Cost Seg for Properties Under $500K: Is It Still Worth It?

The traditional advice in the cost segregation industry was clear: properties under $1 million in value weren't worth the study cost. At $5,000–$15,000 for an engineering study, the math often didn't justify it on smaller properties. But two things have changed that calculation entirely: (1) the permanent reinstatement of 100% bonus depreciation under OBBBA, and (2) the arrival of AI-powered study platforms at $499–$799. For STR investors with the loophole, a $350,000 Airbnb can generate more first-year tax savings per dollar than many larger commercial properties.

The Old Math vs. the New Math

Let's compare the cost-benefit calculation under the old framework (60% bonus dep, $8,000 study fee) vs. the current framework (100% bonus dep, $499 study fee):

The combination of permanent 100% bonus depreciation and dramatically lower study costs has fundamentally changed the economics for smaller STR properties. A $300,000 property now generates over $30,000 in first-year federal tax savings net of the study fee — compared to barely $10,000 two years ago.

The STR Loophole Multiplier

For long-term rental investors, even under the new framework, cost seg deductions below a certain threshold may sit as passive loss carryforwards for years — especially for high-income investors above the $150,000 MAGI phase-out. The deductions are real, but their timing is uncertain.

For STR investors using the loophole, this limitation doesn't apply. The depreciation loss is active and offsets current-year W-2 income. The tax savings are realized this year, not in some future year when passive income happens to materialize. This makes the cost-benefit calculation dramatically more favorable for STR investors at any property value.

The Break-Even Analysis

To determine whether cost seg is worth it for your property, answer this question: what is the additional first-year depreciation deduction the study will generate, multiplied by your marginal tax rate?

For most STRs, the reclassified portion is 25–35% of the improvement value. On a $350,000 property with $280,000 in improvements, that's $70,000–$98,000 in reclassified assets. With 100% bonus depreciation, the full amount is deducted in year one. The study pays for itself many times over.

Properties in the $200K–$400K Range

Many STR investors in secondary markets, the Midwest, or rural vacation destinations own properties in the $200,000–$400,000 range. These are often overlooked for cost seg studies under the old conventional wisdom. But consider:

• A $250,000 STR with $210,000 in improvements: roughly $58,000–$73,000 in reclassifiable assets. At 32%: $18,500–$23,400 in tax savings. Study cost: $499.
• A $350,000 cabin with pool and furnished interior: $280,000 in improvements, with $90,000–$115,000 reclassified including the pool and landscaping. At 32%: $28,800–$36,800 in savings. Study cost: $499.
• A $400,000 urban Airbnb with recent renovation: heavy personal property content from renovations; potentially 30–38% reclassification rate. Savings: $37,000–$56,000 at 35–37% brackets.

When Cost Seg Might Not Be Worth It

Even with favorable economics, a few scenarios reduce cost seg's value for smaller properties:

• You can't use the deductions. If your AGI is too low to have significant tax liability, or if you're in the 10–12% bracket, the absolute savings are modest. Cost seg is most powerful against high-income tax.
• High land-to-improvement ratio. A $300,000 property where $150,000 is land value only has $150,000 in depreciable improvements. Reclassifiable assets may be limited.
• You don't materially participate and have no other passive income. If you can't use the STR loophole and have no passive income to absorb losses, the deductions sit in carryforward limbo.