What a Cost Segregation Study Is
A cost segregation study sorts the cost of a building into the property classes the tax code recognizes, so each part depreciates over its own recovery period. This page says what a study is, what the IRS guide says one should contain, what ours prints, and shows an example computed by our estimate engine. Your CPA applies the result to your return.
What a Study Is
The IRS guide describes what a study is; the fact below states that description, with its source.
- The IRS guide describes a cost segregation study, for income tax purposes, as the allocation or reallocation of the total cost of property into the appropriate property classes and recovery periods so that depreciation is computed properly. Source: IRS Publication 5653 (Rev. 2-2025), chapter 3, part A, paragraph (1)
What a Study Should Contain
The IRS guide lists what every study and report should do and the thirteen elements of a quality study, and it says there are no prescribed qualifications for preparers and no standards for studies.
- The IRS guide says a cost segregation study and report should always classify assets into property classes, explain the rationale with legal citations for treating assets as section 1245 or section 1250 property, and substantiate the cost basis of each asset and reconcile total allocated costs to total actual costs. Source: IRS Publication 5653 (Rev. 2-2025), chapter 4, part A, paragraph (1)
- The IRS guide lists 13 principal elements of a quality study: preparation by an individual with expertise and experience; detailed description of the methodology; use of appropriate documentation; interviews with appropriate parties; common nomenclature; a standard numbering system; explanation of the legal analysis; determination of unit costs and engineering take off; organization of assets into lists or groups; reconciliation of total allocated costs to total actual costs; explanation of the treatment of indirect costs; identification and listing of section 1245 property; and consideration of related aspects such as section 263A, change in accounting method and sampling. Source: IRS Publication 5653 (Rev. 2-2025), chapter 4, part C, paragraph (1)
- The guide says there are no prescribed qualifications for cost segregation preparers, that there are currently no standards for preparing studies, and that the IRS does not prescribe a specific methodology. The guide does not contain a sentence saying the IRS approves or endorses any study or preparer. Source: IRS Publication 5653 (Rev. 2-2025), chapter 4, part C.1, paragraph (1); chapter 1, part C, paragraph (8); chapter 3, part E, paragraph (1)
What a SmartCostSeg Study Prints
Every SmartCostSeg study is structured around the characteristics of a quality study that the IRS Cost Segregation Audit Techniques Guide describes.
Each acquisition, new construction and exchange study is structured around the principal elements of a quality study described in the IRS Cost Segregation Audit Techniques Guide (Pub. 5653) and prints a scorecard showing which are met and which are partial.
Each study states its method plainly, including when the asset schedule is modeled rather than taken off on site.
Every sample is watermarked and open to read before you start; the four family sample shows the parts list, the asset schedule and the scorecard.
An Example From Our Engine
The figures below are computed by the same estimate engine the site uses everywhere, for the inputs shown. They are an illustration for an invented property, not a result for yours.
- When a purchase price covers both land and buildings, the cost must be divided between them based on the fair market value of each at the time of purchase. If fair market values are uncertain, the IRS allows the split to follow the assessed values used for real estate tax. Source: Treas. Reg. section 1.167(a)-5; IRS Publication 527 (2025), chapter 2, Separating cost of land and buildings
- Land cannot be depreciated. The costs of clearing, grading, planting and landscaping are usually part of the cost of land. Source: Treas. Reg. section 1.167(a)-2; IRS Publication 527 (2025), chapter 2, What Rental Property Can't Be Depreciated
| Item | Amount |
|---|---|
| Land value | $127,500 |
| Building basis | $722,500 |
| Moved to the 5 year class | $121,380 |
| Moved to the 15 year class | $52,020 |
| Left on the 27.5 year life | $549,100 |
| Share of the building basis moved | 24% |
| First year depreciation without a study | $26,273 |
| First year depreciation with a study | $193,367 |
| Additional first year deduction | $167,094 |
| Conservative | Middle of the Road | Aggressive |
|---|---|---|
| $137,669 | $193,367 | $249,065 |
Less to land means more to depreciate, so a low land value is the aggressive land position.
Illustrative example computed by our estimate engine for an invented Four-Family at 12 Example Street, Testville, ZZ 00000: purchase price $850,000, $127,500 assigned to land (15.0%), placed in service January 1, 2026, at the Middle of the Road position with 100% bonus. Results vary with property specifics and your tax situation.
The ZZ 00000 marker means invented: these figures are an illustration for the inputs shown, not a result for any real property.
What Happens After Delivery
The study goes to your CPA with the asset by asset detail, and depreciation schedules by year are available on request. For a building placed in service in an earlier year, your CPA decides how the study reaches the return.
- For an automatic change the original Form 3115 is attached to the timely filed federal income tax return (including extensions) for the year of change, and a signed copy is filed with the IRS no later than the date the original is filed. The IRS does not send acknowledgements for automatic change requests. The current Form 3115 instructions are the December 2022 revision. Source: Instructions for Form 3115 (Rev. 12/2022), When and Where To File; Rev. Proc. 2015-13 section 6.03(1)
Questions people ask
How long does a study take?
- Most projects are completed within approximately 5 to 7 business days.
What documents does a study need?
- Your closing or settlement statement, any inspection or valuation report you have (optional), and interior and exterior photos of the property. For condos we also ask for the CC&Rs.
Who prepares the study?
- Studies are prepared by SmartCostSeg's analysis system, and our team checks every study before it is delivered.
Is a tax result certain?
- No. Every estimate is a range, never a guarantee, and the study states its method and its assumptions so your CPA can apply it to your facts.
The rules on this page were checked against their sources on October 1, 2026.
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