Cost Segregation 2024: Trends and Outlook

Cost segregation studies provide real estate investors with ample opportunity to minimize their taxes with fast depreciation. In recent years, this financial tool has become increasingly important, which has pushed the cost segregation study industry to greater heights. In 2024, you can use this tool to accelerate your depreciation deductions and reduce the amount of taxes you owe. 

What is Cost Segregation?

Cost segregation is a widely used tax deferral strategy that helps property owners save money by allowing them to write off as much as 30-35% of the home’s initial purchase price. By deferring some of your taxes, you’ll be able to increase your cash flow. 

When a building gets older, it depreciates, which means that it loses some of its value. While the entirety of the building can have a lifespan of 27.5 or 39 years, the subcomponents usually have much shorter lifespans that last for around five to 15 years. 

When performing a cost segregation study, it’s possible to write off many of the components within your building. To learn more about cost segregation and how it works, read our main post on the subject. Depending on the size of your property, you can claim several hundred thousand dollars with a simple cost segregation study.

How Does It Help Airbnb Hosts and Real Estate Investors?

Cost segregation studies are highly beneficial for Airbnb hosts and real estate investors alike. This tool allows you to harness greater depreciation deductions because you can precisely separate the value of your land from the value of your home and other improvements. The simplest building-to-land allocation method is 80% building and 20% land. A high building allocation percentage results in better depreciation deductions.

This strategy is most effective when you own multiple properties. You can use your extra cash flow to reinvest in additional properties or make improvements to your existing ones. If you own numerous properties, you can earn more cash flow with this strategy. You’ll also be able to generate massive tax savings in certain situations. By accelerating your depreciation deductions, you should significantly reduce your taxable income.

Are There New Rules for CostSeg in 2024?

The cost segregation industry encounters new rules and changes every year. For example, this strategy has proven popular with Low Income Housing Tax Credit (LIHTC) properties. It’s possible to estimate how much you’ll earn from a cost segregation study before you even buy this type of housing. You can perform cost segregation throughout the entire lifecycle of this project. 

CostSeg Trends & Updates for 2024

Like most tax breaks and deductions, you need to be aware of the latest trends and updates that can affect how much you earn from a cost segregation study. Bonus depreciation continues to be phased out and may dissipate completely by 2026. Real estate costs are high as well, which is why investors must adapt to maintain a positive cash flow.

Cost Segregation and the Bonus Depreciation Phase-Out

For the 2024 tax year, the depreciation amount is 60%. When using the cost segregation strategy, you can deduct 60% of your investment property’s value in 2024.

High Costs in Real Estate

Constrained inventory and high rates continue to be the dominant themes fueling the real estate market. To acquire properties, you must have the capital needed to buy them and deal with the high interest rates associated with any mortgage loans you obtain. 

Because of the state of the economy in 2024, you’ll face high mortgage rates, increased costs for improvements, and higher property costs. With costs rising so dramatically, you must save money where you can. A CostSeg study will incur a short-term expense, but it typically pays off over the long term, especially for owners with multiple properties.

How to Get Started with Cost Segregation

To get started with this process, you must obtain a cost segregation study, which can be handled by a reputable financial firm. Before the firm creates a cost segregation report, they’ll first perform a feasibility analysis to ensure your property is a strong candidate for the process. 

The average cost of this type of study in 2024 is around $5,000-$15,000. Numerous factors impact the overall costs, which include everything from your location to the financial firm you hire. The industry is growing, so there are lots of different options to choose from. To make sure your cost segregation study maximizes your deductions, be sure to choose a reputable vendor.

Closing Thoughts on CostSeg

From high real estate costs to the bonus depreciation phase-out, now may be the best time to obtain cost segregation studies for your investments. You’ll gain more cash flow at a time when costs are high, which will allow you to invest in additional properties before bonus depreciation runs out in 2026. 

Connect with a Shared Economy Tax pro now to learn more about advanced strategies that can slash a chunk off your annual tax bill. Get started now with a one-on-one strategy session.

About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Shared Economy Tax. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
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