Cost Segregation in 2026 & 2027: How Real Estate Investors Can Unlock Major Tax Deductions—Even Without Real Estate Professional Status
Discover how cost segregation, 100% bonus depreciation, and short-term rental tax strategies can help real estate investors maximize tax deductions in 2026 and 2027.
Is it too late to take advantage of bonus depreciation in 2026? Maybe not! You may be able to operate a qualifying short-term rental in 2026, claim substantial tax deductions, and convert it to a long-term rental in 2027—without automatically losing those benefits. Read our companion article to learn how this strategy works.
Thinking about buying an investment property in Newport Beach, Costa Mesa, or Orange County? A powerful combination of cost segregation, 100% bonus depreciation, and short-term rental tax rules could make your next real estate purchase more valuable than you realize.
What if buying an investment property could do more than generate rental income and build long-term wealth?
What if that same purchase could potentially create tens—or even hundreds—of thousands of dollars in accelerated tax deductions?
And what if you didn’t have to quit your day job or become a full-time real estate professional to take advantage of certain strategies?
Welcome to the world of cost segregation and bonus depreciation.
For investors purchasing property in 2026 or planning acquisitions in 2027, these strategies deserve serious attention.
Thanks to changes in federal tax law enacted in 2025, 100% bonus depreciation is back for qualifying property. When combined with a properly conducted cost segregation study, this creates significant opportunities for real estate investors.
But there’s a catch.
Not every investor can use those deductions immediately. Not every property qualifies in the same way. And simply buying a vacation rental or listing a property on Airbnb doesn’t automatically create a tax write-off against your salary.
At Lucas Real Estate Group, serving Newport Beach, Eastside Costa Mesa, Laguna Beach, and surrounding Orange County communities, we believe understanding these distinctions is part of making smarter real estate decisions.
Our team combines the experience of Devin R. Lucas, Real Estate Broker, REALTOR®, and California Real Estate Attorney, with the financial insight of Courtney Lucas, licensed CPA and REALTOR®.
We don’t believe the job ends when escrow closes. We help investors understand the bigger picture, identify potential opportunities, connect with appropriate specialists, and work through the practical details of buying, owning, and managing investment real estate.
Let’s explore how cost segregation works, what’s changed for 2026 and 2027, and why short-term rental properties may present a particularly interesting opportunity for investors who aren’t real estate professionals.
What Is Cost Segregation in Real Estate?
When you purchase a rental property, you generally cannot deduct the entire purchase price in the year you buy it.
Instead, the IRS requires most of the depreciable building cost to be deducted over time.
For example:
- Residential rental buildings are generally depreciated over 27.5 years.
- Commercial buildings are generally depreciated over 39 years.
- Land is not depreciable.
But here’s what many investors don’t realize.
Not everything you purchase along with a building necessarily has to be depreciated over 27.5 or 39 years.
Certain components may qualify for much shorter depreciation periods.
A cost segregation study analyzes the property and identifies qualifying assets that may be depreciated over 5, 7, or 15 years rather than the longer building recovery period.
Depending on the property, these might include qualifying appliances, carpeting, certain specialty electrical installations, furniture, landscaping, fencing, and other eligible improvements.
The exact classifications depend on the nature and use of the property. Ordinary structural components, such as general building walls, roofs, and residential HVAC systems, generally remain part of the building’s longer depreciation schedule.
The result?
Instead of waiting decades to recover the cost of certain assets through depreciation, investors may be able to deduct those costs much sooner.
And under today’s bonus depreciation rules, some qualifying costs may be deductible immediately.
Cost Segregation vs. Bonus Depreciation: What’s the Difference?
These two terms are related, but they’re not interchangeable.
Cost segregation identifies and classifies property components into their appropriate depreciation categories.
Bonus depreciation allows an accelerated deduction for certain qualifying property, potentially permitting the entire eligible cost to be deducted in the year the asset is placed in service.
Think of cost segregation as identifying the opportunity and bonus depreciation as one way of realizing its tax benefits.
For a deeper discussion, see our related article: Bonus Depreciation and Real Estate Investment Tax Strategies.
The Big Tax Change: 100% Bonus Depreciation for 2026 and 2027
This is where things get especially interesting.
Under the Tax Cuts and Jobs Act of 2017, bonus depreciation was originally scheduled to decline over several years.
The rate had already fallen from 100% to 80% in 2023, 60% in 2024, and generally 40% in 2025 under the prior schedule.
But Congress changed course.
