I hope you have some takeaways from this blog. if you want our team to provide you tenant placement or property management. Click Here
Author: Mark Ainely | Partner GC Realty & Development & Co-Host Straight Up Chicago Investor Podcast

If you own rental property in Chicago (or anywhere else) and you’ve heard the term cost segregation, there’s a good chance you’ve also felt that little panic around the end of the year:

On this Straight Up Tuesday Tip, we brought back Cost Seg Kev from CSSI to clear that up once and for all, and then go deeper into how to time your study, how phased cost segs work when you’re doing big rehabs, and when it actually makes sense to spend money on a study versus just using Section 179 expensing.

Kev has been on the show multiple times, he’s worked on my own deals, and he’s very good at taking dense tax concepts and putting them into plain English for investors and housing providers.

If you’re buying buildings, rehabbing them, or planning your next couple of years from a tax and cash-flow perspective, this is one you’ll want to pay attention to. The deadlines are more flexible than most people think, but the strategy matters more than ever.

Cost Seg Deadlines Are NOT December 31st

This entire episode started because I called Kev in “oh crap” mode.

I’m working on a purchase that will close toward the end of the year, and I told him, “We’ve got to get the cost seg done before December 31st.”

The calendar year and the tax year are not the same thing when it comes to cost segregation. You don’t need the study done by December 31st, you need it done before you file that year’s tax return.

If you file an extension, that gives you until September/October of the following year to get the study completed. That’s a huge mental shift for a lot of investors who think they’ve “missed the window” when they really haven’t.

From there, we got into:

How long a typical cost seg study actually takes
How to use a phased approach when you’re doing major rehabs
What Section 179 and the de minimis safe harbor do to the “minimum rehab size” question
Bonus depreciation: 60% vs 100% depending on when you bought
How “placed in service” really works on vacant or under-construction properties
A teaser on something called a 1245 exchange that could help with recapture down the road

This isn’t about gaming the system. It’s about understanding the rules well enough to line up your acquisitions, rehabs, and filings so you’re keeping as much money in your pocket as legally possible.

Questions We Answer in This Tuesday Tip

Q: Do I need to have my cost segregation study done by December 31st of the year I buy the property?
A: No. That’s the biggest misconception Kev sees. The study does not need to be done by the end of the calendar year. It needs to be completed before you file your tax return for that year. If you extend, that can push your deadline all the way into September/October of the following year for that tax year.

Q: What’s a realistic timeline to complete a cost seg study once I sign up?
A: Once Kev has everything he needs, appraisal, site visit, and agreed-upon basis net of land, the study itself typically takes about two weeks. If you factor in the time to gather documents and schedule the inspection, assume around three weeks total as a safe planning number.

Q: What is a “phased” cost seg study and when does it make sense?
A: A phased study is when you break the project into two parts:

Phase 1: Cost seg on the building as-is when you acquire it.
Phase 2: Cost seg on the improvements/rehab after the work is done, in a later tax year.

This is especially useful when:

You buy late in the year and won’t finish rehab before year-end, or
You don’t need a huge tax deferral this year, but do expect bigger income next year.

You can lock in benefits on the original structure now, then capture all the value from improvements in the next tax year.

Q: How does Section 179 change the conversation around rehabs and minimum project size?
A: The new Section 179 limits allow interior improvements to be expensed up to around $2.4 million (under current rules). Combined with the de minimis safe harbor (generally expensing items under $5,000), this means:

Many smaller interior rehab items (drywall, paint, framing for new walls, etc.) are just expensed by your CPA without needing a cost seg study.
Bigger items in residential, like roofs and certain systems, still follow different rules, but for commercial properties the 179 expensing is even more powerful.

Where cost seg still shines is when you want to create or maximize a net operating loss (NOL), because Section 179 can’t create an NOL, but cost seg can.

Q: So is there a “minimum rehab amount” where cost seg becomes worth it?
A: There isn’t a clean “if it’s under X, don’t bother” answer, because it’s not just about rehab size. The real drivers are:

Your total basis (purchase price + capitalized improvements – land)
Your tax situation (do you need a big loss now or later?)
Whether 179 and de minimis rules already wipe out most of what you’d study

In other words, if your CPA can expense the majority of your interior spend anyway, cost seg adds less value. But once you’re dealing with bigger numbers, multiple properties, or you’re trying to maximize NOLs, cost seg becomes powerful again.

Q: How does “placed in service” actually work for a vacant or heavy rehab building?
A: “Placed in service” doesn’t technically mean “has a tenant in it.” Tax law generally defines it as ready and available for its intended use.

Kev’s seen three types of accountants:

Super aggressive: “If you’re paying a ComEd bill, it’s in service.”
Super conservative: “No tenant, no service. I won’t sign off.”
Reasonable middle: “If the unit is finished and being actively marketed for rent, we’ll treat it as placed in service.”

