The Internal Revenue Service published a new edition of its Cost Segregation Audit Techniques Guide on February 6, 2025, marking a significant shift in how residential real estate depreciation claims will be examined. The update has expanded the guide's use of the Amerisouth case, a 2012 tax court ruling that favored the IRS after the taxpayer stopped responding during litigation. This change means IRS examiners are now citing Amerisouth more frequently to challenge reclassifications of items like sinks, kitchen cabinetry, and similar components in residential cost segregation studies. These items have historically been treated as short-life personal property eligible for accelerated depreciation, but the updated guidance suggests tighter scrutiny.
Brian Kiczula, founder of CostSegRx and a member of the American Society of Cost Segregation Professionals, has been observing the practical implications of these changes. He notes that every property requires individual analysis, stating that certain items can still be reclassified if specific facts and circumstances support it, but this determination must be made at the individual property level rather than through blanket estimates. This distinction carries greater weight now than it did two years ago, particularly with 100% bonus depreciation becoming permanent under the One Big Beautiful Bill for property acquired and placed in service after January 19, 2025.
The permanence of bonus depreciation has driven increased investor interest in cost segregation strategies, but the same conditions that make these approaches valuable also raise the stakes for incorrect implementation. Not all service providers are working from the same rulebook, creating potential compliance risks. Engineering-based studies that review specific properties, individual assets, and their conditions represent the defensible standard described in the ATG itself. In contrast, modeling approaches that estimate depreciation by property type and do-it-yourself online tools that generate instant reports without professional review fall short of this standard.
Kiczula advises investors to be cautious about instant online reports without accessible professional support. For investors who acquired property in 2022, 2023, or 2024, look-back studies remain available to potentially capture missed depreciation opportunities. Those undertaking renovations or capital improvements may qualify for separate capital expenditure studies, a category Kiczula identifies as frequently overlooked. The process at CostSegRx begins with a complimentary benefit estimate reviewed individually for each property, delivered with a video walkthrough and the consistent recommendation to consult with a CPA before proceeding.
It's important to recognize that the ATG itself is not law but rather a roadmap for how IRS examiners evaluate studies. Investors who understand this distinction and work with providers who recognize it are better positioned regardless of where the IRS directs its attention next. The updated guidance creates both challenges and opportunities, requiring more careful analysis of residential property components while offering potential tax benefits through proper implementation. As the industry continues to adapt to these changes, the emphasis on property-specific analysis and professional engineering-based studies becomes increasingly critical for compliance and optimal financial outcomes.
