September 7, 2026 · 6 min read
What is cost segregation, and is it worth it for one rental house?
If you own a rental property, the IRS lets you deduct a portion of what you paid for it every year, on the theory that buildings wear out. For residential rental property that write-off is spread evenly over 27½ years. Buy a house for $400,000, put a value on the land, and roughly speaking the rest comes off in equal slices over nearly three decades.
The obvious problem is that a house is not one thing. The dishwasher in that house is not going to last 27 years. Neither is the carpet, the range hood, the light fittings or the fence. Those are shorter-lived items that happened to be bought at the same moment as the roof, and the tax code has always recognised that they can be depreciated over their own lives instead — five years for a lot of what is inside, fifteen for a lot of what is outside.
A cost segregation study is the exercise of going through a property, identifying those parts, working out what each one is worth, and documenting it well enough that the split can be defended. That is all it is. It is not a loophole and it is not aggressive; the IRS publishes its own audit techniques guide describing how these studies should be done and what a good one looks like.
So why has almost nobody with one house had one done?
Because of who has traditionally done them. A conventional study means engaging an engineering firm, who send somebody to walk the property, take measurements, and produce a report. That is genuinely skilled work and it is priced accordingly — typically thousands of dollars.
Against a shopping centre or an apartment block, that fee is a rounding error. Against a single rental house, it is a large share of whatever the study might be worth to you, and the arithmetic often stops making sense. So the owners of small residential properties — which is most owners — have quietly been priced out of a perfectly ordinary part of the tax code.
Is it worth it for your property?
We are not going to pretend to know, and you should be wary of anyone who tells you a number before they have seen your tax return. What a study is worth to you depends on things that have nothing to do with your house: your income, whether the property is actually rented, what else is on your return, and whether you can use a deduction in the year it lands.
What we can tell you is what the study itself is for. It answers the question "what is this property made of, and what is each part worth" — with enough documentation behind each answer that somebody else can check it. Turning that into a number on your return is your accountant’s job, and it is the right order to do things in: the study first, the tax position second.
What actually goes into one
Three things, in roughly this order. First, the facts about the property: what you paid, when you placed it in service, how big it is, and how much of the purchase price was land, since land is never depreciated at all. Second, an inventory of what is physically there. Third, a cost for each item, taken from a published construction cost book rather than guessed.
The second of those is where the work is, and it is the part that used to require a site visit. It is also the part that determines whether the study holds up: a list of components with nothing behind it is an assertion, and an assertion is not worth much if anybody ever asks where it came from.