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Cost Segregation Study CPA in Los Angeles

Reviewed by Shawn Lavi, CPA.

LaviCPA is a Los Angeles CPA firm that helps rental owners decide whether a cost segregation study is worth buying, works with the engineering firm that performs it, and puts the results on the federal and California returns. The study moves parts of a building into 5-, 7-, and 15-year property, and for property acquired after January 19, 2025, those parts qualify for 100% federal bonus depreciation in the year they are placed in service. California does not allow bonus depreciation, so the state benefit is smaller. A study still pays in California, but less, because the state adds the bonus back and the study's shorter recovery lives are the only state benefit.

Shawn Lavi, CPA is LaviCPA's principal. Elias Lavi, CPA is co-owner and founder. We're a 12-person firm at 7707 Sunset Blvd, and we meet in person or by video.

Book a free New Client Introduction

Who this is for

  • You own a rental house, a multifamily building, or a commercial property and plan to hold it for several years.
  • You bought or built in 2025 or 2026 and want the depreciation set up right in the first year.
  • You have owned a building for years and depreciated it straight-line. A look-back study can catch up the missed depreciation in one year.
  • You run a short-term rental or qualify as a real estate professional, and you materially participate, so a large loss may offset your other income.
  • You finished a 1031 exchange and want to know what can be done with the replacement property.

It usually doesn't pay on a property you plan to sell soon. On a small building, the study fee can use up most of the benefit.

How it works with LaviCPA

  1. New Client Introduction. It's free and runs 30 minutes, by Zoom, by phone, or at our office. Bring the closing statement, last year's return, and any study proposal you already have.
  2. Can you use the deduction? We check the passive loss rules, real estate professional status, the short-term rental exception, the $25,000 allowance, and the excess business loss cap. We also look at how long you plan to hold and how you expect to exit.
  3. The proposal. An engineering firm quotes the study. Many give an estimate of the added deduction before you sign. We read it with you.
  4. The study. The engineer inspects the property, in person or by video, and delivers a report and an asset schedule.
  5. The return. We put the schedule on your federal return with the right bonus rate for each class, make any election out, and file Form 3115 for a look-back. We keep a separate California schedule.
  6. The exit. We plan for recapture when you sell, a 1031 exchange, or a long hold.

The engineering firm does the study. We don't. The engineer doesn't prepare your return.

How a cost segregation study works

A residential rental building is depreciated over 27.5 years. A commercial building is depreciated over 39 years. Land is not depreciated at all.

Some parts of a building have shorter lives. Appliances, carpet, cabinets and some electrical work can be 5- or 7-year property. Paving, fencing and landscaping can be 15-year land improvements. A cost segregation study is an engineering report that finds those parts and assigns each one its cost.

The result is more depreciation in the early years. The total depreciation over the life of the building doesn't change. You take it sooner, and most of it is taxed back when you sell. The value is in the timing.

Bonus depreciation in 2025 and 2026

Bonus depreciation lets you deduct a percentage of qualifying property in the year it's placed in service. It applies only to property with a recovery period of 20 years or less. The building itself doesn't qualify. The 5-, 7- and 15-year parts a study finds do.

The rate depends on when you acquired the property. The acquisition date is the date of the written binding contract, not the closing date.

AcquiredPlaced in serviceFederal bonus rate
After January 19, 20252025, 2026 or later100%, with no scheduled phase-down
Before January 20, 2025202540%
Before January 20, 2025202620%

For the first tax year ending after January 19, 2025 (2025 for most individuals), you can elect 40% in place of 100%. You can also elect out of bonus for a whole class of property. Those choices matter when you can't use a big loss this year.

A short-term rental can be 39-year property, not 27.5. A building counts as residential rental property only if 80% or more of its rent comes from dwelling units. Units in a building where more than half the units are used on a transient basis aren't dwelling units. The study still finds the 5-, 7- and 15-year parts.

When it pays off

  • You'll hold long enough. The deduction comes now and the recapture comes later. A longer hold means more value from the deferral.
  • You can use the loss. Rental losses are passive by default. They offset other income only if you qualify as a real estate professional and materially participate, or run a short-term rental with an average stay of 7 days or less and materially participate. The $25,000 allowance phases out between $100,000 and $150,000 of modified adjusted gross income. Unused passive losses carry forward until you have passive income or sell.
  • The cap. For 2026, net business losses above $256,000, or $512,000 on a joint return, can't offset other income that year. The excess carries forward as a net operating loss.
  • The numbers clear the fee. Ask the study firm for its estimated added deduction and compare it to the fee before you commit.

Look-back studies and Form 3115

If you've owned a building for years, the study can be done now. You don't amend old returns.

  • We file Form 3115 with your current return. It's an automatic change in accounting method, designated change number 7 in Rev. Proc. 2025-23.
  • The depreciation you missed since you placed the building in service comes in as one catch-up deduction, called a section 481(a) adjustment, in the year of change.
  • The return with the 3115 must be filed on time, including extensions. A copy goes to the IRS separately.
  • The automatic change generally needs the old method on two or more filed returns. If you placed the building in service last year and filed one return, you can amend that return or use the 3115.
  • The catch-up uses the bonus rate of the year the building was placed in service. A building placed in service in 2023 uses 80% for its shorter-life parts, not 100%.

