If you own rental properties and want to keep more of what you earn, this episode is for you. I sat down with Brian Kiczula, a cost segregation specialist, to unpack what cost segs actually are, who can benefit from them, and how new tax law updates for 2025 make this strategy even more powerful. We talk ROI, depreciation myths, and the real numbers behind pulling forward paper losses—without touching your cash flow. Whether you own short-term rentals, long-term buy and holds, or commercial buildings, this one could save you serious money. It’s full of real-life examples, smart cautions, and actionable takeaways.
For a complete guide on optimizing and scaling your real estate investments, download my Freedom Blueprint! This essential tool walks you through ten key steps for organizing a profitable property portfolio. Click here to get your copy today!
Hello everyone and welcome back. I’m really glad that you joined me today. Thanks for being here with me.
Thanks for having me.
Get ready for insights to help you scale, systemize, and create more freedom with your real estate investing. And what’s going to be shared with us is something that is really exciting, something I use myself, and something that’s really relevant here in 2029 in our current new tax bill situation. And that is cost segregations. So, let’s start at the beginning. If you could tell me, like, how did you get into cost segregations? And for those that it’s new to them, kind of give us an intro of what does that mean.
Yeah, everybody grows up dreaming about being a cost segregation specialist. That’s certainly for sure. No, so cost segregation, something I’ve been in the real estate space since 2002, probably a little bit earlier than that. And fast forward up to 2019, I had to step away from work for about a year. And when I had to come back and start working again, I had to kind of reinvent myself and decide what I wanted to do. Did I want to jump back into the real estate space? The answer is probably not as, let’s say an agent or a sales rep of any kind. So I decided I wanted to start doing tax returns like any normal person would do and started doing tax returns.
Did not really like it. I mean, I enjoy taxes. I really enjoy reviewing tax returns and analyzing them, but it really wasn’t my sweet spot. Wasn’t something I wanted to do full time, but then I found cost segregation. So just a small niche of, let’s call it a specialty tax service where I focus really on your fixed asset schedules—so your depreciation schedules—on your tax returns and I looked to maximize your depreciation benefits and because of accelerated depreciation, there is just a ton of benefits. So that’s kind of my journey into cost segregation. Wasn’t something I ever thought I would do. And to be honest, I hadn’t really heard of it before.
Yeah, I will say for myself, it was one of those things that I didn’t hear about cost segs until, I want to say 2022. And I’ve been doing real estate investing since 2013. And so it hadn’t crossed my plate. Then I heard about it. And I was like, oh my gosh, how did I not know about this? So if someone like that is listening, let’s start with like, OK, so what real estate investors is cost segregation for? Like, who can use it?
Sure. I’d first learned about cost segregation probably back in 2005. I had a client that was buying apartment complexes in San Diego and in Texas, and they were using the strategy the same way we use it today. And it’s to accelerate the depreciation on your short life assets. So in the case of apartment complexes, you think about a 200-unit apartment complex and you own 200 refrigerators and 200 washers and dryers, all the equipment that comes along with it. Those are the types of assets that we’re looking at accelerating.
And I think when a lot of real estate investors—or the reason they haven’t heard about cost segregation—is because historically the cost associated with doing a cost segregation study was very expensive. We’re talking thousands, sometimes tens of thousands of dollars to do a study. So it really only made sense for your larger projects. You know, we’re talking multimillion-dollar projects. Those were the only folks that wanted to pay the money to do it because there just wasn’t a return on investment. But you fast forward from the early 2000s to where we are today with technology and we’re able to do studies on all sizes of properties. So I’d say really any real estate investor, whether you’re strictly a passive real estate investor, you own a couple of long-term rentals or you’re an active real estate investor and you own short-term rentals or another asset that has a business activity use. It’s really for all investors right now.
And something I want to highlight there, because you made a good point, some investors who are like, they think, because a lot of the tax benefits you hear of, you’ve got to be actively managing, right? Or you’ve got to spend more time on your real estate than you do on your W-2. But even if somebody has a W-2 job, even if they use a property manager for a few long-term rentals, they can still do cost segregations, right?
