Here is a question we field constantly from newer investors: “I only put 20% down on the rental, the bank owns most of it, so is a cost segregation study even worth running on my little slice of equity?” It is a reasonable-sounding worry, and it rests on a misunderstanding that quietly costs leveraged investors real money. Your depreciation deduction has nothing to do with how much cash you put down. It follows the building’s basis. Whether you paid all cash or financed 80% of the purchase, the deduction is the same.
Does a mortgage change your cost segregation deduction?
No. Depreciation is calculated on your cost basis in the building, and your cost basis is the full price you paid for the property, not the portion you covered in cash. When you buy a $500,000 rental with $125,000 down and a $375,000 loan, your basis in that property is $500,000. The tax code treats money you borrowed to buy an asset as part of what you paid for it. So the mortgage does not shrink your depreciable basis by a dollar, and cost segregation, which simply re-sorts that basis into faster depreciation buckets, has exactly as much to work with as it would on an all-cash deal.
Why depreciation follows basis, not your down payment.
The instinct to tie deductions to cash out of pocket comes from everyday life, where you can only count what you actually spent. Tax basis works differently. It is the whole cost of the asset, and it is what you recover over time through depreciation. Land is not depreciable, so the first move on any study is to carve land out of the price. What is left, the building and its components, is the depreciable basis, and that number is driven by the purchase price and the land allocation, never by your loan-to-value ratio. Two investors who buy identical $500,000 houses get the identical study result whether one paid cash and the other put 10% down.
The math on a financed $500K rental.
Say you close on a $500,000 single-family rental, put $125,000 down (25%), and finance the other $375,000. Land is allocated at 20% of the price, or $100,000, which leaves $400,000 of depreciable building basis. A typical residential study reclassifies roughly 22% of that basis, about $88,000, out of the slow 27.5-year bucket and into 5-, 7-, and 15-year property: flooring, cabinetry, appliances, dedicated electrical and plumbing, driveways, fencing, and landscaping.
Because 100% bonus depreciation is back for property acquired after January 19, 2025 (the OBBBA change we covered here), that entire $88,000 is deductible in the first year rather than dripping out over decades. Sign a purchase contract on or before that date and older phase-down rates apply instead, but most 2025-and-later buyers get the full write-off. At a 32% marginal federal rate, the $88,000 deduction is worth about $28,160 in first-year federal tax savings, before any state benefit.
Now set that next to your cash in the deal. You put $125,000 down, and the study hands you an $88,000 first-year deduction, roughly 70% of your entire down payment, recovered as a write-off in year one instead of over 27.5 years. The $28,160 of actual tax savings is about 23% of what you put in, back in your pocket. The bank financing 75% of the purchase did not reduce any of that by a dollar.
Can you actually use the loss if you borrowed most of the money?
Generating the deduction and using it are two different questions, and financing touches only the second one, lightly. Under the at-risk rules, a standard real-estate mortgage from a commercial lender is generally “qualified nonrecourse financing,” which counts as an amount you are at risk for, so the debt-funded portion of your loss usually is not trapped the way some other borrowed money would be. The bigger gate is the passive-activity rules: whether a rental loss can offset your W-2 or business income depends on short-term-rental material participation, real estate professional status, or your income level, not on your mortgage. If the loss is passive and you cannot use it this year, it is not lost; it banks as a suspended loss and releases later. Your CPA is the right person to confirm which bucket you land in.
Does paying down or refinancing the loan change anything?
No. Your depreciable basis was fixed when you bought the property; paying down principal, or later refinancing, does not change it. Depreciation keeps running on the original building basis regardless of your loan balance. A cash-out refinance does not create new depreciable basis either, because it is a loan against equity, not a purchase. The one thing that does add basis is buying more property or improving the one you have: a renovation adds to basis and can itself be cost-segregated.
The takeaway for leveraged investors.
Leverage is exactly what makes the return on a cost segregation study look so lopsided. You control a $500,000 asset, and its full $400,000 of depreciable basis, with only $125,000 of your own cash in it, yet the deduction is sized to the whole building. That is not a loophole; it is simply how basis and depreciation have always worked. The mistake is assuming a mortgage makes a study “not worth it.” For most financed residential rentals, it is the opposite. Run your own numbers on the savings estimate, and if it looks worth a closer look, run the free instant estimate. It shows your projected savings and your flat study fee before any payment, and we will give you a candid yes or no. There are properties where a study does not pencil, and we will tell you when yours is one of them.