RE Cost Seg
The IRS says you depreciate a commercial building over 27.5 years. Cost segregation engineers say you can depreciate much of it in year one. Both are right. The difference is tens of thousands of dollars.
What Cost Segregation Is
Cost segregation is a tax strategy for owners of commercial or income-producing real estate. A team of engineers analyzes the property and reclassifies components that qualify for accelerated depreciation — windows, landscaping, electrical systems, ground improvements — from the standard 27.5-year straight-line schedule to 5, 7, or 15-year schedules.
nick-huber explained it precisely in his MFM episode: “We have engineers who go in and break out the different parts of a commercial property or income-producing real estate, and then give you a schedule of what you can depreciate faster to the IRS. Normally it’s 27 years straight-line depreciation. They take it and say, ‘The windows — those have a five-year life. The landscaping outside, that only has a five-year life. The ground improvements have these lives.’ So you get way more depreciation upfront and save money in taxes.”
The Numbers
Sam Parr walked through the baseline: without cost segregation, a $1 million property depreciates at roughly $37,000 per year. With it, the front-loading is dramatic:
- Self-storage facility: 20-30% depreciation in year one
- Industrial property: 10-20% in year one
- RV park: 60-70% in year one (depending on ground improvements)
The variance across property types reflects how much of the asset’s value is in components that legitimately have shorter economic lives. An RV park with extensive landscaping, gravel pads, and site improvements has a lot of short-life assets. A raw warehouse has fewer.
Ari CostSeg: Nick Huber’s Business
Nick built a cost segregation business called Ari CostSeg, which he discussed at length with Sam. He owns 45%; his partner Mitchell Baldridge — who had personally completed 100+ cost seg studies before they formalized the company — co-founded it with him.
Sam’s reaction: “I think those businesses could potentially be bigger than your storage thing.” Nick’s observation about what drives growth: a dedicated Twitter account (@AriCostSeg) posting anonymous client examples of tax savings. “It blows people’s minds when they realize that if you’re a real estate professional and you buy property each year and cost-seg them, you can have zero tax liability. Zero.”
The Recapture Question
The most common objection to cost segregation: “Won’t I have to pay it back when I sell?”
Nick’s answer: yes, but conditionally. “If you sell the property before 27 years, it’s called recapture. Your taxable basis drops by the amount you depreciated, and when you sell, that gap is called recapture — you pay it at the recapture rate. So if you don’t plan to hold the property long-term, you need to keep some cash for that.”
For real estate investors who plan to hold long-term, or who use 1031 exchanges to defer gain on sale, the recapture can be deferred indefinitely. The time value of money makes this extremely favorable: a dollar of tax saved today is worth far more than a dollar of tax paid in 15 years.
The Real Estate Professional Loophole
Nick’s more advanced insight: cost segregation is most powerful when combined with real estate professional status. A “real estate professional” for IRS purposes must spend at least 700 hours per year in real estate activities, and more hours in real estate than any other profession.
“If you’re a real estate professional and you buy property each year and cost-seg them, you can have zero tax liability. Zero.”
But even without that status, there’s a short-term rental workaround: “You just have to spend more time on that rental property than anybody else.” Mitchell Baldridge’s threads on this strategy are publicly available at the @AriCostSeg Twitter account.
The implication: for high-income earners who can legitimately qualify as real estate professionals, cost segregation converts ordinary income tax into a deferred (and sometimes eliminated) obligation. The after-tax return on real estate investment changes significantly.
Why It Isn’t More Common
The barrier to cost segregation is primarily awareness, not complexity. The engineering work is specialized, and the IRS rules governing asset classification are arcane. Before Mitchell Baldridge partnered with Nick, he’d done 100+ studies without ever thinking to formalize the business and scale it.
Nick’s broader lesson from building Ari CostSeg: high-margin service businesses built around genuine technical expertise, distributed through content, can compound quickly. The Twitter account converts complex tax strategy into shareable examples. The examples create leads. The leads close at high margins because the service is genuinely valuable and requires real expertise to deliver.
See also: nick-huber, real-estate-investing, self-storage, passive-income, bolt-storage, sweaty-startups