Maximizing Tax Savings Under the CARES Act Using Cost Segregation: A Practical Playbook for Real Estate Owners

Real estate investors rarely get a second chance at a “retroactive” tax opportunity, yet that is exactly what the CARES Act created for many property owners who placed assets in service during the 2018–2020 window. When executed correctly, maximizing tax savings under the CARES Act using cost segregation can convert long, slow depreciation into accelerated deductions, generate (or enlarge) net operating losses, and, where eligible, unlock meaningful cash-flow through carryback mechanisms and amended returns.

If you are evaluating whether your building, renovation, or tenant improvement project qualifies, the fastest way to get clarity is to start with a defensible engineering-based analysis. Cost Segregation Guys can help you identify reclassifiable components, quantify first-year deductions, and coordinate clean support for your CPA’s filing position, so you can pursue accelerated benefits while staying audit-ready.

This guide breaks down the CARES Act connection, explains where cost segregation fits, and shows you how to document the position correctly. We’ll also touch on a common residential scenario: Cost Segregation Study for Residential Rental Property, because many investors assume these opportunities apply only to large commercial assets.

Why the CARES Act Still Matters for Depreciation Strategy

The CARES Act did not “create” cost segregation. Cost segregation has been used for decades to reclassify eligible building components (e.g., certain interior finishes, specialty electrical systems, and land improvements) into shorter recovery periods, typically 5-, 7-, or 15-year property—rather than depreciating everything as 27.5-year residential real property or 39-year nonresidential real property.

What the CARES Act did change, critically, was the downstream tax value of accelerated depreciation for certain years by modifying net operating loss (NOL) rules and correcting a major depreciation classification issue related to qualified improvement property (QIP).

The NOL “Cash-Flow” Angle

For many taxpayers, the practical benefit of large depreciation deductions is not merely reducing this year’s taxable income; it is creating an NOL that can be used strategically. The CARES Act temporarily provided a special 5-year carryback for NOLs arising in tax years beginning in 2018, 2019, and 2020, and it also suspended the 80% limitation for certain years, rules that can materially change the value of accelerated deductions when you are looking at amended returns and carrybacks.

If your property was placed in service (or substantially improved) during that period, maximizing tax savings under the CARES Act using cost segregation can become an amendment-driven planning exercise, not just a forward-looking depreciation tactic.

How Cost Segregation Creates Larger, Earlier Deductions

A cost segregation study is a methodology, supported by engineering and tax law, that identifies components of a building that are properly classified as personal property (5- or 7-year) or land improvements (15-year), rather than structural building property. The result is a faster depreciation schedule and, frequently, a significantly larger first-year deduction.

Typical Reclassification Buckets

While every property is different, cost segregation commonly focuses on:

• Personal property (5- and 7-year): dedicated wiring and electrical for specialized equipment, certain removable finishes, cabinetry in specific contexts, specialized plumbing, and other components that are not considered “structural” building elements.
• Land improvements (15-year): parking lots, sidewalks, site lighting, landscaping, fencing, drainage, and certain exterior improvements.
• Qualified improvement property (QIP): interior improvements to nonresidential real property that can be eligible for accelerated recovery (more on this below).

These buckets matter because shorter-lived assets produce larger early-year depreciation. When combined with bonus depreciation (where applicable to the year in question), the front-loading effect can be substantial.

The “Retail Glitch” Fix: QIP and the CARES Act Connection

One of the most meaningful CARES Act changes for real estate owners was the correction to QIP depreciation treatment, often called the “retail glitch.” The CARES Act corrected an error that had left QIP assigned to a 39-year life (which generally prevented bonus depreciation), and it treated QIP placed in service after 2017 as 15-year property, making it eligible for bonus depreciation under the rules in effect at the time.

Why This Matters for Cost Segregation

A strong cost segregation study does not merely “accelerate something.” It:

1. Separates qualifying interior improvements from structural building costs, and
2. Supports the correct asset life and treatment so your CPA can capture the appropriate depreciation behavior.

For owners who made interior improvements in 2018–2020, the CARES Act QIP change can amplify the benefit of reviewing prior-year classifications, especially where improvements were mistakenly treated as 39-year property.

This is a central reason that maximizing tax savings under the CARES Act using cost segregation often starts with a lookback: if the classification was wrong, correcting it can be worth real money.

The Strategic Workflow: From Study to Filing Position

To translate cost segregation findings into tax savings that survive scrutiny, treat the process like a controlled project.

Step 1: Confirm the “Placed-in-Service” Story

Depreciation is driven by placed-in-service timing. Gather:

• purchase closing statements,
• construction draw schedules,
• certificates of occupancy (or comparable proof),
• invoices for major improvements,
• tenant improvement agreements (if applicable).

