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. Elias Lavi, CPA works with investors who already hold property and with buyers who want the depreciation plan set before or soon after closing. Shawn Lavi is co-owner of the practice. 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 (Book Consultation / Calendly). 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% bonus
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0% (bonus expires)
Bonus applies to property with a recovery period of 20 years or less — which is exactly what a cost segregation study identifies. So a study done in 2024 lets you bonus-depreciate 60% of the reclassified 5-, 7-, and 15-year property in year one. The combination of cost segregation and bonus depreciation is one of the largest single-year deductions available to a real estate investor.
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 the 60% (or 40%, or 20%) bonus deduction. 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 does not conform to federal Section 179 in the same way for real property, and limits it differently. 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. Accelerated and bonus depreciation is recaptured as unrecaptured Section 1250 gain, taxed at a maximum 25% federal rate (plus California). This is why cost segregation is a deferral strategy, not a reduction strategy — unless you pair it with a 1031 exchange, which defers the recapture, or hold the property until death, when your heirs get a stepped-up basis that wipes out the deferred gain.
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 — especially while bonus depreciation is still above zero.