Residential Cost Segregation Study

Section 167(a) of the Internal Revenue Code of 1986 establishes the foundational authority for depreciation deductions, permitting a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or held for the production of income.

The authority discussion connects the report terminology to the references used throughout the study. It provides context for the classifications and schedules, with supporting notes organized alongside the relevant topic. Readers can use the section headings to locate a particular subject, then consult the accompanying report materials for the property information on which the discussion depends.

IRC Section 168(e)(2)(A) defines residential rental property as a building or structure from which 80 percent or more of the gross rental income for the taxable year is rental income from dwelling units. For this purpose, a dwelling unit means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment in which more than one-half of the units are used on a transient basis.

The property profile records the rental use described for this study. That context is carried through the classification discussion and the report schedules so the reader can compare the findings with the property information supplied for review.

Rental-use information should be read together with the supporting property records. Questions about the description of the property or the information supplied for the study can be identified during the owner and preparer review.

The scope of this study is described in the property profile and accompanying qualifications. The discussion is tied to that stated scope. Information about a different property, use, or reporting period should be reviewed separately rather than assumed to be covered by the same report.

Property in the 3-year through 10-year recovery classes is depreciated using the 200 percent declining balance method, with a mandatory switch to straight-line in the first year that method yields a greater deduction. Property in the 15-year and 20-year classes uses the 150 percent declining balance method with the same crossover rule. Residential rental property (27.5-year) is recovered exclusively under the straight-line method using a mid-month convention.

The report schedules organize the results by asset class and show the associated recovery information in one place. The classification discussion provides context for reading those schedules. The owner and preparer can review the summary alongside the supporting detail and the limitations stated elsewhere in the report.

Asset Class 00.12 designates Information Systems as 5-year property under the GDS, recovered using the 200 percent declining balance method switching to straight-line. This class covers computers, peripheral equipment, and integrated information systems hardware placed in service in connection with the taxpayer’s trade or business. For properties placed in service after December 31, 2017, the Tax Cuts and Jobs Act removed computers and peripheral equipment from the listed property rules of Section 280F, eliminating the business-use percentage documentation requirements that previously applied to this asset class.

The equipment discussion describes the items identified in the property records and the context in which they are used. Supporting descriptions help the reader distinguish individual equipment from the broader building systems discussed elsewhere in the report.

Equipment descriptions and the property locations recorded for review.

Smart thermostats functioning as part of a connected home system rather than as a primary building HVAC control

Installation information available in the supporting property records.

Owner-provided observations about the equipment and its use.

Tenant-interface tablets or devices provided for occupant use

Supporting documentation associated with the identified items.

Equipment notes carried forward for owner and preparer review.

The equipment discussion should be read with the related schedules and report qualifications. Any missing or uncertain property information can be raised during review so the supporting records and the report description can be considered together.

Asset Class 00.3 designates Land Improvements as 15-year property under the GDS, recovered using the 150 percent declining balance method switching to straight-line. This class encompasses improvements made directly to or added to land, whether characterized as Section 1245 or Section 1250 property, provided they are depreciable. Qualifying assets include sidewalks, roads, canals, waterways, drainage facilities, sewers (excluding municipal sewers under Class 51), wharves, docks, bridges, fences, landscaping, shrubbery, and radio and television transmitting towers. Excluded from this class are land improvements explicitly assigned to another asset class, buildings and structural components as defined under Treas. Reg. Section 1.48-1(e), and public utility initial clearing and grading improvements addressed in Rev. Rul. 72-403, 1972-2 C.B. 102.

The site-improvement discussion groups the exterior items described in the property records. Their locations, descriptions, and supporting documentation provide context for reviewing the corresponding report entries alongside the property profile.

Asset Class 57.0 designates assets used in Distributive Trades and Services as 5-year property under the GDS, recovered using the 200 percent declining balance method switching to straight-line. This class encompasses assets used in wholesale and retail trade and in personal and professional services. Under established IRS guidance and case law — including the IRS Cost Segregation Audit Techniques Guide — this asset class extends to tangible personal property within residential rental properties that serves the rental function rather than the structural integrity of the building.

The following entries illustrate how the report organizes component descriptions. Each description is read together with the available property records, supporting notes, and corresponding schedule entry.

Interior component descriptions documented in the property records.

