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Yes. A single-family rental, a duplex, a triplex or a fourplex can support a cost segregation study, and the size of the property is not what decides whether the study makes sense. A fully engineered and accounted study separates the cost of the house into the components the code lets you depreciate faster than the building: 5-year, 7-year and 15-year property instead of the 27.5-year structure. For property acquired and placed in service after January 19, 2025, those components take 100 percent bonus depreciation in the first year under the One Big Beautiful Bill Act. On a $450,000 rental house that means a first-year deduction several times the standard schedule.
The catch comes first. Whether that bigger deduction reduces your tax bill this year depends on a question that has nothing to do with engineering: can you use the loss? The passive activity rules, the short-term rental rules, real estate professional status and the excess business loss limit decide that. One house and four owners below show how the numbers change depending on who you are.
Ray is hypothetical. He is a nurse practitioner in Corpus Christi, Texas. In March 2025 he bought a three-bedroom single-family house for $450,000 and rented it to a long-term tenant. Her CPA mentioned cost segregation at a year-end meeting, and his first reaction was the one most owners of smaller rentals have: that cost segregation was for apartment complexes and shopping centers, and a single house was beneath it.
That reaction is out of date. A house has carpet, appliances, specialty electrical, window coverings, a driveway, fencing, a patio, landscaping and exterior lighting, none of which are structural components, and the code has never required them to be depreciated as if they were. Property size changes the dollar amount of the benefit; the opportunity is the same. We will follow Ray's purchase and then change the facts, because the right answer for a house depends far more on the owner than on the structure.
Residential rental property is depreciated straight-line over 27.5 years with the mid-month convention. Residential rental property means a building where at least 80 percent of the gross rental income comes from dwelling units, which covers single-family homes, duplexes, triplexes, fourplexes and apartment buildings. Nonresidential buildings use 39 years. Two features of that baseline matter here.
On the standard schedule, with a March placed-in-service date, the IRS mid-month table gives Ray a first-year rate of 2.879 percent, so his first-year deduction is $10,364. After that, depreciation runs at $13,091 a year until 2052. It is a respectable deduction, and it is slow.
A study examines the property, its purchase price and the components inside it, and assigns each component to the class the code and the IRS's own guidance recognize. The IRS describes the standards for a quality study in its Cost Segregation Audit Techniques Guide, Publication 5653. A study built to those standards uses actual cost data and a real review of the property: on larger properties an in-house analyst does a proper inspection, and on a house the team does a live video walkthrough with you or you follow a guided photo and video checklist and the team reviews every frame. The classes break down this way, where the engineering supports each item.
Section 168(k) allows bonus depreciation on property with a recovery period of 20 years or less, which captures the first three categories. For property acquired and placed in service after January 19, 2025, the One Big Beautiful Bill Act set bonus at 100 percent and made it permanent. Bonus is automatic; the election is to opt out. Property acquired under a binding written contract signed on or before that date follows the earlier phase-down, which is why the contract date matters more than the closing date. Read more in our guide to 100 percent bonus depreciation under the OBBBA.
Back to Ray. Suppose the study reclassifies 22 percent of his depreciable basis, or $79,200, into 5-, 7- and 15-year property. Percentages vary with the finishes, the lot and the outdoor features; 22 percent is an example. With 100 percent bonus, the $79,200 is deducted in full in year one, never prorated for the month. The remaining $280,800 stays on 27.5 years and produces $8,084 of first-year depreciation at the same 2.879 percent. Her total year-one depreciation is $87,284, against $10,364 without the study. The additional deduction is $76,920.
Notice what did not change. Over the life of the property, Ray still recovers the same $360,000. A study moves deductions forward in time and creates none, and the time value of money is the reason the move matters.
A $76,920 larger deduction on a rental that earns modest net income creates a loss on paper. Whether that loss reduces what you owe depends on how the code classifies your rental activity, which is why the same study is a great decision for one owner and a poor one for the next. Rental activities are passive under Section 469 by default, and passive losses offset passive income and nothing else unless an exception applies. There are four situations worth understanding, and we will run Ray's house through each.
Ray and his wife earn $320,000 in wages and file jointly. The house is on a standard twelve-month lease, and neither of them is a real estate professional. It nets about $8,000 before depreciation, so with $87,284 of depreciation it shows a loss of $79,284.
