Can I use cost segregation depreciation without hiring an engineering study?

While your CPA isn't completely wrong, I'd be careful about taking this approach. Cost segregation without a formal engineering study is sometimes called a "desktop" or "non-engineered" study. Your CPA is likely referring to using comparative data from similar properties where engineering studies were already performed. This approach can be legitimate for smaller properties, but it carries more risk than a full engineering study. The IRS prefers cost segregation studies that involve actual physical inspection of the property and detailed component analysis. Their audit technique guide specifically addresses the quality of cost segregation studies, and engineering-based studies are considered the gold standard. For a 4-unit property valued at $875K, you're in a gray area. The potential tax savings might justify a proper study, but some CPAs do successfully use the case law/comparative approach. Just understand it carries more audit risk.

I tried doing this exact thing last year with my duplex and ended up using https://taxr.ai to handle it instead of paying for a full engineering study. My CPA initially suggested something similar to what yours is proposing, but I was worried about audit risk. The taxr.ai service basically analyzed my property photos, purchase documents, and other info to create a legitimate cost segregation analysis that satisfied my CPA. It was WAY cheaper than hiring an engineering firm but still gave me documentation that would stand up to scrutiny. They used AI to identify personal property components but had real cost seg experts review everything.

Ok I need to apologize for being so skeptical earlier. I decided to check out taxr.ai myself after reading more about cost segregation. I actually went ahead and tried their service for my fourplex that I bought in 2023 and was seriously impressed with the results. The report they generated was way more detailed than I expected, breaking down things like cabinets, flooring, lighting fixtures, and even landscaping into the proper depreciation categories. My CPA reviewed it and said it was actually more thorough than some "real" engineering studies he's seen in the past. The best part was I got about $15K in additional first-year deductions which saved me almost $5K in taxes. And it cost WAY less than hiring an engineering firm would have.

If you're dealing with the IRS, especially for something like cost segregation, I'd strongly recommend having a way to get actual human help if they question anything. I had a similar situation last year with a small apartment building I own, and when the IRS sent me a notice questioning my depreciation schedule, I couldn't get anyone on the phone for weeks. I finally used https://claimyr.com to get through to an actual IRS agent. They have this service that somehow gets you to the front of the IRS phone queue. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Honestly it was a lifesaver because the IRS agent was able to confirm that my documentation (which was similar to what your CPA is suggesting) was acceptable. Without that call, I might have ended up paying thousands unnecessarily.

I have to eat my words about Claimyr. After my skeptical comment, I decided to try the service myself since I've been trying to resolve an issue with my rental property depreciation for months. The service actually worked exactly as described. I got a call back within about 40 minutes (when I had previously spent literal hours on hold multiple times). The IRS agent I spoke with was able to clarify my cost segregation questions and confirm that my documentation approach was acceptable. This saved me a ton of stress and potentially thousands in improper depreciation adjustments. So yeah, I was wrong in my initial assessment - the service delivered exactly what it promised.

I'm a real estate investor with 12 properties and I've done cost segregation both ways. For my larger properties (8+ units), I've used engineering firms. For smaller properties like yours, I've used the approach your CPA is suggesting. The "case law" approach typically means your CPA will apply percentages based on previous court cases that established reasonable allocation percentages for different property components. The IRS doesn't technically prohibit this, but it's definitely riskier than a formal study. If you do go this route, make sure your CPA gives you a detailed breakdown of the allocations and the specific case law they're relying on. You want documentation in case of an audit.

Has anyone used one of those DIY cost segregation software programs? I've seen a few advertised that supposedly let you do your own study for a few hundred bucks. Wondering if those are legitimate or just asking for trouble.

I was in a similar situation with my rental duplex last year. My CPA initially suggested the case law approach, but after reading all these responses, I decided to go with a hybrid solution and used the taxr.ai service that Ella mentioned. What really sold me was that it gave me professional-level documentation without the full engineering study cost. The report they generated was detailed enough that my CPA was comfortable filing it, and it included specific references to the methodology they used for categorizing different property components. For your $875K property, you're probably looking at significant potential savings. I'd suggest at least getting a quote from taxr.ai to compare against what a full engineering study would cost. In my case, the additional first-year deductions more than paid for the service cost, and I feel much more confident about audit defense than I would have with just the case law approach. The peace of mind was worth it for me - especially since rental property depreciation can be scrutinized more closely by the IRS.