LaviCPA is a Los Angeles CPA firm that helps real estate investors decide whether a study is worth commissioning, how the results should appear on the federal return, and how California's rules interact with the federal picture. Shawn Lavi, CPA and Elias Lavi, CPA work with investors who already hold property and with buyers who want the depreciation plan set before or soon after closing. The office is at 7707 Sunset Blvd.
If you are weighing a study on a recent purchase, a refinance, or a look-back year, book a consultation. Bring the closing statement, depreciation schedules, and any engineering proposal you have already received. We will talk through fit, timing, and how the study should connect to your return, without promising results the facts do not support.
What a cost segregation study does
When you buy a building, the IRS lets you depreciate it over 27.5 years (residential rental) or 39 years (commercial). But not every part of a building is a 27.5- or 39-year asset. Carpeting, appliances, cabinetry, specialty lighting, landscaping, parking lot paving, and certain building systems can be reclassified to 5-, 7-, or 15-year recovery periods. A cost segregation study is an engineering analysis that breaks the building's cost into these components and reassigns the depreciation lives.
The result: more depreciation in the early years of ownership, which reduces taxable income now. This is tax deferral, not tax elimination — the depreciation is recaptured when you sell — but deferring tax for years has real value, and the time value of that deferral is the entire point.
Bonus depreciation: the federal schedule
Bonus depreciation lets you deduct a percentage of qualifying property's cost in the first year, instead of depreciating it over its recovery period. For real estate investors, the relevant schedule under current law:
- 2022: 100%
- 2023: 80%
- 2024: 60%
- Acquired before Jan. 20, 2025: 40% if placed in service in 2025, 20% if placed in service in 2026
- Acquired after Jan. 19, 2025 (OBBBA): 100% — permanent, no sunset
Bonus applies to property with a recovery period of 20 years or less — which is exactly what a cost segregation study identifies. So for property acquired after January 19, 2025, the reclassified 5-, 7-, and 15-year property can be written off in full in the year it's placed in service, unless you elect out for a class. The combination of cost segregation and bonus depreciation is one of the largest single-year deductions available to a real estate investor.
A large first-year deduction only helps if you can use it. Rental losses are usually passive unless you qualify for real estate professional status or a short-term rental exception. Even then, the 2026 excess business loss cap limits net business losses to $256,000 ($512,000 joint) against other income.
The California problem: no bonus depreciation
Here is the part that catches investors by surprise: California does not conform to federal bonus depreciation. On your federal return, you take bonus depreciation at the rate that applies to the property (for example, 100% for qualifying property acquired after Jan. 19, 2025, or 40% for property acquired earlier in 2025). On your California return, you add it back and depreciate the property under standard California MACRS — no bonus.
This creates a federal-state difference that must be tracked every year on your California return (Schedule CA adjustments). The federal and California depreciation schedules diverge, and the difference reverses over the life of the asset. If your CPA is not tracking this, you are either overpaying California tax now or storing up a reconciliation problem for later. We maintain the dual depreciation schedules so both returns are correct.
California also caps Section 179 at $25,000, with a phase-out starting at $200,000 of qualifying purchases. The federal limit for 2026 is $2,560,000. The short version: the federal tax benefit is real and large, but the California benefit is much smaller, and the difference is permanent tracking work.
Recapture: what happens when you sell
Depreciation is not free money — it is a loan from the IRS that comes due when you sell. The reclassified 5- and 7-year property is Section 1245 property, recaptured as ordinary income. The 15-year land improvements and the building are Section 1250 property. Depreciation above straight line on them, including bonus, is recaptured as ordinary income. The rest is unrecaptured Section 1250 gain, taxed at up to 25% federal. This is why cost segregation is a deferral strategy, not a reduction strategy — unless you pair it with a 1031 exchange, which can defer the recapture if the replacement property carries enough Section 1245 property, or hold the property until death, when heirs may receive a basis tied to fair market value that can eliminate much or all of the deferred gain, depending on ownership and estate facts. Pairing cost seg with a 1031 replacement is also scoped in the nationwide 1031 Exchange Tax Plan.
The decision to do a cost segregation study should always include a recapture analysis: how long you expect to hold, whether a 1031 is likely at exit, and whether the present value of the deferral exceeds the future recapture cost. For most investors with a 5+ year hold, the math works. For a quick flip, it usually does not.
When a study makes sense
- Residential rental and multifamily. Apartments and rental houses have significant 5-year property (appliances, carpeting, cabinetry) and 15-year property (landscaping, paving).
- Commercial with tenant improvements. Retail, office, and hospitality often have extensive build-outs that reclassify well.
- New purchases and new construction. The earlier the study, the more years of accelerated depreciation you capture. A study done in year one of ownership is far more valuable than one done in year five.
- Properties above ~$500K in basis. Below that, the cost of the engineering study can eat the benefit. The threshold is not fixed — it depends on the property type and component mix.
A study can also be done retroactively ("look-back") for property you already own and have been depreciating over 27.5 or 39 years, capturing the missed acceleration without amending prior returns — the adjustment is taken in the current year.
Who does the study
The study itself is performed by an engineering firm — not by us. We are the CPA who determines whether a study is worth it, coordinates with the engineer, integrates the results into your depreciation schedule, tracks the federal-California difference, and plans the recapture. If you own property and have never had a study, the conversation is worth having.