The One Big Beautiful Bill Act, signed into law on July 4, 2025, restored 100% bonus depreciation for eligible property acquired and placed in service after January 19, 2025.
That means qualifying assets identified through a cost segregation study may be eligible for an immediate federal deduction of their full depreciable cost.
What Are the Bonus Depreciation Rates for 2026 and 2027?
| Tax Year | Federal Bonus Depreciation |
|---|---|
| 2024 | 60% |
| 2025 | 40% under the earlier phaseout; 100% for qualifying property acquired and placed in service after January 19, 2025 |
| 2026 | 100% |
| 2027 | 100% under current law |
The restored 100% provision is not currently scheduled to expire after 2026.
That is an important difference from the prior law.
However, the availability of bonus depreciation does not eliminate other tax limitations, including passive activity loss rules, basis limitations, at-risk rules, and restrictions applicable to particular types of property.
California investors should also understand that California generally does not conform to federal bonus depreciation. Federal and California depreciation deductions can therefore differ significantly.
For Orange County investors, this is one reason working with knowledgeable tax professionals matters.
A Real-World Example: A $2.8 Million Orange County Investment Property
Let’s say you’re considering purchasing a $2.8 million investment property in Newport Beach, Corona del Mar, Costa Mesa, or Laguna Beach.
At this price point, cost segregation can create significant tax opportunities. But coastal Orange County presents a unique challenge that investors in many other markets may not face.
The land itself can represent the majority of a property’s value.
In some of Newport Beach’s most desirable neighborhoods, an older home may sit on a parcel worth considerably more than the structure itself.
Why does that matter?
Because while buildings and certain improvements can be depreciated, land cannot.
And that brings us to a question we believe every coastal real estate investor should understand.
Are You Stuck With the Orange County Assessor’s Land vs. Improvement Allocation?
No. And this distinction could make a substantial difference in your investment property’s depreciation deductions.
When you purchase real estate in Orange County, the Assessor maintains separate values for land and improvements for property tax purposes.
In certain coastal neighborhoods, the land allocation can be particularly high.
But here’s what many investors don’t realize:
The county assessor’s allocation is not automatically binding for federal income tax depreciation purposes.
Under IRS Publications 527 and 551, the purchase price generally must be allocated between land and buildings based on their relative fair market values at the time of acquisition.
The IRS permits taxpayers to use property tax assessed values when the respective fair market values are uncertain. However, it does not require taxpayers to use those ratios when better-supported valuation evidence is available.
That means an investor may be able to establish a different, defensible allocation using appropriate appraisal and valuation methods.
This is particularly important when acquiring high-value coastal real estate.
Three Ways to Evaluate the Land and Improvement Values
1. Independent Fair Market Value Appraisal
A qualified real estate appraiser can evaluate the property’s land and improvements separately, using appropriate valuation methods and market evidence.
An appraisal specifically prepared to support the allocation of an investment property’s acquisition cost may provide stronger evidence than simply relying on the county assessor’s percentages.
However, the appraisal must reflect actual fair market values at the time of purchase. It cannot arbitrarily assign additional value to the building to increase depreciation.
2. Replacement Cost Less Depreciation
Another potential approach is to evaluate the building using a replacement-cost methodology.
This may involve construction cost data, building size, quality, materials, and professional cost-estimating resources.
But there’s an important distinction.
The cost of constructing a brand-new replacement building is not necessarily the fair market value of an existing structure.
A proper analysis must consider physical deterioration, functional obsolescence, economic obsolescence, and relevant market conditions.
For example, a home that would cost $1.5 million to rebuild today is not automatically worth $1.5 million as an existing improvement, particularly if the structure is older or functionally outdated.
Insurance replacement-cost estimates can provide useful information, but they are not automatically an acceptable substitute for an acquisition-date valuation.
3. Cost Segregation of Buildings, Site Improvements, and Personal Property
A qualified cost segregation study takes the analysis further.
Rather than treating all depreciable improvements as one building, the study identifies assets that may qualify for different depreciation schedules.
Depending on the property, these could include qualifying:
- Appliances, carpeting, and certain furnishings.
- Landscaping, fencing, and exterior improvements.
- Certain paving, drainage, and site improvements.
- Specialized electrical and other qualifying building-related components.
Some land improvements may qualify for 15-year depreciation, while certain personal property may qualify for 5- or 7-year depreciation.
Under current federal law, eligible assets may also qualify for 100% bonus depreciation.
Importantly, not every exterior improvement or building component qualifies for accelerated depreciation. The classification must follow applicable IRS rules.
