The law behind your study.

IRS Cost Segregation Audit Technique Guide (Pub 5653)

IRS Publication 5653, Feb 2025 revision

IRS administrative guidance

This is the IRS playbook for how a cost segregation study should be done and reviewed. It lays out the methods the IRS accepts, the records a study needs, and the 13 study elements plus 9 report elements a quality study must hit. It also carries the IRS's own case tables, matching specific building parts to the court decisions that classified them.

Rev. Proc. 2024-23

2024-23 I.R.B. 1334

IRS revenue procedure

The list of accounting method changes the IRS approves automatically. Section 6.01 (change number 7) is the standard cost-seg change from a wrong depreciation method to a right one. Section 6.12 (change number 200) covers regrouping inside MACRS. The IRS refreshes this list about once a year (Rev. Proc. 2025-23 is the most recent update), and the change numbers carry forward.

Rev. Proc. 2015-13

2015-5 I.R.B. 419

IRS revenue procedure

Spells out the general rules for changing a tax accounting method, including the consent process and how the §481(a) catch-up adjustment is taken. A negative catch-up (extra depreciation you were owed) is generally taken all at once in the year of change.

Rev. Proc. 2014-54

2014-41 I.R.B. 675

IRS revenue procedure

Gives the steps for making a partial disposition election under Treas. Reg. §1.168(i)-8(d), so you can write off the leftover value of a part you tear out and replace.

Peco Foods, Inc. v. Commissioner

T.C. Memo 2012-18, aff'd 522 Fed. App'x 840 (11th Cir. 2013)

U.S. Tax Court

IRS won

The court held Peco was bound by the written allocations it had agreed to. A buyer in a §1060 'applicable asset acquisition' who agrees in writing to a purchase-price allocation cannot later use a cost-seg study to contradict those agreed values. The case did not say cost segregation is barred on purchased buildings, only that you cannot re-trade an allocation you signed.

Rev. Proc. 2011-42 (Statistical Sampling)

2011-37 I.R.B. 318

IRS revenue procedure

Sets out an IRS-blessed way to use statistical sampling in tax computations. It was written for other areas of tax, but the same sampling logic is persuasive for large cost-seg jobs.

Rev. Rul. 2002-9 (Impact Fees)

2002-1 C.B. 614

IRS revenue ruling

Impact fees incurred in connection with the construction of a new residential rental building are capitalized costs allocable to the building under sections 263(a) and 263A (indirect costs of production), not allocable to the land. The fees are then depreciated under section 168 as part of the building beginning when the building is placed in service. Conforming changes are method changes under sections 446 and 481.

Norwest Corp. & Subs. v. Commissioner

111 T.C. 105 (1998)

U.S. Tax Court

Rev. Proc. 87-56 sets up two kinds of classes: asset classes (00.11 through 00.4) for specific assets used in all business activities, and activity classes (01.1 through 80.0) for assets used in specific industries. The Tax Court held that an item described in both an asset class and an activity class is classified in the asset class, unless the activity class specifically includes it.

Rev. Proc. 87-56

1987-2 C.B. 674

IRS revenue procedure

Sets the official MACRS asset classes and their depreciation lives. General asset classes (00.11 through 00.4) cover assets used in any business; activity classes (01.1 through 80.0) cover assets used in specific industries. For example, asset class 00.3 covers land improvements at a 15-year life, and class 57.0 covers distributive trades and services at 5 years.

Rev. Proc. 87-57

1987-2 C.B. 687

IRS revenue procedure

Prescribes the mechanics of the MACRS depreciation computation and, in section 8, supplies the optional depreciation tables: year-by-year percentage rates applied to unadjusted basis for each combination of depreciation system, method, recovery period, and convention.

Rev. Rul. 65-265 (Land Clearing & Grading)

1965-2 C.B. 52

IRS revenue ruling

Costs of general grading and clearing of land are capital expenditures that become part of the non-depreciable cost basis of the land. Costs of excavation, grading, and removing soil necessary for the proper setting of buildings and paving of roadways are part of the cost of those depreciable assets and are included in their depreciable base. Clarified by Rev. Rul. 68-193.

