If you’re a real estate investor and you’re not using cost segregation, you may be leaving tens—or even hundreds—of thousands of dollars on the table.
In a recent episode of SoCal Multifamily Insights, we sat down with tax strategy expert Geraldine Serrano, who broke down this powerful yet often overlooked strategy that savvy investors use to dramatically lower their tax liability and increase cash flow.
What Is Cost Segregation?
Cost segregation is a tax planning tool that allows real estate investors to accelerate depreciation on components of their properties. Typically, buildings are depreciated over 27.5 years (for residential) or 39 years (for commercial), meaning the tax deduction is spread out over decades.
But not all parts of a building wear down at the same rate. Through a cost segregation study, you can reclassify parts of the building—such as carpet, cabinetry, asphalt, and landscaping—as short-life assets eligible for depreciation over 5, 7, or 15 years. This front-loading of depreciation allows for significantly higher deductions in the early years of ownership, which reduces taxable income and improves immediate cash flow.
Real Case: From $100K Owed to $0
Geraldine shared a real-life example of a Denver-based investor who was ready to send the IRS a $100,000 check—until a friend told him to call her first. He owned 12 single-family rentals. After a detailed cost segregation study, Geraldine’s firm was able to accelerate enough depreciation to eliminate his entire tax bill for the year. His only out-of-pocket cost? $27,500 for the study—fully tax-deductible.
This example highlights the core benefit of cost segregation: trade a big check to the IRS for a smaller investment in a tax-saving strategy, and keep more of your money working for you.
When Is the Best Time to Do a Cost Segregation Study?
Ideally, right after acquiring the property.
Why? Because investors often renovate soon after purchase. If you wait until after renovations, you may miss out on valuable depreciation from the original condition of the property. Geraldine recommends a two-part study for multifamily investors: one before renovations to capture what’s being removed, and one after renovations to capture new components that can also be depreciated quickly.
This also enables investors to take advantage of what’s called a partial asset disposition, which lets you write off the remaining value of replaced items—like roofs, plumbing, or windows—rather than waiting for those components to fully depreciate.
What About Bonus Depreciation?
Bonus depreciation is a major component of why cost segregation has become so popular in recent years. Thanks to the Tax Cuts and Jobs Act of 2017, investors were allowed to take 100% bonus depreciation on qualified property improvements made between late 2017 and the end of 2022.
That meant any short-life components identified in a cost seg study could be fully deducted in year one. Even if you bought a property in 2020, you can retroactively apply cost segregation to your 2025 return and potentially still benefit—if you act quickly.
The bonus percentage is now phasing out:
• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027 and beyond: sunset (unless extended)
But even at 40%, the upfront deduction can still offer significant tax savings—especially for those with high income or active real estate businesses.
Residential vs. Commercial Use
A common myth is that cost segregation only applies to large commercial properties. Geraldine debunked that quickly. It can be used on residential rentals, ADUs, condos, mobile home parks, and more. The key requirement: the property must be used for investment purposes—not as a primary residence or vacation home.
Even house hackers—those who live in one unit and rent out the others—can benefit. In Geraldine’s example, a client used this strategy to accumulate rental properties and applied cost segregation to each one as it became a full rental.
Planning Ahead: Developers & Bonus Strategies
Cost segregation becomes even more powerful when applied before construction or renovation begins. Developers and investors can work with cost seg specialists to review building plans and material selections. For example, bolting down components instead of welding them may qualify more of the structure for short-life depreciation.
Geraldine shared a missed opportunity where a developer used welded shipping containers to build a commercial project. Had he used bolts instead, he could have classified more of the structure as removable—and thus depreciated it faster.
This is why she advises developers, builders, and syndicators to have these conversations early. Strategic decisions during the planning phase can translate to tens or hundreds of thousands in tax savings later.
Who Qualifies?
Any real estate investor with tax liability can benefit. That includes:
• Multifamily owners
• Commercial property investors
• Syndicators and fund managers
• ADU landlords
• Mobile home park operators
The main caveat: if you don’t have taxable income or significant gains, cost segregation won’t help. It’s a tool for reducing tax exposure—not creating refunds out of thin air.
What Makes a Good Cost Seg Provider?
Not all providers are created equal. Geraldine recommends choosing a firm that offers engineered reports backed by IRS standards. These reports should clearly list every asset category, valuation, and depreciation schedule. Detailed line items help CPAs apply the numbers properly and help investors document any future asset disposals.
Some investors even consult cost seg firms before choosing which property to buy—favoring buildings where the land value is lower relative to structure value, since land isn’t depreciable.
Final Thoughts
Cost segregation isn’t a loophole—it’s a well-established, IRS-approved strategy that more investors should be using. Whether you’re buying your first 4-plex or planning a 50-unit development, this is a tool that can significantly enhance your returns.
If you haven’t had a cost seg study done, or you’ve recently acquired or renovated property, it’s time to take a closer look. Consult a qualified professional like Geraldine and explore how much you could save—before your next tax bill arrives.
How to Contact Geraldine
Geraldine Serrano, Empowered Tax Strategies
📞 (510) 386-0872
🌐 https://www.specialtytaxgroup.com/geraldine-serrano
