Frequently Asked Questions
Browse answers about cost segregation, real estate tax strategies, and depreciation.
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This information usually comes from your CPA or accounting records, not from tax forms themselves. Most tax preparers maintain a depreciation schedule or fixed asset report (often generated from their accounting or tax software) that shows the property’s original basis and depreciation taken to date.
If you don’t have access to this schedule, your CPA can typically pull it directly from their system or accounting software. This information is important so the cost segregation study correctly accounts for any depreciation already taken and avoids double-counting.
According to the Cost Segregation Audit Technique Guide, the IRS requires that we "reconcile the cost basis of property in a study to the cost basis contained in the taxpayer's books and records" and verify how any prior accelerated depreciation affects your remaining basis.
When you've already claimed depreciation and filed taxes on a property, you've established what the IRS calls an "adopted method of accounting" that includes your depreciable basis, recovery period (27.5 or 39 years), and depreciation method.
According to the Cost Segregation Audit Technique Guide, any cost segregation study must be "easily reconcilable to the taxpayer's depreciation or fixed asset schedules". We review your existing depreciation schedules to ensure our cost segregation report properly ties to your established tax position and to identify your remaining depreciable basis after accounting for depreciation already taken.
This review is critical because we need to determine if you've already claimed accelerated depreciation benefits like Section 179 expensing, bonus depreciation, or 179D energy efficiency deductions - each of which reduces your remaining basis dollar-for-dollar and diminishes the potential benefits of cost segregation.
During our review, we also check for any errors your tax preparer may have made in the original setup, such as using the wrong recovery period or depreciation method. If we find errors, we can only recommend corrections through Form 3115 (Application for Change in Accounting Method) - not by amending prior returns.
As the IRS clearly states: "Amended returns or claims for adjustment, based on a cost segregation study performed after the original return was filed...should generally be disallowed on the basis that the taxpayer is attempting to make a retroactive method change". The goal is to maximize your tax benefits within the framework of your existing filings while ensuring everything can withstand IRS scrutiny.
Your short-term rental is classified as 39-year nonresidential real property because of the IRS's "transient use" rule. According to IRS Publication 946, while residential rental property typically depreciates over 27.5 years, there's a critical exception: dwelling units do NOT include "a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis."
The IRS considers properties used on a "transient basis" to be those with average guest stays of less than 30 days, which captures most Airbnb and VRBO properties. Even though your property might be a single-family home or condo that looks exactly like a traditional rental, if you're operating it as a short-term rental with typical stays of a few days or weeks, it's treated like a hotel for tax purposes.
Since you're stuck with the slower 39-year base depreciation, cost segregation studies become even more valuable for STR owners. You can typically reclassify 20-35% of your property's components into 5, 7, or 15-year assets, partially offsetting the disadvantage of the 39-year classification.
For renovation projects, we ideally request the same types of documentation used for new construction, such as contractor invoices, AIA payment applications (Forms G702/G703), and detailed cost ledgers. That said, we understand that smaller residential renovations often don’t have this level of formal documentation.
In those cases, we provide a template spreadsheet designed specifically to help you organize renovation expenses. Estimated or ballpark figures are acceptable, although more detailed information can help maximize your depreciation benefits. You do not need to submit every individual receipt, but we recommend keeping them on file as supporting documentation in the event of an IRS inquiry.
If renovation costs have already been expensed or depreciated on prior tax returns, or if you plan to do so, those amounts should not be included again in the cost segregation study, as this would result in double-counting.
No, you don't need to complete your cost segregation study before December 31st. The critical deadline is your tax filing deadline, not the calendar year-end. As long as the study is completed before you file your tax return for the year you want to claim the benefits, you can take full advantage of the accelerated depreciation.
For example, if you placed a property in service in 2024, you can conduct the study anytime in 2025, as long as it's completed before your 2024 tax return filing deadline, April 15th for individuals (or October 15th with extension), or March 15th for partnerships and S-Corps (September 15th with extension). The study will analyze your property as of its placed-in-service date and provide depreciation schedules starting from that date.
If you've already filed your tax return without a cost segregation study, you still have options. You can file an amended return for that year if you haven't yet filed the following year's return. Otherwise, you'll need to file Form 3115 (Application for Change in Accounting Method) to adjust your depreciation going forward and capture the "catch-up" depreciation you missed.
The flexibility in timing allows you to complete renovations, gather documentation, and work around your schedule without rushing to meet a year-end deadline. This also means you can strategically time the study based on your tax planning needs and cash flow considerations, making it a more manageable process that fits your business timeline rather than being forced by an arbitrary calendar deadline.
The IRS requires depreciation to be based on your actual cost (tax basis), not the property's current market value or appraised value. This fundamental principle exists because depreciation is designed to recover your actual investment in the property over time. Not to track market fluctuations or potential profits.
Tax law views depreciation as a way to deduct the cost of an asset as it wears out or becomes obsolete through business use. Since you can only "recover" what you actually spent, the calculation starts with your historical cost basis, not what the property might be worth today. If you paid $500,000 for a property that's now worth $700,000, you can only depreciate the $500,000 you actually invested, not the $200,000 in unrealized appreciation.
There's one important exception: when converting personal property to business use (like turning your residence into a rental), you must use the lower of your adjusted cost basis or the fair market value at conversion. This prevents taxpayers from claiming depreciation on personal-use appreciation that occurred before business use began.
Market values matter for other purposes, like allocating purchase price between land and building in an acquisition, or determining asset values in a cost segregation study for used properties, but the total depreciable amount always ties back to your actual cost. This cost-basis system ensures depreciation deductions reflect real economic investment, not paper gains, maintaining the integrity of the tax system while providing predictable, verifiable deductions based on documented purchase prices rather than subjective valuations.
Placed in service is a critical concept that determines when depreciation begins. Property is placed in service when it's ready and available for its specific use, whether or not you actually begin using it immediately. For newly constructed buildings, this typically coincides with receiving a certificate of occupancy, though the property might be placed in service earlier if it's ready for its intended use.
For rental properties, the placed-in-service date is when the property is ready and available for rent, evidenced by activities like advertising for tenants, not necessarily when the first tenant moves in. Construction projects can have multiple placed-in-service dates if portions are completed and available for use at different times, with each portion depreciated from its respective date.
For renovations and improvements, each project has its own placed-in-service date when that specific improvement is complete and ready for use. Documentation such as certificates of occupancy, notices of substantial completion, final inspection reports, or evidence of advertising for tenants helps establish the placed-in-service date.
If your property has already been depreciated in prior tax years, it’s important that the placed-in-service date used in a cost segregation study matches the date established in your existing depreciation schedule to ensure consistency
The classification depends on how the property is used rather than its physical characteristics. Residential rental property depreciates over 27.5 years and includes any building or structure where 80% or more of the gross rental income comes from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations, but specifically excludes units in hotels, motels, or other establishments where more than half the units are used on a transient basis.
If your property operates like a hotel with average stays under 7 days and provides substantial services similar to hotels, it's classified as nonresidential property depreciating over 39 years. This distinction is crucial for short-term rental operators who might assume their single-family home would automatically qualify for 27.5-year depreciation when it may actually be classified as commercial property due to its transient use pattern.