Quick answer
Cost segregation is a study that splits a property into components with shorter depreciation lives, so you deduct more of the purchase price sooner. For a furnished vacation rental, furniture, appliances, some fixtures and outdoor improvements can move from a 39-year schedule to 5, 7 or 15 years, and with 100% bonus depreciation they can often be deducted in the first year.
Key takeaways
- A cost segregation study splits a property into parts that depreciate over 5, 7, 15 and 27.5 or 39 years instead of one long schedule.
- Furnished vacation rentals tend to have more short-life property than long-term rentals: furniture, appliances, fixtures and outdoor improvements.
- With 100% bonus depreciation restored for property acquired after January 19, 2025, the short-life parts can often be deducted in year one.
- The deduction only lowers your tax bill if the loss is usable, which for most investors means the short-term rental loophole or passive income.
- Depreciation taken is recaptured when you sell, so a study changes the timing of tax more than the total.
In this guide
Why it matters
Without a study, most of a rental's purchase price, minus land, is depreciated in a straight line over 27.5 years for a long-term rental, or 39 years for a short-term rental treated as nonresidential property. That is a small deduction each year.
A study looks for the parts of the property that the tax rules treat as shorter-lived. Moving cost into those buckets brings the deductions forward.
| Class | Typical examples in a vacation rental | Recovery period |
|---|---|---|
| Personal property | Furniture, beds, appliances, TVs, décor, some flooring and cabinetry | 5 years |
| Certain fixtures and equipment | Some specialty fixtures and equipment | 7 years |
| Land improvements | Driveways, patios, fencing, landscaping, pools, outdoor lighting | 15 years |
| Building | The structure and its core systems | 27.5 or 39 years |
| Land | The lot | Not depreciable |
How bonus depreciation changes the math
Bonus depreciation lets you deduct the full cost of qualifying property with a recovery period of 20 years or less in the year it is placed in service. The 2025 tax law made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025, reversing the phase-down that had cut it to 40% for 2025.
So every dollar a study moves into the 5, 7 and 15-year classes can usually be deducted in year one.
Can you use the deduction?
A big depreciation deduction only saves tax if the resulting loss is usable.
- If the property is a passive rental and you have no other passive income, the loss is suspended and carried forward. It is still useful, but later.
- If the property qualifies for the short-term rental tax loophole, with a 7-day average stay and material participation, the loss can offset wages and business income now.
- If you qualify as a real estate professional, rental losses can be non-passive too.
- If you invest as a limited partner in a fund, your share of the fund's depreciation usually arrives on a K-1 as a passive loss.
Choosing a study and a provider
- Engineered studies use site visits, plans and cost data, and hold up best in an audit. The IRS publishes an audit techniques guide that describes what a quality study looks like.
- Lower-cost desktop or model-based studies are common for single homes. They are cheaper but rely more on assumptions.
- Ask each provider for their method, a sample report, how they treat furniture you bought separately, and whether they will support you in an IRS exam.
- Bought a while ago? A look-back study can catch up missed depreciation through an accounting method change on Form 3115, generally without amending old returns.
Verdict: for a furnished group home bought for well over half a million dollars, by an owner who can use the losses, a study is usually worth pricing. For a small unfurnished rental, or when the loss would sit suspended for years, it often is not.
When to order the study
Timing affects both the deduction and the cost.
| Situation | What to do |
|---|---|
| Buying this year | Order the study after closing and before your return is filed. Keep the closing statement and any furniture invoices |
| Renovating or furnishing | Keep itemized invoices: separate furniture, appliances and outdoor work from structural work |
| Bought in an earlier year | Ask your CPA about a look-back study and Form 3115 |
| Planning to sell soon | Weigh the deduction against recapture on sale; the benefit shrinks with a short hold |
Common mistakes
- Counting the land. Land is never depreciable. The study starts from the building and improvements, so make sure the land value is reasonable and documented.
- Double counting furniture. If you bought the furniture separately, it is already 5-year property. Tell the provider, so it is not also counted inside the building cost.
- Ignoring the passive rules. A huge deduction that sits suspended for years is worth far less than it looks. Confirm you can use the loss before paying for the study.
- Forgetting state tax. Some states do not follow federal bonus depreciation, so the state deduction can be smaller.
- Thin documentation. A one-page allocation with no method behind it is hard to defend. Keep the full report.
Cost segregation for group homes
Large group homes tend to suit the study well. They usually have more bedrooms to furnish, bigger kitchens and more appliances, and outdoor spaces such as patios, pools, decks and fire pits, all of which can fall into the shorter classes. They are also often bought at higher prices, so the dollar amounts reclassified are larger. If you are comparing markets, our owner markets page shows where JekkyStay manages large homes.
What to give the provider
A study is only as good as the documents behind it. Send the closing statement, the purchase contract, any appraisal, floor plans or listing photos, and itemized invoices for furniture, appliances and outdoor work. Note the date the home was first listed and available to book, since that sets the placed-in-service date.
How it fits into the investment math
Tax benefits sit on top of the property's cash performance, not in place of it. Check that the home works before tax with the cap rate calculator and the cash-on-cash return calculator, then treat cost segregation as an extra.
The bottom line
Cost segregation turns a long, slow depreciation schedule into a large early deduction by separating out furniture, fixtures and land improvements. Furnished vacation rentals benefit more than most property types, and 100% bonus depreciation makes the first year count. It pays when you can use the loss, and it defers tax rather than avoiding it, so plan it with your CPA before you buy.
Frequently asked questions
What is a cost segregation study?
It is an engineering-based analysis that identifies parts of a property that qualify for shorter depreciation lives than the building itself, such as furniture, appliances, certain fixtures and land improvements. Reclassifying them speeds up depreciation deductions.
Is cost segregation worth it for a single vacation rental?
It can be, especially for a larger furnished home bought for several hundred thousand dollars or more, where the investor can use the losses. For a small, unfurnished property, or an owner who cannot use the losses, the study fee may not pay off.
How much does a cost segregation study cost?
Fees vary by provider, property size and method, from lower-cost desktop studies for single homes to engineered studies with site visits. Get quotes and ask what method they use and whether they defend the study in an audit.
Can I do cost segregation on a property I bought years ago?
Generally yes. A look-back study can catch up missed depreciation through an accounting method change, usually without amending past returns. Ask your CPA about Form 3115.
Do short-term rentals depreciate over 27.5 or 39 years?
Practitioners generally treat rentals with average stays under 30 days as nonresidential property on a 39-year schedule, because units used on a transient basis are not dwelling units for this purpose. Confirm the treatment for your property with your CPA.
