As we head into a new year, many real estate investors start thinking about goals, acquisitions, and how to scale.
Far fewer take time to look backward and fix what may have been missed on the tax side.
One of the most overlooked opportunities we see is retroactive cost segregation, particularly for properties placed in service between 2017 and 2022. During those years, bonus depreciation was as high as 100%, and under current law, bonus depreciation is scheduled to return to 100% again in 2026. For many investors, that creates a planning opportunity hiding in plain sight.
Why Cost Segregation Matters
Cost segregation is not a loophole. It is a strategy built into the tax code that allows investors to accelerate depreciation by breaking a property into components with shorter depreciation lives. Instead of depreciating the entire property over 27.5 or 39 years, certain components are depreciated over 5, 7, or 15 years.
The result is higher depreciation earlier, which reduces taxable income and improves after-tax cash flow.
What many investors do not realize is that this does not have to be done in the year the property is purchased.
How Retroactive Cost Segregation Works
The IRS allows you to go back and reclassify depreciation from prior years. A retroactive cost segregation study can capture depreciation you already missed and apply it all at once in the current tax year.
This includes two key pieces. First, it captures the accelerated depreciation that was missed by not reclassifying shorter-life components earlier. Second, it includes any bonus depreciation those components qualified for based on the year the property was placed in service, even if the study itself is completed years later.
All of this is done through a single adjustment in the current year.
No Amended Returns Required
The biggest benefit for many investors is this:
You can do this without amending prior tax returns.
Instead, the adjustment is taken in the current tax year, often creating a large “catch-up” deduction. Depending on your situation, that can mean a meaningful reduction in taxes owed or even a refund.
Why This Matters Going Into the New Year
Lower tax liability directly improves real cash flow. That capital can be used for reserves, debt reduction, or reinvestment. It also allows investors to improve after-tax returns without buying another property, refinancing, or selling anything.
Regardless of when a property was placed in service, and no matter the level of bonus depreciation available at the time, accelerated depreciation can still materially improve after-tax returns. And importantly, depreciation is based on cost, not market value. Appreciation does not reduce depreciation benefits.
Who This Strategy Is Often a Fit For
Retroactive cost segregation is commonly worth exploring for:
- Investors with strong cash flow but high tax bills
- High W-2 earners who qualify as Real Estate Professionals
- Buy-and-hold investors focused on long-term efficiency
The Big Picture Takeaway
Cost segregation is not about avoiding taxes. It is about timing them.
A retroactive study can turn missed depreciation into an opportunity, but timing matters. Planning conversations held before filing season create far more flexibility than last-minute decisions in April.
If you have acquired property in the last few years and have never explored cost segregation, this may be one of the highest-leverage planning conversations you can have going into the new year.
As always, speak with your CPA or tax advisor to determine how this applies to your specific situation. Smart investing is not just about what you buy. It is about what you keep after taxes.
