Real estate investors who wait until the tax year closes to reconstruct their property spending risk losing the details that determine how those costs are depreciated, according to CostSegRx, an engineering-based cost segregation firm. The firm says the last-minute scramble through inboxes and bank statements is exactly where owners tend to lose the information that shapes their depreciation.
"Property owners should really document all of their capital improvements and expenses throughout the year," said Brian Kiczula of CostSegRx. "It's not just at the year-end." The goal is not a perfect filing cabinet but a clear record of what work was done, when it was done, and what it cost.
The distinction matters because capital improvements and repairs are treated differently for tax purposes. When a CPA or cost segregation professional reviews an owner's spending, they typically apply the BAR test, which asks whether each cost is a betterment, an adaptation, or a restoration. Costs meeting one of those definitions generally must be capitalized and depreciated over 27.5 years for residential rental property, 39 years for commercial property, or shorter lives of 15, 7, or 5 years depending on the asset. Costs that do not meet the test usually fall into repairs and maintenance, which can be deducted in the year they are incurred. Without records, there is no reliable way to tell which bucket a cost belongs in.
In CostSegRx's experience, the gap almost always comes down to individual receipts and a clear description of the work performed. Owners tend to fall into two groups: one keeps every receipt in a cloud folder and tracks each improvement with dates in a spreadsheet, while the other knows roughly how much it spent over the year but cannot say how that money was divided among new flooring, windows, lighting, or a bathroom remodel. The second group is often not at fault, since many contractors bill in lump sums without breaking out what each part of the project cost. For those owners, CostSegRx uses construction cost estimating, rebuilding the contractor's costs from the owner's description and images of the property so each improvement can be classified.
Timing adds another layer for owners who bought and renovated in the same year. If renovations were finished before the property went into service, the original cost segregation study may need to be adjusted. If the property went into service first and a major remodel followed, the tax preparer would typically receive two separate fixed asset schedules, one for the acquisition and one for the remodel. CostSegRx sees this pattern often with hotels, where an owner acquires a property and begins updating rooms the following year.
Disorganization is common among landlords, but it does not necessarily mean the opportunity is lost. CostSegRx recently completed a study on a multi-year renovation of three buildings, including a restaurant, a boutique bed and breakfast, and a group of shops. The owner did not have the original construction data, and the team still produced a quality study. As long as an owner can document that the improvements were made, a study can usually still be done.
The practical takeaway is to stop treating documentation as a year-end task. Owners should keep records as work happens, share them with their CPA, and ask early how any renovations will be classified. For investors, that habit could mean the difference between capturing available depreciation and leaving it on the table.
