople on commission, or anyone expecting a windfall.
Factor 3: Property Type (The Range Driver)
Different property types have dramatically different reclassification potential. This is the data from our 1,000+ study database:
High reclassification (30%–44%):
- Full-service restaurants, hotels, medical offices, luxury multifamily
- More specialty systems = more reclassifiable components
Moderate reclassification (24%–35%):
- Single-family rentals, offices, retail, standard multifamily
- Solid returns for most investors
Lower reclassification (15%–28%):
- Warehouses, industrial, simple construction
- Still worthwhile at $500k+ basis, but lower percentage moves
The difference is meaningful: A $2M restaurant might reclassify $880,000 (44%), while a $2M warehouse might reclassify $400,000 (20%). Same purchase price, very different tax outcomes.
Factor 4: Hold Period (The Time Value)
Cost segregation front-loads depreciation. The benefit comes from the time value of money—tax dollars saved today are invested and compounded.
| Hold Period | Impact on ROI | Notes |
|---|---|---|
| 5+ years | Maximum benefit | Full time-value compounding |
| 3–5 years | Strong benefit | Most of the value captured |
| 18 months – 3 years | Moderate benefit | Recapture reduces but doesn't eliminate benefit |
| Under 18 months | Minimal or negative | Depreciation recapture on sale may offset gains |
Important about recapture: When you sell, accelerated depreciation is recaptured at up to 25%. However:
- Time value still favors early deduction in almost all 3+ year scenarios
- 1031 exchanges defer recapture indefinitely—if you exchange into another property, you keep the accelerated depreciation benefit without triggering recapture
- With 100% bonus (now reinstated), the front-loaded benefit is so large that even moderate hold periods produce excellent returns
Factor 5: Your Ability to Use the Deductions (The Unlock)
Having a large depreciation deduction is only valuable if you can actually use it. Passive activity rules can limit deductions for some investors:
No limitations (deductions fully usable):
- You qualify as a Real Estate Professional (REPS) under IRC §469(c)(7) — 750+ hours/year in real property trades
- You operate short-term rentals with average guest stays under 7 days (material participation required)
- The property generates active business income (not passive rental)
Passive activity limitations apply:
- Standard rental income without REPS status
- Deductions may only offset passive income from other rentals or passive activities
- Excess deductions carry forward to future years (not lost, but delayed)
Key insight: If you have passive activity limitations, cost segregation still creates value—the deductions accumulate and offset future rental income or are released when you sell. But the highest-ROI scenarios involve REPS qualification or STR operators who can use deductions against all income types.
Learn more about REPS and STR strategies.
Real Scenarios from Our Database
Scenario 1: The Clear "Yes" — W-2 Professional with REPS
| Detail | Value |
|---|---|
| Investor | Tech executive, $450k W-2 income |
| Property | 12-unit apartment, $1.8M purchase |
| Land value | $360,000 (20%) |
| Depreciable basis | $1,440,000 |
| Reclassified | 32% = $460,800 |
| With 100% bonus | $460,800 deducted year one |
| Tax savings (47% rate) | $216,576 first year |
| Study cost (Overline) | ~$3,500 |
| ROI | 62x |
Why it works: REPS status lets this investor offset W-2 income, and the high combined tax rate maximizes the value of every dollar of depreciation.
Scenario 2: The Clear "Yes" — Short-Term Rental Operator
| Detail | Value |
|---|---|
| Investor | Physician, $350k W-2 income |
| Property | Luxury vacation rental, $850k purchase |
| Land value | $170,000 (20%) |
| Depreciable basis | $680,000 |
| Reclassified | 30% = $204,000 |
| With 100% bonus | $204,000 deducted year one |
| Tax savings (42% rate) | $85,680 |
| Study cost (Overline) | ~$1,800 |
| ROI | 48x |
Why it works: STR with under 7-day average stay + material participation = deductions offset all income types without REPS.
Scenario 3: The "Run the Numbers" — Standard Rental
| Detail | Value |
|---|---|
| Investor | Engineer, $180k W-2, no REPS |
| Property | Single-family rental, $425k purchase |
| Land value | $85,000 (20%) |
| Depreciable basis | $340,000 |
| Reclassified | 28% = $95,200 |
| Passive activity limits | Yes — can only offset rental income |
| Annual rental profit | $12,000 |
| Study cost (Overline) | ~$800 |
Analysis: The $95,200 deduction can only offset $12,000/year in rental income (passive limits). Excess carries forward. Still creates value over time—and all deductions are released at sale. At $800 study cost (vs. $4,000+ at traditional firms), the math works even with passive limitations. With traditional firm pricing, it might not.
This is why our pricing model expands who can benefit from cost segregation.
Scenario 4: The Honest "No"
| Detail | Value |
|---|---|
| Investor | Retiree, 12% tax bracket |
| Property | Small duplex, $220k purchase |
| Land value | $55,000 (25%) |
| Depreciable basis | $165,000 |
| Reclassified | 26% = $42,900 |
| Tax savings (12% rate) | $5,148 |
| Study cost | ~$500–$1,000 |
Our honest assessment: The savings are real but modest. At a 12% bracket with $165k basis, the first-year benefit barely exceeds the study cost. We'd recommend waiting until a higher-income year, or combining this with other rental properties for a portfolio study at a reduced per-property rate.
We'd rather tell you "not now" than sell you something that doesn't deliver strong ROI. That's why we offer the free calculator—so you can screen before spending anything.
