Acquisition and Renovation Sample Study
A two building residential property bought and then renovated, with the purchase and the renovation studied together in one PDF, each building read for its own recovery period, and a catch up on the years already filed.
Illustrative sample
The watermarked PDF is the Study, the short document a client and a CPA receive. The Engineering Appendix beside it is the full study, with every part this page names.
Dollar figures shown are illustrative and come from the sample's own data. Estimates, never guarantees; results depend on your specific tax situation.
The Property and the Land
Property type
Square feet
2,480
Year built
1925
Units
3
Stories
2
Acquired
February 1, 2023
Placed in service
May 1, 2023
Purchase price
$412,000
Land value
$82,400
How the land was set
owner-provided estimate
Building basis
$329,600
The three positions describe the building only. Land is carved out first and never depreciates, so the less of the price assigned to land, the more there is to depreciate: a low land value is the aggressive land position and a high land value is the conservative one.
Two Buildings, Two Recovery Periods
The parcel carries 2 buildings, each with its own units, use and placed in service date.
Front building
2 units, rented long term, placed in service May 1, 2023; stated on its 27.5 year life.
Rear building
1 unit, rented for periods normally under 30 days, placed in service May 1, 2023; stated on its 39 year life.
The study states the rear building on its 39 year life, the reading that counts the building's own units, and carries the 27.5 year life of the reading that takes the whole parcel as one establishment beside it in the PDF. The rules behind both readings are set out below, and your CPA decides which applies.
The test for residential rental property and the meaning of transient use are set out below, with their sources.
- A building is residential rental property only if 80 percent or more of its gross rental income is from dwelling units. A dwelling unit does not include a unit in a hotel, motel or other establishment where more than one half of the units are used on a transient basis. Section 168 does not define transient basis or state a number of days. Source: IRC section 168(e)(2)(A)(i) and (ii)(I)
- The 30 day figure comes from Treas. Reg. 1.48-1(h)(2)(ii), an investment credit regulation on hotel and motel property, not from section 168. It says accommodations are used on a transient basis if the rental period is normally less than 30 days. Paragraph (h)(1)(i) of the same regulation contains no 30 day language. Source: Treas. Reg. section 1.48-1(h)(2)(ii)
The Three Positions
| Position | Conservative | Middle of the Road | Aggressive |
|---|---|---|---|
| Share of the building basis moved | 30% | 37% | 43% |
| First year depreciation with the study | $103,498 | $125,153 | $147,072 |
| Additional first year depreciation | $96,354 | $118,009 | $139,928 |
First year depreciation without a study: $7,144.
Part 1A sets out 9 combinations of land value and position.
These figures come from the study's own year by year figures, which the Engineering Appendix prints in Part 1, and they cover the acquisition and the renovation together.
How the Basis Was Classified
Classification method: Modeled residual method. This sample is modeled: no site inspection, no engineering take off and no documents were reviewed, and the Engineering Appendix says so in its methodology.
The class totals below are at the Middle of the Road position, the one this study states.
| Class | Amount | Share of basis |
|---|---|---|
| 5 year property | $81,156 | 20% |
| 15 year land improvements | $32,981 | 8% |
| 15 year qualified improvement property | $31,607 | 8% |
| Building on its 27.5 year life | $170,337 | 43% |
| Building on its 39 year life | $80,159 | 20% |
36 asset rows in the classification schedule.
Every dollar of the $396,240 basis is allocated.
$81,156 of section 1245 property, 20% of the basis. What section 1245 property is
Bonus rate 80% on the sample's dates: acquired February 1, 2023, placed in service May 1, 2023.
Bonus basis in the study $145,744, bonus amount $116,594.
- For qualified property acquired after September 27, 2017 and placed in service before January 1, 2023, the additional first year depreciation was 100 percent; for property placed in service in 2023 it was 80 percent. Source: IRC section 168(k)(6)(A)(i) and (ii) as enacted by P.L. 115-97 section 13201(a)(2), before repeal by P.L. 119-21 section 70301(b)(1)(B); IRS Publication 946 (2022), chapter 3
Which bonus rate applies to which datesWhich property gets bonus depreciation
The Renovation Beside the Acquisition
Building renovated
Rear building
Work began
June 1, 2023
Renovation placed in service
October 1, 2023
Total spend
$68,540
Expensed by the study
$1,900
Capitalized by the study
$66,640
One ledger line is expensed in the year paid, under a treatment the study names; the Engineering Appendix gives the authority, and your CPA confirms.