Yeah, so you’re always going to want to talk to your individual tax preparer or CPA, because everybody’s situation is a little bit different. But at the end of the day, you have two buckets of income. You have a passive bucket and an active bucket. And the depreciation that we’re able to provide is going to be offsetting one of those buckets. But you’re never going to have the bucket jump from one to the other—or typically you won’t. So just keep that in mind. You really want to investigate how the benefits are going to impact you specifically and how that depreciation is going to sit on your fixed asset schedule or depreciation schedule. It’s not a use it or lose it scenario. So if you don’t use all the passive depreciation that year, it’ll carry over to the next year when you might have a passive income gain that you’re trying to offset.
That’s good, that’s good to point out that it can carry over for future years. So pretty much everybody who is buying an actual piece of real estate can use this and it just matters that they’ll get depreciation, it’ll help offset taxes, and their specific tax situation controls how beneficial it’ll be to them. Does that seem like a good summary?
Yeah, I think we should back up and just say the why. Why in the world? Why does it matter? What really is cost segregation and why does it matter? And that’s exactly it. You’re offsetting either active or passive income. So if I’m able to find $100,000 of depreciation this year and you have $100,000 of income, it’ll wipe out all of that income, whether it’s active or passive.
So it’s really powerful. But now let’s say that in your same real estate investment, you only have $25,000 of taxable income. You’ll have that $75,000 that you can roll to the next year. So it’s really attractive and it’s one of the big components of owning real estate, you know, is depreciation.
Well, and to hit on that with that last example you gave, it wipes out that income only in the sense of your taxes. You still get that cash income. It’s just a paper loss, right?
Yeah. So when you’re underwriting for a loan, the underwriters are going to look at your income. What income are you generating year after year? And I’ve had some clients come up to me and say, hey, I can’t do this because I’m buying more property this year. So it’s just a paper loss. So it’s not actually impacting your bottom line. You’re still making the money. It’s a paper loss. It’s depreciation.
Right. You still get the money in the bank. You just don’t have to pay taxes on it. Isn’t that nice?
Yeah. So then let’s look at what are we really doing when we’re doing a cost segregation study? What are you really accelerating? And a lot of clients think you’re accelerating 60% of the asset or 100% of the asset, because I’ve heard of 100% bonus depreciation. And that’s just not the case. You’re only depreciating a percentage of the asset. So you’re pulling forward the short life assets.
When we’re talking about specific assets on properties, the first thing that I’m going to do, and we’ll use that apartment complex as an example, is I’m going to look at the exterior of the apartment complex. I’m going to walk it. I’m going to measure the driveways, the sidewalks. I’m going to measure the pool area, all your pavers. I’m going to check for irrigation lines, landscaping, tennis courts. All of those items are really considered short life assets. It’s a 15-year site improvement. It doesn’t have anything to do with the building structure itself.
Then we’re going to go inside of the building and we’re going to look at the interior and really identify any short life assets that you have inside the interior. Think about your ovens, your washers, your dryers, your microwaves—just all of your appliances, your flooring covers, any window treatments, and some of the electrical and plumbing if it’s for a specialty use.
In addition, if you have furnished apartments or a hotel that’s furnished or Airbnbs that are furnished, we’re also going to look at the furniture. We want to see what we can carve out. So when you really start looking at the short life assets, all of a sudden you’re talking about tens of thousands or hundreds of thousands of dollars in items that we’re able to pull forward on some of these properties. So it’s a huge benefit, whether you’re a residential property owner or you’re investing in, yeah, I don’t know, veterinarian clinics across the country. The benefit is just really there.
I think that that was a really good walkthrough there of all of these pieces you can depreciate over a shorter period. Now, for somebody who’s wrapping their heads around it, can you maybe compare—like let’s say somebody didn’t do a cost segregation—what is their depreciation looking like? Like what happens with those pieces versus if they do the cost segregation?
Sure. So on a traditional depreciation schedule on a residential property, it’s going to be straight line depreciation over 27.5 years. And on a commercial building, it’s straight line depreciation over 39 years. So the first thing that your tax preparer is probably going to do is they’re going to try to determine the cost basis of the property. What did you buy it for?
So let’s say you bought a property for $500,000. And then you have to carve out the land allocation. Land is a non-depreciable asset and it varies depending on where you’re at in the country. Land in Lake Charles is going to be a lot different than land in San Diego. So you’re going to want to look at the land allocation and come up with a reasonable land allocation.
