Should an investor review passive-loss limits before ordering the study?

Yes. Passive-loss and at-risk rules under IRC Section 469 and IRC Section 465 can materially change the immediate value of accelerated depreciation.

John Malone, JD, CTC

When should a real estate investor order a cost segregation study in 2026?

Q: Is it too late to order a cost segregation study after year-end?

Not necessarily. A late study can still help, but it usually provides less strategic flexibility and more administrative cleanup than a timely study.

Author:

John Malone, JD, CTC

June 28, 2026

A real estate investor should usually order a cost segregation study as early as the facts are stable enough to support the work, often soon after acquisition or after a major improvement plan is clearly defined. Waiting is not always fatal, but delay can reduce planning flexibility, postpone deductions, and make the catch-up process more administrative.

At Anomaly CPA, a Boston-based CPA firm serving clients nationwide, John Malone, JD, helps investors connect cost segregation timing to passive-loss limits, holding period, bonus depreciation, and exit math.

This matters because the best study is not just technically accurate, it also arrives early enough to influence the year's tax decisions. Bottom line: order the study when the property basis, use, and ownership plan are clear, not when filing deadlines are already on top of you.

Key takeaways

The best time to order a study is usually shortly after purchase or after a major improvement plan is finalized.
A great study can still help later, but the tax administration often gets less clean once the year is already closed.
Passive-loss and at-risk limits should be reviewed early because accelerated deductions are only valuable if the investor can use them.
Cost segregation works best when it is part of a broader real estate tax plan, not a standalone rush project.

The best times to order a cost segregation study

Timing	Why it can work	Main drawback
Right after purchase	Creates the cleanest path for current-year depreciation planning	Requires quick coordination on basis and records
After major improvements are scoped	Can capture the updated asset mix more accurately	May delay some deductions if construction drags
After year-end	Still potentially useful through catch-up methods	More administrative cleanup and less planning flexibility
Years later	Can still unlock missed depreciation in the right case	Usually less elegant and more reactive

The live Cost segregation page is helpful here because it frames cost segregation as part of proactive real estate tax strategy, not just an engineering report.

Key takeaway: investors usually get the best mix of accuracy and flexibility when the study happens close to acquisition or clearly defined improvement work.

The limitation flags investors should check early

Internal Revenue Code §168 governs depreciation timing and methods, including the framework that makes shorter asset lives valuable in cost segregation work (Source: IRC §168, https://www.law.cornell.edu/uscode/text/26/168).

Definition — Depreciation under §168: Section 168 tells taxpayers how quickly qualifying property is depreciated for federal tax purposes, and cost segregation works by identifying components that can be depreciated over shorter recovery periods than the building itself.

Just as important, investors need to review the passive-activity and at-risk rules early. Internal Revenue Code §469 can limit whether losses are currently usable, and Internal Revenue Code §465 can limit deductions to the amount economically at risk (Source: IRC §469, https://www.law.cornell.edu/uscode/text/26/469; IRC §465, https://www.law.cornell.edu/uscode/text/26/465).

Definition — Passive-loss and at-risk limits: These rules can restrict whether an investor can use accelerated depreciation right away, which means a technically strong study may still produce less immediate value if the investor's facts do not support current use of the deductions.

That is the practical implication. If the investor cannot use the losses now, the timing decision becomes more about future planning, basis tracking, and exit strategy than immediate cash savings.

Key takeaway: order timing should be coordinated with loss usability, not decided in isolation.

What changes if you wait too long

A late study can still help. It just tends to shift the work from proactive planning toward cleanup.

That means:

Less ability to model the year's tax position before major decisions are made.
More accounting-method and filing administration after the fact.
More pressure around basis support, records, and documentation.
Less opportunity to coordinate the study with refinancing, disposition, or grouping strategy.

If you need the detailed compliance framework, the verified Guide to IRS rules for cost segregation studies is the better technical companion page.

Key takeaway: a late study is still better than no study in many cases, but it usually gives the investor fewer strategic options.

A worked example on timing

Assumptions: an investor buys a small multifamily property in February 2026 for $1,800,000, with $1,500,000 allocated to depreciable basis after land. A timely study identifies $300,000 of shorter-life property in 2026, while a delayed study is not ordered until after the 2026 return is already prepared (Illustrative assumptions prepared for explanation, June 2026).

In the timely scenario, the investor and CPA can model the accelerated depreciation before year-end, review whether passive-loss limits apply, and coordinate estimated taxes. In the delayed scenario, the investor may still capture missed depreciation later, but the benefit arrives with more administrative work and less decision-time value (Illustrative assumptions based on IRC §168, §469, and common timing outcomes, June 2026).

Why this matters for real estate investors: the study is most valuable when it influences the year's tax strategy, not when it only repairs last year's missed opportunity.

Key takeaway: the sooner the study fits into the planning calendar, the more strategic value it usually creates.

Action steps for business owners

Review basis allocation and intended holding period as soon as a purchase closes.
Decide early whether passive-loss or at-risk limits will reduce current-year benefit.
Order the study once property facts and improvement plans are stable enough to support the work.
Coordinate the study with year-end projections instead of treating it as a filing-season add-on.
If the study was missed earlier, ask whether a catch-up approach still makes sense before assuming the window is closed.

FAQ

Is it too late to order a cost segregation study after year-end?

Not necessarily. A late study can still create value, but it is usually less strategic and more administrative than a study completed while the year is still open.

Should an investor order the study before knowing whether losses are usable?

The investor should at least review passive-loss and at-risk limits early. Accelerated deductions are far more valuable when they can be used in the intended year (Source: IRC §469, https://www.law.cornell.edu/uscode/text/26/469; IRC §465, https://www.law.cornell.edu/uscode/text/26/465).

Does every property need a study immediately after purchase?

No. Timing still depends on basis size, expected hold period, improvement plans, and how the investor expects to use the deductions. But waiting should be a decision, not an accident.

Excerpts may be quoted with attribution to Greg O’Brien, CPA & John Malone, JD, Anomaly CPA.