A cost segregation study does not magically convert nondepreciable land into depreciable property. It identifies and properly values qualifying assets that may otherwise be overlooked or grouped into longer-lived building categories.
Let’s Run the Numbers: A $2.8 Million Coastal Investment Property
Suppose you purchase a $2.8 million investment property in Newport Beach.
For illustration, assume the county assessor’s land-to-improvement ratio is 75% land and 25% improvements.
If you relied on that ratio, your initial allocation would look like this:
| Category | Amount |
|---|---|
| Purchase Price | $2,800,000 |
| Land Allocation (75%) | $2,100,000 |
| Depreciable Improvement Basis | $700,000 |
| Qualifying Shorter-Life Assets (25%) | $175,000 |
| Potential 100% Bonus Depreciation | $175,000 |
Even with a substantial land allocation, a qualifying cost segregation study could potentially identify $175,000 in assets eligible for immediate federal depreciation.
But what if a properly supported independent valuation establishes that the property’s actual acquisition-date allocation should be 60% land and 40% improvements?
That would change the calculation.
| Category | Amount |
|---|---|
| Purchase Price | $2,800,000 |
| Land Allocation (60%) | $1,680,000 |
| Depreciable Improvement Basis | $1,120,000 |
| Qualifying Shorter-Life Assets (25%) | $280,000 |
| Potential 100% Bonus Depreciation | $280,000 |
That’s an additional $105,000 in potential first-year federal depreciation deductions.
The important qualification is that the 60% allocation must be supported by actual valuation evidence. An investor cannot simply choose the more favorable percentage.
The 25% allocation to shorter-life assets is also hypothetical and would need to be substantiated by the study.
How Much Difference Can the Land Allocation Make?
Consider three possible land allocations for the same $2.8 million purchase, assuming 25% of the depreciable basis consists of assets eligible for 100% bonus depreciation.
| Land Allocation | Depreciable Basis | Potential Bonus Depreciation |
|---|---|---|
| 75% Land | $700,000 | $175,000 |
| 60% Land | $1,120,000 | $280,000 |
| 50% Land | $1,400,000 | $350,000 |
The difference between the first and third scenarios is $175,000 in potential accelerated deductions.
That is not an insignificant number.
But these are alternative hypothetical valuations, not different elections an investor can freely choose.
Only an allocation supported by the property’s actual facts and appropriate valuation methods should be used.
What Could That Mean in Actual Tax Savings?
Using the 60% land allocation example, let’s assume the investor can currently use the entire $280,000 accelerated depreciation deduction against income otherwise taxed at a 35% federal marginal rate.
| Potential Tax Benefit | Amount |
|---|---|
| Accelerated Depreciation Deduction | $280,000 |
| Assumed Federal Marginal Tax Rate | 35% |
| Illustrative Federal Income Tax Savings | $98,000 |
That’s potentially $98,000 in federal income tax savings from accelerated depreciation alone.
Of course, the example assumes the entire deduction is currently usable and offsets income taxed at 35%. Actual results depend on the investor’s income, applicable tax brackets, passive activity rules, other loss limitations, and individual circumstances.
California also generally does not conform to federal bonus depreciation, so state tax results may differ substantially.
Why This Matters When Buying Coastal Orange County Investment Property
For investors considering properties in Newport Beach, Costa Mesa, Corona del Mar, Laguna Beach, or Newport Coast, the distinction between land value and improvement value deserves careful attention.
A high assessor land allocation does not automatically mean the investor must accept that percentage for federal depreciation purposes.
But neither does it mean a lower land allocation can always be justified.
The goal is not to manufacture deductions. It’s to identify every legitimate deduction the law allows.
This is where planning ahead can make a meaningful difference.
At Lucas Real Estate Group, our combination of real estate brokerage, legal knowledge, and CPA insight allows us to recognize issues that may affect an investment long after escrow closes.
We can help clients evaluate acquisition opportunities, understand the significance of land and improvement values, identify potential ownership and tax considerations, and coordinate with qualified appraisers, cost segregation specialists, and tax advisors.
We believe these conversations should begin before an investor purchases a property—not after discovering that an important opportunity may have been overlooked.
Because sometimes the most valuable part of a real estate transaction isn’t simply negotiating the purchase price.
It’s understanding what you’re buying, how you intend to use it, and how to position that investment for long-term success.
And there’s one more critical question: Can you actually use those depreciation deductions against your regular income?
For many investors, the answer depends on whether the property is operated as a traditional rental or a qualifying short-term rental, and whether the investor satisfies the applicable material participation requirements.