So let’s say on that $500,000 acquisition, it’s $100,000. You’re left with a $400,000 basis that’s going to be depreciated over 27.5 years or 39 years. If we do a cost segregation study, we might be able to accelerate, let’s call it $100,000 of that and pull that forward into the first years of ownership.
And now, you know, we talked about it before we started the recording with the one big, beautiful bill that was just passed last week—they brought bonus depreciation back up to 100%. So what that means is of that $100,000 that we’re able to identify in short life assets, if you acquired a property on or after 1/1/2025, you can take 100% of that in year one. So that’s just a big win for real estate investors.
Yeah, that’s huge. Like in your example, that’s $100,000 of income that you could potentially not pay taxes on this year, right?
And it scales. I mean, you think about clients that are buying hospitals or large apartment buildings or hotels. All of a sudden you’re talking about millions of dollars in depreciation that we’re pulling forward. So yeah, it’s pretty powerful.
And so let’s talk through some of the questions I know people ask about this. So let’s start with maybe somebody who’s got these single-family homes. They’re like, is the juice worth the squeeze? Is the ROI there? If we’re looking at a single-family home, what are they expecting ballpark to spend on a cost seg? Obviously it depends on the property, the value, what they bought it for, what they’ll get. But how much does it typically cost to do that cost seg?
Yeah, so the cost depends on the scope of work. So if you’re a small residential property, you’re under a thousand dollars to do the cost segregation study. And I just have to say, depends on the scope of work because most of us have been in mansions—properties that do have the tennis courts, the swimming pools, multiple elevators—so that property is going to be a bigger project to rebuild. So the cost would be more in that case.
But I’d say you could do a residential study for well under a thousand dollars. And what’s your return on investment? It just depends on the asset—what type of site improvements you have, what type of interior improvements you have—but let’s say we’re able to pull forward 15% to 25% of the basis of the property. I would say the return on investment is almost always there. There are cases when it just doesn’t make sense to do it, and what I would recommend to all investors is get an estimate of benefit done.
It’s free to do. You can take that estimate of benefit back to your tax preparer or financial advisor, run the numbers to make sure that the ROI is there and it really works for you. And then come back and do the study. I always tell my team, I’m like, look guys, I’m always in a hurry to deliver reports, turn around the estimates—that’s just my nature, like I want to get things done.
But I tell them, at the end of the day, you don’t have to do it today or now. So I have a lot of clients that I work up estimates for and I’ll hear back from them in six months. Sometimes it’s a year later, they’re ready to move forward with the study. So you have time to run it by your trusted advisors to make sure that it really works for them.
That’s a great service that you offer where you can do that estimate of benefit and people can see that it’s going to be a win and they’re going to get that ROI.
It’s definitely a little bit more heavy lifting on the front end. We don’t use an automated tool. I certainly could build one and put it on my website. But what I found is that most properties are unique. So I really want to put my eyes on it to make sure that what I’m saying I can accelerate, we’re actually able to do. So it does take a little bit longer to get the upfront estimate. We are going to ask some specific questions from you.
But it’s usually: Can you provide me with a closing statement so I can see what the cost basis is? When was the in-service date? What type of improvements have you made to the property? And then if it’s a look-back study—let’s say you bought the property three years ago and we’re going to do a study on that—we’re going to pull forward past depreciation. I’ll just need a copy of your most recent fixed asset schedule or depreciation schedule to see what’s already been taken into depreciation.
And we’ll review that, come up with the estimate, and then you can take it back to your tax preparer or financial advisor really to make sure it fits in what you’re trying to accomplish.
And that hits on another question I know people ask me about cost segs is, well, I just learned about this, but I already have like five properties. Can I do it on ones I bought before? What does that look like?
Yeah, you can. So what you’re doing is you’re going back and you’re not amending a prior year’s tax return. You’re pulling forward all of that missed depreciation using what’s called a change of accounting method. It’s form 3115 and it’s a 481(a) adjustment. It’s just telling you that you’ve missed depreciation in the past and now you’re going to take it on this year’s tax returns. And that’s what we’re doing. So it is an extra step in the sense that you do have to file the form 3115.
