Cost Segregation for Rental Property
What a cost segregation study finds in a single family or small multifamily rental, the rules your CPA applies to the deduction, and two examples computed by our estimate engine. Every rule on this page is printed from its primary source.
What Usually Moves to the Shorter Classes
The IRS names the common rental items in the 5 and 15 year classes; the study itemizes them from your documents and photographs.
- For residential rentals the IRS says appliances, carpeting and furniture are 5 year property, and roads, fences and shrubbery (if depreciable) are 15 year property. Source: IRS Publication 527 (2025), chapter 2, Property Classes Under GDS
- Land improvements fall in asset class 00.3 of Rev. Proc. 87-56, with a 20 year class life and a 15 year recovery period under the general depreciation system. Examples are sidewalks, roads, drainage facilities, fences and landscaping shrubbery. The class does not include buildings and structural components, or land improvements that another asset class explicitly includes, so a class for the business activity can set a different recovery period. IRS Publication 946, Appendix B lists the class in Table B-1. Source: IRS Publication 946 (2025), Appendix B, Table B-1; Rev. Proc. 87-56, 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22), asset class 00.3; IRS Publication 5653 (Rev. 2-2025), chapter 2, part L, paragraph (5); Rev. Rul. 2001-60
In the 5 year class, a study itemizes:
- Carpet, vinyl and other removable floor coverings
- Kitchen and laundry appliances
- Decorative and accent lighting fixtures
- Electrical branch circuits and outlets dedicated to equipment
- Plumbing connections dedicated to equipment and appliances
- Window treatments (blinds, drapes and hardware)
- Low-voltage security, access-control and data cabling
- Miscellaneous removable finishes and accessories
In the 15 year class:
- Parking lot paving, curbs and striping
- Sidewalks and exterior hardscape
- Landscaping, shrubbery and planting beds
- Site drainage, storm structures and retention
- Fencing, gates and retaining walls
- Site and parking-lot lighting (poles, bases, circuits)
- Swimming pool, spa and pool equipment
The Building Itself
Which recovery period the building takes and when depreciation starts, from the Code and the IRS publication.
- Under the general depreciation system, residential rental property is depreciated over 27.5 years and nonresidential real property over 39 years. The alternative depreciation system, which applies to some property, has longer recovery periods. Source: IRC section 168(c) and (g)(2)(C); IRS Publication 946 (2025), chapter 4
- Depreciation begins when property is placed in service, which for a rental means when it is ready and available for rent, even if no tenant has moved in yet. Source: Treas. Reg. section 1.167(a)-10(b); IRS Publication 527 (2025), chapter 2, Placed in Service
Using the Deduction
How a deduction can be used depends on the passive activity rules. It is not a promise that losses will reduce your wages or other income; your CPA decides how the rules apply to you.
- A passive activity is a trade or business in which the taxpayer does not materially participate, and it includes any rental activity except as provided for real estate professionals. An activity that falls outside the rental definition is tested under the material participation rules instead. Source: IRC section 469(c)(1) and (c)(2)
- An individual materially participates by meeting any one of seven tests: (1) more than 500 hours; (2) substantially all of the participation in the activity; (3) more than 100 hours and not less than any other individual; (4) significant participation activities totaling more than 500 hours; (5) material participation in any five of the ten preceding tax years; (6) a personal service activity with material participation in any three preceding tax years; (7) regular, continuous and substantial participation on the facts and circumstances. For income and loss from a limited partnership interest, an individual can use only the first, fifth and sixth of these tests. Source: Temp. Treas. Reg. section 1.469-5T(a)(1) through (7) and (e)(1) and (2)
- A taxpayer meets the real property business tests, often called real estate professional status, for a year if more than one half of the personal services the taxpayer performs in trades or businesses during the year are performed in real property trades or businesses in which the taxpayer materially participates, and the taxpayer performs more than 750 hours of services during the year in those real property trades or businesses. Personal services performed as an employee are not treated as performed in a real property trade or business unless the taxpayer owns more than 5 percent of the employer. On a joint return, one spouse alone must meet both requirements, counting only that spouse's own services, although a spouse's work still counts in deciding whether the taxpayer materially participates in an activity. Meeting the tests only lifts the automatic passive treatment of rental real estate: the taxpayer must still materially participate in each rental real estate activity, or, if the taxpayer elects to treat all interests in rental real estate as one activity, in that single combined activity. Source: IRC section 469(c)(7)(A), (B) and (D)(ii); Treas. Reg. section 1.469-9(c)(4), (c)(5), (e)(1) and (g)
Two Examples From Our Engine
A single family rental and a four family, both invented, both computed by the estimate engine for the inputs shown at the Middle of the Road position.
| Item | Amount |
|---|---|
| Land value | $63,750 |
| Building basis | $361,250 |
| Moved to the 5 year class | $55,633 |
| Moved to the 15 year class | $23,843 |
| Left on the 27.5 year life | $281,775 |
| Share of the building basis moved | 22% |
| First year depreciation without a study | $13,136 |
| First year depreciation with a study | $89,721 |
| Additional first year deduction | $76,585 |
| Conservative | Middle of the Road | Aggressive |
|---|---|---|
| $65,353 | $89,721 | $117,570 |
Illustrative example computed by our estimate engine for an invented Single-Family Rental (SFR) at 8 Sample Avenue, Testville, ZZ 00000: purchase price $425,000, $63,750 assigned to land (15.0%), placed in service January 1, 2026, at the Middle of the Road position with 100% bonus. Results vary with property specifics and your tax situation.
| Item | Amount |
|---|---|
| Land value | $127,500 |
| Building basis | $722,500 |
| Moved to the 5 year class | $121,380 |
| Moved to the 15 year class | $52,020 |
| Left on the 27.5 year life | $549,100 |
| Share of the building basis moved | 24% |
| First year depreciation without a study | $26,273 |
| First year depreciation with a study | $193,367 |
| Additional first year deduction | $167,094 |
| Conservative | Middle of the Road | Aggressive |
|---|---|---|
| $137,669 | $193,367 | $249,065 |
Illustrative example computed by our estimate engine for an invented Four-Family at 20 Sample Avenue, Testville, ZZ 00000: purchase price $850,000, $127,500 assigned to land (15.0%), placed in service January 1, 2026, at the Middle of the Road position with 100% bonus. Results vary with property specifics and your tax situation.
Less to land means more to depreciate, so a low land value is the aggressive land position.
The ZZ 00000 marker means invented: these figures are an illustration for the inputs shown, not a result for any real property.
Questions people ask
Does a single family rental fit the flat fee lane?
- Yes, when the purchase price is under one million dollars and the property is held for investment. The wizard checks the eligibility questions and tells you the lane before you commit.
Do I need a site visit?
- No. The study is built from your settlement statement, your photographs and the documents you already have, and it says plainly that the asset schedule is modeled from them rather than taken off on site.
I have owned the rental for years. Is it too late?
- No. A study can still be prepared, and your CPA decides how it reaches the return for a building placed in service in an earlier year.
The rules on this page were checked against their sources on October 1, 2026.
Ready when you are.
The wizard asks the questions for your property and routes it to the right lane.