The Internal Revenue Service published a new edition of its Cost Segregation Audit Techniques Guide on February 6, 2025, creating significant implications for residential real estate investors who utilize depreciation strategies. The update has expanded the guide's use of the Amerisouth case, a 2012 tax court ruling, which IRS examiners are now citing 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 IRS's renewed focus on the Amerisouth precedent represents a shift in enforcement posture. Brian Kiczula, founder of CostSegRx and a member of the American Society of Cost Segregation Professionals, has been observing the practical effects of this change. "Every property is different," Kiczula says. "Certain items can still be reclassified if the facts and circumstances support it. But that determination has to be made at the individual property level, not with a blanket estimate."
The timing of this IRS guidance update carries particular weight for the investment community. With 100% bonus depreciation made permanent under the One Big Beautiful Bill for property acquired and placed in service after January 19, 2025, investor interest in cost segregation strategies has surged significantly. This combination of permanent tax incentives and increased IRS scrutiny creates a landscape where the financial benefits of proper cost segregation are substantial, but the risks of improper implementation have correspondingly increased.
Industry professionals note that not all cost segregation providers are working from the same operational standards. Engineering-based studies, which involve reviewing specific properties, individual assets, and their actual conditions, represent the defensible standard described in the Audit Techniques Guide itself. These contrast with modeling approaches that estimate depreciation by property type and do-it-yourself online tools that generate instant reports without professional review. "If you're generating an instant report online and can't get anyone on the phone, that's probably not a study I'd move forward with," Kiczula advises.
For investors who acquired properties in 2022, 2023, or 2024, look-back studies remain available as an option to capture missed depreciation opportunities. Additionally, investors undertaking renovations or capital improvements may qualify for separate capital expenditure studies, a category that Kiczula identifies as frequently overlooked in planning. The process at CostSegRx typically begins with a complimentary estimate of benefit, reviewed individually for each property and delivered with a video walkthrough, accompanied by a consistent recommendation to consult with a certified public accountant before proceeding.
It is important to recognize that the Audit Techniques Guide itself does not constitute tax law but rather serves as a roadmap for how IRS examiners evaluate cost segregation studies during audits. Investors who understand this distinction and work with providers who operate accordingly position themselves more favorably regardless of future IRS examination priorities. The evolving guidance underscores that in an environment of permanent bonus depreciation, methodological rigor in cost segregation has become both more valuable and more scrutinized.
