A cost segregation study on a $320,000 single-family rental typically pulls about 25% of the depreciable building value into year one — roughly $68,000 of deductions instead of the standard $10,000. At a 30% tax rate, that converts to somewhere around $18,000 to $20,000 of actual tax saved in the first year.
That is the number most articles skip past. It is also useless to you if you cannot apply the loss, which is where the 750-hour real estate professional test comes in and disqualifies a large share of the people who get excited about the arithmetic.
Gian Pazzia, chairman of KBKG and an owner of seven multifamily buildings totaling about 40 units, walked through the full calculation on a normal rental — the land carve-out, the acceleration percentage, the conversion from deductions to dollars, and the passive activity gate that decides whether any of it lands on your return.
Key takeaways
- On a $320,000 single-family rental with $50,000 in land, the depreciable basis is $270,000 — about $10,000 a year straight-line. A cost seg study accelerating 25% produces roughly $68,000 in year one, or $58,000 of additional deduction.
- Deductions are not savings. Multiply by your marginal rate: $58,000 of extra deduction at 30% is about $18,000 in real tax reduction.
- Property type drives the acceleration percentage more than price. A $1M fast-food building may support around $400,000 of write-off; a $1M office or apartment building closer to $200,000.
- Real estate professional status requires 750+ hours in real estate activities AND more hours in real estate than in any other activity — a doctor with 2,000 clinical hours and 780 real estate hours does not qualify.
- A conventional study runs around $5,000; self-guided software brings it near $500 for smaller properties, which changes the math on whether a single rental is worth studying.
From the Real Estate Pros Show
This article draws on an interview with Gian Pazzia of KBKG on the Real Estate Pros Show, hosted by Cody Crabb.
What a Cost Segregation Study Actually Does to Your Depreciation Schedule
A cost segregation study on a rental property identifies the components of a building that can be written off right away instead of over the full recovery period. That is Pazzia’s plain-language version, and it is accurate: you are not creating new deductions, you are moving them forward.
Start with the baseline so you know what the study is beating. Take a $320,000 single-family rental. Step one is separating land from building, because land does not wear down and therefore cannot be depreciated. Call it $50,000 of land.
That leaves $270,000 of building depreciated over roughly 27 years. Straight-line, that is about $10,000 of depreciation per year, every year, for 27 years.
Ten thousand dollars of annual deduction on a property that cost you $320,000 is not moving your tax bill much. The study exists to change the shape of that curve — heavy in year one, thinner later. Everything else in this article is either the size of that year-one number or the question of whether you can use it.
Worth stating plainly: this is deferral. You are pulling deductions from future years into the present. The strategy only compounds if you keep buying, or if you plan the exit — both covered below.
Running the Numbers: Deductions vs. Actual Tax Savings
Continue with the $270,000 building basis. Pazzia’s rule of thumb for a residential rental is that a study will typically accelerate around 25% of building value into year one.
Twenty-five percent of $270,000 is roughly $68,000 of first-year deduction, against the $10,000 you would have taken anyway. Net additional deduction: about $58,000.
Here is where most people stop reading and start celebrating the wrong number.
That’s not savings, that’s deductions.
To get to money, multiply by your marginal rate. At 30%, $58,000 of extra deduction is about $18,000 of tax you do not pay this year. At 35% it is higher. If your effective rate is lower, so is the benefit — which is one reason a study on a small rental owned by a low-bracket taxpayer can be a poor use of $5,000.
The same arithmetic scales up. On a $1 million office or apartment building, Pazzia’s team would typically come back with an estimate around $200,000 of first-year deductions. At a 30% rate, that is about $60,000 of tax savings in year one.
Two things to hold onto. First, always run the deduction figure through your own rate before deciding whether the study pays for itself. Second, a study firm’s estimate is an estimate — KBKG’s own process is to hand it to the client and tell them to run it past their CPA before filing, because there are cases where the answer comes back that it will not work for that taxpayer.
