Texas is an excellent market for real estate investment due to its relatively favorable state-level tax environment. However, you must still take tax planning seriously because federal taxes can be substantial.
Therefore, doing cost segregation in Texas is essential. Moreover, it’s a tax strategy you can employ year-round so you aren’t left scrambling for deductions at filing time.
In this post, we’ll explore how cost segregation works in Texas, how to calculate your potential tax savings, and how to choose the right specialist to help you conduct a study.
What is Cost Segregation?
Cost segregation is a tax strategy that enables you to accelerate the depreciation of a property by subjecting its components to depreciation schedules consistent with their actual useful lives.
Traditionally, you allocate the entire depreciable basis of a building over 27.5 years (residential) or 39 years (commercial).
Cost segregation takes a different approach, putting the various building components into different buckets according to their recovery periods as follows:
- 27.5 or 39 years: Real property (the core building structure)
- 15 years: Site/land improvements (fencing, paving, swimming pools, etc.)
- 5 or 7 years: Personal property (furniture, appliances, carpeting, etc.)
The approach paves the way to use 15- or 5/7-year depreciation schedules for the shorter-lived assets, which is more efficient.
Why Cost Segregation Matters in Texas
Doing cost segregation in Texas is crucial because it enables you to front-load depreciation, resulting in larger deductions in the initial years of property ownership.
If you do nothing, the IRS will gladly allocate your entire cost basis linearly over 27.5 or 39 years. That’s not ideal, especially given the fact that a dollar saved or invested today is worth more than a dollar 39 years later.
The main benefits of cost segregation include:
- Better long-term investment strategy: Given the power of the time value of money, it is better to reinvest your tax savings now. You’ll have a longer runway to compound the investments to achieve superior returns.
- You can build a snowball of deductions: If you are constantly putting new properties in service year after year, cost segregation and bonus depreciation allow you to build a snowball of deductions, creating paper losses that can be carried forward.
- It helps you qualify for bonus depreciation: Assets with a recovery period of 20 years or less qualify for bonus depreciation. Therefore, the 5/7- and 15-year properties that would benefit from cost segregation also qualify for this incentive.
Also known as the additional first-year depreciation deduction, bonus depreciation is a tax incentive that allows you to deduct up to 100% of the cost of a qualifying asset in the year it is placed in service.
The original Tax Cuts and Jobs Act (TCJA) of 2017 initially allowed for 100% bonus depreciation through 2022, phasing it out as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
However, the One Big Beautiful Bill Act, signed into law on July 4, 2025, reversed the phaseout schedule. Bonus depreciation under the Big Beautiful Bill has been permanently restored to 100% for properties placed in service after January 19, 2025.
Types of Properties That Qualify in Texas
Most property investors in Texas will benefit from a cost segregation tax strategy. The following property types, which are common in Texas, qualify:
- Multi-family units
- Short-term rentals
- Country clubs and golf courses
- Industrial and manufacturing properties
That said, if you hold a property with a cost basis exceeding $300,000 (excluding land), you likely qualify.
How to Calculate Your Potential Tax Savings in Texas
A significant consequence of doing cost segregation is the ability to claim bonus depreciation.
However, Texas does not conform to federal bonus depreciation rules because it is still using the Internal Revenue Code (IRC) as it existed on January 1, 2007. Therefore, if you do claim bonus depreciation at the federal level, you must maintain a separate depreciation schedule for Texas returns.
Let’s explore the federal-level impact of cost segregation and bonus depreciation with an example:
Cost Segregation Example with Bonus Depreciation (Federal-Level)
Assume you placed a residential property with the following details in service in 2024:
- Purchase: $1,000,000
- Improvements made: $50,000
- Land value: $150,000
- Cost basis: $900,000 (purchase + improvements – land value)
Under traditional linear depreciation, you’d allocate the $900,000 cost basis linearly over 27.5 years, giving you a per-year depreciation of $32,727.27.
Cost segregation is different. For instance, assume Seneca Cost Segregation did a study and found that 12% of the building is personal property, 16% percent is site improvements, and 72% is real property.
- Personal property depriciation = 12% x $900,000 = $108,000
- Site improvements depriciation = 16% x $900,000 = $144,000
- Real property depriciation = 72% x $900,000 = $648,000
Because you placed the property in service in 2024, the shorter-lived assets qualify for 60% bonus depreciation as per the phaseout schedule we discussed earlier.
- Personal property: $108,000 x 60% = $64,800. The remaining 40% comes in over the next 5 years.
- Site improvements: = $144,000 x 60% = $86,400. The remaining 40% comes in over the next 15 years.
