Cost Segregation for $500K to $2M Properties
The advice that studies only pay above several million dollars is out of date. Here is where the breakeven actually falls.
Cost segregation on properties between $500,000 and $2,000,000 is frequently dismissed on the basis that studies only pay at larger scale. That rule of thumb dates from a period of lower bonus depreciation percentages and higher study pricing. With 100 percent bonus permanent under the OBBBA and studies priced by square footage, the breakeven now sits well below $1,000,000 of depreciable basis for most property types.
Where the Old Rule Came From
The guidance that studies need several million dollars of basis was reasonable when two things were true: study pricing was often a fixed engagement fee in the five figures regardless of building size, and bonus depreciation was phasing down, so only a fraction of the reclassified amount was immediately deductible.
Both have changed. Square-footage pricing scales the cost to the building, and permanent 100 percent bonus means the full reclassified amount is deductible in year one. The arithmetic that produced the old rule no longer holds.
The Breakeven Arithmetic
The test is straightforward. A study pays when the present value of the accelerated deduction exceeds its cost.
Take a $900,000 purchase with $150,000 allocable to land, leaving $750,000 of depreciable basis. At a 22 percent reclassification, typical for a modest commercial property, $165,000 moves into short-lived categories and becomes immediately deductible under permanent bonus.
For an owner in the 37 percent bracket who can use the deduction, that is roughly $61,000 of federal tax deferred into year one. Against a study priced at $1 per square foot, a 6,000 square foot building costs $6,000. The ratio is roughly ten to one, and it remains favorable well below this size.
Where the $2,000 Minimum Binds
Because we price at $1 per square foot subject to a $2,000 minimum, small buildings pay the minimum rather than the per-foot rate. A 1,200 square foot property costs $2,000 rather than $1,200.
Even then the arithmetic usually holds. A small property with $400,000 of depreciable basis reclassifying 20 percent produces $80,000 of immediate deduction, worth roughly $30,000 to an owner in the top bracket. Against a $2,000 minimum that is still strongly positive.
What Actually Decides It at This Size
At $500,000 to $2,000,000, study cost is rarely the deciding factor. Three other questions matter more:
Can the deduction be used? A suspended passive loss produces no current benefit regardless of how cheap the study was. This is the single most important question and it should be answered first.
Is a sale planned? Depreciation recapture on sale reverses much of the benefit. A hold of five years or more generally supports a study; a sale within two to three years often does not.
What is the property type? A 10 percent reclassification on a warehouse produces a very different result from a 35 percent reclassification on a dental office at the same price.
The Catch-Up on an Older Small Property
Smaller properties are disproportionately likely to have been held for years without a study, precisely because owners were told they were too small to bother with. That history is now an advantage.
A Form 3115 accounting method change allows the cumulative difference between depreciation claimed and depreciation that should have been claimed to be taken in the current year, without amending any prior return. A $900,000 property bought six years ago and never studied delivers six years of missed acceleration in a single year, which is frequently a larger first-year number than a study on a property acquired this year would produce.
The filing is made with the current year return, so the practical deadline is the return itself rather than year-end. This is one of the few valuable moves still fully available after December 31.
The Case That Is Almost Always Worth It
One profile stands out at this size: a business owner who owns the building their company operates from. The passive activity problem largely falls away because the property is used in the trade or business, the deduction offsets operating income directly, and the hold period is usually long because the business is not moving.
For that owner, a $700,000 building is very often worth studying, and the question is not whether but when, timed against the year with the most income to offset.
Key Takeaways
- The several-million-dollar rule of thumb predates square-footage pricing and permanent bonus.
- Breakeven now sits well below $1,000,000 of depreciable basis for most property types.
- At this size, usability and hold period decide the outcome far more than study cost.
- A sale planned within two to three years usually argues against a study.
- An owner-occupied building at this size is almost always worth studying.
Start With the Pillar Guide
Frequently Asked Questions
Is cost segregation worth it on a $750,000 property?
Usually yes, if the deduction is usable and the hold period is reasonable. At roughly $600,000 of depreciable basis and a 20 to 25 percent reclassification, the immediate deduction is around $120,000 to $150,000, worth $44,000 to $55,000 to an owner in the top bracket against a study cost driven by square footage.
What is the smallest property worth studying?
There is no hard floor, but below roughly $300,000 of depreciable basis the $2,000 minimum starts to matter and the answer depends heavily on property type and whether the deduction is usable. A preliminary estimate settles it quickly.
Does a residential rental qualify?
Yes. Residential rental property depreciates over 27.5 years rather than 39, so the baseline deduction is already larger and the reclassification percentage is typically lower, often 15 to 25 percent. The passive activity question is usually the deciding factor rather than the study economics.
How long does a study take?
Typically a few weeks from engagement to delivered report, including the site documentation and the engineering analysis. Studies on properties already placed in service in prior years also require the Form 3115 filed with the current year return to claim the catch-up.
More in This Series
Talk Through Your Situation
Every situation turns on its own facts. Schedule a discovery call and we will walk through what applies to you, what it is worth, and what it would take to put it in place.