The Internal Revenue Service's February 2025 update to its Cost Segregation Audit Techniques Guide has created significant uncertainty for residential real estate investors seeking accelerated depreciation benefits. The revised guide expands references to the Amerisouth tax court case, leading IRS examiners to more frequently challenge reclassifications of items like sinks and kitchen cabinetry that have historically been treated as short-life personal property.
Brian Kiczula, founder of CostSegRx and a member of the American Society of Cost Segregation Professionals, notes that every property requires individual analysis. "Certain items can still be reclassified if the facts and circumstances support it," Kiczula says. "But that determination has to be made at the individual property level, not with a blanket estimate."
The timing of these changes coincides with increased investor interest in cost segregation strategies following the permanent establishment of 100% bonus depreciation under the One Big Beautiful Bill for property acquired after January 19, 2025. While this creates substantial tax advantages, it also raises compliance risks for investors who may be relying on outdated approaches or inadequate studies.
Industry practices vary significantly, with engineering-based studies representing the defensible standard described in the ATG. These studies review specific properties, individual assets, and their conditions. In contrast, modeling approaches that estimate depreciation by property type and DIY online tools that generate instant reports without professional review may not withstand IRS scrutiny. "If you're generating an instant report online and can't get anyone on the phone, that's probably not a study I'd move forward with," Kiczula advises.
For investors who acquired property in 2022, 2023, or 2024, look-back studies remain available to capture missed depreciation opportunities. Those undertaking renovations or capital improvements may qualify for separate capital expenditure studies, a frequently overlooked category according to industry experts.
The ATG serves as a roadmap for how IRS examiners evaluate studies rather than constituting law itself. Investors who understand this distinction and work with providers who prioritize engineering-based analysis position themselves more favorably for potential audits. The process at CostSegRx begins with complimentary benefit estimates reviewed individually for each property, delivered with video walkthroughs and consistent recommendations to consult with tax professionals before proceeding.
These developments highlight the evolving compliance landscape for real estate investors utilizing cost segregation strategies. As the IRS intensifies its focus on residential property classifications, investors must ensure their studies reflect current guidance and property-specific analysis to avoid potential challenges during examinations.
