A common oversight in value-add apartment renovations is costing investors thousands of dollars in lost depreciation deductions. While many investors are aware of cost segregation studies for their original property purchases, they often neglect to track renovation costs with the detail required to capture full tax benefits, according to cost segregation specialist Brian Kiczula, founder of CostSegRx.
When an investor renovates a unit—removing flooring, cabinetry, or fixtures—those removed assets have remaining undepreciated value on the fixed asset schedule if a cost segregation study was performed on the original property. A partial disposition allows the investor to write off that remaining value in the year the asset is removed. This deduction works on both sides of the renovation: accelerated depreciation on new installed assets and disposition write-offs on old removed assets. However, capturing both requires knowing exactly what was removed and what was installed.
The typical scenario involves a general contractor submitting monthly invoices with lump sums—$10,000 for work completed—without itemizing individual components. That lump sum then gets recorded as a single capital improvement line item, burying short-life assets like removable flooring, appliances, and decorative lighting that qualify for five-year accelerated depreciation. Instead, these assets depreciate over 27.5 years, extending the deduction period five times longer than necessary.
Kiczula notes that most invoices he receives are handwritten notes with a single total, forcing his team to reconstruct what was done after the fact. The fix is procedural and inexpensive: at the start of a renovation project, property owners should set up a shared spreadsheet and require monthly itemization of what was removed from each unit, what was installed, and the cost of each line item. Kiczula recommends establishing this standard operating procedure at the beginning of the job, especially when working with the same contractors across multiple units. "If you let it slip, you're never going to get it back," he warns.
For investors who have already completed renovations without detailed documentation, the situation is recoverable but more labor-intensive and expensive. Cost segregation firms can reconstruct construction cost estimates using industry data, but some short-life assets may go unaccounted for, preventing investors from capturing full value.
The broader implication for value-add investors is that apartment renovation is not just a capital improvement play—when structured correctly with a cost segregation study and proper documentation, it is a depreciation strategy generating deductions on both installed and removed assets. The investors capturing the full benefit are not deploying more sophisticated tax strategies; they are simply keeping better records.
