Hey Reader,
When I started this newsletter two years ago, it looked a lot different than it does today.
Back then, I was running a virtual assistant business and writing about entrepreneurship, business growth, and even some personal development. I was figuring things out in real time, and the newsletter reflected that.
Since then, my path has become much clearer. I went all-in on real estate and built Maven Cost Seg into a firm focused on one thing: helping investors use the tax code to their advantage.
That’s why, moving forward, this newsletter will be laser-focused on cost segregation and tax strategies for real estate investors.
Whether you own single-family rentals, short-term rentals, multifamily, or large commercial buildings, my goal is to give you practical tools and examples you can use to maximize your after-tax returns.
So let’s dive into today’s topic: tenant improvements. Most people treat them as just another cost of doing business. But the IRS sees them differently, and if you know how to classify them, the savings can be massive...
When a new tenant signs a lease, most owners see the same thing: a $200,000 buildout.
New flooring, lighting, partitions, finishes.
The contractor sends one lump-sum invoice, and your CPA books it as 39-year property. Done.
But the problem is treating the entire cost as 39-year means you’re locking up deductions for decades. You’ll get maybe $5,000 in year one.
Meanwhile, the IRS has a category called Qualified Improvement Property (QIP) that can change everything.
QIP covers non-structural interior improvements made after the building was placed in service. Think:
- Interior lighting and electrical
- Flooring
- Millwork and cabinetry
- Non-load-bearing walls
If you classify those correctly, they shift into 15-year property. And under the new OBB bill, 15-year property is once again eligible for 100% bonus depreciation.
That same $200K project that would have generated $5,000 in year-one deductions can now unlock $130,000 in year-one deductions with a cost seg study.
That’s not a rounding error. That’s real cash you can use today to reinvest, pay down debt, or protect your liquidity.
What I Told Kathy Fettke on the Real Wealth Podcast
This idea that the tax code rewards the investors who pay attention was a big part of my recent conversation with Kathy Fettke. We talked about how these strategies actually play out in real portfolios, not just in theory.
Here are three takeaways:
1. Don’t Assume Your CPA Has It Covered
Most CPAs are in the business of filing returns, not mapping tax strategy. That doesn't make them bad CPAs, it’s just the reality of their workload. But it means they might not bring up opportunities like QIP or bonus depreciation unless you ask. If you don’t raise the question, it often gets missed.
2. Match the Strategy to Your Situation
One of the biggest mistakes investors make is applying strategies without asking if they actually fit their situation.
In the podcast, we broke down three common buckets:
- Passive investors. If you have W-2 income and a rental property on the side, depreciation can offset your rental profits but won’t usually touch your wages.
- Real estate professionals. If you qualify for REPS, those losses can offset your ordinary income. That’s a game-changer if your household has high earnings.
- Short-term rental owners. STRs fall into their own category. If you materially participate and meet the average stay test, those losses can be treated as active...even if you don’t have REPS status.
The point is: the rules are different depending on your bucket. Knowing which one you fall into determines how powerful cost segregation will be for you.
3. Think Past This Year’s Return
Kathy raised an important point about estate planning. When your heirs inherit property, they get a step-up in basis. That wipes out prior depreciation recapture. Which means decades of deductions with no tax bill attached.
Most investors never connect today’s buildout decisions with their estate plan. But the ones who do are setting up generational advantages.
What to Do If You’re Planning a Renovation
If you’ve got tenant improvements or a buildout on the horizon:
- Don’t accept lump-sum invoices. Ask contractors for line-item detail.
- Loop in your advisors early. Don’t wait until tax filing season to figure this out.
- Know that 100% bonus depreciation is back. The timing right now is as favorable as it gets.
- Check past projects. Even if you’ve already completed improvements, it might not be too late to reclassify.
Most investors treat tenant improvements as just another expense. The sharper ones understand they’re also a tax event.
If you’ve recently done a buildout (or have one coming up), book a call with me and let’s take a look. We’ll review your invoices, flag QIP opportunities, and make sure you capture the deductions you’re entitled to.
Talk soon,
Sean
CPA | Founder of Maven Cost Seg
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