Cost Segregation for Single-Family Rental Properties
Single-family rental (SFR) properties offer meaningful cost segregation opportunities, especially for investors with multiple properties. While individual homes have lower study fees than commercial properties, the cumulative tax savings across a portfolio can be substantial. Appliances, landscaping, driveways, fencing, and flooring are just some of the components that qualify for accelerated depreciation.
How Cost Segregation Works for Single-Family Rentals
A cost segregation study for single-family rentals identifies components that can be depreciated over 5, 7, or 15 years instead of the standard 27.5-year schedule for residential rental property.
For individual properties or small portfolios, desktop studies using construction cost data provide cost-effective analysis. For larger portfolios, a sample-based approach allows efficient study of many properties.
The result is a detailed allocation that your accountant uses to claim accelerated deductions. For existing properties, a catch-up adjustment captures missed depreciation in the current year.
Why SFR Investors Overpay in Taxes
Single-family rentals contain 15-25% of their value in components eligible for accelerated depreciation: appliances, flooring, driveways, landscaping, fencing, and more. Without a study, this value is depreciated over 27.5 years.
For portfolio investors, the cumulative impact is significant. An investor with 20 properties averaging $300,000 each has $6 million in depreciable basis—and potentially $1-1.5 million in accelerable components.
Many SFR investors assume cost segregation is only for large commercial properties. In reality, the strategy works for any property with sufficient value and the right component mix.
Property Components Commonly Reclassified
Single-family rentals typically achieve 15-25% accelerable percentages. Properties with extensive landscaping, pools, or upgraded finishes often achieve higher results.
Timing, Retroactive Studies, and Cash Impact
For newly acquired rentals, conducting a cost segregation study at acquisition maximizes first-year deductions. This is especially valuable for high-basis acquisitions in competitive markets.
For existing portfolios, retroactive studies capture all missed depreciation across multiple properties. The Section 481(a) adjustment allows this catch-up without amending prior returns.
Cash impact scales with portfolio size: a 20-property portfolio might generate $50,000-$100,000+ in first-year tax savings. This capital can fund additional acquisitions or improve cash-on-cash returns.
Who Qualifies and Who Does Not
Good Candidates
- •Investors with single or multiple rental properties
- •Portfolio operators seeking to optimize across holdings
- •Investors acquiring properties at premium values
- •Properties with renovations or significant improvements
- •Rentals with pools, extensive landscaping, or upgraded finishes
- •Properties with cost basis of $200,000 or more
May Not Benefit
- •Properties with minimal improvements
- •Investors planning immediate sale
- •Properties already substantially depreciated
- •Investors without taxable income to offset
Common Mistakes SFR Investors Make
Assuming individual homes are too small
Even single properties with adequate value can benefit. For portfolios, the cumulative impact is substantial.
Not studying properties with renovations
Renovated kitchens, bathrooms, and finishes create accelerable basis. These improvements are often the most valuable components.
Ignoring land improvements
Driveways, fencing, landscaping, and pools are 15-year property. In suburban properties, this can be significant value.
Waiting to batch portfolio studies
Properties can be studied as acquired. Waiting only delays tax benefits.
Using cookie-cutter allocation percentages
Each property is different. Proper studies analyze actual components, not assumed percentages.