Step-by-Step Guide to the Cost Segregation Process

Greg Pacioli
Aug 4
3 min read

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As a real estate investor, if you’re not using cost segregation, you’re leaving money on the table.

I’ve had the privilege of working with all kinds of real estate investors (from Airbnb hosts to large multifamily operators) and one of the most overlooked tax strategies I see is accelerated depreciation through cost segregation.

Too many investors assume it’s only worthwhile for skyscrapers or 8-figure portfolios. Not the case.

In reality, if you own a rental property valued around ~$300k, the numbers often work in your favor.

In this post, I’ll walk you through the cost segregation process step-by-step (from choosing the right provider to filing your return) so you can use the tax code to your advantage, keep more of your income, and reinvest into your next deal.

Cost Segregation Process steps on a 3D stair diagram: Select Company, Obtain Estimate, Review Strategy, Complete Study, File Study, Invest Savings.

Step 1: Choose a Reputable Cost Seg Company

Not all cost segregation companies are the same. Some focus on commercial properties, while others are more geared towards residential rentals.

It's important to choose a firm that has certified engineers, a solid history of working with your type of asset, and the capability to collaborate closely with your CPA.

Tip: Before you make a decision, be sure to ask for a sample report and client references!

Step 2: Get a Free Estimate

Most firms will provide a free Estimate of Benefits(EOB) showing your potential tax savings. This proposal is based on your property type, land allocation, acquisition cost, and in-service date.

This step helps you answer the question: Is it worth doing a study for this property?

Spoiler Alert: If your property is worth over $300,000 and held for business or investment use, the answer is usually yes.

Step 3: Review the Strategy With Your CPA

Once you have the estimated benefits, it’s time to loop in your CPA.

They’ll help you:

Integrate the results into your overall tax strategy
Time the deductions for maximum benefit
Avoid triggering passive activity loss limitations or other tax traps

Remember: cost seg is a team sport. Your CPA and cost seg provider should be in sync.

Step 4: Complete the Full Cost Segregation Study

The firm will conduct a detailed engineering-based analysis, typically using:

Site visits or architectural plans
Construction cost data
IRS-approved methodologies

The goal is to reclassify eligible building components (like flooring, cabinetry, parking lots, etc.) into shorter depreciation categories.

The result: a comprehensive report with depreciation schedules, IRS audit support, and a summary of accelerated deductions.

Step 5: File the Study With Your Tax Return

Your CPA will include the cost segregation report in your tax return, often via Form 4562 and a Form 3115 for changes in accounting method (if the property was placed in service in a prior year).

You’ll start reaping the benefits right away, usually through bonus depreciation in year one.

Step 6: Use the Tax Savings to Buy More Real Estate

Here’s where the strategy becomes exponential.

By front-loading your depreciation, you free up capital that would have otherwise gone to the IRS. That cash can be reinvested into your next deal, creating a rinse-and-repeat cycle of wealth building.

Why the Cost Segregation Process Matters

While the final cost segregation report is what you’ll file with your taxes, it’s really the process behind it that shapes its quality, accuracy, and how well it can stand up to an audit.

A solid engineered study can lead to bigger tax savings, help you steer clear of IRS compliance headaches, and make sure your CPA gets everything filed correctly.

Understanding this process gives you the power to plan wisely, pick the right company, and confidently apply the same strategy as you expand your portfolio.

Final Thoughts: Build a System Around Cost Seg

If you’re in this for the long haul, you need a system that lets you acquire, depreciate, reinvest, and repeat. That’s what the cost segregation process allows you to do.