How to Get Started with Cost Segregation: Step-by-Step

You have heard about cost segregation and you understand the potential tax savings. Now what? This guide walks you through the entire process — from deciding when to do a study to delivering the final report to your CPA. Whether you just closed on a new property or have owned one for years, the steps are straightforward.

Step 1: Determine If You Are a Good Candidate

Cost segregation is beneficial for most investment property owners, but some situations yield bigger returns than others. You are an ideal candidate if:

• Your property has a depreciable basis of $200,000 or more (purchase price minus land value).
• You own a short-term rental where you materially participate — the tax benefits are especially powerful because losses can offset active income.
• You recently purchased, built, or renovated a property — new acquisitions and major improvements create fresh opportunities for accelerated depreciation.
• You have owned a property for years and have been claiming straight-line depreciation — catch-up studies via Form 3115 let you recapture missed deductions.
• You have significant taxable income that you want to offset with depreciation deductions.

Step 2: Choose Your Timing

There are two main scenarios for timing a cost segregation study:

• At acquisition (or in the year of purchase) — This is the most common and straightforward approach. You complete the study and apply the accelerated depreciation on your first tax return for the property. With 100% bonus depreciation available, the first-year deductions can be substantial.
• Catch-up study (for properties owned for years) — If you have been depreciating your property using straight-line for one or more years, you can still do a cost segregation study and claim all the missed accelerated depreciation as a single adjustment on your current-year return using Form 3115 (Change in Accounting Method). This is an automatic consent filing — no IRS approval needed.

The best time to do a cost segregation study is as soon as possible. Every year you wait is another year of straight-line depreciation when you could be claiming significantly larger deductions. The study pays for itself many times over regardless of when you do it, but the sooner you act, the sooner you realize the tax savings.

Step 3: Gather Your Property Information

To complete a cost segregation study, you will need to provide basic information about your property. The more detail you can provide, the more accurate the study will be. Here is what to have ready:

1. Property address — The full address of the property being studied.
2. Purchase price and date — The total acquisition cost and closing date. Your HUD-1 or closing disclosure is the best source.
3. Land value — If known. This can often be estimated from the county tax assessment (which breaks value into land and improvements).
4. Property type and use — Residential rental, short-term rental, commercial, mixed-use, etc.
5. Square footage — Total living area and any additional structures (garage, pool house, etc.).
6. Year built and any renovation history — Original construction date and details of any major improvements.
7. Property photos — Interior and exterior photos help identify personal property and land improvements.
8. Renovation or improvement invoices — If you have done any significant work on the property, the invoices help allocate costs to specific components.

Step 4: Choose a Study Provider

You have two main options when it comes to getting a cost segregation study:

Traditional engineering firms send a team to physically inspect your property, review construction documents, and prepare a detailed report. This approach is thorough but expensive and time-consuming, which is why cost segregation has historically been reserved for properties worth $1 million or more.

AI-powered solutions like Abode use property data, county records, and validated cost models to produce IRS-compliant studies at a fraction of the cost and time. This makes cost segregation accessible to individual STR investors with properties in the $200,000 to $2,000,000 range.

Step 5: Review the Study with Your CPA

Once your cost segregation study is complete, you will receive a detailed report that includes:

• A summary of reclassified assets by depreciation category (5-year, 7-year, 15-year, 27.5-year)
• Dollar amounts allocated to each category
• Supporting documentation and methodology
• A depreciation schedule your CPA can use to prepare your tax return
• For catch-up studies: the Section 481(a) adjustment amount and Form 3115 filing instructions

Share this report with your CPA or tax preparer. They will use the depreciation schedules to calculate your deductions and apply them to your tax return. If you are doing a catch-up study, your CPA will also file Form 3115 with your return to claim the cumulative missed depreciation.

Step 6: File and Save

After your CPA applies the cost segregation study to your tax return, make sure to keep the complete study report and all supporting documentation in your records. If your return is ever examined, you will need to produce the study to substantiate your depreciation deductions. A quality study — like those produced by Abode — is your best protection in an audit.

For more on what the IRS looks for, read our guide on IRS compliance requirements. And for a deeper understanding of the strategy itself, see our complete cost segregation guide.

Frequently Asked Questions