Because the property is a passive rental and their income is over the limits, the loss does not offset their wages this year. The special allowance of up to $25,000 for rental losses, available to taxpayers who actively participate, phases out at 50 cents for every dollar of modified adjusted gross income over $100,000 and is gone at $150,000. Those thresholds are set by statute and never indexed.
The loss carries forward as a suspended passive loss. It offsets future net rental income from this house or any other passive activity, and it releases in full when the house is sold in a fully taxable transaction to an unrelated buyer. If Ray plans to hold for ten years, the study moved deductions forward within the rental activity and the suspended loss will absorb part of the eventual gain. If he was counting on the study to cut this year's tax bill, he will be disappointed, and that is worth knowing before the fee is paid. We cover the release rules in what happens to suspended passive losses when you sell.
Now change the facts. Kevin and Dana have modified adjusted gross income of $135,000 and own the same house. They screen tenants, approve repairs and set the rent, which satisfies the active participation standard. Their allowance is $25,000 reduced by half of the $35,000 by which their income exceeds $100,000, a $17,500 reduction, leaving $7,500.
Of the $79,284 loss, they use $7,500 this year against other income. The other $71,784 is suspended. Most of the acceleration is trapped. Owners in this range should model the study before ordering it; the standard schedule might serve them nearly as well until their income or their involvement changes.
Under IRC 469(j)(8) and Reg. 1.469-1T(e)(3)(ii)(A), an activity is not a rental activity if the average period of customer use is seven days or less; the average is weighted by gross rental income when there is more than one class of property. An activity outside the rental definition is tested for material participation like any other business instead of being passive by default. If you materially participate, the losses are nonpassive and offset wages.
Suppose Ray had listed the house on a vacation rental platform, a few blocks from the bay, with an average stay of four nights, and he personally spent 520 hours running it, more than any other person including his cleaner. That clears the 500-hour test; more than 100 hours and more than anyone else would also do. Gross rents are $52,000 and expenses before depreciation leave $12,000 of net income. One change in the depreciation: because average stays under 30 days make the house nonresidential property, the structure now sits on the 39-year schedule, where the March mid-month rate is 2.033 percent. Year-one depreciation is $79,200 of bonus plus $5,709 on the remaining $280,800, or $84,909, and the activity shows a loss of $72,909. Furniture he bought separately for guests is already short-lived property and takes bonus on its own receipts, on top of that.
Because the activity is nonpassive, the $72,909 offsets the couple's wages on their joint return. Section 461(l) caps the business loss usable against wages at $626,000 for joint filers in 2025, $313,000 single, adjusted annually, and they are nowhere near it. At a 37 percent federal rate, the first-year federal benefit is $26,976. We lay out the full set of requirements in our guide to the short-term rental tax strategy and the material participation rules.
Two cautions. Hours are the most examined element of this strategy, so keep a contemporaneous log. And if you use the house personally for more than the greater of 14 days or 10 percent of the days it is rented, Section 280A caps your deductions at rental income. Our article on the 14-day rule explains how to manage the calendar.
The fourth path is qualifying as a real estate professional under Section 469(c)(7): more than half of your working time and more than 750 hours in real property trades or businesses in which you materially participate, with one spouse meeting both tests alone. Status by itself does nothing for the house; you also have to materially participate in the rental activity itself, or make the election under Reg. 1.469-9(g) to treat all your rentals as one activity, before its losses are nonpassive. Then the same Section 461(l) cap applies.
This path fits a spouse who manages a small portfolio full time while the other spouse earns the household's wages, and rarely fits someone with a full-time job elsewhere. We cover it in real estate professional status and cost segregation.
Across all four, the engineering is the easy part. Settle the loss treatment first, then the study.
Size changes the cost-benefit math, because the benefit scales with the dollars reclassified while the fixed work of a study does not. Hardscaping, a pool, fencing and specialty finishes raise the share that qualifies, a higher bracket makes each dollar worth more if you can use it, and a longer hold gives the deferral more time to work. For a portfolio of small rentals, study the highest-basis properties first or time the studies across years.
Depreciation you claim reduces your basis, and when you sell, the gain attributable to that depreciation is recaptured. Gain on the 5- and 7-year property is ordinary income under Section 1245, up to the depreciation taken. On the building and the 15-year land improvements, bonus taken beyond straight-line on the land improvements is ordinary, and the rest is unrecaptured Section 1250 gain taxed at a maximum of 25 percent.