IRC §446(e) & §481(a) (Method Changes and Catch-Up)

26 U.S.C. §446(e); 26 U.S.C. §481(a)

Internal Revenue Code

Section 446(e) requires a taxpayer who changes a method of accounting to secure the consent of the Secretary, which the IRS grants automatically for depreciation classification changes through its automatic method change procedures (Rev. Proc. 2015-13 and the annual automatic changes list, via Form 3115). Section 481(a) requires the adjustments necessary to prevent amounts from being duplicated or omitted, which produces the one-time catch-up; for a cost segregation lookback it is typically a large negative (taxpayer-favorable) adjustment taken in the year of change.

AmeriSouth XXXII, Ltd. v. Commissioner

T.C. Memo 2012-67

U.S. Tax Court

Mixed result

The court denied roughly $1.08 million of reclassifications for lack of proof and let only the well-supported items, like dryer vents and dryer gas lines, move to shorter lives. The rest stayed 27.5-year residential rental property. The loss was about evidence, not about whether cost segregation is allowed.

PPL Corporation & Subsidiaries v. Commissioner

135 T.C. 176 (2010) (135 T.C. No. 8)

U.S. Tax Court

Taxpayer won

The Tax Court held street light assets are neither assets used in the distribution of electricity for sale nor land improvements, so they fit neither class 49.14 nor class 00.3. With no class life, they are 7-year property under section 168(e)(3)(C)(ii).

Trentadue v. Commissioner

128 T.C. 91 (2007)

U.S. Tax Court

Mixed result

Vineyard trellises counted as depreciable farm equipment, not permanent structures. Wells and underground irrigation counted as 15-year land improvements. The court applied the permanence factors to operational evidence and credible testimony, without demanding original construction invoices.

Clajon Gas Co., L.P. v. Commissioner

354 F.3d 786 (8th Cir. 2004), rev'g 119 T.C. 197 (2002)

U.S. Court of Appeals, 8th Circuit

Taxpayer won

The Eighth Circuit reversed. Following Duke Energy and Saginaw Bay, it held the gathering systems belong in asset class 13.2 with a 7-year recovery period. Splitting identical assets into different classes based on the owner's producer status would create an inconsistent depreciation regime.

PDV America, Inc. & Subs. v. Commissioner

T.C. Memo 2004-118

U.S. Tax Court

Taxpayer won

The Tax Court applied the Whiteco permanence factors to decide whether the disputed tanks were inherently permanent structures, and held the storage tanks at issue belonged in asset class 57.0 with the 5-year recovery period, rejecting the IRS's 15-year class 57.1 position. The IRS had already conceded class 57.0 for its smaller tanks (5,000 barrels or less).

Saginaw Bay Pipeline Co. v. United States

338 F.3d 600 (6th Cir. 2003)

U.S. Court of Appeals, 6th Circuit

Taxpayer won

The Sixth Circuit reversed. It adopted the Tenth Circuit's Duke Energy analysis and held the lines were gathering pipelines within asset class 13.2, depreciable over 7 years, because they serve the production process.

Rev. Rul. 2003-54 (Gas Pump Canopies)

2003-1 C.B. 982

IRS revenue ruling

Applying the Whiteco factors, the canopies are not inherently permanent structures; they are tangible personal property in asset class 57.0 of Rev. Proc. 87-56 (5-year recovery period under section 168(a), 9-year under ADS). The supporting concrete footings are inherently permanent structures classified as land improvements in asset class 57.1 (15-year recovery period, 20-year ADS). A change to conform is a method of accounting change under sections 446 and 481.

L.L. Bean, Inc. v. Commissioner

145 F.3d 53 (1st Cir. 1998), aff'g T.C. Memo 1997-175

U.S. Court of Appeals, 1st Circuit

IRS won

A rack system that was integrated into and held up part of the building was real property. The court drew the line between racks that are part of the structure and racks you can simply remove.

Hospital Corp. of America v. Commissioner

109 T.C. 21 (1997)

U.S. Tax Court

Taxpayer won

The Tax Court held that the old investment-credit tests still work for sorting a building into §1245 and §1250 parts under modern depreciation law, and that the component-depreciation ban does not stop a taxpayer from identifying personal property embedded in a building. The court did its analysis from plans, documents, and engineering testimony.

SuperValu Inc. v. United States

993 F. Supp. 1243 (D. Minn. 1997)

U.S. District Court, District of Minnesota

Taxpayer won

Supermarket refrigeration systems qualified as personal property, not structural components of the store.

