BARATELLI CPA & ACCOUNTING, PLLC · THE BARATELLI INSTITUTE

Real estate cost segregation

A building is not one asset depreciated over thirty-nine years. It is carpet, cabinetry, specialty wiring, site paving and landscaping, each of which carries its own recovery period — and a cost segregation study is the engineering work that separates them and documents the separation.

Buy a building and the closing statement gives one number. The tax code does not treat that number as one asset, but a depreciation schedule written from the closing statement does — and the difference between those two readings is a deduction the owner is entitled to and has not taken. The study identifies the components, costs them from the construction evidence, assigns each to the recovery period it actually carries, and leaves behind the support for every line of it.

Engineering-based, per the method the IRS Cost Segregation Audit Techniques Guide describes. A fixed fee set by the building's depreciable basis and quoted in writing before anything is signed — never a share of the deduction. Issued as tax work by Baratelli CPA & Accounting, PLLC and signed by a US CPA.

How the fee works A building worked through The five rules this desk holds to Ask for the sample study

The mechanism

What a cost segregation study actually does

The default is the problem. A depreciation schedule written from a closing statement carries the whole purchase price, less land, as one asset over the building's recovery period — thirty-nine years for nonresidential real property, twenty-seven and a half for residential rental. The components inside that building do not all have those lives. Carpet, cabinetry, dedicated electrical for equipment, removable partitions, site paving, fencing and landscaping carry five-, seven- and fifteen-year periods of their own. A study identifies them, costs them, and moves them.

Method authority: the IRS Cost Segregation Audit Techniques Guide, which describes what an engineering-based study is expected to contain and is the standard this desk documents to. Read against the Guide as published; verify the current text for any specific engagement.

Two things follow from that, and only the first one is usually understood. The obvious one is timing: a deduction taken in year one rather than spread across four decades is worth more, because money has a cost and a deduction deferred is a deduction discounted. The second is eligibility. Shorter-lived components qualify for first-year bonus depreciation where the long-lived building does not, so the reclassification does not merely accelerate the deduction — it moves property into a category where the whole remaining basis can come forward at once.

How much moves depends on the building. Measured across the engagements this method is used on, a study typically reclassifies 20% to 35% of depreciable basis — an apartment building with finished units and extensive site work sits at the top of that band, a bare warehouse shell near the bottom. That range is published here as something to check an assumption against, not as a figure this desk supplies on an owner's behalf. A study produces the number for one specific property, and nothing short of a study does.

What this is not: a reinterpretation of the law, an aggressive position, or a filing strategy. It is a measurement of the property that should have been made when the schedule was first written. The components were always five-year property. The default schedule simply never asked.

A worked illustration, with its assumptions stated

A two million dollar building, carried through to the tax

Every figure below is an illustration of the arithmetic rather than a representation about any reader's return, and the two assumptions doing the work are named adjacent to the numbers rather than in a footnote.

Example: $2 million building	Amount
Reclassified to 5-, 7- and 15-year property (25%)	$500,000
First-year deduction with 100% bonus depreciation	$500,000
First-year tax savings at a 37% rate	$185,000

Both clocks, stated inline. The 100% first-year bonus depreciation rate applies to qualifying property acquired after January 19, 2025 — a statutory condition on the acquisition date, so a building bought before it runs on a different percentage and the arithmetic above does not describe it. The 37% is an assumed top marginal rate used to carry the deduction through to a tax figure; it is an assumption of this illustration and not a measurement of any owner's actual rate, which depends on filing status, other income, state tax and the passive activity rules. The 25% reclassification is the midpoint of the 20% to 35% band above and not a finding about any building.

The part of that table worth reading twice is the third line against the first. A reclassification is not a deduction; it is a deduction's eligibility. What converts $500,000 of reclassified basis into $185,000 of cash is a first-year rate the property qualifies for and a marginal rate the owner actually pays. An owner with no income to absorb the deduction, or a property subject to the passive loss limitations, gets the reclassification and waits for the benefit. That question is answered before an engagement rather than after it, which is what the benefit test under the guards below is for.

