Is a cost segregation study worth it on an LA apartment building?
A cost segregation study breaks an apartment building into components such as appliances, flooring, cabinetry, landscaping, and site work, and reclassifies them from 27.5-year property into 5-, 7-, and 15-year property. Because 100% bonus depreciation was made permanent for property acquired after January 19, 2025, those reclassified components (often 20-30% of the building's basis) can typically be deducted in year one. For a buyer with income to shelter, that can mean hundreds of thousands in first-year deductions. The tradeoffs: the study costs money, the deductions come back as recapture at sale, and not every owner's tax situation can actually use the losses.
Answered by Shaya Lowenstein, a Los Angeles multifamily broker at Lyon Stahl Investment Real Estate, CA DRE 01942326, with 15 years in apartment buildings and land across Los Angeles County. His closed sales are published with addresses and recording dates, so anything claimed here can be checked against the county record.
Who actually benefits.
The deductions a cost seg generates are passive losses, and that is the gating question. Real estate professionals (a specific IRS status, not a job title) and owners with other passive income to absorb the losses get full value immediately. A high-income W-2 earner with no professional status may find the losses suspended, usable only against future rental income or at sale. Still valuable, but not the year-one fireworks the seminar promised. The economics scale with price: studies run a few thousand to $10,000-plus, so on a $3M twelve-unit building the math is usually compelling, while on a small fourplex it depends on your bracket and whether a condensed study is available. This is squarely a run-it-past-your-CPA-first decision.
The recapture tradeoff nobody mentions in the pitch.
Accelerated depreciation is a timing play, not free money. Every dollar you deduct up front lowers your basis, and the 5- and 15-year property you wrote off is recaptured at sale, much of it at ordinary income rates, which are worse than the 25% cap on straight-line real-property recapture. Hold long enough and the time value of the deductions comfortably wins; flip the building in three years and you may hand most of the benefit back with interest. The exits that protect the play are the same ones that protect all deferred tax: a 1031 exchange carries the liability forward, and the step-up at death erases it. Do the study with the exit in mind, not as an isolated year-one trick.
EDUCATIONAL ONLY, NOT LEGAL OR TAX ADVICE. RATES, THRESHOLDS AND ORDINANCES CHANGE, AND SEVERAL OF THE FIGURES HERE DEPEND ON FACTS SPECIFIC TO YOU. CONFIRM ANYTHING YOU PLAN TO ACT ON WITH YOUR OWN ATTORNEY OR CPA, OR WITH THE AGENCY THAT SETS IT.
What is the bonus depreciation percentage right now?
One hundred percent, made permanent by the 2025 tax bill for qualifying property acquired after January 19, 2025, and the old phase-down schedule is gone. Tax law moves, so confirm the current rule with your CPA before underwriting around it.
Can I do a cost segregation study on a building I bought years ago?
Yes. A look-back study with a Form 3115 filing lets you catch up the missed depreciation in the current year without amending old returns. Often the single biggest deduction a long-time owner has never taken.
Does cost segregation change my property taxes?
No. Your assessed value under Prop 13 and your county tax bill are untouched. Note that the year-one benefit is federal only: California has never conformed to the federal bonus-depreciation rules of section 168(k), not under the 2017 act and not under the 2025 one, so the bonus amount is added back on the state return and recovered over the standard schedules instead. The federal saving is unaffected; the state saving is deferred, not lost.
SHAYA LOWENSTEIN · LYON STAHL INVESTMENT REAL ESTATE · DRE #01942326 · (323) 944-2221