Frequently asked questions

A cost-segregation study is an engineering-based analysis that identifies portions of a building's depreciable basis that qualify for shorter MACRS recovery periods (5-year personal property, 7-year industry equipment, 15-year land improvements) instead of the default 27.5- or 39-year real-property life. The reclassification accelerates depreciation and produces front-loaded tax deductions. Authority: Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997).

Without cost-seg, you depreciate the entire building over 27.5 years (residential rental) or 39 years (nonresidential). With cost-seg, an engineer identifies which components qualify as §1245 personal property (carpet, appliances, specialty wiring, decorative finishes) or 15-yr land improvements (paving, fencing, exterior lighting). Those reclassified components depreciate faster and in 2025+ are eligible for 100% bonus depreciation under OBBBA.

Almost any depreciable real property: single-family rental, duplex/triplex/fourplex, multi-family apartments, hotels, restaurants (QSR / casual / fine), retail, office, medical office, industrial, warehouse, manufacturing, self-storage, auto dealerships, datacenters, and specialty uses (cannabis grow, lab/clean-room, casino). Land itself is NOT depreciable.

Cost-seg is most valuable when: (1) the depreciable basis exceeds ~$300K, (2) the property was placed in service within the last 5-10 years, (3) the taxpayer is in a high marginal bracket (32%+ federal), (4) the taxpayer is a Real Estate Professional or operates short-term rentals so depreciation losses aren't suspended as passive, and (5) the property type has a meaningful percentage allocable to short-life classes (restaurants 30%+, multi-family 11-22%, single-family 7-12%).

No, but it helps. If you're not REP, your rental losses (including accelerated cost-seg depreciation) are passive under IRC §469 — usable only against passive income, not your W-2 or business income. Two ways to make cost-seg losses non-passive: (1) qualify as Real Estate Professional (750+ hours and >50% of personal services in real property trades), or (2) use the STR loophole — short-term rentals with average rental period ≤ 7 days bypass passive treatment if you materially participate.

No problem. Cost-seg can be applied retroactively via Form 3115 (Application for Change in Accounting Method) under DCN #7, automatic consent (Rev. Proc. 2024-23 §6.01 — impermissible-to-permissible depreciation method change). Schedule E of Form 3115 carries the depreciation method change. The IRS allows a one-time §481(a) catch-up adjustment on the current return — you don't need to amend prior returns. The catch-up amount = (depreciation that would have been claimed under cost-seg) − (depreciation actually claimed under straight-line) for all prior years.

Yes. Cost-seg can be applied to the replacement property's basis — but it's more complex because the basis is split between carryover basis from the relinquished property and new basis from cash + new debt. Per Peco Foods, Inc. v. Commissioner, allocations on Form 8594 and the §1060 schedule are binding. We coordinate with your CPA on the Form 8824 carryover before classifying components.

Inherited property gets a stepped-up basis equal to fair market value at the decedent's date of death (IRC §1014). Gifted property uses carryover basis from the donor (IRC §1015) with a separate loss-basis rule when FMV at gift < donor basis. Both qualify for cost-seg; we handle the basis derivation in our CPA Basis Worksheet.

Yes, with a wrinkle. The depreciable basis = lower of (adjusted cost basis) or (FMV at conversion date). Once that basis is established, cost-seg reclassifies components normally. Document the conversion date, FMV (preferably with appraisal), and prior improvement records.

Year-1 federal tax savings typically range from 5-10% of depreciable basis for a residential rental, up to 25-35% of basis for a restaurant or specialty property — driven by the bonus-depreciation-eligible 5/7/15-yr reclassification. We provide a year-by-year savings projection (year-1, 5-year cumulative, 10-year cumulative, NPV at 8%) before you commit. Actual savings depend on your marginal bracket, state of residence, and passive/non-passive status.

Under the One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation is restored for property placed in service on or after January 20, 2025. Property placed in service in 2024 gets 60%, in 2023 gets 80%. Bonus applies only to 5-, 7-, and 15-yr classes — never 27.5/39-yr real property. Citation: IRC §168(k); OBBBA 2025.

Yes. §179 lets you immediately expense up to $1.22M (2025) of 5/7/15-yr property, with phase-out starting at $3.05M of total qualifying additions. Combined with bonus depreciation, you can often deduct nearly the entire short-life portion in year one. We model the optimal §179 + bonus combination in the report.

The 3.8% Net Investment Income Tax (IRC §1411) applies to net investment income for taxpayers with MAGI over $200K (single) / $250K (MFJ). Rental income and rental losses are normally NII — meaning cost-seg losses reduce NII and reduce NIIT. Better: if you qualify as REP or use the STR loophole, the rental income is excluded from NII entirely per Treas. Reg. §1.1411-4(g)(7).

Partly. Depreciation is "recaptured" at sale, but the rates differ: §1245 personal property (5/7/15-yr) is recaptured at ordinary income rates; §1250 real property (27.5/39-yr) recapture under MACRS straight-line is capped at 25% (unrecaptured §1250 gain). Even with full recapture, cost-seg still wins because of the time value of money — you've had 5-10 years of tax deferral at your marginal rate, then recapture at 32%+. NPV at 8% is typically 60-80% of nominal savings. The Disposition Planner in our report shows the precise comparison.

Cost-seg is a recognized and accepted methodology — IRS Publication 5653 (Cost Segregation Audit Technique Guide, Feb 2025) is the official examiner playbook. It does NOT inherently trigger audit. What does trigger examination: aggressive allocations outside industry norms, weak documentation, generic boilerplate reports (per AmeriSouth XXXII), reclassifying clearly structural components (per Boddie-Noell, L.L. Bean), or pairing cost-seg with REP/STR claims and large net-operating losses.