Recapture applies to depreciation allowed or allowable, so skipping the study skips the benefit and keeps the recapture. Owners manage the exposure by holding long term, using a Section 1031 exchange to defer the gain, or passing the house to heirs, who take a stepped-up basis under Section 1014.
If you bought years ago and never did a study, a lookback study measures the depreciation you could have claimed. You claim it by filing Form 3115 with your current return; the catch-up, a Section 481(a) adjustment, is deducted in the year of change at the bonus rate of the year the house was placed in service, and you do not amend prior returns. Cost Seg America prepares the Section 481(a) computation and, for a separate fee, the Form 3115 itself; your CPA files it. A lookback is strongest when your status changes, say when you convert the house to a short-term rental. If the house was your home first, the depreciable basis is the lesser of your adjusted basis or the fair market value on the conversion date, less land. The full process is in lookback studies and Form 3115.
For new buyers, the study can be completed after year end, before the return is filed; the practical deadline is your filing date, including extensions.
You do not need a study to deduct furniture. Under the de minimis safe harbor, a taxpayer without an applicable financial statement can expense items costing $2,500 or less per invoice or item by electing the safe harbor on a timely filed return. Larger items, a hot tub or a bulk furniture order invoiced as one, are depreciated as 5- or 7-year property and take bonus. The study keeps those categories separate so nothing is counted twice.
The Audit Techniques Guide describes six approaches and prescribes none. It calls detailed engineering from actual cost records the most methodical and accurate, and it says a rule-of-thumb percentage with little or no documentation should be viewed with caution. Our team works only under the first two: engineering from actual cost records where they exist, and engineering with documented estimates reconciled to the purchase price where they do not. On Ray's house that means the driveway and patio measured, the fence in linear feet, the carpet by room, each appliance and its dedicated circuit listed, and the kitchen cabinets left with the building where the courts have put them. Each item is assigned a class with a written reason on a component schedule your CPA imports into the fixed asset system and an examiner can trace line by line back to the $360,000. The report is signed by credentialed professionals, engineered in the United States, and defended for as long as you own the house, with no time limit, hour cap or additional fee: written responses and participation in examiner calls alongside your CPA. The estimated study applies a percentage to your price and hands you a number with nothing behind it. On a short-term rental loss against wages, which examiners look at, the component schedule and the hour log are the two halves of the file.
Below $180,000 of depreciable basis after land, the fee eats too much of the benefit; a $450,000 house with $360,000 of basis clears it, a $220,000 condo with a large land interest may not. If you are a high-income passive owner with no passive income and no plan to sell, the loss sits suspended and the study is a deduction waiting on a disposition. If you expect to sell within a year or two, recapture arrives before the time value has done its work. And if your income sits in the range where the $25,000 allowance is already doing the job, the standard schedule may be enough. A provider should tell you when the answer is no; our own list is in when not to do a cost segregation study.
Yes. A single-family home, duplex, triplex or fourplex held as a rental is depreciable property, and its components can be examined and reclassified like any other building's.
The code sets none. The practical floor is $180,000 of depreciable basis after land; below that the fee outweighs the present value of the deductions.
For property acquired and placed in service after January 19, 2025, yes, on the 5-, 7- and 15-year components. The acquisition date is the binding contract date, and a contract signed earlier follows the previous phase-down.
No, but it is slower. Passive losses carry forward indefinitely, offset future passive income, and release in full when you sell in a fully taxable transaction. Whether that is worth the fee depends on your holding period and your future income.
The depreciation mechanics are the same, except that transient use puts the building on 39 years. The loss treatment differs: with an average stay of seven days or less and material participation, the loss is nonpassive and offsets wages, subject to Section 280A personal-use limits and Section 461(l).
Yes. A lookback study with Form 3115 claims the missed depreciation on the current return without amending prior years, at the bonus rate of the year the house was placed in service.
Send Jim Dougherty and his team the address, the purchase price, the contract and closing dates, your land allocation, and a sentence about how the house is rented and how involved you are. You will have a free proposal in 24 hours showing what a fully engineered and accounted study would move, what it would cost, and which of the four scenarios above is yours. The study takes 30 days, with rush available. Call 1-888-365-5023 or email info@costsegamerica.com, and bring your CPA.
This article is educational and is not tax, legal or accounting advice; the example is hypothetical, thresholds are adjusted annually, and you should confirm your facts with your CPA before acting.
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