Frequently Asked Questions

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.

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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.

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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.

While our studies are based on engineering analysis and IRS guidelines, we understand you may have questions about specific classifications. If you disagree with certain component classifications, we can review the engineering rationale and supporting documentation. Minor adjustments might be possible if you provide additional information about specific assets or their use. However, significant departures from engineering standards could compromise the study's defensibility.

You can choose to be more conservative than the study recommends by treating some personal property as structural components, though this reduces your tax benefits. We provide detailed documentation explaining each classification decision, which your CPA can review. Remember that our studies include audit defense, so we stand behind our engineering conclusions. If you have specific concerns, it's best to address them before finalizing the study.

Since land itself cannot be depreciated, the allocation between land and building directly impacts the results of a cost segregation study. It’s important to note that we do not determine or participate in setting the land allocation — our analysis is based on the land value provided by the county/tax records or provided by the client.

If you believe the land and building allocation on your records is inaccurate, you can engage a qualified third party, such as a certified appraiser, to provide an independent valuation before the study is completed.

Section 179 and cost segregation serve different purposes and can actually be used together strategically. Section 179 allows immediate expensing up to $1,220,000 (for 2024) of qualifying property, including certain qualified real property improvements like HVAC systems, roofs, fire protection systems, and security systems placed in service after the building was first placed in service. However, Section 179 has income limitations requiring sufficient business income to use the deduction.

Cost segregation, on the other hand, identifies and reclassifies components throughout the entire property without dollar limits. The two strategies complement each other - you might use Section 179 for specific qualifying improvements while using cost segregation for the overall property analysis. Note that if you take Section 179 on certain components, those must be excluded from the cost segregation study to avoid double-dipping.

Self-storage facilities have characteristics that make them particularly favorable for cost segregation. These properties typically feature a high percentage of site improvements including driveways, parking, and outdoor lighting. Security systems, fencing, and gates represent significant short-life property investments. The buildings themselves often have minimal interior finishes, meaning a higher percentage of the cost relates to reclassifiable components.

Climate control systems, where present, add to the reclassification potential. It's common for self-storage facilities to achieve 30-40% reclassification rates, making them excellent candidates for cost segregation. When planning expansions, consider the timing of cost segregation studies to maximize benefits across different phases of development.