Duke Energy Natural Gas Corp. v. Commissioner

109 T.C. 416 (1997), rev'd 172 F.3d 1255 (10th Cir. 1999)

U.S. Tax Court, rev'd by U.S. Court of Appeals, 10th Circuit

Taxpayer won

The Tenth Circuit reversed. Gathering systems fit asset class 13.2, assets used in exploring for and producing petroleum and natural gas, with a 7-year recovery period. The asset's primary use and the plain words of the class descriptions controlled, not whether the owner was a producer.

Walgreen Co. & Subs. v. Commissioner

T.C. Memo 1996-374, on remand from 68 F.3d 1006 (7th Cir. 1995), rev'g 103 T.C. 582 (1994)

U.S. Tax Court

Mixed result

The court went component by component. Many generic interior buildout items (drywall partitions, ceilings, doors) stayed structural real property, while decorative finishes, signage, canopies, and branded trade-dress items qualified as personal property.

Boddie-Noell Enterprises v. United States

36 Fed. Cl. 722 (1996), aff'd 132 F.3d 54 (Fed. Cir. 1997)

U.S. Court of Federal Claims

IRS won

The court held that parts the regulations expressly list as buildings or structural components stay real property, and items serving the general running of the building are not personal property. It also said a quality study must be 'both accurate and well documented.' Estimates built on guesses without supporting records cannot carry a reclassification.

La Petite Academy, Inc. v. United States

95-1 USTC ¶50,193 (W.D. Mo. 1995), aff'd 72 F.3d 133 (8th Cir. 1995)

U.S. District Court, Western District of Missouri

IRS won

Most of the daycare building parts were structural components and stayed real property. Items that serve the general building, even ones styled for children, did not become personal property.

Albertson's, Inc. v. Commissioner

38 F.3d 1046 (9th Cir. 1993), rev'g T.C. Memo 1988-582

U.S. Court of Appeals, 9th Circuit

IRS won

HVAC that exists for general comfort is a structural component: real property, not personal property.

Texas Instruments Inc. v. Commissioner

T.C. Memo 1992-306

U.S. Tax Court

Mixed result

Process-support gear in a high-tech plant qualified as personal property. General building systems and permanent structures stayed real property. The case is cited by the IRS alongside Morrison for extending functional allocation to equipment-serving systems.

Morrison, Inc. v. Commissioner

891 F.2d 857 (11th Cir. 1990), aff'g T.C. Memo 1986-129

U.S. Court of Appeals, 11th Circuit

Mixed result

Restaurant parts were judged by what they actually do. Decorative items and kitchen-process gear qualified as personal property, and the appeals court approved allocating dual-use systems between the share serving equipment and the share serving the building.

Metro National Corp. v. Commissioner

T.C. Memo 1987-38

U.S. Tax Court

Mixed result

Going part by part, movable drywall partitions, certain lighting, and removable cabinets qualified as personal property. Restroom partitions, false ceilings, and sprinklers stayed real property.

Illinois Cereal Mills, Inc. v. Commissioner

T.C. Memo 1983-469, aff'd 789 F.2d 1234 (7th Cir. 1986), cert. denied 479 U.S. 995 (1986)

U.S. Court of Appeals, 7th Circuit

Taxpayer won

The Seventh Circuit affirmed allocating the electrical distribution system between personal property and building property based on use, upholding a 95%/5% split in the taxpayer's favor on the facts.

Piggly Wiggly Southern, Inc. v. Commissioner

803 F.2d 1572 (11th Cir. 1986)

U.S. Court of Appeals, 11th Circuit

Taxpayer won

On those facts, the grocery HVAC qualified as personal property because it served the refrigeration process. The win is fact-specific: the taxpayer proved the equipment-serving purpose. The IRS has noted its disagreement (nonacquiescence) and reads this line of cases narrowly.

Duaine v. Commissioner

T.C. Memo 1985-39

U.S. Tax Court

Mixed result

Per the IRS Pub 5653 case table: the foundation slab, the kitchen wall and floor tiles, and the interior and exterior ornamental lighting fixtures stayed section 1250 real property, while the plumbing, gas lines, and electrical conduits serving specific kitchen equipment qualified as section 1245 personal property.

Mallinckrodt, Inc. v. Commissioner

778 F.2d 402 (8th Cir. 1985), aff'g T.C. Memo 1984-532

U.S. Court of Appeals, 8th Circuit

IRS won

The Eighth Circuit affirmed the Tax Court: the gypsum drywall partitions were structural components of the building, section 1250 real property, not tangible personal property eligible for the investment credit.

