CostSegRx: Year-Round Record-Keeping Key to Maximizing Depreciation

As the tax year winds down, real estate investors often scramble to reconstruct property expenses, but according to CostSegRx, an engineering-based cost segregation firm, that last-minute rush can lead to lost details that significantly affect depreciation. Brian Kiczula of CostSegRx emphasizes that property owners should document all capital improvements and expenses throughout the year, not just at year-end. The goal is a clear record of what work was done, when, and at what cost. Many investors mistakenly lump all property costs together and try to expense them, but tax treatment differs: costs must be classified under the BAR test (betterment, adaptation, or restoration), with capitalized costs depreciated over 27.5 years for residential rentals, 39 years for commercial properties, or shorter lives of 15, 7, or 5 years, while repairs and maintenance can be deducted immediately. Without proper records, distinguishing between these categories becomes unreliable.

CostSegRx finds that the most commonly missing records are individual receipts and clear descriptions of work performed. Owners typically fall into two groups: those who meticulously track every improvement with dates and receipts, and those who know the total spent but not how it was allocated among specific items like flooring, windows, or lighting. The latter often stems from contractors billing in lump sums without breaking out costs. For such cases, CostSegRx uses construction cost estimating, rebuilding contractor costs from owner descriptions and property images to classify each improvement. For the remainder of this year and beyond, the firm recommends simple habits: save receipts or invoices, note what was done, record completion dates, and photograph finished improvements.

Timing is especially critical for owners who bought and renovated a property in the same year. If renovations were completed before the property was placed in service, the original cost segregation study may need adjustment—for example, removing old carpet from the purchase price allocation and adding the new carpet. If the property was placed in service first and a major remodel followed, the tax preparer typically receives two separate fixed asset schedules, one for the acquisition and one for the remodel. This pattern is common with hotels, where rooms are updated the year after acquisition. Despite common disorganization among landlords, CostSegRx asserts it is rarely too late to get organized; the firm recently completed a quality study on a multi-year renovation of three buildings—a restaurant, a boutique bed and breakfast, and a group of shops—even without original construction data. As long as improvements can be documented, a study can usually still be performed. The key takeaway is to stop treating documentation as a year-end task and instead keep records as work happens, share them with your CPA, and ask early about classification.