That leads us to perhaps the most important part of this entire discussion.
The Catch: Why Most Traditional Rental Property Investors Cannot Simply Deduct These Losses Against Their Salary
Imagine you’re a physician, attorney, executive, business owner, or another high-income professional.
You earn a substantial salary and decide to buy an investment property.
You conduct a cost segregation study and generate a large depreciation deduction.
Can you use that deduction to offset your W-2 income?
Not necessarily.
Under Internal Revenue Code Section 469, rental real estate activities are generally considered passive activities.
That means losses from traditional rental properties generally cannot be used to offset wages or other nonpassive income, unless an exception applies.
Those losses may instead be suspended and carried forward for potential use against qualifying passive income or in a later year when applicable rules permit.
There are exceptions, including limited rental real estate loss allowances for qualifying taxpayers and special rules for real estate professionals.
But for many high-income earners, those exceptions provide little immediate relief.
This is where the short-term rental strategy becomes particularly interesting.
The Short-Term Rental Tax Strategy: You May Not Need to Be a Real Estate Professional
One of the most misunderstood aspects of real estate taxation is the distinction between traditional rental properties and certain short-term rental operations.
Many people have heard that you must qualify as a real estate professional to use rental real estate losses against W-2 income.
For ordinary rental real estate, that status can be important.
However, certain short-term rental activities may be treated differently under the passive activity regulations.
The Seven-Day Average Stay Rule
Under Treasury Regulation Section 1.469-1T(e)(3)(ii), an activity generally is not treated as a rental activity for passive activity purposes if the average period of customer use is seven days or less.
This creates a potentially important distinction for some vacation rental and short-term rental operations.
For example, an investor who operates a qualifying short-term rental with an average guest stay of four nights may fall outside the general passive classification applied to traditional rental real estate.
But that’s only the first step.
The investor must generally also materially participate in the activity for the losses to be treated as nonpassive.
And this is where the details become essential.
What Does Material Participation Mean?
The IRS provides several tests for determining whether a taxpayer materially participates in an activity.
Three commonly relevant tests include:
1. Participating more than 500 hours during the tax year.
An investor who spends more than 500 qualifying hours participating in the activity may satisfy the material participation requirement.
2. Participating more than 100 hours, with no other individual participating more.
This test can be particularly relevant for hands-on short-term rental operators.
However, hours worked by cleaners, property managers, maintenance providers, and other individuals may affect the analysis.
3. Performing substantially all the participation in the activity.
An investor who personally performs substantially all the work involved in operating the activity may qualify under this test.
These are not the only material participation tests, and not all activities are analyzed identically.
Participation must be genuine and supportable. Certain investor-type activities do not count, and simply reviewing financial statements or occasionally communicating with a property manager may not be sufficient.
Detailed, contemporaneous records of qualifying participation can be extremely important.
Can Short-Term Rental Losses Offset W-2 Income?
Potentially, yes.
If the short-term rental activity is not classified as a rental activity under the applicable rules, the taxpayer materially participates, and the resulting loss satisfies other tax limitations, that loss may be nonpassive.
Nonpassive losses may potentially offset other nonpassive income, including W-2 wages.
This is sometimes promoted online as the short-term rental tax loophole or Airbnb tax loophole.
But it is not a special deduction available to everyone who owns an Airbnb.
It is an application of established federal tax rules, with specific requirements.
A property can qualify for accelerated depreciation and still fail to produce a currently usable nonpassive loss.
Personal use, average customer stays, services provided, management arrangements, participation hours, and the taxpayer’s broader financial circumstances can all change the outcome.
For high-income professionals who want to invest in real estate without changing careers, this strategy may be worth exploring with a qualified tax advisor.
Why Newport Beach, Costa Mesa, and Laguna Beach Investors Need to Be Especially Careful
Orange County coastal real estate offers compelling investment opportunities, but it also presents challenges that investors cannot afford to overlook.
One of the biggest is short-term rental regulation.
Newport Beach, Costa Mesa, Laguna Beach, and surrounding communities have different rules governing vacation rentals, permits, zoning, occupancy, and property use.
A property that looks attractive as a vacation rental may not legally qualify for the operation an investor has in mind.
Even within a city, the rules may depend on the property’s location, zoning, existing permits, and other restrictions.
Homeowners associations and condominium governing documents may impose additional limitations.
Before buying a property based on a short-term rental tax strategy, investors should verify that the intended rental use is legally permitted.
This is not something to figure out after closing escrow.