California is different

California does not allow federal bonus depreciation. We add the bonus back on your California return and depreciate the property under California's regular rules. The shorter lives from the study still apply there, so you get some California benefit, just less and later.

That gives you two depreciation schedules, one federal and one California. They differ every year until the property is sold. We keep both.

California also follows the federal passive loss rules except for real estate professional status. A loss that is nonpassive federally because of REPS is still passive on the California return. See REPS, cost segregation, and the excess business loss cap for how the federal and California numbers diverge.

California limits Section 179 expensing to $25,000, with a phase-out starting at $200,000 of qualifying purchases.

When you sell

  • Depreciation on 5- and 7-year property is Section 1245 property. It's recaptured as ordinary income.
  • Bonus on 15-year land improvements, above what straight-line would have allowed, is also recaptured as ordinary income.
  • The rest of the building's depreciation is unrecaptured Section 1250 gain, taxed at up to 25% federal.
  • A 1031 exchange can defer this. Section 1245 recapture can still be taxed if the replacement property doesn't have enough Section 1245 property.
  • Heirs who inherit the property generally get a basis equal to its value at death.

Who you work with

Shawn Lavi, CPA is LaviCPA's principal. Elias Lavi, CPA is co-owner and founder. He founded the firm about 40 years ago. Both are licensed CPAs with the California Board of Accountancy. We're a 12-person firm at 7707 Sunset Blvd, Los Angeles, CA 90046. Office hours are Monday to Friday, 9 AM to 5 PM.

Related pages

If the rental sits in its own LLC, or you have several, see CPA for real estate investors with several LLCs. For an IRS or FTB exam of the study, see audit help for real estate investors.

Cost segregation FAQs

Who can do a cost segregation study on my rental property in Los Angeles?

An engineering-based cost segregation firm performs the study. A CPA decides whether it is worth buying and puts the results on your return. LaviCPA, a Los Angeles CPA firm on Sunset Blvd, does the CPA side. We check whether you can use the deduction, read the engineer's proposal and report with you, and file the federal and California depreciation, including Form 3115 for a look-back study.

Is a cost segregation study worth it on a single-family rental?

Sometimes. It depends on the building's cost (land does not count), how long you plan to hold, and whether you can use the loss this year. Ask the study firm for its estimate of the extra first-year deduction and compare it to the fee. Then we check whether the passive loss rules let you use it.

What is the bonus depreciation rate for 2026?

100% for qualified property acquired after January 19, 2025. The acquisition date is the date of the written binding contract, not the closing date. Property acquired under a contract signed before January 20, 2025 gets 20% if placed in service in 2026, or 40% if placed in service in 2025. California allows no bonus depreciation at all.

Does California allow bonus depreciation?

No. California does not follow federal bonus depreciation. The bonus you take on your federal return is added back on your California return, and the property is depreciated there under California's regular rules. The shorter lives from the study still apply in California, so the state benefit is smaller but not zero. We keep a separate California schedule.

Can I do a cost segregation study on a property I bought years ago?

Yes. This is called a look-back study. We file Form 3115, an automatic change in accounting method, with your current return. The depreciation you missed since you placed the building in service comes in as one catch-up deduction this year, without amending old returns. The catch-up uses the bonus rate of the year the building was placed in service.

Can cost segregation losses offset my W-2 income?

Only if the rental losses are not passive. That usually means you qualify as a real estate professional and materially participate, or you run a short-term rental with an average stay of 7 days or less and materially participate. Otherwise the losses are passive and carry forward until you have passive income or sell. For 2026, net business losses above $256,000, or $512,000 on a joint return, also cannot offset other income that year.

I did a 1031 exchange. Can I still do a cost segregation study?

Often, yes. Basis you added in the exchange, such as new cash or new debt, can be studied like a new purchase. Basis carried over from the property you sold follows special depreciation rules, and the result depends on the elections made on the return. Bring the exchange closing statements and we will work through it.

Do I need the study done before I file my taxes?

Yes, for it to go on that return. For a purchase year, the report has to be in hand before the return is filed. For a look-back, it has to be done before you file the return that carries Form 3115, and that return has to be filed on time, including extensions.

What happens to the extra depreciation when I sell?

Most of it is taxed back. Depreciation on the 5- and 7-year property is recaptured as ordinary income. Bonus on 15-year land improvements, above what straight-line would have allowed, is also recaptured as ordinary income. The rest of the building's depreciation is taxed at up to 25% federal. A 1031 exchange can defer this, and heirs who inherit the property generally get a new basis.

Book a New Client Introduction

Bring the closing statement, last year's return, and any study proposal you have. If it's a look-back, bring the current depreciation schedule too. We'll tell you whether a study is worth pricing out.

The intro is free and runs 30 minutes, by Zoom, by phone, or at our office on Sunset Blvd. It covers fit, scope and next steps. Tax answers come after that, as paid work.

Book a New Client Introduction or call 323-463-2600.

The information on this page is for educational purposes and is not tax, legal, or investment advice. Tax rules change and your situation is your own. Talk to LaviCPA or another qualified CPA before acting on anything here.

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