That’s $68,000 of deductions versus the $10,000 I talked about earlier, so now you just got $58,000 of additional deductions. That’s not savings, that’s deductions.
— Gian Pazzia, Chairman, KBKG
Why Property Type Changes the Answer More Than Price Does
The acceleration percentage is a function of what is physically built into the building, not what you paid for it. This is why two $1 million purchases can produce wildly different first-year numbers.
Pazzia’s example: a fast-food restaurant where you are the landlord. Inside that building is gas piping for the stoves, sanitary piping, dedicated electrical for cooking equipment, and decorative dining room finishes built into the structure. All of that is short-life property. On a $1 million fast-food building, the owner might write off around $400,000.
Compare that to the $200,000 estimate on a $1 million office or apartment building, or the roughly 25% figure on a residential rental. Same price, double the year-one deduction, purely because of what is bolted into the restaurant.
The practical implication for acquisitions: if you are choosing between two properties at similar price points and depreciation timing matters to your plan, the one with heavy tenant-specific build-out is likely to produce the larger first-year number.
To get a quote, a cost segregation firm needs four inputs:
- Purchase price
- Purchase date
- Property type
- Property address
That is enough for a firm to come back fairly quickly with an estimated deduction and an estimated tax saving. It costs you nothing to collect those four items on a property you already own and find out whether the number is worth pursuing.
The 750-Hour Test That Decides Whether You Can Use the Deductions
Real estate professional status is the gate. Clear it and you can apply losses from real estate against any other income you generate. Miss it and the deductions may sit unused against your rental income only.
There are two parts to the test, and the second is the one people forget.
- You must spend 750 hours or more per year on real estate activities — managing properties, acquiring properties, selling properties, and the rest of the list in the code.
- You must not spend more time in any other activity than you spend in real estate.
Pazzia’s two worked cases make the difference concrete. A doctor logs 2,000 hours in clinical practice and 780 hours in real estate. She clears the 750-hour bar and still fails, because she spent more time being a doctor. A part-time software consultant logs 600 hours consulting and 780 hours in real estate. He qualifies.
Notice that the second person has a lower income and less real estate time than the first. The test is not about scale. It is about the ratio between your real estate hours and everything else you do for money.
The practical consequence is that hour tracking is not paperwork, it is the substantiation for a position that materially changes your return. Log it contemporaneously, by activity, throughout the year. KBKG built a phone app called Track750 specifically for this, which tells you something about how often the question comes up.
If you are close to the line, decide in January how you are documenting, not in April.
If You’re a Passive Investor: What Happens to the Loss
The classic passive investor in this conversation is the high-earning physician. She makes a million dollars from her practice, buys a rental, runs a cost seg study, and generates a large paper loss. She may not be able to apply that loss against her practice income, because passive losses are limited.
The study still generated deductions. She just cannot use them the way she assumed she could.
The workaround Pazzia describes is the spouse route. If you file married filing jointly and one spouse qualifies as the real estate professional — meeting the 750 hours and the more-time-in-real-estate-than-anything-else test — the couple nets it all together. The depreciation from the rentals can then offset the doctor’s practice income.
This is not theoretical for him. Pazzia and his wife own seven buildings, about 40 units. She manages them, and she is the qualifying real estate professional in the household.
The structural point for a two-earner household: the spouse with the lower outside workload is often the one who can realistically hit the test. That is a decision about how you divide labor in the business, made before the tax year, not a filing-season maneuver.
Pazzia said it twice in the same conversation and it is worth repeating here. There are situations where a passive investor can use those deductions and it is still worthwhile, and there are situations where it will not work. Which one you are in depends entirely on your own tax picture. Take the estimate to your CPA and get an answer specific to your return before you spend money on the study.
Cost, Timing, and the Compounding Play
A conventional study runs around $5,000. KBKG’s self-guided software option brings that closer to $500 for smaller investors, which is the difference between a study being obviously worth it on a $320,000 rental and being a coin flip.