It belongs in the acquisition due diligence process.
And it’s an example of why understanding the legal, financial, and operational side of a real estate purchase can be just as important as finding the right home.
At Lucas Real Estate Group, we help clients evaluate properties with those broader considerations in mind, coordinating with appropriate professionals when specialized tax or regulatory analysis is needed.
It’s October 2026. Is It Too Late to Buy an Investment Property and Take a Tax Deduction This Year?
Not necessarily.
If you’ve been considering an investment property purchase, the final months of 2026 may still present an opportunity.
But timing matters.
For depreciation purposes, closing escrow is not necessarily the same as placing a property in service.
Generally, property is placed in service when it is ready and available for its intended business or income-producing use.
For a rental property, this could involve completing necessary improvements, furnishing the home, obtaining required approvals, and making the property ready and available for rent.
Simply signing a purchase agreement or taking title before December 31 does not automatically establish eligibility for a 2026 depreciation deduction.
A Possible Year-End Investment Timeline
Imagine an investor who:
- Identifies a suitable investment property in October.
- Completes due diligence and closes escrow in November.
- Finishes necessary improvements and furnishing.
- Obtains required permits and prepares the property for lawful rental use.
- Places the property in service before December 31, 2026.
- Coordinates with a CPA and qualified cost segregation professional to evaluate eligible depreciation deductions.
Depending on the facts, the investor may be eligible to claim qualifying depreciation for 2026.
However, if the investor also hopes to use short-term rental losses against nonpassive income, there is another challenge.
Material participation must be established for the relevant tax year.
An investor who acquires a property in late December may have very limited time to satisfy a material participation test.
Some legitimate startup and operational work may count, depending on its nature and the applicable rules. But investors should not assume that hours spent researching properties, negotiating a purchase, arranging financing, or performing investor-level oversight will qualify.
That’s why early planning is so important.
The objective should never be to rush into a questionable investment simply to obtain a deduction.
The objective is to identify a sound investment and understand whether a legitimate tax advantage can improve its overall financial performance.
What About 2027? Is Cost Segregation Still Worth Considering?
Absolutely.
Under current federal law, 100% bonus depreciation remains available for qualifying property acquired and placed in service in 2027.
That means investors do not necessarily need to rush into a 2026 acquisition simply because they fear the federal bonus depreciation rate will disappear next year.
The more important questions are whether the property is a sound investment, whether the depreciation benefits are available, and whether the investor can actually use the resulting deductions.
For some investors, acquiring and preparing a property in early 2027 may be preferable to forcing a rushed year-end transaction.
For others, a 2026 acquisition may align naturally with their investment plans and tax circumstances.
Good tax planning should support a good investment—not replace one.
Already Own an Investment Property? You May Still Benefit from Cost Segregation
Here’s another opportunity that often gets overlooked.
Cost segregation is not exclusively for properties purchased this year.
Investors who acquired rental properties in prior years may be able to conduct a cost segregation study and identify depreciation deductions that were not previously claimed.
Depending on the circumstances, a taxpayer may be able to use an accounting-method change, often involving IRS Form 3115 and a Section 481(a) adjustment, to address missed depreciation without amending every prior return.
The treatment depends on the taxpayer’s accounting history, property details, and applicable IRS procedures.
A later cost segregation study also does not automatically make property eligible for the bonus depreciation percentage available in the year the study is performed. The property’s original acquisition and placed-in-service dates, among other factors, remain important.
For investors who already own rental property in Newport Beach, Costa Mesa, Laguna Beach, or elsewhere in California, this can be worth reviewing with a CPA and qualified cost segregation specialist.
What Happens When You Sell? Understanding Depreciation Recapture
Cost segregation can accelerate deductions, but investors should also consider what happens when the property is eventually sold.
Depreciation can reduce a property’s adjusted tax basis.
When an investor sells depreciated property, some of the resulting gain may be subject to depreciation recapture or other special tax treatment.
The exact outcome depends on the type of property, depreciation claimed or allowable, sales price allocation, and other circumstances.
For example, certain personal property gains may be subject to ordinary income recapture under Internal Revenue Code Section 1245. Depreciation attributable to real property may also affect the treatment of gain under Section 1250 and related rules.
That does not necessarily make cost segregation a poor strategy.
Accelerating deductions can provide valuable cash-flow and timing benefits, and some investors may have opportunities to defer gain through properly structured transactions, including qualifying Section 1031 exchanges.
But the exit strategy matters.
A smart investor considers both the tax benefits of acquiring a property and the tax consequences of eventually selling it.