At the end of the day, your accountant will put the onus on you. They’re there to guide, not to make the risk decision for you.

Q: If I bought a building in late 2024 or early January 2025, can I still do cost seg now?
A: Yes. If you purchased:

In calendar year 2024 up to January 19, 2025 → you’re generally under 60% bonus depreciation rules for that property.
On or after January 19, 2025 → you fall under the new 100% bonus depreciation rules (at least under the current law).

You can still do a cost seg now; you just need to understand which bonus regime your property falls under so you and your CPA can model the impact correctly.

Q: Is cost segregation only for big rehabs, or does it still help if I buy a turnkey building?
A: Cost seg is based on your basis, not on who swung the hammers. If you buy a turnkey building that someone else rehabbed:

You’re paying a premium for their improvements
That premium becomes part of your basis
You can still accelerate depreciation on those components through cost seg

Same idea for new construction, in many ways, it’s even easier because the engineer has blueprints and architectural drawings that lay out exactly how the building is composed.

Q: Are there any new strategies on the horizon for handling recapture on cost seg?
A: Kev teased something called a “1245 exchange”, a potential strategy to defer or reduce recapture on the personal property portion that was carved out by cost seg when you sell.

It’s still being vetted with tax pros, so this isn’t something to run with blindly. But if it’s real and widely accepted, it could be another tool to soften the recapture pain when you exit a property where you previously did a cost seg.

Stay tuned, that’s a full episode by itself.

Show Notes

00:00 Intro – Tuesday Tip with Cost Seg Kev back on the show
00:16 How Tom and Kev originally connected, early episode history
01:19 The “we need this done by December 31st” misconception
01:47 Tax year vs calendar year – what actually matters for cost seg
02:04 Filing extensions and how far you can push the study timeline
03:02 Realistic timeline: 2 weeks for the study, 3 weeks total with prep
03:48 Introducing the idea of phased cost segs for rehab-heavy deals
04:18 When phased studies make sense (late closings, big rehabs, timing income)
05:06 Why some investors intentionally wait to stack benefits in a future year
05:20 Section 179 “big beautiful bill” and the $2.4M expensing limit
06:11 Matching strategy to income: chopping benefits over two years vs one
06:51 Placed-in-service rules for vacant/building rehab projects
07:08 How aggressive vs conservative accountants treat “in service”
08:25 Why your CPA will push the ultimate decision back on you
08:55 Clarifying bonus depreciation percentages by purchase date
09:31 60% bonus vs 100% bonus moving forward
09:59 Minimum rehab questions and why basis matters more
10:16 De minimis safe harbor ($5K) and 179 expensing make small projects easy
11:04 When cost seg shines: creating net operating losses beyond 179 limits
11:42 Strategy: max out 179, then layer cost seg on what’s left
11:56 Turnkey vs rehabbed asset, why basis is the real driver
12:09 New construction: why it’s the easiest scenario for cost seg
13:24 Kev’s teaser on a possible 1245 exchange for recapture
14:22 Chicago fact: Sears kit homes in Downers Grove
15:39 Gift card winner shoutout
15:52 Closing thoughts and invite for listeners to reach out

Takeaways for Chicago Landlords and Property Managers

You don’t need a cost seg done by December 31st. You need it done before you file that year’s return. Extensions buy you time.
Three weeks is a good planning window for a typical study from “I’m ready” to finished report.
Phased studies are powerful when you’re buying late in the year or doing large rehabs that span multiple tax years.
Section 179 and the de minimis safe harbor now cover a ton of interior work, especially on smaller projects. That shifts where cost seg has the most bang for the buck.
Cost segregation is still about basis, not effort, turnkey, heavy rehab, or new construction can all benefit.
“Placed in service” is not always the same as “fully occupied.” Talk with your CPA about what “ready and available for rent” looks like in your situation.
For investors stacking acquisitions, rehabs, and income from multiple sources, coordinating timing with your CPA + a cost seg pro can be worth six figures over a few years.
There may be emerging strategies (like a 1245 exchange) that change how we think about recapture in the future, this isn’t a static game.

Guest Info

Guest: “Cost Seg Kev” – CSSI

Guest Company: CSSI

https://www.costsegkev.com/

Because finding good tenants and property management shouldn’t feel like online dating.

Dear Investor,

If you are an investor in either the city or suburbs of Chicago, I would love to speak with you about how we can help you on your real estate journey. At GC Realty & Development LLC, we help hundreds of Chicagoland real estate owners and brokers each year manage their assets with both full service property management and tenant placement services.

We understand that every investor’s goals are unique, and we love learning about each client’s individual needs. If there is an opportunity to help you buy back your time by managing your rental property or finding quality tenants, please check us out.

Best Investing,