Cabinetry, countertops, and shelving unrelated to the structural operation or maintenance of the building

Room locations associated with the identified component entries.

Supporting purchase and installation records supplied for review.

Kitchen and laundry appliances (refrigerators, ranges, dishwashers, washers, dryers)

Additional component notes recorded during preparation of the study.

Related documentation linked to the component descriptions.

Electrical service connections dedicated to items of tangible personal property (dedicated appliance outlets and circuits)

The component discussion connects the descriptions in this section with the supporting report schedules. The reader can compare those entries with the property information and records supplied for the study. Questions about an individual item should identify the relevant description and report section so the review can address the specific entry.

Section 168(k) provides for bonus depreciation, allowing an immediate first-year deduction on a specified percentage of the cost of eligible business property. The Tax Cuts and Jobs Act of 2017 established 100 percent bonus depreciation for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, and eliminated the original-use requirement, extending eligibility to used property so long as the taxpayer had not previously placed that property in service. The TCJA phased bonus depreciation down beginning in 2023: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026, with full expiration in 2027 absent further legislative action.

The timing discussion draws attention to the dates recorded for the study and the assumptions shown in the report. Supporting acquisition and completion records provide context for reviewing those dates. The owner and preparer should read the timing information together with the schedules and qualifications, and identify any discrepancy between the report and the underlying records before using the results.

The summary schedules present the treatment shown for each asset class. The accompanying discussion provides context for reviewing those figures without replacing the detailed schedules. The report assumptions and preparer notes remain part of that review, including any questions about the information supplied for the study.

The principal classification question is whether a particular asset is tangible personal property, a land improvement, or a building or structural component. Treasury Regulation Section 1.48-1 and the former investment tax credit authorities remain important classification references for MACRS cost segregation analysis.

Reference notes accompany the timing discussion to help the reader locate the supporting material. They should be considered alongside the report assumptions and qualifications.

Residential kitchen components are evaluated at the component level rather than by a blanket room-level rule. Identified kitchen cabinets, counters, sinks, and directly related dedicated service components may be classified as Section 1245 tangible personal property where the property facts support removability, separate identity, non-structural function, and direct association with specific tangible personal property.

The kitchen and bathroom discussion follows the component descriptions recorded for the property. Supporting notes distinguish the items being reviewed and connect them to the relevant report entries. The room name alone does not describe the full scope of the work or the information supplied for the study.

The available records may describe several kinds of work within the same room. Clear descriptions help the reader follow the relationship between those records and the report entries, particularly where a single invoice covers more than one item.

Dedicated branch plumbing or electrical service directly connected to specific depreciable kitchen appliances, kitchen sinks, or other separately identified tangible personal property may be classified with that property where the report data documents the dedicated function and cost. If the available data does not separately identify dedicated service, the report should not imply a separately modeled plumbing or electrical allocation.

Bathroom component descriptions are presented with the associated property information. Supporting records and report notes provide the context for reviewing each entry.

The component review brings together the recorded descriptions, available documentation, and report schedules. Questions about the scope of an entry can be raised with reference to those materials. The discussion should be read with the qualifications and assumptions that apply to the study as a whole.

The report framework relies on statutory depreciation concepts, Treasury Regulation Section 1.48-1, and judicial authorities applying the tangible-personal-property and structural-component tests. Detailed authorities may be referenced in the appendix or workpaper support when needed for reviewer analysis.

The report findings depend on the property information and supporting records available for the study. The scope and limitations sections describe that reliance so the owner and preparer can understand the context in which the report was prepared.

The report date identifies when this document was prepared. Later changes to the property or its supporting information may require further review. Readers should retain the report version and the records used when reviewing its findings.

The IRS Cost Segregation Audit Techniques Guide and IRS Publication 5653 are treated as nonbinding guidance for documentation and examination posture rather than controlling legal authority.

Each authority reference has a specific role in the discussion. The accompanying notes explain its context within the report and should be read together with the property information and stated scope.

The reference materials, cost-support notes, and report schedules serve different purposes. Reading them together helps the preparer follow the supporting documentation and identify any questions that need to be resolved during review.

The final review brings together the property description, classification discussion, schedules, and qualifications. The owner and preparer can use the report outline to locate each part of that record. Any questions should identify the report version, section, and entry involved so the supporting information can be reviewed in context.