Can I claim accelerated tax depreciation/bonus on STR rentals I built myself?

This is helpful but I'm confused about the Form 3115 option. If I go that route instead of amending old returns, do I get all the depreciation benefit on my 2024 return? Or is it spread out somehow? Also, do you know if cost segregation is worth it for smaller STR properties or is it only for bigger commercial buildings?

When you file Form 3115, you get to claim all the "catch-up" depreciation you missed in prior years as a single deduction on your current year return. This is called a 481(a) adjustment and it can be very beneficial as it doesn't require amending prior returns. Cost segregation is absolutely worth considering even for smaller STR properties. The benefit comes from identifying components of your property that qualify for shorter depreciation periods (5, 7, or 15 years) instead of the standard 27.5 years for residential rental property. Even smaller properties have significant components like appliances, carpeting, landscaping, and specialized electrical systems that can be broken out. The ROI on a cost seg study generally makes sense for properties valued at $500K+, but can sometimes be worthwhile for smaller properties too, especially when bundling multiple properties together.

Did they actually accept your depreciation claims without a physical inspection of the properties? I was told by my accountant that the IRS requires an in-person engineering report for cost segregation to hold up in an audit. Was there any pushback when you filed?

I'm interested but skeptical. How much did it cost? And did they help with filing the amended returns or Form 3115 mentioned above? That paperwork seems like the most complicated part to me.

They use a combination of AI analysis of your documentation plus remote consultation with their engineers. I provided detailed photos, blueprints, and construction documents which they said was sufficient. My CPA was initially skeptical too but said their report was actually more thorough than some in-person inspections he's seen. For the paperwork question, they provided everything my accountant needed to file the Form 3115. I didn't have to amend my previous returns, which saved a lot of hassle. The platform actually generated the completed form attachments with all the calculations and component breakdowns required. My accountant said it was the easiest 3115 he'd ever filed because all the supporting documentation was so well organized.

How does this actually work? Do they have some kind of special access to the IRS phone system? Seems too good to be true if the regular wait time is hours and they can get through in minutes.

Sounds like a scam honestly. The IRS is understaffed and there's no magic way to skip the line. They probably just put you on hold themselves and charge you for the privilege. Did they actually connect you to a real IRS number or was it some "tax expert" on their team?

They use an automated system that handles the holding and callback process for you. It monitors the IRS phone system and when the IRS is ready for your call, they connect you directly to the agent. You're actually talking to real IRS representatives, not third-party "experts." They don't have special access - they're just using technology to handle the frustrating part of waiting on hold. When they connected me, I verified I was speaking to the actual IRS by checking the phone number and the agent identified themselves as an IRS employee. They even transfer you to different departments if needed, which is what happened in my case since I needed to speak with someone specifically about business depreciation.

Lol I wish I had the problem of $27 million in annual income from my STRs! But seriously, do you know if there's any minimum property value where cost segregation makes sense? I've got a small cabin I rent out that's only worth about $175k total.

The general rule of thumb is that cost segregation starts to make financial sense when the property value is $500k or higher, but it depends on several factors. For your $175k cabin, the study itself might cost between $3k-$5k, so you'd need to weigh that against the potential tax savings. However, if you purchased the cabin recently and could do a simplified cost segregation (like with one of the AI tools mentioned above), the economics might work out even at that lower value. Look at your cabin's components - if you have a lot of specialized systems (hot tub, custom lighting, high-end appliances, extensive landscaping), you might have more segregation opportunities than a basic property. You also need to consider your tax bracket - the higher your rate, the more valuable the accelerated deductions.

This is important advice! Did the IRS completely disallow your depreciation or did they just make you get a proper study after the fact? I'm wondering how severe the consequences are if you don't have the right documentation.

I'm curious about this too! Also, what kind of documentation did they specifically ask for during the audit? I'm planning to do cost segregation on a few properties I built myself and want to make sure I have everything properly documented upfront. Did you end up having to pay penalties or just back taxes?

@Keith Davidson I m'really sorry to hear about your audit situation - that sounds stressful! This is exactly the kind of scenario I m'trying to avoid. Could you share what specific red flags might have triggered the audit? Was it the amounts you claimed, the way you allocated the depreciation, or something else? Also, for those of us considering cost segregation, what would you recommend as the minimum documentation to have in place before filing? I d'rather spend a bit more upfront on proper documentation than deal with audit headaches later.