Built a backyard cottage, garage conversion, or in-law suite? Cost segregation reclassifies 15–25% of your ADU's cost into 5-year depreciation — unlocking $10,000–$50,000+ in Year 1 tax deductions with OBBBA 100% bonus.
Try your numbers
Year 1 — without cost seg
$2,825
standard 27.5-year schedule
Year 1 — with cost seg
$36,392
first-year tax savings
First-year multiple
12.9×
vs. Year-1 standard depreciation
Annual tax savings, year-by-year
Adjust your inputs
Assumptions
Illustrative estimate. Actual savings depend on your property, basis, acquisition date, and tax situation. Consult your CPA.
When you rent out an ADU, the IRS lets you depreciate the construction cost over 27.5 years (for long-term rentals) or 39 years (in certain situations). That means you deduct about 3–4% of the cost each year. Slow.
Cost segregation changes that. An engineering-based study examines every component of your ADU — flooring, appliances, cabinetry, plumbing fixtures, electrical outlets, HVAC, window treatments — and reclassifies the ones that qualify as 5-year personal property. Instead of depreciating those items over 27.5 years, you depreciate them over 5 years. And with the OBBBA 100% bonus depreciation (for properties placed in service on or after January 19, 2025), you can take the entire 5-year amount as a deduction in Year 1.
For a typical ADU, 15–25% of the construction cost qualifies for 5-year treatment. On a $200,000 ADU, that's $30,000–$50,000 in accelerated deductions — and $11,000–$18,500 in actual tax savings at a 37% marginal rate. In Year 1.
Whether your ADU is freestanding or part of your main house, cost segregation accelerates your deductions.
A standalone structure in your backyard — a backyard cottage, casita, or converted garage that is physically separate from your main house. It has its own foundation, walls, and roof.
Tax treatment
A detached ADU is a separate building from your main house. If you rent it long-term (leases of 30+ days), it depreciates over 27.5 years — same as any residential rental property. The IRS evaluates it independently from your main house.
Cost seg impact
Typically 15–20% reclassified to 5-year personal property. The detached ADU also has its own utility connections (electrical subpanel, water/waste lines from the main house) which are part of the depreciable cost.
A unit within your existing house — a garage conversion, basement conversion, or room addition that shares walls, roof, or foundation with the main house.
Tax treatment
Because the ADU shares the main building structure, and you (the owner) live in the main house, the combined building usually doesn't qualify as "residential rental property" under IRS rules. The result: the ADU's structural components depreciate over 39 years instead of 27.5. (This is the "80% residential rental test" — when you occupy the main house, the building fails the test.)
Cost seg impact
Typically 20–25% reclassified to 5-year personal property. The higher percentage happens because interior conversion costs are proportionally more personal property (flooring, cabinets, appliances, fixtures) and less structural.
$26K+ 1
Average Year 1 Accelerated Deduction for a Detached ADU
10 min
Time to Complete a Study
$499
Flat Fee (vs $3K–$15K Traditional)
1 Based on a $150,000 detached ADU with 18% reclassification into 5-year personal property, OBBBA 100% bonus depreciation, and 27.5-year base recovery period. Actual results vary by property type, construction quality, acquisition year, and taxpayer situation. CostSegX does not provide tax advice.
| Category | % of Basis | Amount | Year 1 Deduction |
|---|---|---|---|
| 5-year personal property (appliances, flooring, cabinetry, fixtures, window treatments, lighting) | 18% | $27,000 | $27,000 (100% OBBBA bonus) |
| 27.5-year real property (foundation, framing, roof, exterior walls, HVAC, plumbing, electrical) | 82% | $123,000 | $4,473 (straight-line) |
| Total Year 1 deduction | $150,000 | $31,473 |
Without cost segregation: $5,455/year (straight-line 27.5). With cost segregation + OBBBA bonus: $31,473 in Year 1 — an additional $26,018 in first-year deductions. At a 37% marginal tax rate, that's approximately $9,627 in Year 1 tax savings.
Based on a 600 SF detached ADU with $150,000 depreciable basis, OBBBA 100% bonus depreciation (placed in service on or after 1/19/2025), and 37% combined federal + state marginal tax rate. Actual results vary by property specifics, quality of construction, and taxpayer situation. CostSegX is a software tool and does not provide tax advice.
Does NOT work if:
Three steps. No site visit. No waiting.
Our Agent pulls property data from public records and satellite imagery. Select 'ADU - Detached' or 'ADU - Attached' as the property type.
Verify the square footage, construction quality, flooring, appliances, and HVAC. The Agent pre-fills most fields — you confirm what's accurate.
The full cost segregation study — with MACRS schedules, Form 3115 lookback worksheet, recapture tables, and state conformity warnings — is delivered immediately. $499 flat fee. Hand it to your CPA and file.
The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation for properties placed in service on or after January 19, 2025. That means every dollar reclassified into the 5-year personal property bucket is fully deductible in Year 1 — no spreading it over 5 years.
For ADUs placed in service before 2025, the TCJA phase-down schedule applies: 60% bonus in 2024, 40% in 2025 (pre-OBBBA). But even with reduced bonus, cost segregation still accelerates deductions significantly compared to straight-line.
Already built your ADU in a prior year? A Form 3115 look-back study captures all the accelerated deductions you missed — taken as a single catch-up deduction in the current tax year. No amended returns needed.
Free estimate in 30 seconds. Full study for $499. No signup required for the estimate.
Estimate My ADU SavingsQuestions? See our FAQ above or email support@costsegx.ai
CostSegX is a software tool, not a CPA firm — we do not provide tax advice. Scope: residential 1-4 unit rentals, depreciable basis under $1M. This material is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional before making tax decisions. Tax savings vary based on individual circumstances, property characteristics, and applicable tax rates. 100% bonus depreciation applies to qualifying property placed in service on or after January 19, 2025 under the One Big Beautiful Bill Act (OBBBA).