Cost segregation & bonus depreciation.

How the illustrative first-year depreciation loss shown on the investment calculator is estimated — and how it can flow through to your return.

What cost segregation is

When you own real estate as an investment, the building — everything except the land — can be depreciated (deducted) over time. Normally residential rental property is depreciated on a straight line over 27.5 years. A cost segregation study is an engineering-based analysis that breaks the building into its shorter-life components — appliances, flooring, cabinetry, fixtures, and land improvements like the fence and driveway — which carry 5-, 7-, and 15-year lives instead of 27.5.

Under current law, 100% bonus depreciation was permanently restored for qualifying property (recovery period of 20 years or less) placed in service after January 19, 2025. That means the short-life portion a cost-seg study identifies can be deducted entirely in year one rather than spread across decades.

How the sample number is estimated

The ~30% share is a rough industry ballpark — actual studies commonly land anywhere from about 20% to 35% of the building basis depending on the property. The land figure above is an assumption for illustration; your real land/building split should be supported by the county tax card or an appraisal.

Who can use the losses

These are paper losses. By default they are passive — they offset income from this and your other rental or passive investments, and any unused amount carries forward and frees up when you sell. Two situations let them offset ordinary income (like W-2 wages or business income):

• Short-term rental with material participation. If the average guest stay is seven days or less and you materially participate, the activity isn’t treated as a rental under the passive-activity rules — so the losses can offset ordinary income. This is the path that fits an Airbnb-style use.
• Real Estate Professional status. If you (or a spouse) qualify as a real estate professional and materially participate, rental losses are non-passive and can offset ordinary income.

How it affects your return

In an IRR projection, the year-one depreciation loss shows up as a tax savings (a cash inflow) in year one. Later, when you sell, the depreciation you took is “recaptured” and taxed, and any appreciation is taxed as a capital gain — both of which the calculator estimates at the sale. The net effect is to pull return forward: a large benefit up front, settled up at sale.