Shoney's South, Inc. v. Commissioner

T.C. Memo 1984-413

U.S. Tax Court

Taxpayer won

Per the IRS Pub 5653 case table: the chandeliers, lanterns, and hanging lanterns qualified as section 1245 personal property. The IRS later non-acquiesced on the decorative lighting point in AOD 1986-48, meaning it disagreed with the result but did not pursue it.

Consolidated Freightways, Inc. v. Commissioner

708 F.2d 1385 (9th Cir. 1983), aff'g in part and rev'g in part 74 T.C. 768 (1980)

U.S. Court of Appeals, 9th Circuit

IRS won

Per the IRS Pub 5653 case table: the truck loading docks, dock overhead doors, and dock lighting were all structural components, that is, section 1250 real property. The dock structures counted as buildings even though they lacked permanent walls.

A.C. Monk & Co. v. United States

686 F.2d 1058 (4th Cir. 1982)

U.S. Court of Appeals, 4th Circuit

Mixed result

Industrial facility parts were classified using a test focused on whether the item was specially adapted to the business process. Some items qualified as personal property under that approach. The Fourth Circuit's adaptability emphasis is its own. Other courts weigh permanence and function differently.

Scott Paper Co. v. Commissioner

74 T.C. 137 (1980)

U.S. Tax Court

Taxpayer won

When an electrical system serves both factory machines and the building itself, you can split it based on a load analysis. The share that runs production equipment can be personal property; the share that runs the building stays real property.

Whiteco Industries, Inc. v. Commissioner

65 T.C. 664 (1975)

U.S. Tax Court

Taxpayer won

The court held the billboards were not inherently permanent, so they qualified as tangible personal property, and it set out six questions, now called the Whiteco factors, for deciding whether something is truly permanent. Being attached to the land does not, by itself, make a part permanent.

Weirick v. Commissioner

62 T.C. 446 (1974)

U.S. Tax Court

Mixed result

The Tax Court looked at each component on its own. It held the line towers qualified for the investment credit because they worked as part of the lift machinery, not as an inherently permanent structure. The earthen passenger ramps did not qualify.

Thirup v. Commissioner

508 F.2d 915 (9th Cir. 1974)

U.S. Court of Appeals, 9th Circuit

Taxpayer won

The Ninth Circuit reversed. It rejected the appearance test and applied a functional test: a greenhouse whose principal function is providing the controlled growing environment for the crop, where human activity inside is incidental, is not a 'building' under section 48, so the investment credit was allowed.

Catron v. Commissioner

50 T.C. 306 (1968)

U.S. Tax Court

Mixed result

Parts of one building were split by what they were used for. The refrigerated rooms qualified as personal property; the sorting and boxing rooms stayed real property.

Treas. Reg. §1.1245-3

26 C.F.R. §1.1245-3

Treasury regulation

Defines what counts as §1245 property by pointing back to the tangible-personal-property test of §1.48-1(c), and sets the limit on treating structural components as personal property.

Treas. Reg. §1.48-1

26 C.F.R. §1.48-1

Treasury regulation

The older investment-credit rules that define tangible personal property versus a building and its structural components. Subsection (c) says machinery can be personal property even when attached to the ground; subsection (e)(2) lists the parts that normally stay structural (walls, floors, ceilings, central HVAC, wiring, plumbing), with a narrow exception for machinery that exists only to meet temperature or humidity needs of other equipment or product.

Tangible Property Regulations

Treas. Reg. §1.263(a)-3

Treasury regulation

Defines a building's structure and its major systems (HVAC, plumbing, electrical, elevators, fire protection, security, and gas distribution), and gives the betterment, restoration, and adaptation test for deciding when a cost is a repair you can deduct now versus an improvement you must capitalize.

Treas. Reg. §1.168(i)-8

26 C.F.R. §1.168(i)-8

Treasury regulation

Sets the rules for how you handle a part you dispose of under MACRS (sale, retirement, abandonment, or destruction), including the partial disposition election in subsection (d).

Notice 2026-11 (OBBBA Bonus Guidance)

IRS Notice 2026-11

IRS notice

Interim guidance: taxpayers apply rules consistent with Treas. Reg. 1.168(k)-2 and 1.1502-68, substituting January 19, 2025 for September 27, 2017 (and January 20, 2025 for September 28, 2017) each place they appear, and 100 percent for the applicable percentage. It also covers the section 168(k)(5) election, the amended 40-percent (60-percent for long-production property) 168(k)(10) election, the component election, and qualified sound recording productions. Taxpayers may rely on it until forthcoming proposed regulations are published.

