Worked example: a $410,000 rental house

The property

A 1,980 square foot three-bedroom rental in a suburban market, purchased for $495,000 in 2024. Land allocated at $85,000 based on a purchase appraisal, leaving $410,000 of depreciable basis. Fenced yard, covered patio, mature landscaping, concrete driveway, no pool. Owner is a physician whose spouse manages six rentals and qualifies as a real estate professional.

Without a study

$410,000 over 27.5 years, straight line, mid-month convention. First full year: about $14,909.

The reclassification

5-year property — $42,000. Refrigerator, range, dishwasher, microwave, disposal, washer and dryer, kitchen and bathroom cabinetry, vanities, countertops, carpet and vinyl plank flooring, window blinds, decorative light fixtures, ceiling fans, smart thermostat and locks.

15-year land improvements — $38,000. Concrete driveway and walkways, covered patio slab, wood privacy fencing and gates, landscaping and irrigation, exterior lighting, site drainage.

27.5-year property — $330,000. Foundation, framing, roof, siding, windows, doors, HVAC, plumbing and electrical serving the house generally.

Total reclassified: $80,000, or 19.5% of basis.

With a study and 100% bonus

$80,000 of reclassified basis deductible in full in year one, plus $12,000 on the remaining 27.5-year basis. First-year deduction: about $92,000, against $14,909 without a study.

Additional first-year deduction: roughly $77,000. At a combined 37% federal and state rate, about $28,500 of tax deferred.

Why it works here

Because the spouse's real estate professional status with a grouping election makes the loss non-passive and usable against the physician's income in the year taken. Without that, this loss suspends and the present value collapses.

That single fact is the difference between a study that pays for itself eighteen times over and one we would have advised against. It is the first thing we screen.

Fee and net

Study fee $1,850, deductible. Net first-year benefit approximately $26,700. Recapture on a future taxable sale would claw back part of it at ordinary rates on the 1245 components, which we modelled at engagement and disclosed.