Cost-Segregation & Bonus-Depreciation Primer (STR)

It reclassifies parts of a property (fixtures, flooring, land improvements) into shorter 5-, 7-, and 15-year depreciation lives instead of the standard 27.5 or 39. That front-loads depreciation, creating a much larger early deduction than straight-line alone.

It lets you deduct a large share of those shorter-life components in year one rather than spreading them out. The exact percentage is set by current law (and has been phasing down — verify), but it's the piece that turns cost seg into a big first-year paper loss.

It offsets rental income by default; using it against W-2 income requires STR material participation or real-estate-professional status. Without one of those, the loss is passive and can't touch your W-2 — that's the crux the whole strategy hinges on.

Depreciation recapture at sale: the accelerated deductions are partly paid back as taxable income when you sell. It's often still worth it for the time value and offset, but it means modeling the whole arc, not just year one.

On the right property and tax situation, usually yes — the first-year deduction typically dwarfs the study fee. But it's fact-specific, so the study should be modeled against your income before you buy, not after.

Model the cost-seg deduction and the participation requirement against your marginal rate with a CPA — before you buy the property. That pre-purchase modeling is part of a Real Estate Review.