It’s an automatic change of accounting method. It is a document that your CPA is going to have to complete with your tax returns and mail a copy into the Ogden office. So there is an extra step. But yeah, you can pull forward missed depreciation. I’ve got clients that—we just do it every day. I just got I think 13 properties this morning that we’re working on.
Awesome. Is there any property or purchase, let’s say, that was so long ago that it’s like, don’t do it? I mean, obviously there’s the 27.5 years, but anything more recent than that?
Yeah, you know, I’d say we could go back further than 2017, but when you start looking at… you just start losing benefit the further back in time you go. But I’m happy to work up an estimate of benefit to see if there’s still benefit there for you. There might be. But yeah, I’d say five-plus years is kind of a good range to go back.
Awesome. And something else you mentioned is, when you were talking about that 200-unit apartment complex, you were talking about going and measuring and seeing places. If someone wants to work with you, do they have to be in your physical footprint or where are you servicing, or can you help people nationwide?
Yeah, so we can help clients nationwide. The site inspection is something that we would like to do on every single property. It’s not always possible. Certainly on smaller residential properties, it’s not. So we’ll do remote site inspections or we’ll use a third-party site inspector to go out and do the site inspection for us. On larger commercial properties, it’s something that I typically like to go see myself.
Or I’ll have one of my team members go out, walk the property, do the measurements just because it’s a larger asset. But on smaller residential, we’ll use a third party or a remote site inspection if needed.
Okay, awesome. That’s great. So you can help anybody with any property in the US, effectively.
Yeah, anywhere in the United States we can do the property. Hawaii, yeah, certainly. Because if a client has property in Hawaii, we’re not flying to Hawaii. I mean, I’d like to, you can call me. But I live in Sarasota, so maybe not. Yeah, definitely.
Well, and one of the things, like two of my properties when we did cost segs on them, they’re oceanfront. And what was interesting is the land there was so much of the purchase price that even though they’re some of the more expensive properties in my portfolio, they didn’t necessarily have the most lucrative cost segregation because so much of that value was in the land. And I’m sure that would be the case in Hawaii as well. That land is so valuable.
Yeah, so you have to be careful. Land allocations are tricky on high land areas. Let’s call it coastal San Diego, coastal Florida, Hawaii, certainly. But we still want to run the numbers because what happens is, for example, in Los Angeles, if you pull a copy of the county tax assessor’s record and look at the land allocation that the county has assigned, it might be 94% of the value of the property.
So when I’m talking to clients and CPAs, I say that’s probably not the best way to value that asset. And the reason why is because you couldn’t rebuild the property for what they’re saying that 4% or 6% covers. So you have to look at different methods to calculate the land allocation. But you’re absolutely right. The land might be upwards of 50% or more of your acquisition cost. You see it—there is a condo project here in South Florida that just sold. They bought it for like $130 million and they’re going to tear down the whole project and build new condominiums. So $130 million automatically goes to land because that’s what they bought. Ripped down, and whatever they build going up is going to be the new basis for the property.
So land allocations are definitely tricky, and it’s one of the things that I caution clients to really be careful of, because when they’re doing studies or putting properties on their fixed asset schedules, you want to have a reasonable land allocation. If you are involved in an examination or an audit, you want to be able to tell the IRS agent or auditor engineer how you calculated the land allocation. And you really want to make sure that it’s a valid method, because if you tell them, “Yeah, I just assigned a 10% or a 20% land allocation to all my properties,” they’re going to throw it out and make some adjustments. Because like you just said, if you have some coastal properties, it’s probably going to be quite a bit more than 10%, most of the time. You never know what they’re going to buy.
Right, that’s a good point. I’d love to hear other cautions or gotchas. People love to hear about horror stories. Let’s share some of those.
Yeah. So horror stories—more than anything, there’s a couple of things to watch out for. I’d say the land allocation is certainly one of them. The other one is depreciation recapture. Depreciation recapture is real. So whether you do a cost segregation study or not, when you sell your property, you’re going to have a portion of the depreciation that you need to recapture. So if you’ve done the study and sold it within a couple of years after you acquired it, you’re going to have to pay back all of that depreciation. So you need to be very careful and understand what you’re planning to do with that asset, meaning with the disposition of the property, before moving forward with doing a study. If you’re planning on selling the property in the next year or two, then I would say you probably don’t want to do the study. But if it’s five, ten years long term, then absolutely you’d want to look at doing a cost segregation study.
