Cost segregation has long been associated with institutional investors purchasing $100 million properties, but a growing number of smaller real estate investors are discovering that this tax strategy can also work for them. Brian Kiczula, a Real Estate Professional at CostSegRx, notes that the traditional pricing model for cost segregation studies often makes them cost-prohibitive for investors in the $1 million to $15 million range, such as Airbnb owners, small hotel buyers, and RV park operators. As a result, these investors either overpay for studies designed for much larger deals or skip them entirely, leaving valuable tax benefits unclaimed.
Cost segregation works by breaking down a property into its individual cost components, allowing short-life assets like exterior site improvements, interior fixtures, and specialized equipment to be depreciated over 5 or 15 years instead of the standard 27.5 or 39 years. With bonus depreciation currently at 100%, investors can accelerate all short-life asset depreciation into the first year, offsetting active or passive income depending on their tax situation. The benefit can be substantial, but only if the cost of the study does not outweigh the tax savings.
Kiczula explains that most cost segregation firms have designed their workflows and fee structures around large transactions and never adjusted them downward. 'Historically, cost-segregation studies were very expensive, and most cost-segregation firms in the United States cater towards larger investors – your clients that are buying the $100 million building,' he says. 'I saw that there was a real need for clients that were investing in residential real estate, your Airbnb clients, your investors that are buying small hotels for $5 million.'
The issue is not that smaller properties lack depreciable assets; rather, the high fees can erase the return on investment for properties at lower purchase prices. When a traditional firm analyzes a $4 million Airbnb or a $6 million mobile home community, it often applies pricing designed for far larger engagements. This pricing dynamic shapes how CPAs advise their clients: when the study costs more than the tax savings it produces, advisors reasonably tell investors not to bother. Over time, that advice hardens into conventional wisdom that cost segregation doesn't work for smaller investors, but Kiczula argues that this belief is often wrong.
'I've had a lot of tax preparers tell their clients that it doesn't make sense for them to do a cost segregation study because they only own a certain amount of properties with a basis or a purchase price at a certain level,' Kiczula says. 'Individuals can get studies that are affordable to make the return on investment beneficial for them.'
Investors and their advisors often assume that smaller properties, such as a $750,000 short-term rental or a small RV park, won't have enough short-life assets to justify the cost of a study. However, the opposite is frequently true. Properties with resort-style pools, pickleball courts, and extensive exterior site improvements carry substantial accelerated depreciation. RV parks consistently surprise clients with how much qualifies, and car washes and gas stations are similarly asset-rich. The common thread is significant exterior improvements and specialized equipment that qualify as 5-year or 15-year property rather than depreciating over the building's full life.
CostSegRx was built to serve investors in the $1 million to $15 million range directly, providing upfront estimates of benefit so clients can evaluate the return before committing to a full study. 'We want to make sure there's a solid return on investment for our clients,' Kiczula says. The firm uses an engineering-based methodology rather than rule-of-thumb approaches like online calculators or percentage-based estimates, which fail to account for the actual condition and age of components like parking lots or HVAC systems and would not hold up under audit.
For investors in this segment, the decision hinges on whether the study's cost leaves enough room for the tax savings to matter. Kiczula's argument is that it can – provided the firm performing the work prices the engagement to match the property's actual scope rather than defaulting to institutional rates. To learn more about cost segregation for smaller properties, visit CostSegRx.