This timeline matters because it determines which tax-year rules apply to depreciation and NOL treatment.

Step 2: Decide Whether You’re Doing a Lookback or Current-Year Study

There are two common scenarios:

• Current-year study: You purchased or improved a property this year and want optimal classification from day one.
• Lookback study (catch-up depreciation): You placed the property in service in prior years and want to correct classification and accelerate missed depreciation.

In CARES Act planning, the lookback scenario is especially important because it can interact with 2018–2020 NOL rules and potential amended returns.

Step 3: Engineer-Grade Documentation (Not a Spreadsheet Guess)

The IRS has long emphasized documentation quality and methodology in cost segregation contexts, and a credible report should show how costs were identified, quantified, and classified.

This is where specialized providers add value: the report needs to be technically coherent, consistent with tax rules, and easy for your CPA to defend.

If you want a quick “go/no-go” determination, especially for a 2018–2020 placed-in-service property, Cost Segregation Guys can review your property type, improvement history, and depreciation schedule to identify whether a CARES-era lookback is likely to produce a meaningful deduction, and what support will be needed for your tax filing.

Using Accelerated Depreciation to Optimize CARES-Era NOLs

The core planning logic is straightforward:

1. Cost segregation accelerates depreciation.
2. Accelerated depreciation can create or increase an NOL.
3. CARES Act rules made certain NOLs more valuable during the specified years because of carryback and limitation changes.

Practical Examples of “Where It Shows Up”

Here are common fact patterns where maximizing tax savings under the CARES Act using cost segregation is most relevant:

• Hospitality, retail, and restaurants: frequent interior remodels and tenant improvements → QIP reclassification opportunities.
• Medical and industrial facilities: significant specialty electrical and plumbing.
• Multifamily value-add renovations: interior upgrades plus substantial site work (often 15-year land improvements).
• Newer acquisitions with incomplete cost detail: cost segregation can reconstruct cost allocations more defensibly than broad estimations.

Residential Notes: Rental Properties and the “Primary Residence” Misconception

Cost Segregation Study for Residential Rental Property

Residential rentals often qualify for cost segregation benefits, especially when the property includes meaningful land improvements or when renovations introduce components that are properly classified into shorter lives. While residential buildings are typically 27.5-year properties, portions may be reclassified where supported by facts and methodology. The result: faster depreciation early on, which can matter substantially if you have high taxable income from other activities.

Cost Segregation on Primary Residence (When It Can and Cannot Apply)

A true personal-use primary residence is not depreciable. However, taxpayers sometimes ask about Cost Segregation on Primary Residence in situations where part of the home is legitimately used in a business or income-producing activity (for example, a properly qualified rental portion or business-use area under applicable rules). In those cases, the depreciable portion may be analyzed, but it must be narrowly and correctly scoped, and the documentation needs to be clean.

In other words, the “primary residence” phrase is often shorthand for a mixed-use reality. If there is no income-producing or business-use portion, depreciation (and cost segregation) is generally not in play.

Compliance and Audit-Readiness: How to Avoid the Common Mistakes

If you want the upside without headaches later, avoid these recurring errors:

• Over-aggressive classifications: Treating clearly structural components as personal property without support.
• Thin documentation: No engineering rationale, no cost traceability, no reconciliation to purchase price or construction costs.
• Misunderstanding improvement rules: QIP and related categories have specific requirements; not every interior spend qualifies.
• Ignoring state-level differences: Federal results do not always mirror state tax outcomes.

A credible approach aligns facts, methodology, and filing mechanics.

A Simple Decision Framework: Is a CARES-Era Study Worth It?

A cost segregation study tends to be most compelling when the property has:

• high purchase price or large renovation basis,
• meaningful land improvements,
• significant interior buildout (especially in nonresidential properties),
• enough taxable income (current or prior years) to benefit from large deductions,
• or a clear lookback opportunity tied to 2018–2020 placed-in-service timing.

When these conditions exist, maximizing tax savings under the CARES Act using cost segregation is less about theory and more about disciplined execution.

Conclusion

The CARES Act created a rare window where accelerated depreciation could have an outsized value, particularly for properties placed in service or improved in 2018–2020. By reclassifying eligible components into shorter recovery lives and properly addressing improvement property, maximizing tax savings under the CARES Act using cost segregation can increase first-year deductions, potentially generate NOLs, and support strategic amendment opportunities where appropriate.

The real differentiator is not simply “doing cost seg.” It is doing it with correct timing, a defensible report, and a filing strategy coordinated with your CPA. If you want a clear plan, especially if you suspect your depreciation schedule understates QIP or misclassifies improvements, Cost Segregation Guys can provide a structured review and a study deliverable designed to help you pursue CARES-era benefits while staying compliant.