Tax-saving strategies like cost segregation can make a significant difference for property owners, especially those managing rental spaces or commercial properties. In 2025, with bonus depreciation rates decreasing (although revisions are in Congress), understanding how cost segregation works and how it can accelerate tax deductions is more valuable than ever. Property owners who take advantage of these benefits can now reduce their taxable income, increase cash flow, and reinvest in property improvements, positioning themselves for greater financial flexibility and growth.
What is cost segregation?
Cost segregation is a tax strategy that lets property owners classify parts of their property (like lighting, landscaping, or HVAC systems) as shorter-life assets. Instead of depreciating a rental property over the typical 27.5 years (or 39 years for commercial), you can deduct certain components faster—over 5, 7, or 15 years. This accelerated deduction process allows for larger tax savings sooner, helping to offset operating expenses or reinvest in property improvements.
Why 2025 is a key year for cost segregation benefits
2025 is a crucial year for property owners looking to maximize cost segregation benefits. With bonus depreciation phasing down to 40%, this year offers a unique opportunity to leverage the remaining benefits of both accelerated depreciation and bonus depreciation before the rates decrease further. Property owners can capture more upfront tax deductions, reducing taxable income and enhancing cash flow right away—an especially powerful advantage for rental and commercial property owners.
What is bonus depreciation?
Bonus depreciation is a tax incentive that allows property owners to deduct a large portion of an asset’s cost in the year it’s placed in service, rather than spreading it out over time. When combined with cost segregation, bonus depreciation makes it possible to recover the costs of specific property components quickly, maximizing tax savings early on.
The role of bonus depreciation in cost segregation
Since the 2017 Tax Cuts and Jobs Act, 100% bonus depreciation has allowed real estate investors to fully deduct the cost of eligible assets in the year they’re placed in service. However, this benefit began phasing out in 2023. The bonus depreciation rate is set to drop in the next few years, so it’s essential that you do a cost segregation study as soon as possible. That being said, bonus depreciation has been around for a while, and there are currently bills being circled around Congress to maintain the status quo.
Major benefits of cost segregation for property owners in 2025
With the phase-out of bonus depreciation in full swing, 2025 is a critical year to capture the maximum possible tax savings. Here are some of the main advantages of cost segregation for property owners in this tax year:
| Benefit | Description |
|---|---|
| Front-loaded tax savings | Cost segregation accelerates the timeline for claiming deductions by categorizing property components into shorter-life asset classes. This means larger deductions in the early years of ownership, freeing up cash flow for reinvestment or operational costs. |
| Enhanced cash flow for reinvestment | For property owners—especially those in the rental and short-term rental markets—improved cash flow can be a game-changer. By claiming deductions sooner, owners have more capital on hand to reinvest in property improvements, expand their portfolios, or cover other expenses. |
| Ideal for rental and commercial properties | Cost segregation works for a variety of properties, including commercial spaces, rental apartments, and even short-term rental properties like those listed on Airbnb and VRBO. This makes it a versatile strategy for maximizing tax efficiency, especially for owners with multiple properties or high renovation costs. |
“In 2025, bonus depreciation is indeed set to drop to 40%, providing a smaller upfront benefit than in prior years. This reduction makes it essential for property owners to act strategically to maximize remaining savings opportunities through cost segregation. Here’s how to take full advantage: The key benefits are driven by the ability to reclassify components of a building into shorter asset classes, typically 5, 7, or 15 years instead of the standard 27.5 or 39 years for residential and commercial properties, respectively.” – Jay Tobey, Founder & CEO of North Star Financial Group
Cost segregation vs. standard depreciation: Which is better in 2025?
Standard depreciation spreads tax savings evenly across the asset’s useful life—27.5 years for residential properties and 39 years for commercial properties. While this offers predictable deductions, it doesn’t provide the upfront savings that many property owners look for.
Accelerated benefits with cost segregation: Cost segregation allows you to reclassify property components and take much larger deductions in the first 5, 7, or 15 years, which is particularly valuable in 2024 as bonus depreciation remains partially available. This front-loaded approach can be far more beneficial than standard depreciation for investors looking to enhance cash flow immediately.
| Method | Depreciation Timeline | Typical Yearly Tax Savings | Applicability |
|---|---|---|---|
| Standard Depreciation | 27.5 or 39 years | Spread out over time | All real estate types |
| Cost Segregation | 5, 7, or 15 years | Larger, immediate savings | Commercial, rental, short-term rentals |
Example: How Mei maximized tax savings with a cost segregation study in 2025
Let´s take Mei, for example, a part-time real estate investor who owns a property portfolio consisting of different asset classes, including commercial office space, a residential rental building, and a few short-term rental units on Airbnb. As Mei prepares for the 2025 tax year, she consults her tax advisor to find ways to reduce her taxable income and increase cash flow. Her advisor recommends a cost segregation study to maximize her depreciation deductions, especially while the 40% bonus depreciation is still available in 2025. Here’s how cost segregation plays out for Mei and how it impacts each of her property types:
Property 1: Commercial office space
Property Value: $1,000,000
Eligible for Cost Segregation: 30% (i.e., $300,000)
Without cost segregation, Mei’s commercial property would depreciate over 39 years, allowing her to deduct only $25,641 annually. However, by conducting a cost segregation study, Mei can reclassify components like lighting, carpeting, and HVAC systems as shorter-life assets, eligible for 5-, 7-, or 15-year depreciation schedules. Here’s what her tax savings look like:
| Property Type | Tax Savings (Standard Depreciation) | Tax Savings (Cost Segregation) |
|---|---|---|
| Commercial Office | $6,410 | $51,000 |
This approach allows Mei to take an additional $51,000 in tax savings in 2025—funds she can use to reinvest in property improvements or new acquisitions.