The other big look out or thing that I would caution people against is: right now the IRS has updated their audit technique guides. They just did it this year in tax year 2025. And there’s still a lot of cost segregation providers that are using the old guidelines, the old guides to do the studies. The IRS—they’ve put case study on residential properties into the audit technique guides. You just want to make sure that you’re asking whoever’s doing your estimate: are you using the 2025 guides? Or how aggressive are you really being with this accelerated depreciation? Because you’re not going to find out for, let’s call it, three years. So you’ll get audited maybe three years later, and maybe you have to reclassify some of the short life assets back to 1250 property or real property. So it’s just understanding why some cost segregation estimates are either higher or lower than others—and higher is not always better. I would always say that accurate is the best way to go. Because at the end of the day, you’re not losing any depreciation. You’re always taking that depreciation over 27.5 or 39 years. We’re only pulling forward the short life assets. So if you’re not taking it as a short life asset, it’s still going to be a straight line item. So you’re not losing any. You just might be taking a little bit less in the front end. So that would be my other caution—just really look at your estimate and understand how aggressive the provider is being in the study.
Those are fabulous cautions. They are definitely things that—some of them I’d heard of—but yes, really good point about how more write-offs isn’t necessarily better. Because if you get audited, you can’t necessarily defend it. It doesn’t necessarily make sense. So wonderful, wonderful points.
What else? We’ve talked a lot about these cost segs. Do you want to maybe walk through another example so people could really envision what it could look like for them?
Dollar-wise, what type of property would you want to consider or look at? Residential, apartments, car washes, restaurants? I mean, I think that’s really what the segue is. You can do cost segregation studies on a wide range of assets. A lot of real estate investors are only thinking about residential properties—whether they’re single-family homes or small apartments, or you do a syndication into more apartments. But I’ll tell you that different asset classes can pull forward just a ton of depreciation. So you think about restaurants, car washes, gas stations, movie theaters. We can do cost segregation studies on all types of properties, and the more site improvements, the more accelerated depreciation you’re going to find. It’s just one of those things that if you’re looking for specifics, it just depends on the individual asset class.
That’s a great point, because so many real estate investors are getting into businesses right now. I know so many real estate investors who now do have, like you said, car washes or other things like that. Laundromats is another big one, right? But if they’re buying the real estate as a part of buying that business, then they could do this cost seg on that real estate piece.
So, and that’s a big thing because the IRS, when you’re depreciating these assets, you’re not saying that, “Oh, the business is worth $300,000, that’s why you paid a million dollars for that laundromat.” What you’re doing is you’re depreciating the whole thing as a piece of real estate, which it’s just a… I don’t know, a failure in the current tax code. You should be able to pull out chunks of that goodwill for the business specifically, besides just appreciating or amortizing it. So what happens is you end up with an inflated piece of real estate because you’re wrapping in that business asset. So all of a sudden, let’s say the site improvements… the fence might cost 10 times what a fence would actually cost in reality. It’s because all of that goodwill is wrapped up in the real estate itself.
Yeah. So businesses are great. We didn’t talk about the short-term rental loophole today, and that’s a whole different podcast we could get into. It’s such a big market right now with clients taking advantage of active losses from the depreciation using the short-term rental loophole. And it’s just one of those things that—it’s very real. So that would be a different subject or podcast that we could talk on for 30 minutes to an hour, anytime.
Right, and I know our time here is wrapping up. I do know, thinking of what you were talking about with car washes or things like that, I think another question listeners would have is, so many people right now are doing value-add, right? Whether it’s residential real estate or one of these business real estate purchases, they’re getting something that’s underperforming because it needs some work. Can you walk through, like, a cost seg — let’s say I buy something that needs work, so I’m buying it for $200K, but I’m going to put $100K into it. Is that $100K going to be part of the cost seg, or is the cost seg only going to deal with the $200K for that initial purchase?