Do the sanity check before you order anything: estimated year-one deduction, times your marginal rate, minus the study cost. On the single-family example, $18,000 of savings against $5,000 of cost still clears. On a smaller or lower-basis property, the $500 path may be the only version that pencils.
The compounding argument is where operators separate from hobbyists. That $18,000 to $20,000 of year-one savings on one rental is capital. Put it toward the down payment on the next property, which generates its own depreciation, which produces the next round of savings, which funds the following down payment. Pazzia describes buying with borrowed money specifically to create depreciation deductions that offset the taxable income thrown off by the properties you already own.
The exit chain matters as much as the entry. When you sell for a gain, a 1031 exchange defers it. You can keep deferring across acquisitions. At death, heirs receive a stepped-up basis — Pazzia’s illustration is a portfolio bought for $100,000 now worth $10 million, where the beneficiaries inherit at fair market value and could sell the next day without gain.
Say clearly what that is: deferral operating inside the tax code as written, not a loophole. And say clearly what it is not: advice for your situation. Ordering matters, entity structure matters, and your CPA is the one signing off.
Frequently asked questions
How much of a building can a cost segregation study typically accelerate into year one?
On a residential rental, roughly 25% of the depreciable building value on average. On a $270,000 building basis that is about $68,000 of first-year deduction, against the roughly $10,000 you would take under straight-line depreciation over 27 years.
Commercial results vary widely by property type. A $1 million office or apartment building might produce around $200,000 in year one, while a $1 million fast-food restaurant with gas piping, sanitary piping, dedicated cooking electrical and built-in dining finishes could reach around $400,000.
Does a cost segregation study help if I have a W-2 job and my rentals are passive?
Sometimes, but not the way most people assume. A passive investor — the classic case being a physician earning a million dollars from a practice who buys a rental — generates the deductions but may not be able to apply them against the practice income, because passive activity losses are limited.
The most common route around this for married couples is having a spouse qualify as the real estate professional and filing jointly, which lets the household net the depreciation against the high earner’s income. Whether any of it works for you is entirely dependent on your tax situation, so get an answer from your CPA before you pay for a study.
How many hours do I need to qualify as a real estate professional for tax purposes?
750 hours or more per year in real estate activities — managing, acquiring, and selling properties, among others on the list in the code. There is a second requirement people routinely miss: you cannot spend more time in any other activity than you spend in real estate.
A doctor with 2,000 clinical hours and 780 real estate hours fails, despite clearing 750. A part-time software consultant with 600 consulting hours and 780 real estate hours qualifies. Track the hours contemporaneously through the year rather than reconstructing them at filing time.
What information does a cost segregation firm need to quote my study?
Four things: what you paid for the property, when you bought it, what type of property it is, and the address. Purchase price, date, type, and location are enough for a firm to estimate your first-year deduction and the corresponding tax saving fairly quickly.
Expect the output to be an estimate you take to your own tax preparer. A reputable firm will tell you to have your CPA confirm it works for your return before you file.
What does a cost segregation study cost, and is DIY software a real alternative?
A conventional engineered study runs around $5,000. Self-guided software brings the cost down to roughly $500, which is aimed squarely at smaller investors holding one or a few single-family rentals where a $5,000 fee eats too much of the benefit.
Run the check before choosing: estimated deduction times your marginal rate, minus the fee. On a $320,000 rental producing $18,000 of first-year savings, either option clears. On a smaller property, the lower-cost path may be the only one that makes sense.
The bottom line
Before you spend anything on a study, settle the real estate professional question for your household this tax year — 750 hours and more time in real estate than anything else — because that single answer determines whether $58,000 of accelerated deduction becomes $18,000 in your pocket or a suspended loss you carry forward. Then collect the four inputs, get an estimate, and hand it to your CPA.
