We turn down cost segregation work more often than people expect. The strategy is powerful, but it is not universal, and a study that does not pay for itself is worse than no study at all. Here are the five questions we ask before recommending one.
Question 1: What is the depreciable basis?
Start with what you paid, subtract the land value, add any capital improvements. That is your depreciable basis. There is no minimum property size. The AICPA suggests a study when acquisition costs reach $750,000, but that is a guideline, not a cutoff.
With studies starting at a flat fee of $3,500, the real test is whether the tax savings clearly exceed the fee. A $400,000 building can work well if the property type segregates well and the owner is in a high bracket. Above $1 million, the case is usually clear.
Question 2: What kind of property is it?
Property type drives how much basis moves into short-life categories.
High segregation (often 30 to 40 percent or more): restaurants, medical and dental offices, hotels, auto dealerships, manufacturing facilities, self-storage, car washes, and retail with significant tenant build-out. These buildings are full of specialized systems, finishes, and equipment.
Moderate (20 to 30 percent): general office, multifamily, warehouses with office space, and mixed use.
Lower (10 to 20 percent): bare warehouses, shell buildings, and simple industrial space with little interior finish.
A $2 million restaurant and a $2 million empty warehouse are very different studies.
Question 3: How long will you hold it?
Cost segregation accelerates deductions. It does not create them. When you sell, the accelerated depreciation is recaptured. Most owners still come out well ahead because of the time value of the tax deferral, and because recapture on some components is taxed at rates that may be lower than ordinary income. But the benefit grows with the holding period.
If you plan to sell within two years, the study rarely pays. If you plan to hold for five years or more, or to exchange into another property under Section 1031, the benefit compounds.
Question 4: Can you use the deduction?
This is where owners get surprised. If the property is a passive activity for you, the large first-year deduction may generate a passive loss that you cannot use against wages or business income this year. The loss is not lost. It carries forward and is released when you have passive income or when you sell. But “deduction in 2026” and “tax savings in 2026” are not the same thing for a passive owner.
Owners who can use it immediately include real estate professionals who meet the material participation tests, owner-occupants whose business operates in the building, and investors with other passive income to absorb the loss. If none of those apply, the study may still be worth doing, but the timing of the benefit shifts.
Your CPA should run this before you order the study, not after.
Question 5: What year are we in?
For property acquired and placed in service after January 19, 2025, 100 percent bonus depreciation applies, permanently. That is the strongest environment for cost segregation since 2022. Everything reclassified into 5-, 7-, and 15-year property can be deducted in year one.
For property placed in service earlier, the bonus percentage that applied in that year governs, and a look-back study captures it through Form 3115 without amended returns.
If you are considering a purchase, the placed-in-service date is worth planning around.
When we say no
We do not recommend a study when the basis is small and the property type is simple, when the owner plans to sell soon, when a passive owner has no near-term use for the loss and no long-term hold, or when the property is already fully depreciated. In those cases we say so, and we move on.