The Critical Cost Segregation Mistakes Investors Still Make

Written by:

Steve Marcinuk

Date:

25 Nov 2025

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Real estate investors continue to leave money on the table – or create unexpected tax bills – by mistiming their cost segregation strategies, according to Brian Kiczula, a specialist with CostSegRx. Kiczula says the biggest issues stem from weak planning and misunderstandings about how accelerated depreciation interacts with broader tax strategies.

The Disposition Planning Gap

One of the most common errors begins at acquisition. Many investors don’t think through how long they plan to hold a property, even though that decision determines whether a cost segregation study actually helps them.

Kiczula says that without a clear exit timeline – five years, ten years, or longer – accelerated depreciation can backfire. That’s because when a property is sold, the investor must pay depreciation recapture tax. If the hold period is too short, the IRS may reclaim a large portion of the tax benefit in the next year, leaving the investor with a substantial bill and not enough new deductions to offset it.

In short: cost segregation works best when the hold period supports the strategy, not when it creates an unexpected recapture event.

The Active vs. Passive Investment Trap

Another widespread mistake involves misunderstanding whether the investor’s participation qualifies as active or passive under IRS rules.

Cost segregation generates large paper losses. But these losses only reduce taxable income if the investor materially participates in the real estate activity. Active investors can use the deductions to offset W-2 or business income. Passive investors – such as most limited partners in syndications – can only use them to offset passive income.

Many investors, especially those entering syndicated deals, assume these deductions reduce their regular income and are surprised when they learn the losses are locked in the passive column.

The Lookback Opportunity Misconception

A third misconception is that cost segregation only applies to new acquisitions. Kiczula says this is false. Investors can conduct a lookback cost segregation study on properties they purchased in earlier years – 2020, 2022, 2023, and so on.

By filing Form 3115, they can claim “catch-up” depreciation all at once, without amending prior returns. According to Kiczula, many owners miss significant tax savings simply because they don’t know this option exists.

Strategic Coordination Requirements

The fix, Kiczula says, is coordination. Cost segregation works best when investors involve their CPA, financial advisor, and tax attorney before making key decisions. This ensures the strategy aligns with their long-term goals, their expected income type, and their planned exit.

Timing is particularly important when pairing cost segregation with 1031 exchanges. To maximize the benefit, gains from a sale and accelerated depreciation from a new purchase often need to occur within the same calendar year.

Kiczula emphasizes that cost segregation should be viewed as part of a larger tax plan – not just a tool for boosting current-year deductions. When used without clear planning, it can create more problems than it solves. But when coordinated with an investor’s long-term goals, cost segregation remains one of the most powerful tax strategies available in real estate.