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Is DIY Cost Segregation Legal?

While cost segregation has been legal for over 20 years, property owners and income tax preparers have been slow adopters. Perhaps tax preparers are cautious by nature. It is clear tax preparers are crazy-busy (80+ hour week) during their peak season. It is not the time for them to have a thoughtful, exploratory conversation with a client. (We understand. We do over 200,000 property tax appeals, mostly in 4 months. Busy fails to describe the challenge.)

3 Basic Requirements of Cost Segregation Report

  1. Credible methodology;
  2. Credible results (and certainly not results which sharply exceed the appropriate level)
  3. Recognized documentation.

The IRS position is clearly stated in the Audit Techniques Guide for Cost Segregation:

The following is a direct quote from the IRS Audit Techniques Guide for cost segregation. It is clear that the IRS states, “to calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset…”

The relevant issue is, are you able to assign the proper recovery period for each of 40 to 100+ components, and then value them? Those are the two steps in cost segregation:

  1. identifying and measuring the quantity and quality of various types of recovery periods (“depreciation lives” in English) and
  2. valuing the components.

The balance is simply reporting.

We believe our limited service report (no site visit) is the ideal option when seeking a leaner fee.

  1. It is a credible method and generates credible and reliable results with relevant documentation.
  2. The cost is about 50 – 70% lower.

For a fairly minimal fee relative to typical savings, you obtain the valuation you need to sharply reduce your income taxes, possibly to $0, with a large net operating loss carryforward.

We believe an “online calculator”, that does not include appropriate research and perhaps only 40 fields of data, does not generate a credible result. On average, their results may be close to correct. But without getting details of land improvements and relevant interior improvements, some will be far too low and some will be far too high. The result is not credible and there is not appropriate support.

For additional information, call our experts at xxx xxx xxxx, or e-mail our National Director for Tax Reduction, Roger Hibbs at