Cost segregation is one of the most powerful tax strategies available to real estate owners—yet it remains widely misunderstood. As a result, many investors delay taking action or dismiss the strategy altogether, often based on outdated assumptions rather than current tax law.
The truth is that believing the wrong information about cost segregation can cost property owners tens—or even hundreds—of thousands of dollars over time. Below, we address the most common myths and explain why relying on them may be quietly draining your cash flow.
Myth #1: “Cost Segregation Is Only for Huge Properties”
A common misconception is that cost segregation is only worthwhile for large commercial buildings or institutional investors. While larger properties can generate significant benefits, size alone is not the deciding factor.
In practice, cost segregation can be effective for properties starting around $500,000, depending on factors such as asset type, tax position, and ownership structure. Multifamily properties, industrial buildings, retail centers, medical offices, and certain residential rentals frequently qualify.
What matters most is not how big the property is, but:
- The purchase price or construction cost
- The types of building components involved
- The owner’s ability to use accelerated depreciation
Ironically, smaller and mid-sized investors often experience some of the strongest returns relative to the cost of the study, making this myth particularly expensive.
Myth #2: “Cost Segregation Triggers an IRS Audit”
Fear of an IRS audit is one of the biggest reasons property owners avoid cost segregation. While no tax strategy is completely risk-free, this concern is often overstated.
Cost segregation is explicitly recognized by the IRS when performed in accordance with established guidelines. The key distinction lies in how the study is conducted.
Audit risk typically increases when:
- Studies lack engineering-based analysis
- Asset classifications are overly aggressive
- Supporting documentation is weak or inconsistent
A properly prepared, engineering-based cost segregation study is not a loophole—it’s a defensible accounting method grounded in tax law. When audits do occur, they more often focus on poorly executed studies rather than the strategy itself.
Myth #3: “I Missed My Chance—It’s Too Late”
Many property owners assume cost segregation must be completed in the year a property is purchased or placed in service. Fortunately, that’s not the case.
The IRS allows owners to perform cost segregation years after acquisition through a change in accounting method using Form 3115. This enables investors to:
- Catch up on missed depreciation
- Claim the accumulated benefit in the current tax year
- Avoid amending prior tax returns
This often results in a large, one-time deduction that immediately improves cash flow. Investors who believe they’ve “missed the window” are frequently sitting on unrealized tax savings.
Myth #4: “The Tax Savings Aren’t Worth the Cost”
Some owners hesitate because they focus on the upfront cost of a study rather than the return it generates. Like any investment, the real question is whether the benefits outweigh the expense.
In many cases, a cost segregation study delivers:
- Tax savings multiple times the cost of the study
- Immediate cash flow improvements
- Capital that can be redeployed into acquisitions or improvements
When evaluated strategically, cost segregation is often one of the highest-ROI tax planning tools available to real estate owners.
Myth #5: “Cost Segregation Only Defers Taxes—It Doesn’t Save Money”
It’s true that cost segregation accelerates depreciation rather than eliminating it outright. However, dismissing it as “just a deferral” oversimplifies its real impact.
Accelerated depreciation:
- Improves near-term cash flow
- Reduces current tax liabilities when capital is most valuable
- Allows investors to reinvest earlier and compound returns
Additionally, strategies such as 1031 exchanges, long-term holding, stepped-up basis at death, and thoughtful exit planning can significantly reduce—or even eliminate—recapture exposure. In practice, many investors turn accelerated depreciation into a lasting advantage.
Myth #6: “Bonus Depreciation Changes Make Cost Segregation Less Valuable”
Some investors hesitate because they believe changes to bonus depreciation have reduced the value of cost segregation. However, with bonus depreciation made permanent under the One Big Beautiful Bill, this concern no longer applies.
In fact, permanent bonus depreciation strengthens the case for cost segregation.
Cost segregation is the process of identifying and reclassifying building components into shorter recovery periods. Bonus depreciation then allows those components to be expensed immediately. When bonus depreciation is permanent, the planning value of cost segregation becomes even more compelling.
With bonus depreciation locked in:
- Investors can continue accelerating depreciation year after year
- Long-term acquisition and construction planning becomes more predictable
- Cost segregation becomes a core portfolio strategy rather than a timing-driven decision
Rather than rushing to act before a deadline, property owners can now integrate cost segregation into ongoing tax and investment planning with confidence.
Myth #7: “Any CPA Can Handle Cost Segregation”
Cost segregation sits at the intersection of tax law, accounting, and engineering. While CPAs play a vital role, not all cost segregation studies are created equal.
A defensible study requires:
- Engineering-based analysis of building components
- Detailed asset classification tied to tax code
- Methodology aligned with IRS audit standards
Relying on simplified or automated approaches can lead to missed deductions—or increased scrutiny. Experience and technical rigor matter.
The Real Cost of Believing These Myths
The biggest risk with cost segregation isn’t executing it incorrectly—it’s not pursuing it at all. Misinformation causes investors to delay decisions that could materially improve cash flow and long-term returns.
By separating fact from fiction and working with knowledgeable professionals, real estate owners can evaluate cost segregation based on current law, real numbers, and strategic goals—not outdated myths.
When done correctly, cost segregation isn’t aggressive, complicated, or reserved for elite investors. It’s a practical, IRS-recognized strategy that helps property owners keep more of what they earn and put capital to work more efficiently.
Ready to Separate Fact From Fiction?
Cost segregation isn’t about chasing loopholes—it’s about applying proven, IRS-recognized strategies correctly and strategically. When done right, it can unlock meaningful cash flow, improve investment returns, and support smarter long-term planning.
At KAJMST, we help real estate owners, investors, and advisors evaluate cost segregation using current tax law, a defensible methodology, and real-world results. Whether you’re considering a new acquisition, reviewing an existing portfolio, or wondering if you missed opportunities in prior years, our team can help you determine if cost segregation makes sense for your specific situation.
The cost of misinformation is real—but so is the opportunity.
Contact KAJMST to explore how cost segregation can work as part of a thoughtful, compliant, and forward-looking tax strategy.