This is especially important for investors evaluating long-term holds, future exchanges, estate planning, and transfers of appreciated real estate.
Can You Claim Bonus Depreciation on a Short-Term Rental in 2026, Then Convert It to a Long-Term Rental in 2027?
Here’s a real estate tax strategy that many investors—and even some real estate professionals—may not have considered.
What if you could purchase an investment property, operate it as a qualifying short-term rental during the acquisition year, take advantage of cost segregation and 100% bonus depreciation, and then convert it to a traditional long-term rental the following year?
Under the right circumstances, that may be possible.
Certain short-term rental activities can qualify for nonpassive treatment under federal tax law without the owner having to meet the demanding real estate professional requirements.
If the investor materially participates and satisfies the applicable rules, substantial depreciation deductions may potentially offset W-2 wages or other nonpassive income.
And here’s the interesting part: A subsequent conversion to a traditional long-term rental generally does not, by itself, require the investor to repay properly claimed first-year bonus depreciation deductions.
Imagine purchasing a $2.8 million Orange County investment property in 2026, identifying $280,000 in qualifying assets through cost segregation, and potentially using those accelerated deductions before transitioning the property to long-term rental use in 2027.
There are important requirements involving average guest stays, actual participation, personal use, placed-in-service dates, and tax documentation. A brief or artificial short-term rental operation is not a substitute for meeting those requirements.
But for investors who ultimately prefer long-term tenants, the possibility deserves a closer look.
Read our detailed guide: Can You Use the Short-Term Rental Tax Strategy in 2026 and Convert to a Long-Term Rental in 2027?
California Investors: Federal Tax Savings May Not Translate Into California Tax Savings
California has its own depreciation rules.
Unlike federal law, California generally does not conform to the federal bonus depreciation provisions.
As a result, a taxpayer may receive a substantial federal deduction while calculating a very different depreciation amount for California income tax purposes.
This can create differences in adjusted basis, future depreciation deductions, and the eventual tax consequences of a sale.
A properly prepared cost segregation study may still have California tax implications, including the classification of qualifying assets under applicable state depreciation rules.
But investors should not assume that a large federal bonus depreciation deduction will produce an identical California deduction.
For Orange County investors, coordinating federal and California tax treatment is an important part of the analysis.
Why Your Real Estate Team Matters: We Go Beyond the Transaction
Most real estate agents are focused on finding the right property, negotiating the purchase price, and closing escrow.
Those things matter enormously.
But for investment property buyers, they’re only part of the equation.
What happens when you want to purchase a property through an LLC?
What if you’re considering a short-term rental strategy?
What if you need to evaluate local rental restrictions, property management arrangements, cost segregation opportunities, or the tax implications of an eventual sale?
And what if you need help coordinating the professionals necessary to turn those ideas into an actual investment plan?
That’s where Lucas Real Estate Group offers a different kind of real estate experience.
Led by Devin R. Lucas, a California Real Estate Attorney, Real Estate Broker, and REALTOR®, and working alongside Courtney Lucas, a licensed CPA and REALTOR®, our team combines real estate market knowledge with an understanding of legal structures, tax issues, and property ownership.
Our focus is not simply on introducing clients to sophisticated-sounding tax strategies.
It’s about helping clients understand their options and move forward with the right information, the right resources, and a practical plan.
For investment property buyers, that may include helping to:
- Identify and acquire investment properties in Newport Beach, Costa Mesa, Laguna Beach, and surrounding Orange County communities.
- Evaluate short-term rental feasibility, including local regulatory considerations and operational requirements.
- Coordinate appropriate LLC and ownership structures, considering legal, liability, financing, and tax implications.
- Connect investors with qualified cost segregation specialists and tax advisors to evaluate potential depreciation opportunities.
- Coordinate transaction timelines and due diligence so investors understand what needs to happen before and after closing.
- Assist with leasing, property management, and ongoing ownership needs, where appropriate.
- Plan ahead for future sales, 1031 exchanges, property transfers, and other real estate transactions.
We recognize that tax advice, legal representation, cost segregation engineering, and brokerage services each involve distinct professional responsibilities.
Where specialized expertise is needed, we believe in bringing the appropriate professionals into the conversation.
And importantly, our goal is not to make every transaction more complicated.
It’s to help clients avoid unnecessary surprises and make informed decisions.
Local Roots. Global Reach. A Broader Perspective.
Lucas Real Estate Group serves Newport Beach, Eastside Costa Mesa, Corona del Mar, Newport Coast, Laguna Beach, and surrounding Orange County coastal communities.