Per Pub 5653 §C.1-C.13, a quality study has 13 elements: qualified preparer, described methodology, sufficient documentation, asset costs traced to records or detailed estimate, site visit, peer review, photo evidence, drawing/blueprint review, statutory and case-law authority cited, quantity takeoff with unit costs, asset detail schedule, reconciliation to total basis, treatment of indirect costs. Our report scores itself against all 13 study + 9 report elements before delivery.

The foundational case is Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997), which established that ITC classification tests apply under MACRS. The 6-factor permanence test comes from Whiteco Industries, 65 T.C. 664 (1975). Property-type-specific authority includes Trentadue (vineyard), Walgreen + McDonald's (retail/QSR), Boddie-Noell + Morrison (restaurant), Scott Paper + Illinois Cereal Mills (manufacturing electrical allocation). Our report's Authority appendix cites the cases applicable to your property type.

The IRS Pub 5653 §C.1 says quality studies are prepared by personnel with construction engineering, cost estimating, or tax depreciation expertise. While a Professional Engineer (PE) license is not strictly required, the preparer must have the technical background to do the engineering analysis, and the report must include their credentials. Tax-only preparers without construction expertise produce studies that lose in audit.

Common situation. We provide a Form 3115 §481(a) preparation worksheet with the report, including DCN #7 designation (Rev. Proc. 2024-23 §6.01 — the standard cost-seg lookback DCN), Schedule E completion, the cumulative depreciation difference, and the required §481(a) statement. Your CPA attaches the form to your current-year return. Most CPAs are familiar with Form 3115 from other method changes; if not, we can refer you to a CPA who handles cost-seg method changes routinely.

Five steps: (1) Online intake — you fill out the property details, photos, and basis worksheet. (2) Site visit — physical inspection by our engineer with photographic documentation. (3) Engineering analysis — we identify and classify components, compute unit costs trended via BLS PPI to your placed-in-service year, and build the asset detail schedule. (4) Peer review — second engineer reviews methodology, classifications, and reconciliation. (5) Final report delivered (typically 30-50 pages) with all 13 quality study elements and all 9 quality report elements satisfied.

Typical timeline: site visit within 30 days of engagement; draft report within 45 days of site visit; final report within 15 days of your review. Most studies complete in 60-75 days end to end. Rush turnaround available for additional fee when filing deadlines are imminent.

Helpful but not always required. New construction studies benefit greatly from construction drawings and contractor pay applications. For acquired property, we use a combination of: assessor records (auto-pulled from county adapters), photos (yours + our site visit), and engineering takeoff. The more source documentation, the higher the report's confidence rating per ATG §C.3.

We can quote a portfolio rate. Each property gets its own study (each property is a separate depreciable asset under MACRS), but the engagement letter, intake workflow, and reporting are streamlined. Sampling methodology may apply to large portfolios (50+ similar properties) — see Pub 5653 §C.13 and Rev. Proc. 2011-42.

Fixed-fee, non-contingent. Typical range: $2,500 - $5,500 for residential, $4,500 - $12,000 for commercial, by property complexity and basis size. Compares favorably to KBKG / CSSI fee schedules. We never charge a percentage of the deduction generated (a contingent-fee arrangement could compromise study independence per Pub 5653 §D.8).

For properties with depreciable basis above $300K, almost always yes. A typical $4K study on a $400K basis residential rental generates $20K-$40K in year-1 federal tax savings (5-10× return) and $60K-$120K in 10-year cumulative savings. The exec-summary section of every report shows year-1, 5-yr, 10-yr, and NPV-at-8% projections so you can verify ROI before committing.

Yes. Use the wizard's intake to enter basic property details — the system will compute an estimated allocation and Year-1 deduction using KBKG industry-norm benchmarks. The free estimate is non-binding and not a substitute for the engineering study, but gives you a defensible ballpark within ±15% of the final result.

Under Treas. Reg. §1.168(i)-8(d), when a structural component is replaced (e.g., the original roof replaced with a new roof), you can elect to recognize the remaining depreciable basis of the old component as a current-year disposition loss — instead of continuing to depreciate the removed item alongside the replacement. Particularly valuable when our cost-seg study identifies prior components that have since been replaced. See Rev. Proc. 2014-54.

Federal yes; state varies. Texas and Florida have no individual income tax (federal cost-seg savings flow through unimpeded). California decouples from §168(k) bonus depreciation entirely — bonus must be added back; remaining MACRS depreciation tracks separately. North Carolina requires 85% addback recovered over 5 years. Our report's Appendix D summarizes state conformity for your jurisdiction; verify with your state CPA.

For self-constructed property and certain other situations, IRC §263A requires capitalization of indirect costs (architect fees, permits, contractor overhead, etc.) into property basis rather than expensing them. We allocate indirect costs proportionally to direct costs across the 5/7/15/27.5/39 classes per ATG §C.11. See adapters/indirect-cost-allocator.js.

Treas. Reg. §1.263(a)-3 establishes the Betterment / Restoration / Adaptation test. An expenditure on existing property is capitalizable if it: (B) ameliorates a material defect or improves capacity/efficiency, (R) replaces a major component or substantially restores the unit of property, or (A) adapts the property to a new or different use. Otherwise it's a deductible repair under §162. The de minimis safe harbor under §1.263(a)-1(f) lets you immediately expense items costing ≤ $2,500 ($5,000 with applicable financial statement).

Yes. Workpapers are retained for 7 years per IRS recordkeeping requirements and are released to you (or your CPA) on request. Workpapers include: site visit notes, photo log with classifications, drawing references, quantity takeoff workbook, unit-cost source documentation, BLS PPI trending factors, classification rationale per line item, and the Form 3115 §481(a) computation if applicable.