- Real Property: $648,000 / 27.5 = $23,563.64 every year until Year 28
The total first-year deduction = $64,800 + $86,400 + $23,563.64 = $174,763.64
The additional first-year year depreciation = Bonus Depreciation 1st Year – SL depreciation 1st year = $174,763.64 – $32,727.27 = $142,036.37
You’ll get a tax deduction of $142,036.37 instead of $32,727.27. At a 37% federal tax rate, this nets you a check from the IRS for $52,553.46.
The additional tax savings are pretty significant. How much can you save with the properties you currently hold?
Use our cost segregation calculator to estimate your potential tax savings. It’s fast, accurate, and provides easy-to-interpret estimates.
Nonetheless, you can’t submit the estimates to the IRS. This is where Seneca Cost Segregation comes in. We’ll conduct a study and prepare a comprehensive report for you to present to your CPA and the IRS. Our studies comply with IRS guidelines fully.
Cost Segregation Study Process in Texas
Cost segregation processes primarily depend on the methodology employed. At Seneca Cost Segregation, we exclusively do engineering-based cost segregation studies.
Here’s the typical process our team follows:
Initial Assessment and Data Collection
You can contact us for a preliminary assessment of your property to see if it qualifies for cost segregation. We’ll provide an estimate of the potential tax savings.
If you decide to proceed with the study, our team will begin by gathering relevant documentation to support the study. We’ll need proof of ownership documents. You should also have purchase and construction documents.
Property Inspection and Engineering Analysis
Our engineering team will do an on-site or virtual tour of your property. We’ll identify its components and classify the assets.
Using industry best practices and engineering-based costing techniques, we’ll allocate costs to the various shorter- and longer-lived assets.
Report Preparation and Implementation Support
We’ll put together a report detailing our findings. We’ll also detail our methodology and the rationale used to classify assets and allocate costs.
Your CPA can then use the report to prepare your taxes. We provide post-study support in case you and your CPA need assistance in effectively implementing our findings.
How to Find the Right Cost Segregation Expert in Texas
It’s essential to work with the right cost segregation experts to effectively navigate the nuances of doing cost segregation in Texas.
Below are the criteria you should use to vet potential candidates:
- Engineering vs. other methodologies: In its Cost Segregation Audit Technique Guide, the IRS explicitly states that a study done by someone with an engineering or construction background is more reliable.
- State-specific nuances: You want a cost segregation team that can navigate local rules and construction nuances with ease. Our engineering team has completed over 10,200 studies across the nation.
- Post-study support: In case your CPA needs help or clarification, will the cost segregation firm be available post-study to assist in implementing the findings effectively?
Risks and Compliance Considerations
The IRS approves of cost segregation because it is actually the correct way to depreciate property. Done correctly, it is a low-risk tax strategy.
Still, you must pay attention to the following issues to reduce audit risk:
- The IRS Cost Segregation ATG: Strictly following the IRS Audit Technique Guide signals that a study was conducted according to industry best practices.
- Reasonable cost allocations: You may be tempted to allocate costs to shorter-lived assets aggressively. The IRS expects all cost allocations to be reasonable and defensible.
- Audit defense: You cannot completely eliminate audit risk. Therefore, you want to work with a cost segregation firm that can help you defend the study in case of an audit. All our studies are backed by the iron-clad Seneca AuditDefense Guarantee.
Frequently Asked Questions (FAQs)
Let’s address some of the common questions we receive about cost segregation in Texas:
How Long Does a Cost Segregation Study Take?
It will depend on the property and its complexity. We typically complete most studies within two to four weeks.
Can I Do Cost Segregation on a Property Already Owned for Years?
Yes, you can perform cost segregation on a property that was placed in service in prior years.
You’ll apply for a change in accounting method using IRS Form 3115 to “catch up” on the depreciation you may have missed by not doing cost segregation earlier.
What Is the Minimum Project Cost for Cost Segregation in Texas?
A cost segregation study typically costs around a couple of grand.
If you hold a property with a cost basis exceeding $300,000 (excluding land), we believe the potential tax savings justify commissioning a study.
Does Land Value Count in a Cost Segregation Study?
Yes, land valuation determines your depreciable basis.
You must obtain an accurate and reasonable land valuation, as the IRS expects the allocation to adhere to industry best practices.
Conclusion
Cash flow is king if you want to remain competitive in the Texas real estate market. The best way to assure an excellent cash position is to keep more of your rental income instead of giving it to the IRS.
Cost segregation helps you accelerate depreciation, allowing you to front-load your deductions and lower your tax bill, keeping more of your money. At Seneca Cost Segregation, we consistently help investors turn 20-40% of their property costs into immediate tax savings through our engineering-based studies.
Request a free proposal today to see exactly how much tax savings you can unlock before the year ends.
