How do I depreciate renovation costs for my investment property? Worth doing it?

Thanks for the explanation! But how do you know what depreciation schedule to use for different things? Like does a new refrigerator depreciate differently than new flooring? And do you have to itemize every little thing or can you just lump all the renovation costs together?

Different components of your renovation may qualify for different depreciation periods. Appliances and carpeting typically qualify for 5-year depreciation, while built-in fixtures generally follow the 27.5-year schedule for residential rental property. For practical purposes, many landlords group similar items together rather than depreciating every single expense separately. You can create reasonable categories for your renovations - perhaps "kitchen appliances" as one category and "bathroom fixtures" as another. Just be consistent and keep good records of what's included in each category.

How accurate is it really? I've got a stack of receipts from my rental reno and the thought of categorizing everything makes me want to cry. Does it actually understand the difference between repairs and improvements?

I'm skeptical about these AI tax tools. How does it determine what's a capital improvement vs a repair? That seems like a judgment call that needs human expertise. And what about state-specific rules?

It's surprisingly accurate - it uses some kind of pattern recognition to identify common renovation expenses and categorizes them based on IRS guidelines. It correctly identified my flooring as a capital improvement but tagged my water heater repair as an immediate expense. The tool specifically asks clarifying questions when something could be interpreted either way. For example, when I uploaded receipts for painting, it asked if this was part of a larger renovation or just routine maintenance, which helped determine proper categorization. It handles both federal and state-specific rules.

Wait, you pay someone to call the IRS for you? How does that even work? Couldn't you just keep calling yourself until you get through?

This sounds like a scam. How would some random service get you through to the IRS faster than anyone else? The IRS phone system is designed to treat everyone equally - there's no "fast pass" option.

They don't call the IRS for you - they hold your place in line. You register your number, and their system waits on hold with the IRS. When an agent picks up, you get a call connecting you directly to that agent. No more wasting hours listening to hold music. It's definitely not a scam - they're just using technology to solve the hold time problem. I was skeptical too, but when you've spent 6+ hours over multiple days trying to reach someone about a notice that's threatening penalties, the service fee becomes totally worth it.

If you do a 1031 exchange when you sell, can you avoid the depreciation recapture? Or does that get carried over to the new property somehow? I'm thinking about selling my current rental to upgrade to a larger one.

With a 1031 exchange you can defer the depreciation recapture tax, but you're not avoiding it permanently. The adjusted basis of your new property will reflect this deferral. Basically, the depreciation recapture gets built into the new property's basis. If you eventually sell your replacement property without doing another 1031, you'll face the recapture tax at that point. That said, a 1031 is still usually a great strategy for upgrading to larger properties since you can keep deferring until much later.

Cost segregation is definitely legit but usually only worth it for larger properties. I did it for my 8-unit building after a $175k renovation and it freed up like $30k in deductions the first year. For a fourplex it might be worth it depending on how extensive your renovations were.

Thanks for sharing your experience! My renovation was around $65k total, so not as large as yours. Do you think there's a dollar threshold where it makes sense? I'm trying to figure out if the $3000 study cost would be offset by the tax savings.

For a $65k renovation, cost segregation could still make sense depending on what you renovated. Generally, you want the study cost to be less than 10-15% of the potential first-year tax savings. If you can accelerate depreciation on 40-50% of your renovation costs from 27.5 years down to 5-15 years, you might save $8-12k in taxes the first year (depending on your tax bracket). That would easily justify the $3k study cost. I'd ask your accountant for a rough estimate of potential savings before committing to the full study.