Three engagements, and they are not interchangeable

Which study you need depends on when the building was placed in service

Acquisition study

A building bought this year, before the first depreciation schedule is written. This is the cleanest case and the cheapest one to document, because the closing statement, the appraisal and the property condition report are all current and in one place — frequently already assembled, where the purchase was financed. The study is delivered in time for the return rather than as a correction to it.

When: The year the property is placed in service
Evidence: Closing statement, appraisal, condition report, plans where they exist
Fee: Fixed, set by the building's depreciable basis — see the table below

Look-back study

A building placed in service in an earlier year and depreciated as one asset ever since. The missed depreciation is not lost and the earlier returns do not have to be amended: the correction is made on the current return as a change in accounting method, which brings the whole cumulative shortfall forward into one year. The older the building, the larger that catch-up is — which makes this the engagement most often worth the most and least often asked about.

When: Any open year after the property was placed in service
Mechanism: A change in accounting method on the current return, not amended returns
Fee: The basis fee below, plus $1,500 for the method-change computation and the filing schedule

Construction or improvement study

A building constructed, expanded or substantially improved, where the actual construction cost records exist. This is the strongest evidentiary position available, because the components are costed from the contractor's own schedule of values rather than estimated from the finished property. It is also where the distinction between a repair, an improvement and a new asset gets decided, and that decision is worth making deliberately rather than inheriting from how an invoice happened to be coded.

When: The year the construction or improvement is placed in service
Evidence: Schedule of values, change orders, contractor invoices, as-built plans
Also decided: Repair against improvement against new asset, on the record

What gets separated

What moves out of the building, and what stays in it

A study is an inventory before it is a computation. The components below are the ones that most often carry a recovery period shorter than the building's; whether a particular item in a particular property does is a question about that property, and the answer is documented rather than asserted.

Typically five-year property

Carpet and other removable floor coverings. Cabinetry and millwork that is not structural. Decorative lighting and trim. Window treatments. Dedicated electrical and plumbing serving specific equipment rather than the building. Removable partitions. Signage. Appliances in residential rental units.

Typically fifteen-year land improvements

Paving, curbs and parking lot striping. Sidewalks and exterior stairs. Site lighting and its conduit. Fencing and gates. Landscaping and irrigation. Retaining walls. Site utilities outside the building footprint. Dumpster enclosures.

Stays with the building

Structure, foundation, roof, exterior walls and windows. The general electrical, plumbing, and heating and cooling systems that serve the building as a whole. Elevators. Fire suppression. These are the building, and a study that moved them would be a study a reader should not want.

Never depreciated

Land. A study's first job on a purchased property is to establish the land allocation defensibly, because every component percentage downstream is a share of what is left after it — and an aggressive land allocation is the fastest way to make a study worth less than it cost.

Evidence

How the property gets measured

An engineering-based study rests on an inspection of the property rather than on a questionnaire about it. How that inspection is performed scales with the building, and what it produces is a dimensioned record the component model is built from — which is also what makes the study defensible years later, when the person asking has only the document.

Method	When it applies	What it produces
Guided virtual inspection	Every study	A recorded call walking the property room by room and around the site, directed by the engineering team and kept as part of the file
3D scan	Larger or complex properties	A dimensioned walkthrough the component model is measured from rather than estimated against
Local field inspector	Buildings above $3 million	An on-site inspection, engaged locally and passed through at cost rather than marked up
Transaction file	Acquisitions	The appraisal, property condition report and environmental report already assembled for the purchase or the loan

The last row is the one that saves a buyer money. A financed acquisition has already paid for an appraisal and a condition report, and those documents describe the property in exactly the terms a component model needs. A study engaged while that file is still warm costs less to support than the same study engaged three years later from photographs.

The deliverable

Three documents, and the depreciation schedule is the one your preparer files from

The study report

The property described, the method named, the inspection recorded, the land allocation supported, and every reclassified component listed with its cost, its basis of costing and the recovery period assigned to it. Written to be read by someone who was not there — a reviewer, a successor preparer, or an examiner.

The depreciation schedule

The asset detail in the form a tax preparer enters, by class life and placed-in-service date, reconciled to the total depreciable basis so the schedule and the closing statement agree to the dollar. This is the working document; the report is what supports it.

