Cost Segregation 101:
The Tax Strategy Every Real Estate Investor Should Know
If you're investing in real estate—whether it’s short-term rentals (STRs), long-term rentals, or multifamily properties—one of the most powerful (yet underutilized) tax strategies you should have in your toolbox is cost segregation.
It might sound complicated, but here’s the simple truth: cost segregation can dramatically reduce your tax liability and increase your cash flow almost immediately. If you're buying real estate, managing a STR, or expanding your real estate portfolio anywhere in the U.S., this could be a game-changer for your bottom line.
What Is Cost Segregation?
Cost segregation is a strategic tax planning tool that allows real estate investors to accelerate depreciation on certain parts of a property. Instead of depreciating the entire asset over 27.5 years (for residential rentals) or 39 years (for commercial buildings), a cost segregation study breaks down the property into components that can be depreciated over 5, 7, or 15 years.
Think of it this way: your property isn’t just a structure - it’s a collection of assets like cabinetry, appliances, lighting, flooring, HVAC systems, landscaping, and more. These components wear out faster than the building itself, and the IRS allows you to reflect that with faster depreciation - which means bigger deductions now, not decades from now.
Why Does Cost Segregation Matter?
Here’s how cost segregation can make a serious difference:
Immediate Tax Savings
By accelerating depreciation, investors often realize five- or six-figure tax savings in the first year alone. That’s money that stays in your pocket instead of going to the IRS.
Increased Cash Flow
Lower taxes = more cash. That cash can be reinvested into your next property, used to upgrade an existing asset, or simply boost your returns.
Offset Other Income
Depending on your tax status, accelerated depreciation could help you offset passive income from rentals—or even active income, such as W-2 earnings, if you qualify. (STR operators, see below!)
Who Should Consider a Cost Segregation Study?
You don’t need to be a commercial developer or own a massive apartment complex to benefit. Cost segregation is ideal for:
- Short-term rental owners
- Long-term rental owners
- Multifamily property owners
- High-income professionals using real estate for tax planning to reduce taxable income
If your property is worth more than $300,000, it’s typically worth exploring. And - yes - cost segregation can be applied to both new acquisitions and properties you’ve owned for years.
Special Note for STR Investors
Here’s where things get even more exciting.
If you actively participate in your short-term rental business (i.e., manage the property yourself), cost segregation might allow you to classify the losses as active rather than passive. This can open the door to using those losses to offset your W-2 income - a major win for high earners or full-time professionals looking for smart tax strategies.
In other words, STRs + cost segregation = one of the most powerful wealth-building combinations available to investors today.
How to Get Started with Cost Segregation
To take advantage of this strategy, you’ll need two key players:
- A qualified cost segregation firm - these professionals will perform an engineering-based study, identifying and categorizing all of the depreciable components of your property.
- A savvy CPA or tax advisor - your accountant will help determine how to best apply the deductions based on your unique tax profile.
Don't try to DIY this. Partner with experts who specialize in real estate and know how to document everything properly for compliance with the tax code.
Let’s Talk About Your Next Investment Strategy
If you’re thinking about buying, selling, or investing in real estate in Austin, the Texas Hill Country, or anywhere in Central Texas, I’d love to help you make strategic moves that not only build equity, but also reduce your tax burden.
Need a referral to a top-notch cost segregation firm or investor-savvy CPA? I’ve got you covered.
Contact me at beth@beth-perkins.com.
Let’s make your real estate work smarter for you!
