What is Cost Segregation?

 A Cost Segregation Study identifies and reclassifies personal property from real property assets, accelerating depreciation for tax purposes and reducing current income tax obligations.

Section 1245 property includes non-structural elements, while land improvements can also qualify for shorter depreciation periods. The primary goal of a cost segregation study is to uncover all costs eligible for faster depreciation, maximizing tax savings and improving cash flow.

 2-story, 3,536 square feet Cost Reclassified. Estimated Property Value $427,000

Year 1 Increased Depreciation: Over 110K in deductible income. Filed Jointly with Real Estate Professional Spouse. 

Few investors and even CPAs understand that cost segregation benefits can apply to all income-producing investments, including single family rental homes. Fortress Wealth  was engaged to perform a study on this property located in Dallas TX in 2018 and the results were incredible.

 In real estate tax strategy, cost segregation is an incredibly powerful tool—but only if used correctly. By default, cost segregation deductions can only offset passive income. That means if you’re a high-income professional—like a doctor, lawyer, or executive—those deductions won’t touch your W-2 income unless you or your spouse qualify as a real estate professional under IRS rules. And here’s where the strategy becomes transformative: you don’t need to stop being a doctor or lawyer to take advantage of this. Instead, you can keep practicing in your high-income career while your spouse—perhaps a stay-at-home spouse or one seeking more flexible work—becomes the real estate professional.

Why is this so powerful? Because when you file jointly, the real estate professional status applies to both spouses. That means the massive cost segregation deductions that normally would be “stuck” against passive income can now be applied against your active income—slashing or even eliminating your taxable income entirely. Real estate professionals can take depreciation deductions directly against active income, and when you file jointly, both of you benefit.

For example, consider a physician earning $500,000 per year in W-2 income. Together with their spouse, they purchase three rental properties a year, each undergoing a cost segregation study. Those properties generate over $300,000 in depreciation deductions annually, which can now be used to offset $300,000 of the physician’s active W-2 income—all because the spouse works 750 hours per year in real estate, qualifying as a real estate professional. Filing jointly, their taxable income is dramatically reduced, leaving far less to the IRS and far more to invest.

Now step back and ask the critical question: Over the next 10 years, what’s the smarter path—continuing to send hundreds of thousands of dollars to the IRS, or buying three rental properties per year and using cost segregation to generate $300,000 in deductions annually, redirecting that money into building long-term wealth?