The Legal Way to Reduce Taxes With Cost Segregation
I buy and hold multifamily apartments. I care about two things for my investors: steady cash flow and smart tax planning. Cost segregation helps with both.
In simple terms, cost segregation helps us speed up depreciation on parts of a property so that we can reduce taxes on that property sooner. This matters for apartment deals and other real estate syndications because timing of cash is everything.
A dollar today is worth more than a dollar tomorrow. In this post, I’ll break down what cost segregation is, who can use it, how bonus depreciation works right now, and how this saves more of your money as a passive real estate investor.
Related: The Legal Way to Reduce (or Eliminate) Taxes (Cost Segregation Explained)
What Cost Segregation Is, In Plain English
Think of normal depreciation like getting $10 back every year. With cost segregation, you reclassify parts of the building into 5-year and 15-year “buckets” and take a bigger chunk sooner.
Engineers walk the property, count components like parking lots, pavement, lighting, flooring, windows, doors, and other non-structural items, then a CPA signs off on an 80-page report. That report allocates the purchase price into structure, land improvements, and 5-year property. We plug results into K-1s so investors see both distributions and losses.
Who Can Use The Losses
There are two paths.
- Real Estate Professional Status (REPS).
If you or your spouse qualify (generally 750+ hours and more time in real estate than anything else), you can use depreciation to offset ordinary income, capital gains, and passive income. This is how many full-time operators pay very little in taxes, legally.
- No REPS.
You can still use depreciation to offset passive income. That includes cash flow from rentals and syndications and, in some cases, gains your CPA treats as passive. If you don’t have passive income yet, losses carry forward. If you or your spouse later qualify for REPS, you can often use prior suspended losses going forward.
Always coordinate with your CPA. Some W-2 real-estate roles may still qualify for REPS depending on duties and documentation. Keep a simple activity log if your situation is borderline.
How Bonus Depreciation Works Now
From 2017 through 2022, you could take 100% of the 5- and 15-year components in year one. In 2023 it stepped down to 80%, in 2024 to 60%, in 2025 to 40%, in 2026 to 20%, and is slated to phase out in 2027.
The benefit is still strong. You now take a meaningful portion up front and the rest over years two to five. The math is about timing, not losing the benefit. If policy changes restore 100%, it would apply to those components again according to whatever law passes. Plan with the current schedule and treat any policy shift as upside.
When To Do A Study
For value-add deals, do a study before heavy renovations. If you rip out old flooring and cabinets first, the IRS treats those as worthless and you lose the chance to accelerate them. Capture them, then renovate, then consider a second study.
The added depreciation usually dwarfs the cost of two studies. For lighter turns, doing it before tax season is fine, but don’t wait so long that providers are slammed.
Real Numbers, Simple Picture
On our Waverly Manor deal (about a $9M purchase with $5.1M raised), we modeled a $100K investor receiving about $57K of total depreciation over five years under the current step-down schedule. At a 30% federal rate, that’s roughly $17K–$18K in tax savings over the period. Your effective invested capital is closer to $82K than $100K. That can free you to invest more or get to your next unit faster.
Action Steps You Can Take Now
- Ask your CPA about REPS. Confirm whether you or a spouse can qualify this year. Keep a simple hour log if needed.
- Order a pre-renovation study. If you have a value-add plan, do it before demo.
- Model the step-down. Underwrite depreciation at today’s bonus schedule. Treat any policy change as upside only.
- Build a pipeline. Invest in multiple deals over time. Use fresh losses to soften recapture from sales.
- Consider 1031 options. If rolling equity matters to you, work with a sponsor who supports drop-and-swap structures.
- Use look-backs. If you missed a study on a recent acquisition, file a 3115 and catch up.
Conclusion
Cost segregation is “depreciation on steroids.” It accelerates deductions, boosts after-tax cash flow, and helps you scale. REPS expands the impact, stacked deals smooth out recapture, and smart timing around renovations increases benefits.
If you want to see the full walk-through, including live Q&A and examples, watch the full video below. Click the link and learn how we apply this in real deals.
Related: The Legal Way to Reduce (or Eliminate) Taxes (Cost Segregation Explained)