Real estate is a popular path to financial independence for high-income professionals. And it’s no surprise why: rental properties offer cash flow, appreciation, and powerful tax benefits. But here’s the problem: many doctors are missing out on the full potential of those tax benefits because their CPA never told them about one key strategy.
It’s called cost segregation.
If you own investment property—especially commercial or short-term rentals—understanding cost segregation could help you unlock tens (or even hundreds) of thousands of dollars in early tax deductions.
And depending on how your income is structured, it could dramatically reduce what you owe the IRS. But the benefits only come if the strategy is applied correctly and paired with a proactive tax plan.
What Is Cost Segregation?
Cost segregation is a tax strategy that accelerates depreciation. Instead of deducting your property evenly over 27.5 or 39 years, like you typically would with a short-term rental and a commercial building, respectively, you break it into parts that depreciate faster: things like flooring, cabinetry, appliances, landscaping, and lighting.
These components are considered “personal property” or “land improvements,” and they qualify for five-, seven-, or 15-year depreciation schedules, rather than the 27.5- or 39-year schedule of the building itself. A cost segregation study reclassifies those components so you can deduct them much sooner—and in many cases, all at once through bonus depreciation.
Depending on the property type and scope, studies typically range from $1,200-$5,000. On the lower end, investors can get a condensed engineering study that uses virtual site verification and streamlined reporting to deliver tax savings at a lower cost, while a full detailed study includes an in-person site visit and more comprehensive documentation—ideal for larger or more complex properties.
That means you could take a huge deduction in Year 1 instead of spreading it out slowly over decades.
Here’s an example:
- A doctor buys a $1 million short-term rental
- Without cost segregation, they get ~$25,000 per year in depreciation
- With cost segregation, they might front-load $400,000+ in Year 1 deductions
Same property. Same purchase price. Drastically different tax outcome. That $400,000 deduction could offset your clinical income, capital gains, or other earnings if you meet the requirements.
More information here:
10 Tax Advantages of Real Estate – How Many Can You Name?
Real Estate Losses Against Ordinary Income
Why It Matters for High-Income Earners
For most W-2 physicians, real estate losses are considered “passive,” which means they can’t offset their W-2 income. This is due to the IRS’s passive activity loss rules under Section 469.
But there are important exceptions that allow you to treat real estate losses as active:
#1 Short-Term Rental (STR) Loophole
If your average rental duration is seven days or less and you materially participate in managing the property, it is not considered a rental activity under IRS rules—and therefore your short-term rental is not subject to passive loss limitations. That means you can use the losses (including bonus depreciation from cost segregation) to offset your active income, even if you don’t qualify as a real estate professional.
For busy physicians, this is one of the most accessible ways to unlock tax savings.
#2 Real Estate Professional Status (REPS)
To qualify for REPS, you must:
- Spend more than 750 hours per year in real estate activities, and
- Perform more hours in real estate than in your physician job
This is tough for full-time clinicians, but it’s often achievable by a spouse who actively manages properties. REPS allows you to treat all rental income and losses as non-passive—which means the large depreciation deductions from cost segregation can offset your clinical salary.
A Case Study: 2 Doctors, 2 Outcomes
Let’s say Dr. A and Dr. B each purchased a $1.2 million short-term rental in early 2025. Both properties have a $1 million depreciable basis after allocating $200,000 to land (land can’t be depreciated).
- Dr. A works full-time, hires a management company, and treats the property as passive. They depreciate it over 39 years using the straight-line method.
- Dr. B keeps average guest stays under seven days, self-manages the property to meet material participation standards, and gets a cost segregation study.
Here’s the difference:
- Dr. A gets ~$25,600 in straight-line depreciation for 2025 (39-year schedule).
- Dr. B gets a cost segregation report that identifies $400,000 in five- and 15-year components (eligible for 100% bonus depreciation in 2025). The full $400,000 is deducted immediately in Year 1.
If Dr. B is in the 37% tax bracket, that translates to ~$148,000 in federal tax savings in Year 1 alone. The remaining depreciation continues to offset income in future years.
Same purchase price. Same market. The only difference? Strategic planning and a cost segregation study.
What Most CPAs Get Wrong
Many high-income clients come to me after their CPA told them cost segregation wouldn’t help. In reality, the CPA wasn’t wrong—but they didn’t go far enough. Cost segregation only helps if you can use the losses.
That’s why proactive planning matters. Before you close on a property, ask:
- Can I (or my spouse) qualify for REPS?
- Can we meet the material participation tests for a short-term rental?
- Will these losses reduce our taxable income this year or just carry forward?
Too many investors discover the strategy after it’s too late to qualify for the key exceptions. But with the right setup, cost segregation can eliminate your entire tax bill for the year.
More information here:
How the IRS Treats You as a Real Estate Investor
How We Became Accidental Landlords: Turning a Primary Residence into a Rental Property
Other Considerations for Physicians
Here’s what to consider if you’re a high earner thinking about a cost segregation study.
- Alternative Minimum Tax (AMT): Cost segregation deductions are generally not an AMT preference item, which means they still benefit you even if you’re subject to AMT.
- Phaseout rules: High earners often phase out of many tax deductions—but depreciation isn’t capped. That makes cost segregation one of the few levers left for physicians earning $500,000+.
- Entity structure: Whether you hold the property personally, in an LLC, or in an S Corp can affect how losses are treated. Make sure your tax professional understands real estate and high-income clients.
- Bonus depreciation phaseout: Bonus depreciation was set to phase down in 2025 and 2026, but the One Big Beautiful Bill Act reversed that. Bonus depreciation can significantly accelerate deductions.
Final Thoughts
Too many doctors invest in real estate hoping for tax savings but end up leaving money on the table.
Cost segregation isn’t right for everyone. (e.g., a low-income earner, a non-investor (since primary residences don’t work), if your depreciable basis is too low, if you can’t access the losses from one of the loopholes). But if you own high-value property or you qualify for one of the key exceptions, it can be a game-changer.
Don’t assume your CPA has explored this. Ask. Plan. And if you’re considering a property this year, make sure you understand how depreciation fits into your overall tax strategy.
Because when it’s done right, this one move can be worth six figures—and it can help you build wealth faster than almost anything else in real estate.
Have you used cost segregation? Did it work out for you? How much did you save in taxes?
