By: KeyCrew Media

Brian Kiczula mentions that the IRS quietly updated its audit technique guides in early 2025, incorporating a 2012 residential property case that restricts how certain assets can be reclassified for accelerated depreciation, but most cost segregation providers are still using pre-2025 methodologies that could invite examinations.

The Amerisouth case, litigated over a decade ago, is now officially part of the IRS playbook for evaluating residential cost segregation studies. The update limits which residential assets can be reclassified as short-life property, lowering potential depreciation yields but also establishing clearer guidelines for what the IRS will accept.

“Not all cost segregation providers know the audit technique guides have been updated,” says Brian Kiczula, founder of CostSegRx. “There are still firms taking aggressive positions on residential studies that the IRS explicitly addressed.”

The Portfolio Blind Spot Costing Investors Millions

Beyond regulatory changes, a fundamental misconception prevents smaller investors from pursuing cost segregation: the belief that individual properties must justify the cost of the analysis.

Kiczula describes encountering an investor acquiring Louisiana rental homes for under $100,000 each. Multiple firms told him properties were “too small” for studies, after backing out land allocation, the $70,000 basis didn’t warrant it.

The catch? He was buying 50 to 100 homes annually. His actual basis wasn’t $70,000; it was several million dollars.

“It required an extra conversation to uncover the real opportunity,” Kiczula explains. “Once we understood his annual acquisition volume, the numbers completely changed”.

This portfolio approach applies across property types: investors accumulating storage facilities, medical plazas, hotels, or multiple residential rentals throughout the year.

How Cost Segregation Works

The strategy involves identifying assets within a property that can be reclassified with shorter depreciation schedules. Swimming pools, parking lots, and decorative lighting normally depreciated over 27.5 or 39 years can be accelerated to 5 or 15-year schedules.

With the One Big Beautiful Bill Act making 100% bonus depreciation permanent, investors can take up to 100% of reclassified assets as first-year deductions, creating immediate tax offsets.

What Triggers IRS Attention

Cost segregation studies themselves don’t trigger audits; outliers do:

Unrealistic land allocation: Zero land value or 10% allocation on beachfront property signals aggressive positioning. Land allocation must reflect actual market conditions for that specific location.

Disproportionate asset reclassification: Claiming 25%+ of a standard suburban home as short-life assets without swimming pools or significant site improvements invites scrutiny. However, resort properties with seawalls can legitimately show site improvements exceeding structural value.

Outdated residential methodologies: Post-Amerisouth, certain residential asset classifications the IRS previously questioned are now explicitly restricted in audit guides.

Design-Phase Opportunities

For design-build investors, incorporating cost segregation during planning, not after construction, maximizes classifiable assets:

• Lighting: One primary source per room allows decorative fixtures to qualify as short-life assets
• Flooring: LVP and carpet qualify as 5-year property; permanently-attached tile doesn’t
• Site improvements: Tennis courts, pickleball courts, and pools outside the building footprint qualify as 15-year assets

Choosing a Provider in 2026

Kiczula recommends avoiding automated online calculators that can’t assess replacement cost, physical condition, or functional obsolescence at acquisition.

“Have actual conversations with the professional conducting your study,” he advises. “Ask specifically about 2025 audit technique guide updates and how they’ve modified residential methodologies.”

Every property requires individual asset evaluation based on condition when acquired, not just theoretical classifications.

The Depreciation Recapture Factor

When selling investment property at a gain, you must recapture depreciation taken. Accelerating significant depreciation through cost segregation, then selling in year two, means paying back those deductions.

The solution is strategic disposition planning: 1031 exchanges, acquiring replacement properties, or timing sales to optimize tax impact.

Why This Matters Now

Permanent bonus depreciation removes artificial urgency, but new IRS guidelines demand updated compliance approaches. For investors accumulating multiple properties annually, cost segregation offers substantial benefits if implemented with current methodologies and realistic asset classifications.

Brian Kiczula founded CostSegRx, a Sarasota-based cost segregation firm working with residential and commercial real estate investors. Visit costsegrx.com or contact the team to discuss your specific investment portfolio.

Disclaimer: The content presented in this article is for informational purposes only and does not constitute legal, tax, or financial advice. Real estate investors are encouraged to consult with qualified professionals regarding their specific circumstances and to stay up-to-date with the latest IRS guidelines and audit techniques. The strategies and recommendations discussed here may not apply universally to all investors or properties, and tax laws are subject to change. The information provided is based on current regulations as of the publication date and may not reflect future updates or revisions to IRS rules.