Do It Yourself Cost Segregation Study

By Jason Watson, CPA
Posted Sunday, May 25, 2025

The fee for a cost segregation study varies between $750 to a bajillion dollars. There are two types of cost seg reports- one is routinely called “do it yourself” and the other is a fully engineered report. The fully-engineered report is very similar to a property appraisal- there is a site visit, a bunch of measurements and pictures are taken, and a qualified person dissects the property to create the 5-, 7- and 15-year piles. Costs range from $2,500 to $6,000 for most rental properties under $2 million(ish).

There is a depreciable property value of about $1,500,000 where things change. Below that value, the statistical reliability and therefore predictability is very good, and most cost segregation reports can rely on basic property vitals such as address, age, price, square footage, etc. plus a quickie survey of the stuff inside. What stuff? According to CostsegEZ.com, here is a quick list-

• Removable floor coverings (i.e., carpet, vinyl, LVP, floating wood)

• Kitchen cabinets and countertops

• Kitchen appliances (including mechanical, electrical, plumbing connections)

• Laundry appliances (including mechanical, electrical, plumbing connections)

• Window treatments

• Ceiling fans

• Electrical wiring and outlets for telephones (really?!), televisions, internet

• Closet shelving

• Decorative trim and wall coverings

• Decorative light fixtures (including electrical connections)

• Hot tubs and pool equipment (see our hot tub conundrum)

• Security systems

• Furniture and decor

• Window air conditioning units

WCG CPAs & Advisors has a similar list that we use for renovations where we do a “poor man’s” version of cost segregation when a rental property owner details out a renovation or rental rehab. We discuss this later. Riveting!

How does a do it yourself cost segregation report work again? Said another way, the cost segregation report is relying on a slew of prior reports to homogenize the data and draw correlations to the basic property vitals and a survey of certain components. Plus, this technique has been successfully defended in multiple courts. Is there a risk? Are there standards?

According to IRS Publication 5653 Cost Segregation Audit Techniques Guide (ATG)–

Neither the Internal Revenue Service (Service) nor any group or association of practitioners has established any requirements or standards for the preparation of cost segregation studies. The courts have addressed component depreciation but have not specifically addressed the methodologies of cost segregation studies.

The Service has addressed this issue but only briefly, i.e., Revenue Ruling 73-410, 1973-2 C.B. 53, Private Letter Ruling (PLR) 7941002 (June 25, 1979), Chief Counsel Advice Memorandum 199921045 (April 1, 1999). These documents all emphasize that the determination of § 1245 property is factually intensive and must be supported by corroborating evidence. In addition, an underlying assumption is that the study is performed by “qualified individuals” and “professional firms” that are competent in design, construction, auditing, and estimating procedures relating to building construction (See PLR 7941002).

Despite the lack of specific requirements for preparing cost segregation studies, taxpayers still must substantiate their depreciation deductions and classifications of property. Substantiation using actual costs is more accurate that using estimates. However, in situations where estimation is the only option, the methodology and the source of any cost data should be clearly documented. In addition, estimated costs should be reconciled back to actual costs or purchase price.

The big takeaway from the blurb is the phrase “factually intensive.” It appears 7 times in the ATG. When shopping for a DIY cost seg provider, ensure you are comfortable with their reporting and see if their results feel “factually intensive.” However, do not be discouraged from using a do-it-yourself cost segregation provider- many are extensions of fully-engineered cost seg experts, and will prepare a full report should you be audited.