Cost Segregation Study for Rental Property Put Into Service in 2020 - Bonus Depreciation Questions

I'm debating whether to get a cost segregation study done on my rental property that I started using as a long-term rental back in 2020. I really want to take advantage of the bonus depreciation, but I'm getting conflicting advice. My accountant is warning me that doing a cost seg study "after the fact" might increase my chances of getting audited by the IRS. Does anyone have experience with this? Is there actually a higher audit risk when you do a cost segregation study years after putting the property into service? Also, my situation is a bit more complicated because my wife qualifies as a Real Estate Professional this year (2024), but we didn't claim that status back in 2020 when we started renting the property. Would that create any issues with the cost seg study or change how we should approach this?

0 coins

18 comments

Alana Willis

•8M

A cost segregation study for a property placed in service in 2020 is absolutely still viable, even in 2024. The IRS allows you to claim "catch-up" depreciation by filing Form 3115 (Change in Accounting Method) rather than amending prior returns. This is a normal, accepted practice. Regarding audit risk - there's no statistical evidence showing cost segregation studies by themselves trigger audits. The IRS is familiar with cost segregation, and it's a legitimate tax strategy when done properly. What DOES increase audit risk is having a poorly-performed study with unreasonable allocations or one that doesn't follow proper engineering methodologies. With your wife now qualifying as a Real Estate Professional, you actually have even more reason to do the study since the passive activity loss limitations won't apply to your rental activities, allowing you to potentially take full advantage of the depreciation against your other income sources.

0 coins

Alana Willis

•8M

You won't need to amend prior returns - that's the beauty of Form 3115. You file it with your 2024 return, and you'll take all the "catch-up" depreciation as a single deduction on your 2024 return. This represents all the additional depreciation you would have been entitled to in 2020-2023 if you had done the cost seg from the beginning. For 2024 and future years, you'll just use the new depreciation schedule going forward. The bonus depreciation for qualified property placed in service in 2020 was 100%, so potentially a significant portion of your property could be fully depreciated immediately (5, 7, and 15-year property components). But remember bonus depreciation is phasing down - it's 80% for 2023, 60% for 2024, etc.

0 coins

Sara Unger

•8M

I recently went through something similar with my duplex that I bought in 2019. I was nervous about the audit risk too, but I found this tool called taxr.ai (https://taxr.ai) that really helped me understand how to properly document everything for the cost segregation. The site analyzed my property details and showed me exactly what documentation I needed to support each component classification. I was worried I didn't have enough records since I'd owned the property for a few years, but their system walked me through what kinds of evidence would support my claims - from original purchase documents to photos and even comparable properties.

0 coins

Sara Unger

•8M

It doesn't actually do the cost seg study itself - it's more like a guided system that helps you understand what you need for proper documentation and classification. It shows you examples of what proper support looks like based on tax court cases. For the photos, you don't necessarily need new ones - I was able to use photos from when I purchased the property, plus some recent ones my property manager had taken. The system actually helped me identify which components needed better documentation.

0 coins

Butch Sledgehammer

•8M

Following up on my question about taxr.ai - I decided to try it out and I'm actually surprised how helpful it was. The site didn't just explain documentation, it also has this feature that helps identify which property components qualify for accelerated depreciation. It flagged several items I wouldn't have thought to include like specialized electrical systems, certain flooring types, and even some landscaping elements. I showed the report to my accountant and he was impressed with how thorough it was. He's now much more comfortable doing the cost seg because we have better documentation to support our classifications. Big relief since I was worried about the audit risk too!

0 coins

Leslie Parker

•8M

If you're worried about getting your cost seg questions answered directly by the IRS, I was in the same boat a few months ago. Calling the IRS was impossible - kept getting disconnected or waiting for hours. Then I found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had specific questions about how to handle the Form 3115 for a cost seg on a property I bought in 2018, and I needed clarification straight from the IRS. The agent walked me through exactly what they look for with these filings and gave me peace of mind about doing it correctly.

0 coins

Leslie Parker

•8M

It uses some kind of automated callback system that continually calls the IRS until it gets through, then connects you when an agent is on the line. It's completely legitimate - the service just handles the frustrating waiting part for you. You're right that not every IRS agent is an expert on everything, but I specifically asked for someone in the business division who handles depreciation issues. The first agent transferred me to a specialist who absolutely knew what she was talking about regarding Form 3115 and cost segregation documentation requirements.

0 coins

Freya Ross

•8M

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I had some questions about passive activity losses related to my cost segregation study. Not only did I get through to the IRS in about 20 minutes (compared to my previous 2+ hour waits), but I was able to get transferred to someone in the right department who actually understood cost segregation. The agent confirmed exactly what I needed to document for my situation and clarified how the Real Estate Professional status affects taking the losses from accelerated depreciation. Saved me hours of frustration and gave me definitive answers directly from the source. Consider me converted.

0 coins

Savanna Franklin

•8M

My CPA did a cost seg on my 4-plex from 2019 last year. The study shifted about $127,000 from 27.5 year property to 5/7/15 year property. With bonus depreciation we got a huge write-off. No audit issues at all. Make sure your study is done by an engineering firm that specializes in cost segregation - we used one that had actual engineers create the report and they were super detailed with their component breakdown. The real value came from having my wife qualify as a real estate professional - we were able to offset a ton of W2 income with the accelerated depreciation. Definitely worth the cost of the study.

0 coins

Savanna Franklin

•8M

They actually needed less than I expected. They used the purchase documents, property tax records, and some photos I already had. They also did a virtual walkthrough where I showed them around the property using my phone. For components they couldn't see (like wiring, plumbing systems), they based estimates on industry standards for the building type and age. What really mattered was having a qualified firm that understood both the engineering aspects AND the tax rules. They documented their methodology carefully which is what protects you in case of an audit. The IRS doesn't usually challenge properly performed studies, even after-the-fact ones.

0 coins