Sure. So we do two studies. One on your initial acquisition and then one on your improvements — your capital expenditures. And I’ve got clients that come back year after year because they’ll, you know, next year they’ll put another $100,000 in or a million dollars into a project. So we’ll go back and do another study on their improvements that they made. So it would be essentially a study on the purchase price allocation, and then I would take a look at all of the improvements that you made, and I would do the cost segregation on that separately. And then you combine them for either the same year tax return or a separate year tax return.
One of the nice things about that as well is, let’s say that you acquired a property last year, 2024, and then fast forward to 2026, you have to replace the roof. If you did a cost segregation study on it, the roof is always going to be a 27.5-year or 39-year asset, but since you replaced it two years later, you can take the disposition of the roof because you’ve removed it from the property and you’ve replaced it. So now you can accelerate that depreciation. It’s not really accelerating the depreciation — it’s disposing of the asset that’s no longer on the property. Think about replacing windows, doors, HVAC systems. So the cost segregation study that you’ve done today can really benefit you well into the future if it was done properly and you’ve got line item by line item breakdown of the individual cost of the asset.
So CAPEX study — absolutely, or capital expenditure study — and then also future dispositions.
Amazing. Thank you. That I’m sure makes some listeners very happy to know that it can help them with not only their initial purchase, but also all that money they spend fixing it up after they buy it. Very nice.
Well, we’re at the end of our half hour here, so let’s get into our quickfire questions here at the end.
First, what is your go-to tool for managing operations?
You know, right now for me, it’s monday.com. So monday.com is kind of the platform that I run just all of our projects through and I found it super helpful. monday.com.
Love it. You know, that’s one of my favorites as well. If I was somebody who’d get tattoos, I’d probably get a tattoo of monday.com. I love it so much, but I don’t. All right, what is one piece of advice you’d give to your younger self when you were starting out?
I would just say stay open to new ideas. Like I said, I never thought in a million years that I would transition into taxes and specialty taxes with cost segregation. So it’s keep your eyes open for new opportunities, especially in today’s world with AI and everything else. Instead of turning on the news in the morning, pop on YouTube and learn something. So keeping open to new ideas.
Love that. And then finally, what is a book that has been transformational in your journey?
So I wouldn’t say any books have been transformational, like individual books. There’s so many of them that you kind of read and go through. And I think one of the really cool things about some of the masterminds that I’ve been in is I’ve gotten to meet some of the authors of these books that I read in the early 90s and 2000s and you get to meet them in person. But actually, one that I just have right next to me is actually really good and it’s more of a marketing book, but it’s by a guy named Nate Woodbury and it’s The Hero’s Guide to Influence on YouTube. And what’s really cool about it is he’s not going after big wins like, “I got 100,000 views” or “I got 1,000 views” or even 200 views. He’s saying, “Look for the leaves,” or the little individual topics that people are looking for—the niches.
And do YouTube videos on those, promote those ideas. And what you’ll find is that the people who do comment or the ones that do call you from them typically are going to move forward with what you’re offering. That’s why I put out the most boring YouTube videos in the world. Like, How to Complete a Form 3115. Nobody wants to know that… until they need to know that. And then I get a call. There’s just so many things—tangible property regulations… Nobody asks those questions until they’re in the weeds. And then I typically get a call from one of my boring YouTube videos.
I love learning on YouTube, so I am your ideal client in that sense. Yes, I’m the one who’s Googling how do I do this in QuickBooks for sure. Well, that’s a great recommendation. Thank you so much. And finally, if people want to learn more about cost segs, if they want to talk to you, if they’re interested in getting one done, what is the best way for them to reach you?
Super easy. Just go to the website: costsegrx.com. You can schedule a call, you can click a button just to get an estimate, shoot me an email—all the information’s there.
And we’ll have that in the show notes or the description. So wherever you’re listening to this afterward—on the podcast or on YouTube—just find the show notes and that’s going to be in there for you to grab.
Alright, well thank you so much, and thank you to all of our listeners who have chimed in and been a part of this today. I would love for you as listeners to first off, like this wherever you’re listening to it. And then think of an investor who could benefit from hearing about cost segregations and hearing what was shared with us today. Go ahead and send this over to them now. Text them a link, email it to them, whatever you need so that they can learn from this as well.