The Internal Revenue Service's February 2025 update to its Cost Segregation Audit Techniques Guide has introduced significant uncertainty for residential real estate investors utilizing depreciation acceleration strategies. The revised guide expands references to the Amerisouth case, a 2012 tax court ruling the IRS won after the taxpayer stopped responding during litigation. IRS examiners are now citing this precedent more frequently to challenge reclassifications of items like sinks, kitchen cabinetry, and similar residential components that have historically been treated as short-life personal property eligible for accelerated depreciation.
Brian Kiczula, founder of CostSegRx and a member of the American Society of Cost Segregation Professionals, notes the increased scrutiny comes at a critical time. With 100% bonus depreciation made permanent under the One Big Beautiful Bill for property acquired after January 19, 2025, investor interest in cost segregation has surged dramatically. However, the same conditions that make the strategy valuable also raise the stakes for getting classifications wrong, potentially leading to audits, penalties, and disallowed deductions.
The industry faces fragmentation in how providers approach these studies. Engineering-based analyses that review specific properties, individual assets, and their conditions represent the defensible standard described in the ATG itself. These contrast with modeling approaches that estimate depreciation by property type and DIY online tools that generate instant reports without professional review. Kiczula cautions against instant online solutions, stating that if investors cannot speak directly with a professional about their report, they should reconsider using that service.
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 itself is not law but serves as a roadmap for how IRS examiners evaluate studies, making compliance with its guidance essential for audit defense.
The distinction between proper engineering-based studies and less rigorous approaches matters more now than in previous years. Each property requires individual assessment based on facts and circumstances rather than blanket estimates. Investors working with providers who understand this distinction and the updated guidance position themselves more favorably regardless of where the IRS directs its examination efforts next.