Property 2: Residential Rental Building
Property Value: $800,000
Eligible for Cost Segregation: 20% (i.e., $160,000)
Mei’s residential rental building would typically depreciate over 27.5 years, allowing her to deduct $29,091 annually. With cost segregation, however, her tax advisor identifies assets like kitchen appliances, flooring, and outdoor landscaping that qualify for accelerated depreciation. Here’s how this impacts her 2025 tax savings:
| Property Type | Tax Savings (Standard Depreciation) | Tax Savings (Cost Segregation) |
|---|---|---|
| Residential Rental | $7,273 | $27,250 |
By accelerating her deductions, Mei will gain an additional $27,250 in tax savings in 2025, which she can put toward property maintenance or a marketing campaign to attract new tenants.
Property 3: Short-Term Rental Units (Airbnb)
Property Value: $500,000
Eligible for Cost Segregation: 25% (i.e., $125,000)
Mei’s short-term rental properties would normally depreciate over 27.5 years, providing a steady deduction of $18,182 each year. Given the high turnover and regular upgrades needed for her Airbnb units, Mei’s advisor suggests cost segregation to maximize her deductions upfront. Here’s how the numbers add up:
| Property Type | Tax Savings (Standard Depreciation) | Tax Savings (Cost Segregation) |
|---|---|---|
| Short-Term Rental | $4,546 | $21,250 |
The accelerated deductions allow Mei to save an additional $21,250 in 2025, which she uses for upgrades to her short-term rental units, such as smart locks, decor enhancements, and landscaping improvements that help boost her bookings and nightly rates.
Summary of Mei’s 2025 tax savings with cost segregation
By conducting a cost segregation study, Mei realizes significant additional tax savings across her properties in 2024:
Challenges and considerations for cost segregation
While cost segregation offers significant benefits, there are a few considerations:
- Cost of conducting a study
Performing a cost segregation study requires an initial investment in professional services, including tax specialists and engineers. However, the potential savings often outweigh this cost, particularly for high-value properties or those with substantial improvements. - Navigating IRS requirements
Cost segregation is a complex process and needs to be handled accurately to avoid IRS scrutiny. Working with a professional cost segregation firm ensures that deductions are correctly classified, compliant with tax laws, and fully optimized.
Steps for conducting a cost segregation study
- Step 1: Evaluate your property’s eligibility
Determine whether your property is suitable for cost segregation. Properties with substantial assets like landscaping, customized lighting, or high-cost improvements often benefit the most. - Step 2: Choose a professional cost segregation firm
Selecting a reputable firm ensures the study is done accurately and in compliance with IRS standards. Look for a team with experience in real estate tax strategies and engineering expertise to classify components correctly. - Step 3: Conduct the study
Engineers and tax specialists will analyze property components, classifying eligible items (like flooring, HVAC, fixtures) into shorter depreciation schedules. A detailed report will be produced, summarizing the reclassified assets and potential tax savings. - Step 4: Apply findings to your tax filings
Use the results of the study to maximize deductions in your tax filings for 2025, allowing for immediate and significant tax savings.
Planning your cost segregation strategy for 2025 and beyond
As bonus depreciation phases out, cost segregation remains a highly effective tax strategy, but it’s essential to act in 2025 to capture the full benefits. Here’s a look at future planning:
Take advantage of 2025 bonus depreciation rates
With bonus depreciation at 40%, property owners still have a valuable opportunity for immediate deductions. By pairing it with cost segregation, you can maximize upfront tax benefits.
Long-term tax efficiency
Even beyond 2025, cost segregation continues to be valuable. Future tax planning strategies, like 1031 exchanges or opportunity zone investments, can further enhance tax efficiency and provide flexibility for reinvestment.
Final thoughts: maximize tax savings in 2025
Cost segregation in 2025 offers property owners a practical way to reduce taxable income, boost cash flow, and make the most of remaining bonus depreciation benefits. If you own rental, commercial, or short-term rental properties, now is the time to consider cost segregation to maximize your tax efficiency. Connect with Remote Cost Seg today to learn how a cost segregation study can help you unlock significant tax savings and transform your investment returns.
FAQ
What types of properties benefit most from cost segregation?
Cost segregation is especially beneficial for commercial, rental, and short-term rental properties with substantial physical assets, such as lighting, HVAC systems, and flooring. Properties with unique or high-value components typically see the most significant tax savings due to the reclassification of assets for accelerated depreciation.
Can residential homeowners use cost segregation for tax savings?
No, cost segregation is primarily designed for income-producing properties, such as commercial buildings, rental properties, and short-term rentals. Personal residences do not qualify for this tax-saving strategy, as they are not income-generating assets in the eyes of the IRS.
How often should a property owner conduct a cost segregation study?
Typically, a cost segregation study is conducted once after the purchase or construction of a property or after substantial renovations. However, some property owners may revisit cost segregation if they make significant upgrades or changes to the property that add qualifying assets for accelerated depreciation.
Are there risks to using cost segregation?
The primary risk is that cost segregation requires precise classification and documentation, and errors can lead to IRS scrutiny. To mitigate this, it’s essential to work with a qualified cost segregation specialist who understands IRS guidelines and ensures accurate and compliant asset classification.
How much can cost segregation save on taxes?
The exact tax savings vary depending on the property’s value, asset composition, and the percentage eligible for accelerated depreciation. However, property owners can often save tens to hundreds of thousands of dollars in the early years of ownership by leveraging cost segregation, especially in a bonus depreciation year like 2025.
