For clients who own multiple rental properties, cost segregation is generally more valuable in 2026 than it has been in several years, largely because Congress restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025. That means a properly performed cost segregation study can once again generate significant first-year deductions for qualifying 5-, 7-, and 15-year assets.
Here are the primary planning strategies I would consider.
| Strategy | Best Use | Key Considerations |
|---|
| Cost segregation study | Recently acquired or constructed properties | Accelerates depreciation into earlier years |
| Partial asset disposition | Renovations or remodels | Write off replaced building components |
| Bonus depreciation | Assets identified in cost seg | 100% available for qualifying assets under current law |
| Repair regulations review | Annual improvements | Deduct repairs instead of capitalizing when appropriate |
| Section 179 | Business-use assets | More limited for rental real estate than bonus depreciation |
1. Cost segregation should be evaluated property-by-property
A quality engineering-based study typically reallocates portions of the building into:
- 5-year personal property
- 7-year property
- 15-year land improvements
- Remaining building basis (27.5-year residential or 39-year commercial)
Common reclassified items include:
- Decorative lighting
- Specialty electrical
- Cabinets
- Carpeting
- Certain plumbing
- Parking lots
- Sidewalks
- Landscaping
- Fencing
For residential rentals, it's not unusual for 20–35% of the depreciable basis to qualify for shorter recovery periods, although each property is different.
2. The restoration of 100% bonus depreciation changes the math
This is probably the biggest planning change.
Prior to the law change, bonus depreciation was phasing down.
Current law generally restores:
- 100% bonus depreciation
- Permanent treatment for qualifying property placed in service after January 19, 2025
- Immediate deduction of qualifying assets identified in a cost segregation study, unless the taxpayer elects otherwise.
Example:
Purchase price: $2,000,000
Depreciable building basis: $1,600,000
Cost seg identifies:
- $260,000 of 5-year assets
- $180,000 of 15-year land improvements
Potential immediate depreciation:
- approximately $440,000 instead of spreading those amounts over decades (subject to basis allocation and qualification).
3. Retroactive studies remain worthwhile
A client does not have to perform the study in the acquisition year.
If they bought a property several years ago:
- they can often obtain a cost segregation study now
- file a Form 3115 accounting method change
- "catch up" missed depreciation in the current year without amending prior returns, if the applicable requirements are met.
This is often one of the highest-return planning opportunities.
4. Coordinate with passive activity rules
Accelerated depreciation only produces immediate tax savings if the losses can be used.
Consider whether the taxpayer:
- qualifies as a real estate professional,
- materially participates,
- has passive income,
- has suspended passive losses,
- is subject to the excess business loss limitations.
Large depreciation deductions can otherwise become suspended losses.
5. Watch state conformity
Not every state conforms to federal bonus depreciation rules.
Some states:
- disallow bonus depreciation,
- require addbacks,
- have separate depreciation schedules.
Always evaluate both federal and state impacts before recommending a cost segregation study.
6. Renovations create additional opportunities
Whenever a rental property undergoes improvements:
- replace roof
- HVAC
- parking lot
- interior remodel
- tenant improvements
Review for:
- partial asset dispositions,
- repair vs. capitalization,
- new cost segregation opportunities.
Many taxpayers continue depreciating components that no longer exist because prior assets were never disposed of.
When cost segregation usually makes sense
Generally favorable when:
- Building basis exceeds roughly $500,000–$1 million
- Client expects significant taxable income
- Long holding period
- Multiple properties
- New construction
- Recently acquired property
Less attractive when:
- Property will be sold very soon
- Taxpayer cannot currently use passive losses
- Very small property
- Very low tax bracket
- Minimal depreciable basis
Potential downsides
Cost segregation is not always a clear win. Consider:
- Depreciation recapture on sale (especially for §1245 property)
- Study cost
- Additional recordkeeping
- State tax differences
- IRS scrutiny if the study is not engineering-based
A quality study prepared using IRS-recognized methodologies is generally preferable to software-only or rule-of-thumb allocations.
Changes to be aware of in 2026
The biggest change is the return of permanent 100% bonus depreciation for qualifying property placed in service after January 19, 2025, along with IRS guidance on implementing the revised rules and certain transition elections. This has made cost segregation substantially more valuable than it appeared during the prior phase-down period.
For clients with multiple rentals, I would also review:
- Whether prior acquisitions should receive a retroactive cost segregation study.
- Whether grouping elections and real estate professional status affect the usability of accelerated losses.
- Upcoming capital improvement projects that could be structured to maximize deductions.
- State-specific conformity with the federal depreciation rules.
For many high-income real estate investors, a coordinated depreciation review across the entire portfolio can produce significantly greater tax savings than evaluating each property in isolation.