Operating in conjunction with Coldwell Banker Newport Beach and the Coldwell Banker Global Luxury program, we provide strategic buyer and seller representation, property management, and real estate-related legal services.
We understand these communities because we live, own, and invest here ourselves.
Whether you’re considering a coastal investment property, preparing to sell a longtime rental, evaluating a 1031 exchange, or exploring a new acquisition, we welcome the opportunity to be a resource.
Frequently Asked Questions About Cost Segregation in 2026 and 2027
Can I use cost segregation on a residential rental property?
Yes. Qualifying residential rental properties may benefit from cost segregation studies that identify assets eligible for shorter depreciation periods. The actual benefit depends on the property’s characteristics, depreciable basis, and the owner’s tax situation.
Can cost segregation offset my W-2 income?
Potentially, but not automatically. Traditional rental real estate losses are generally passive and usually cannot offset W-2 wages. Certain qualifying short-term rental activities may produce nonpassive losses if the taxpayer materially participates and satisfies other applicable tax rules.
Do I need to be a real estate professional to use the short-term rental tax strategy?
Not necessarily. Under the passive activity regulations, certain short-term rental activities with average customer stays of seven days or less may not be classified as rental activities. If the taxpayer materially participates, the resulting losses may be nonpassive.
Is 100% bonus depreciation available in 2026 and 2027?
Yes. Under current federal law, qualifying property acquired and placed in service after January 19, 2025, may be eligible for 100% bonus depreciation, including qualifying property placed in service in 2026 or 2027.
Can I buy an investment property in December 2026 and deduct depreciation on my 2026 taxes?
Potentially. The property must generally be placed in service during 2026, and all applicable depreciation requirements must be satisfied. If you’re seeking to use losses against nonpassive income, participation and other tax limitations must also be evaluated.
Does California allow 100% bonus depreciation?
Generally, no. California does not conform to the federal bonus depreciation rules, so California income tax depreciation calculations may differ significantly from federal calculations.
Can I conduct a cost segregation study on a property I purchased years ago?
Often, yes. A properly supported study may identify depreciation deductions that were previously missed. Depending on the circumstances, an accounting-method change may allow certain adjustments without amending every prior return.
Can I use cost segregation on an Airbnb in Newport Beach or Costa Mesa?
Potentially, provided the property is used in a qualifying income-producing activity and eligible assets are properly identified. However, the property’s rental use must comply with applicable local laws, permits, and other restrictions. Cost segregation eligibility and the ability to use resulting losses are separate questions.
How much does a cost segregation study cost?
Fees vary based on the property’s size, complexity, construction details, available records, and the scope of the analysis. Investors should compare the study’s cost with the expected tax benefit and consider the provider’s methodology, documentation, and experience.
Is cost segregation worth it if I plan to sell the property in a few years?
It may be, but the expected holding period, potential depreciation recapture, future tax rates, and possible 1031 exchange plans should be considered. The best strategy depends on the investor’s broader financial and real estate objectives.
The Bottom Line: Don’t Just Buy Real Estate. Understand the Opportunities That Come With It.
A great investment property is more than a building.
It’s a combination of location, acquisition price, rental potential, operating expenses, financing, appreciation, and tax considerations.
Cost segregation and bonus depreciation can be powerful tools, particularly under the federal rules applicable in 2026 and 2027.
For certain investors, qualifying short-term rental activities may also create opportunities to use depreciation losses against income that traditional rental property losses generally cannot offset.
But these strategies require more than simply buying a property and ordering a cost segregation report.
They require thoughtful planning, careful documentation, and coordination among the right professionals.
At Lucas Real Estate Group, we believe real estate representation should go beyond the purchase agreement.
Whether you’re purchasing your first investment property, expanding an existing portfolio, or preparing to sell or exchange a longtime investment, our goal is to help you understand the opportunities, avoid unnecessary pitfalls, and navigate the process with confidence.
If you’re considering buying or selling investment property in Newport Beach, Costa Mesa, Laguna Beach, or surrounding Orange County communities, we’d welcome the opportunity to help.
Questions or Need Help?
Thinking about buying, selling, or managing investment property in Newport Beach, Costa Mesa, or the surrounding Orange County coastal communities?
At Lucas Real Estate Group, we offer full-service buyer and seller representation, property management, and guidance informed by real estate legal and tax considerations.
We would love the opportunity to assist you.
For real estate buying, selling, or property management, call or email us anytime for a complimentary initial consultation and market evaluation.
