Will I Qualify for Cost Segregation?
An eligibility flowchart for cost segregation. Property type, basis size, holding period, and tax-bracket factors that determine whether the math pencils.
Will I Qualify for Cost Segregation?
What you'll learn. A simple flowchart for whether cost segregation is even on the table for your property — covering use type, basis size, holding period, and tax posture.
The five eligibility checks
In order, the questions to answer:
- 1. Is the property used in a trade or business or held for the production of income?
- 2. Is the depreciable basis large enough to justify the analysis?
- 3. Will the property owner hold it long enough to clear the recapture risk?
- 4. Does the property owner's tax posture absorb the deduction in Year 1?
- 5. Did the acquisition happen recently enough to matter?
If all five answers are yes, cost segregation is generally worth screening. If any one is a hard no, the analysis is usually not worth the effort.
Check 1 — Property use
Cost segregation applies to property that depreciates under IRC §167. That requires the property to be used in a trade or business or held for the production of income.
In the flowchart:
- Long-term rental, short-term rental, commercial building, mixed-use — qualifies.
- Primary residence — does not qualify. The personal-use portion of a property is not depreciable.
- Vacation home with mostly personal use — generally does not qualify; partial-use rules are complex and require CPA review.
- Land only — does not qualify. Land is not depreciable.
Check 2 — Basis size and study cost
Engineering-firm fees for a full study typically run $3,000–$8,000 for a single-family rental, more for commercial properties. The math has to clear that fee.
A useful rule of thumb: depreciable basis below $200,000 rarely supports a full study. Basis between $200,000 and $500,000 is the "screening matters" range — feasibility output decides whether to proceed. Above $500,000, a study almost always pencils on the math alone.
The screening calculator labels the result "above," "near," or "below" the screening floor based on the actual Year-1 federal tax effect. The thresholds are:
- Above threshold — Year-1 tax effect ≥ $5,000.
- Near threshold — $2,000–$5,000.
- Below threshold — under $2,000.
Run the screening to see which bucket your property lands in →
Check 3 — Holding period and §1245 recapture
Reclassified personal property is §1245 property. On disposition, accumulated depreciation on §1245 property is recaptured as ordinary income — not at the §1250 25% unrecaptured-gain rate that applies to building-shell depreciation.
For short holds, recapture can claw back most of the Year-1 cash benefit. The general posture:
- 5+ year hold — recapture is generally a smaller concern; time value usually wins.
- 2–5 year hold — recapture warning fires on the result page; review with a CPA before commissioning a study.
- Under 2 year hold — recapture is likely to erase most of the Year-1 benefit unless paired with a 1031 exchange or installment sale.
A 1031 exchange can sometimes defer recapture into the replacement property. An installment sale spreads it. Outright sale inside two years is the worst case.
Check 4 — Tax posture (PAL gate and bracket)
Two questions on the tax-posture side.
PAL gate (IRC §469)
If the property is a long-term rental and the property owner does not qualify as a real-estate professional under §469(c)(7), the rental activity is passive. Passive losses can only offset passive income — not W-2 wages, business income, or portfolio income. Without passive income to absorb the deduction, it suspends on Form 8582 and carries forward until passive income is generated or the property is sold.
Two paths around the gate:
- REPS under §469(c)(7). Both prongs: 750+ hours per year in real-property trades, and more than half of all personal services across all trades in real-property trades.
- STR carve-out under §469(c)(2). Average rental period of 7 days or less, plus material participation.
If neither applies on a long-term rental, the screening still computes a deduction — but the result page shows "cash impact ~$0 in Year 1, deduction carried forward to year of disposition or future passive income."
Marginal bracket
The dollar value of the deduction depends on the marginal federal bracket. A $50,000 deduction is worth roughly $18,500 at 37%, $12,000 at 24%, and $6,000 at 12%. Lower-bracket property owners often find that the cost-seg study fee itself eats most of the benefit.
Check 5 — Acquisition date
Cost segregation works for both current-year and prior-year acquisitions:
- Current-year acquisition. File Form 4562 Part III with the cost-seg allocation in the year of placement.
- Prior-year acquisition. File Form 3115 with a §481(a) catch-up adjustment under DCN 7 (Rev. Proc. 2024-23). All the missed depreciation comes through in the catch-up year — no amended returns required.
Pre-2017 acquisitions are out of scope for the screening calculator: the §168(k) regime predated TCJA and the rules differ. CPA review.
The flowchart in one line
Income-producing property + basis ≥ $200k + 5+ year hold + REPS or STR carve-out (for LTR) + 22%+ marginal bracket → cost-seg almost always pencils. Any one of those is no → screening still useful, but expect "near" or "below threshold."
How to test your specific property
Run the screening with your actual numbers. The result page surfaces all five gates explicitly: it tells you the basis, the bracket-adjusted Year-1 tax effect, the threshold label, the §469 PAL gate status, and the §1245 recapture warning if your stated disposition is short.
Run a screening for a 2026 long-term rental → · Try the short-term-rental scenario →
Sources
- IRC §167 — Depreciation (eligible property)
- IRC §168(k) — Bonus depreciation
- IRC §469(c)(7) — Real-estate-professional status; §469(c)(2) — STR carve-out
- IRC §1245 — Ordinary-income recapture on personal property disposition
- Rev. Proc. 2024-23, DCN 7 — Automatic accounting-method change for cost-seg §481(a) catch-up
- IRS Cost Segregation Audit Techniques Guide
Disclaimer. This tutorial describes general federal tax concepts. TaxProtestTx (Nought Labs LLC) is a feasibility-screening tool, not tax advice or a cost segregation study. Calculator output cannot be relied on under Treasury Circular 230. Consult a qualified CPA, EA, or attorney before filing. Results are not guaranteed.