The 100% Bonus Depreciation Game-Changer
The reinstatement of 100% bonus depreciation (July 2025) dramatically shifts the "is it worth it?" calculation:
Before (phased-down bonus): Reclassified assets depreciated over 5–15 years using MACRS. Benefits were meaningful but spread over multiple years.
Now (100% bonus): Reclassified assets are fully deducted in year one. The entire accelerated depreciation benefit hits your return immediately.
| Metric | Without Bonus | With 100% Bonus |
|---|---|---|
| Year 1 benefit | 20%–40% of reclassified amount | 100% of reclassified amount |
| Break-even timeline | 1–3 years | Immediate |
| ROI multiplier | 5x–15x typical | 15x–50x+ typical |
Bottom line: Properties that were marginal candidates before 100% bonus are now strong candidates. The threshold for "worth it" has dropped significantly.
Common Objections (And Our Honest Responses)
"Won't I just pay it back in recapture when I sell?"
Partially true. Recapture at sale is taxed at up to 25% on the accelerated portion. But:
- Time value: Cash saved today and invested for 5+ years almost always exceeds the recapture cost
- 1031 exchanges: Defer recapture indefinitely by exchanging into another property
- Step-up at death: If held until death, heirs receive a stepped-up basis eliminating all depreciation recapture
- Lower rate: Recapture is taxed at max 25%, which may be lower than the 37%+ rate at which you took the original deduction
"I already did my taxes for the purchase year—is it too late?"
No. You can do a look-back study and claim all missed depreciation in the current year using Form 3115 (change in accounting method). No amended returns needed. This is one of the most underutilized strategies we see.
"My CPA says it's too aggressive."
Cost segregation is explicitly supported by the IRS through the Cost Segregation Audit Techniques Guide. It's not aggressive—it's standard practice for institutional investors. The key is having a properly engineered study with defensible classifications. CPAs who are unfamiliar with cost seg sometimes confuse it with more aggressive strategies. A properly documented study by qualified engineers has decades of court case support.
"The study costs too much for my property."
Traditional firms charge $5k–$15k+, which does price out smaller properties. That's exactly why we built Overline with AI-assisted studies starting at $499. Run the free calculator to see if your ROI justifies the investment at our pricing—you might be surprised.
The Decision Checklist
Use this checklist to make your final decision:
Green lights (strong candidate):
- Depreciable basis above $300k
- Combined tax rate above 30%
- Planning to hold 3+ years
- REPS status or STR operator
- Property type with 25%+ reclassification potential
Yellow lights (evaluate carefully):
- Depreciable basis $150k–$300k
- Passive activity limitations with no REPS path
- Planning to sell within 2 years
- Tax rate below 25%
Red lights (likely not worth it):
- Depreciable basis below $150k
- Tax-exempt or 0% bracket
- Selling within 12 months
- Already fully depreciating through other methods
Frequently Asked Questions
Q: What's the minimum property value for cost segregation to make sense? A: With Overline's pricing starting at $499, properties with $300k+ in depreciable basis generally produce meaningful net savings. At traditional firm pricing ($5k+), the threshold is closer to $500k–$750k. Run the free calculator for your exact ROI.
Q: Can I do cost segregation on multiple properties at once? A: Yes. Portfolio studies often qualify for reduced per-property rates, making cost segregation worthwhile even for smaller individual properties that might not justify a standalone study.
Q: Does cost segregation make sense for properties I plan to 1031 exchange? A: Absolutely. Cost segregation maximizes your cash flow during the hold period, and 1031 exchange defers all depreciation recapture. This is actually one of the best combinations in real estate tax strategy—accelerated deductions now, deferred recapture later.
Q: What if I'm unsure about my hold period? A: As a general rule, if you're planning to hold for at least 2 years, cost segregation is likely worth evaluating. The longer you hold, the more the time value of money works in your favor. Even if you sell earlier than planned, the 100% bonus depreciation benefit is large enough to produce positive ROI in most scenarios above 18 months.
Q: How do I know if I qualify as a Real Estate Professional? A: REPS requires 750+ hours per year in real property trades or businesses AND more time in real estate than any other occupation. This is easier to qualify for than many investors think—especially if your spouse qualifies. See our detailed REPS guide for the full breakdown.
Ready to Find Out?
Stop guessing. Get a property-specific estimate in 60 seconds using the free calculator. You'll see your estimated reclassification, first-year tax savings, and ROI based on real data from 1,000+ completed studies.
If the numbers work, we'll deliver an IRS-compliant study at 50% of traditional firm pricing—with full transparency and engineer review of every number.
Continue Reading
Explore more cost segregation guides from our library:
- How to Choose a Cost Segregation Provider — The 10-point evaluation checklist
- Best Cost Segregation Companies Compared — Side-by-side comparison of all provider types
- Affordable Cost Segregation Options — Engineering studies starting at $499
- Cost Segregation for W-2 Earners Making $250K+ — The complete guide for high-income professionals
- Cost Segregation vs. Straight-Line Depreciation — Side-by-side comparison with real numbers
- How Much Does Cost Segregation Save? — Actual savings ranges by property type from our $1B+ database
- Cost Segregation Audit Risk — What actually triggers IRS scrutiny
Disclaimer: This framework is based on observed patterns from 1,000+ engineering-based cost segregation studies and is for informational purposes only. Individual results vary based on specific property conditions, tax situations, and other factors. This content does not constitute tax, legal, or financial advice. Consult qualified professionals regarding your specific circumstances.