As the tax year draws to a close, real estate investors often scramble to reconstruct their property-related spending from bank statements and receipts. According to CostSegRx, an engineering-based cost segregation firm, that last-minute effort frequently results in lost details that can significantly affect depreciation deductions. "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 system but a clear record of what work was done, when it was completed, and what it cost.
The distinction between capital improvements and repairs is critical. Many investors lump all property costs together and attempt to expense them immediately, but tax rules treat these categories differently. When a CPA or cost segregation professional reviews spending, they typically apply the BAR test—asking whether each cost is a betterment, an adaptation, or a restoration. Costs that meet one of those definitions generally must be capitalized and depreciated over 27.5 years for residential rental property, 39 years for commercial property, or shorter lives of 15, 7, or 5 years depending on the asset. Costs that fail the test usually fall into repairs and maintenance, which can be deducted in the year incurred. Without proper records, there is no reliable way to determine the correct bucket for each expense.
In CostSegRx's experience, the most common documentation gaps involve individual receipts and clear descriptions of work performed. Owners tend to fall into two groups: those who keep every receipt in a cloud folder and track improvements with dates in a spreadsheet, and those who know roughly how much they spent but cannot break down the costs among new flooring, windows, lighting, or a bathroom remodel. The second group is often not at fault. Many contractors bill in lump sums without itemizing each component. For owners in that position, CostSegRx uses construction cost estimating to rebuild contractor costs from the owner's description and images of the property, allowing each improvement to be properly classified.
For the remainder of this year and beyond, the firm recommends simple habits: save the receipt or invoice for each project, write a short note on what was done, record the completion date, and take photos of the finished improvement. Timing becomes especially important when a property is acquired and renovated in the same year. Owners must document when improvements were placed into service relative to the property itself. If renovations were completed before the property went into service, the original cost segregation study may need adjustment. For example, replacing all carpet before the building was placed in service would require removing the old carpet's value from the purchase price allocation and adding the new carpet. If the property went into service first and a major remodel followed months later, the 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, a pattern CostSegRx often sees with hotels.
Disorganization is common among landlords, but it is rarely too late to get organized. 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—where the owner lacked original construction data, yet the team still produced a quality study. As long as an owner can document that improvements were made, a study can usually still be performed. 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 renovations will be classified. For more information, visit costsegrx.com.