📞 949-478-1623
✉️ info@lucas-real-estate.com
For discussions requiring individualized real estate legal advice, private family transactions, ownership structuring, or detailed tax-related consultation, please schedule a paid one-hour consultation by Zoom, phone, or in person.
About the Authors
Devin R. Lucas is a Real Estate Broker, REALTOR®, and California Real Estate Attorney specializing in Newport Beach, Costa Mesa, and Orange County coastal communities.
Courtney Lucas, a licensed CPA, Real Estate Salesperson, and REALTOR®, brings financial knowledge and real estate experience to the team.
Together, they lead Lucas Real Estate Group, operating in conjunction with Coldwell Banker Newport Beach and the Coldwell Banker Global Luxury program.
Their combined background allows them to assist clients with real estate sales, acquisitions, property management, legal matters, ownership structures, and real estate-related tax considerations.
Guiding Your Real Estate Journey | Managing Your Real Estate Investments
Sources & Additional Reading
For readers interested in exploring the legal and tax rules governing cost segregation, bonus depreciation, short-term rental properties, and real estate investment deductions, the following official IRS publications, federal tax authorities, and California resources provide additional guidance.
- IRS Notice 2026-11 – 100% Bonus Depreciation Guidance – IRS guidance implementing the restoration of 100% bonus depreciation under the 2025 federal tax legislation.
- Internal Revenue Code Section 168 – Depreciation and Bonus Depreciation – Federal statutory rules governing depreciation recovery periods and additional first-year depreciation deductions.
- IRS Publication 946 – How to Depreciate Property – Explains depreciation methods, asset classifications, recovery periods, and placed-in-service requirements.
- IRS Cost Segregation Audit Techniques Guide – Official IRS examination guidance addressing cost segregation studies, asset classifications, and supporting documentation. Locate the Cost Segregation guide on this page.
- Internal Revenue Code Section 469 – Passive Activity Loss Rules – Establishes passive activity loss limitations and special rules applicable to rental real estate.
- Treasury Regulation Section 1.469-1T – Rental Activity Exceptions – Includes rules addressing short-term rental activities, including the seven-day average customer-use exception.
- Treasury Regulation Section 1.469-5T – Material Participation – Describes the material participation tests relevant to determining whether an activity is passive or nonpassive.
- IRS Publication 925 – Passive Activity and At-Risk Rules – Discusses passive losses, rental activities, material participation, and restrictions on deductible losses.
- IRS Form 3115 – Application for Change in Accounting Method – Information about accounting-method changes potentially relevant to depreciation adjustments for previously acquired investment properties.
- Internal Revenue Code Section 481 – Accounting Method Adjustments – Governs adjustments required when changing accounting methods, including certain depreciation-related changes.
- Internal Revenue Code Section 1245 – Depreciation Recapture – Addresses ordinary-income recapture on dispositions of certain depreciable property.
- Internal Revenue Code Section 1250 – Depreciable Real Property – Provides rules concerning gains from dispositions of certain depreciable real property.
- California Franchise Tax Board Publication 1001 – Supplemental Guidelines to California Adjustments – Explains differences between federal and California tax treatment, including depreciation adjustments and California’s nonconformity with federal bonus depreciation.
These resources are provided for educational purposes. Tax laws and administrative guidance may change. Investors should consult qualified tax and legal professionals regarding their specific circumstances.
Disclaimer
The content on this blog is for informational purposes only. Nothing on this blog should be construed as legal, tax, accounting, or investment advice. You should not act or refrain from acting on the basis of any content without seeking appropriate professional advice regarding your particular circumstances.
Tax treatment depends on individual facts, applicable federal and state law, and changes in statutes, regulations, and administrative guidance. Examples are illustrative only and do not guarantee eligibility for deductions or any particular tax result.
The content on this blog is not guaranteed to be correct, complete, or up to date.
Devin R. Lucas’ office is in Newport Beach, California, and he is licensed to practice law only in California. Devin R. Lucas provides legal services or advice only pursuant to a written legal services agreement.
The content on this blog is not intended to create, and does not create, an attorney-client relationship between you and Devin R. Lucas, nor does receipt of an email or other communication establish such a relationship.
Some jurisdictions may consider this site to constitute attorney advertising; accordingly, please be advised that this is an advertisement.
IRS Circular 230 Disclosure: Any discussion of federal tax matters herein is provided for general informational purposes and is not intended as individualized written tax advice. Readers should consult their own qualified tax professionals regarding the application of tax laws to their circumstances.
