Cost Segregation Study Example: Accelerating $500K Depreciation on 40 Units
- NCC IQ
- Aug 10
- 5 min read
Picture a freshly renovated garden-style property: forty two-bedroom units spread across five buildings, a clubhouse, parking lots, and manicured green space. The acquisition price is $4 million, with $800,000 allocated to land, leaving $3.2 million available for depreciation. A traditional straight-line schedule over 27.5 years would yield roughly $116,000 in first-year deductions. A cost-segregation study reshapes that timeline, moving a notable share of the basis into 5, 7, and 15-year buckets, and - under current bonus rules, compressing much of that into year one. The result in our sample file: roughly $500,000 of year-one depreciation, more than quadruple the conventional figure.
What Cost-Segregation Really Does
The tax code allows shorter recovery periods for personal property and certain land improvements that happen to be attached to a building. An engineer catalogs every countertop, appliance, light fixture, irrigation loop, retaining wall, and even the stripes on the asphalt, then matches each item with the applicable class life. The study’s report becomes support for re-classifying part of the building basis away from 27.5 years. Once the re-classification is accepted, bonus depreciation - 40% for assets placed in service during 2025, applies to everything in those shorter classes.
Engineering Summary for the 40 Unit Example
Category | Class life (years) | Basis re-classified | 40 % bonus captured 2025 | Year-one total* |
5-year personal property | 5 | $690,000 | $276,000 | $414,000 |
15-year land improvements | 15 | $300,000 | $120,000 | $140,000 |
27.5-year structural | 27.5 | $2,210,000 | - | $80,364 |
Total | - | $3,200,000 | $396,000 | $634,364 |
*Year-one total combines bonus with the regular first-year amount for each class using half-year convention. Rounded to nearest dollar for readability.
A single spreadsheet cannot convey the day-to-day cash-flow shift created by moving from $116,000 to $634,000 of depreciation, but any investor running an internal-rate-of-return calculation will spot the lift instantly.
Why Many Sponsors Still Skip the Study
Fear of audit exposure.
Perceived up-front cost - studies for mid-sized properties can run $12,000-$20,000.
Temporary nature of bonus percentages (the allowance phases down to 20% in 2026).
Passive-loss limitations for some limited partners.
Yet a large share of multifamily buyers fit one of three profiles:
Full-time real-estate professionals who can apply unlimited passive losses to active income.
Investors with sizable prior-year gains who plan to use carrybacks.
Partners with material participation in this asset who can pair the accelerated loss with salary, consulting, or brokerage income.
For these groups, even a 40% bonus window yields cash savings dwarfing the study fee.
Mechanics of Cash Savings in Year One
Federal ordinary bracket saved: 37%.
Net investment income tax avoided: 3.8% (when applicable).
State rate (sample assumes Georgia state): 5.75%.
Combined rate: roughly 46%. Tax shield on $500,000 accelerated: ~$230,000.
That shield either lands as a refund or trims quarterly estimates - freeing capital for CapEx, debt pay-down, or the next acquisition deposit.
Steps Sponsors Take When Ordering the Study
Kick-off call with the engineering firm - share closing statement, appraisal, renovation budget.
Site visit - field team photographs and measures each building, roofline, paving edge, and utility run.
Draft review - sponsor and CPA verify cost buckets, confirm that no capitalized improvement is double-counted.
Final report delivered - PDF plus fixed-asset detail ready for the accountant’s depreciation software.
File Form 3115 if the property was placed in service on a prior return; attach the study as support.
Average timeline: six to eight weeks from engagement letter to finished report.
A Subtle But Valuable Ripple: Exit Pricing
Buyers underwriting a disposition three to five years out often prize after-tax cash flow.
If your study front-loaded depreciation, the next owner still receives the remaining basis on an accelerated schedule - making your property marginally more attractive than a similar asset without a study. That extra appeal can shave basis points off the cap rate used by bidders, raising the eventual sale price.
Risks and guardrails
Recapture at exit: Ordinary-rate recapture applies to portions classed as 5 or 7-year personal property. Planning for that tax with a 1031 exchange or a fresh cost-segregation study on the replacement asset can soften the bite.
State conformity: A handful of states, such as New Jersey, disregard federal bonus rules. Sponsors operating in multiple jurisdictions need separate state schedules.
Qualified improvement property (QIP): Post-2017 non-structural interior upgrades qualify for 15-year life and bonus. Cataloging QIP carefully during renovations keeps depreciation consistent with current law.
How First-Time Multifamily Buyers Frame the Decision
Question | Straight-line answer | With study |
Year-one depreciation per unit | ~$2,900 | ~$15,800 |
Cash saved per unit (46 % rate) | ~$1,330 | ~$7,270 |
Breakeven hold period on study fee | Study never ordered | ~14 months |
Even a short hold, such as a bridge-to-agency refinance in year three, meets the breakeven threshold.
Conversation Starters With Your CPA
Will passive-loss limitations block me from using the deduction?
Does my state conform to federal bonus rules for 2025?
How should we model recapture if my business plan targets a sale in year seven?
Can we layer energy-credit studies (Section 179D, 45L) on top of cost segregation?
CPAs juggle busy seasons; placing these questions early keeps filing season drama to a minimum.
Cost-segregation lives at the intersection of engineering detail and tax strategy.
In the 40 unit illustration above, a move from $116,000 to $634,000 of first-year depreciation shaved roughly two hundred thirty thousand dollars from the tax bill. That’s cash staying inside the asset - or rolling into the next one, rather than leaving the ecosystem.
The landscape of bonus percentages will look different every calendar flip between now and 2027, and Congress may adjust the slope again. Even so, the underlying principle endures: front-loading deductions improves cash velocity.
For sponsors building a track record, or for limited partners seeking shelter for high-bracket wages, the study often pays for itself before the first renewal letter hits a tenant’s inbox.
Consult qualified professionals, weigh state nuances, and compare competing engineering firms. When the math lines up, a well-executed cost-segregation study transforms depreciation from a slow drip into a year-one flood - fuel that can accelerate portfolio expansion long before the roofs need replacement.
Credit: (IRS, AICPA, New Jersey Division of Taxation, Congressional Research Service)
No Offer or Solicitation
This communication is intended solely for informational and educational purposes. It does not constitute, and shall not be construed as, an offer, invitation, or solicitation to purchase, acquire, subscribe for, sell, or otherwise dispose of any real estate investments, securities, or related financial instruments. Nothing contained herein should be interpreted as a recommendation or endorsement of any specific investment strategy or opportunity. Furthermore, this communication does not represent, and shall not be deemed to constitute, the issuance, sale, or transfer of any real estate interests in any jurisdiction where such actions would be in violation of applicable laws, regulations, or licensing requirements.
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