IRC §168(k) Bonus Depreciation

26 U.S.C. §168(k)

Internal Revenue Code

Allows an extra first-year write-off (bonus depreciation) on qualifying property with a recovery period of 20 years or less. It fell from 100% to 80%, 60%, and 40%, then the OBBBA law (Pub. L. 119-21, July 2025) brought it back to a permanent 100% for qualifying property acquired after January 19, 2025. Used property can qualify if you had not used it before and the purchase passes the related-party rules.

Rev. Proc. 2020-25 (QIP Catch-Up)

2020-19 I.R.B. 785

IRS revenue procedure

Confirms QIP placed in service after December 31, 2017 is 15-year MACRS property (straight-line) with a 20-year ADS recovery period, and is bonus-eligible when the section 168(k) and Reg. 1.168(k)-2 requirements are met. For tax years ending in 2018, 2019, or 2020 it allowed the catch-up by amended return or AAR (time-limited window) or by automatic Form 3115 method change, and allowed late elections, revocations, or withdrawals under sections 168(g)(7), (k)(5), (k)(7), and (k)(10).

IRC §168(e)(6) Qualified Improvement Property

26 U.S.C. §168(e)(6), as amended by CARES Act §2307

Internal Revenue Code

Defines QIP and excludes expenditures attributable to building enlargement, any elevator or escalator, and the internal structural framework. After the CARES Act fix, QIP is 15-year property under section 168(e)(3)(E)(vii), carries a 20-year ADS recovery period under the section 168(g)(3)(B) table, and can qualify for bonus depreciation under section 168(k).

Treas. Reg. §1.168(k)-2

26 C.F.R. §1.168(k)-2

Treasury regulation

Property bought under a written binding contract is acquired under the contract-date rules; self-constructed property is acquired when physical work of a significant nature begins, with a safe harbor treating work as begun when more than 10 percent of total cost (excluding land and preliminary activities) is paid or incurred. These dates decide which bonus rate applies. For property acquired after January 19, 2025, the OBBBA statute overrides the regulation's phase-down schedule, and Notice 2026-11 directs taxpayers to apply these same rules with the OBBBA dates substituted until new regulations are issued.

IRC §168(g) Alternative Depreciation System

26 U.S.C. §168(g)

Internal Revenue Code

ADS is mandatory for the categories listed in section 168(g)(1), including property of an electing real property trade or business under sections 168(g)(8) and 163(j)(7)(B). Section 168(k)(2)(D) excludes property to which ADS applies from bonus-eligible qualified property, determined without regard to the voluntary section 168(g)(7) election. So a voluntary ADS election does not kill bonus, but mandatory ADS status does.

IRC §179

26 U.S.C. §179

Internal Revenue Code

Lets you expense the cost of qualifying tangible personal property right away, up to a yearly dollar limit, with a phase-out once total purchases pass a threshold.

IRC §1250

26 U.S.C. §1250

Internal Revenue Code

Defines real property (the building shell and structural components) as everything depreciable that is not §1245 property, and caps the tax rate on unrecaptured straight-line depreciation at 25% when you sell.

IRC §1245

26 U.S.C. §1245

Internal Revenue Code

Defines tangible personal property for depreciation, and says that when you sell it, the depreciation you took comes back as ordinary income up to the gain.

Treas. Reg. §1.469-1T(e)(3)(ii)(A)

26 C.F.R. §1.469-1T(e)(3)(ii)(A)

Treasury regulation

Under (e)(3)(ii)(A), an activity is not a rental activity for the year if the average period of customer use for the property is seven days or less. The per-se passive rental rule of section 469(c)(2) then does not apply, so the owner's loss is non-passive if the owner materially participates in the activity.

IRC §469 Passive Activity Loss

26 U.S.C. §469

Internal Revenue Code

Limits how much of a passive rental loss you can use against other income. It carves out an exception for real estate professionals (§469(c)(7)), and the regulations treat a short-term rental with an average stay of seven days or less as not a 'rental activity' at all (Treas. Reg. §1.469-1T(e)(3)(ii)(A)), so material participation can make its loss non-passive.