Which Property Records Matter Most Before the Tax Year Closes?

As the tax year winds down, many real estate investors start digging through inboxes and bank statements to piece together what they spent on their properties. According to CostSegRx, an engineering-based cost segregation firm, that last-minute scramble is where owners tend to lose the details that shape their depreciation.

“Property owners should really document all of their capital improvements and expenses throughout the year,” said Brian Kiczula of CostSegRx. “It’s not just at the year-end.” The goal is not a perfect filing cabinet. It is a clear record of what work was done, when it was done, and what it cost.

Many investors put every property cost into one category and try to expense all of it. That is not how those costs are treated for tax purposes. When a CPA or cost segregation professional reviews an owner’s spending, they typically apply what is known as the BAR test, which asks whether each cost is a betterment, an adaptation, or a restoration.

Costs that meet one of those definitions generally have to be capitalized. Depending on the asset, they may be depreciated over 27.5 years for residential rental property, 39 years for commercial property, or over shorter lives of 15, 7, or 5 years. Costs that do not meet the test usually fall into repairs and maintenance, which can be deducted in the year they are incurred.

That distinction is the reason records matter. Without them, there is no reliable way to tell which bucket a cost belongs in.

In CostSegRx’s experience, the gap almost always comes down to individual receipts and a clear description of the work performed. Owners tend to fall into two groups. One keeps every receipt in a Google Drive or Dropbox folder and tracks each improvement, with dates, in a spreadsheet. The other knows roughly how much they spent over the year but cannot say how that money was divided among new flooring, windows, lighting, or a bathroom remodel.

The second group is often not at fault. Many contractors bill in lump sums, monthly or per job, without breaking out what each part of the project cost. For owners in that position, CostSegRx uses construction cost estimating. Working from the owner’s description of the work and images of the property, the team rebuilds the contractor’s costs so each improvement can be classified.

For the rest of this year and going forward, the most useful habits are simple: save the receipt or invoice for each project, write a short note on what was actually done, record the date the work was completed, and take photos of the finished improvement.

Owners who acquired a property this year need the same documentation, plus one more detail: when the improvements were placed into service compared with the property itself.

If renovations were finished before the property went into service, the original cost segregation study may need to be adjusted. For example, if an owner replaced all the carpet before the building was placed into service, the old carpet had no value. It would be removed from the purchase price allocation, and the new carpet would be added in its place.

If the property went into service first and a major remodel followed a few months later, the owner’s tax preparer would typically receive two separate fixed asset schedules, one for the acquisition and one for the remodel. The same approach applies when a property is bought one year and renovated the next. CostSegRx sees this pattern often with hotels, where an owner acquires the property and then begins updating rooms the following year.

Disorganization is common among landlords, and it is understandable. Owners are running the business of their properties, and most do not have a team behind them tracking every expense. According to CostSegRx, being disorganized is usually the rule rather than the exception.

That does not mean the opportunity is lost. CostSegRx recently completed a study on a multi-year renovation of three buildings: a restaurant, a boutique bed and breakfast, and a group of shops. The owner did not have the original construction data, and the team was still able to produce a quality study. As long as an owner can document that the improvements were made, a study can usually still be done.

The practical takeaway is to stop treating documentation as a year-end task. Keep records as work happens, share them with your CPA, and ask early how any renovations will be classified.

About CostSegRx: CostSegRx is an engineering-based cost segregation firm led by Brian Kiczula, a member of the American Society of Cost Segregation Professionals. The firm works with residential and commercial real estate investors nationwide. CostSegRx provides complimentary estimates of benefit and supports investors and their CPAs through the full reporting process. Learn more at costsegrx.com or call (888) 850-4155.

This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.

Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.

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