13 ledger lines are capitalized and enter the classification schedule as rows of their own, beside the acquisition's rows.
Every ledger line prints in the Engineering Appendix with its date, payee and reference as the receipts carry them.
The rules for the renovation's cost, its own placed in service date and its convention are set out below, with their sources.
- Amounts paid to improve a unit of property (a betterment, a restoration or an adaptation to a new use) are capitalized; each building and its structural components is a unit of property; costs that directly benefit or are incurred by reason of an improvement are capitalized with it; and work done on a unit of property before it is placed in service is part of the cost of acquiring or producing it, not an improvement. Source: Treas. Reg. section 1.263(a)-3(d), (e)(2)(i) and (g)(1); Treas. Reg. section 1.263(a)-2(d)(1)
- An addition or improvement to property is depreciated as separate property placed in service on the later of the date the improvement is placed in service and the date the improved property is placed in service, and over the same recovery period and method that would apply to the improved property if it were placed in service when the improvement was. Source: IRC section 168(i)(6)(A) and (B); IRS Publication 946 (2022), chapter 4, Additions and Improvements
- Residential rental property and nonresidential real property use the mid month convention: the property is treated as placed in service at the midpoint of the month. Other MACRS property uses the half year convention unless more than 40 percent of the basis of all such property placed in service during the year is placed in service in the last three months, in which case the mid quarter convention applies. The first year percentage for 27.5 year property is 2.576 percent for an April placed in service month and 0.455 percent for November, and a full year is 3.636 percent; for 39 year property April is 1.819 percent and November 0.321 percent. Source: IRC section 168(d)(1), (d)(2), (d)(3) and (d)(4); IRS Publication 946 (2022), chapter 4 and Appendix A, Tables A-6 and A-7a
- For the 40 percent mid quarter test the basis of property is not reduced by the additional first year depreciation. Source: IRS Publication 946 (2022), chapter 4, Which Convention Applies
The Catch Up and the Form 3115 Attachment
Placed in service in 2023.
Year of change 2025.
Catch up deduction in the year of change: $118,627
The catch up is measured against the depreciation the filed returns claimed, year by year.
The Engineering Appendix carries the Form 3115 attachment for the year of change: the description of the change, the section 481(a) worksheet, the asset table and the filing notes for your CPA.
- A negative section 481(a) adjustment, which lowers taxable income, is taken in full in the year of change. A positive adjustment is generally spread over four tax years. The adjustment for a depreciation change equals the difference between depreciation actually taken and depreciation allowable for all years before the year of change. Source: Rev. Proc. 2015-13, 2015-5 I.R.B. 419, section 7.03(1); Rev. Proc. 2025-23 section 6.01(5); IRS Publication 946 (2025), chapter 1
- The automatic change from an impermissible to a permissible method of accounting for depreciation is in section 6.01 of Rev. Proc. 2025-23, and its designated automatic accounting method change number is 7. It applies to property the taxpayer owns at the beginning of the year of change and for which the impermissible method was used in at least two tax years immediately before the year of change, with a special rule for property placed in service in the immediately preceding year. Section 6.01 also lists property it does not cover, and property disposed of before the year of change is handled in section 6.07. Source: Rev. Proc. 2025-23, 2025-24 I.R.B. 1476, sections 6.01(1), 6.01(9) and 6.07
- 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)
- Changing the depreciation method, period of recovery or convention of an asset for which a method has been adopted is a change in method of accounting. It therefore generally requires Form 3115 rather than an amended return. Before a method is adopted, an amended return can correct the depreciation. Source: Treas. Reg. section 1.446-1(e)(2)(ii)(d)(2)(i); IRS Publication 946 (2025), chapter 1
Quality and Audit Risk
9 of the 13 principal elements met and 3 partial, by the study's own scorecard.
Audit risk gauge: red, with 37% of the basis in the shorter lives.
What Is in the Engineering Appendix
This Engineering Appendix adds: Part 13A: Major Renovation Cost Analysis; Part 13B: Consolidated Receipts and Payments; Part 14 Supplement: §481(a) Adjustment and Form 3115; Part 14 Attachment: Form 3115 Supporting Statements; Part 15A: Combined Acquisition and Renovation Summary.
The Engineering Appendix runs 76 pages.
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