The method-change computation

On a look-back study only: the cumulative depreciation adjustment, computed, and the filing schedule that carries it onto the current return. Prior returns are not amended, and the computation shows why they do not need to be.

Delivered to whoever files the return

Most owners have a tax preparer already, and this desk does not need to displace them to do this work. The package is built to hand over. Where the Institute also prepares the return, that is a separate engagement with its own letter.

The fee

A fixed fee, set by the building's basis and quoted before anything is signed

The fee is published because the work does not change with the owner's tax position. A $2 million building takes the same inspection, the same component model and the same documentation whether the deduction is worth $185,000 to one owner and nothing this year to another — so the fee follows the building, which is the thing that determines the work.

Depreciable building basis	Fixed fee	Notes
$500,000 to $1 million	$3,500	The minimum engagement, and the basis floor this desk works from
$1 million to $3 million	$6,500	Virtual inspection; a 3D scan where the property warrants one
$3 million to $7.5 million	$10,000	Includes a local field inspection, passed through at cost
Above $7.5 million	Quoted	Quoted in writing from the property and the document list, before anything is signed
Look-back addition	$1,500	Added to the basis fee for the method-change computation and the filing schedule

Fees stated as of October 11, 2026 and quoted in writing for each engagement; a figure on a page is orientation and the engagement letter is the quote. Basis means the depreciable building basis after the land allocation, not the purchase price.

No fee is contingent on the deduction. Not a share of it, not a percentage of the tax saved, not a success fee. The reason is in the guards below and it is not a marketing position.
Buildings below $500,000 of basis are declined rather than quoted. At that size the fee and the benefit converge, and an engagement that does not clear the benefit test is one the owner should not buy.
The quote comes before the engagement letter, from the document list. A fee that moves after the work starts is not a fixed fee.

How it works

Four steps, and the document list is the whole schedule

1 · Screen

Basis, placed-in-service year, property type and the owner's capacity to use a deduction this year. This is where an engagement gets declined, and declining it here costs the owner nothing. A study that produces a deduction nobody can absorb is an expense with a deferred and discounted benefit.

2 · Engage

The fee is quoted in writing from the document list, then the engagement letter is signed. It names the property, fixes the fee, states the scope and the method, and explains depreciation recapture — which is on the face of the letter rather than in a schedule to it.

3 · Inspect and model

Documents arrive through the Bankable Document Portal — a private upload link, no account required. The property is inspected by the method its size calls for, and the component cost model is built from the inspection and the construction evidence.

4 · Review and deliver

A US CPA reviews the component classifications, the land allocation and the schedule, and signs the study. The report, the depreciation schedule and — on a look-back — the method-change computation are delivered together, to the owner and to whoever prepares the return.

The document list — what a quote is built from

It is published here rather than sent after signing, because a building owner can tell from this list in about ten minutes whether a study is straightforward or difficult for their property — which is frequently the real question behind the first call.

The closing statement on a purchase, or the schedule of values and change orders on construction. This is where the total basis comes from and it is the one document a study cannot proceed without.
The appraisal, which is ordinarily where a defensible land allocation starts.
The property condition report, which describes systems, finishes and site work in the terms the component model uses.
Plans, as-builts or a rent roll with unit counts, whichever exists — a dimensioned record of what is actually there.
The environmental report where the transaction produced one; it frequently describes site work nothing else documents.
The current depreciation schedule and the last filed return, which is what a look-back's catch-up is computed against.
Any improvement history since the property was placed in service, including work that was expensed.

Owners keeping books in Baratelli Bankable send the whole set through the portal in one pass. Bankable is free and is not a condition of the engagement; any accounting system works, and the documents are what the study is built from either way.

The rules this desk holds to

Five rules, stated plainly and not buried in the letter

Fixed fees only. No study is sold for a share of the deduction or a percentage of the tax saved. A contingent fee on a tax position draws scrutiny toward the position itself, and it conflicts with the contingent-fee rules a CPA practices under. It also puts the preparer's interest on the wrong side of the component classifications, which is the part that matters: the person deciding whether an item is five-year property should have nothing riding on the answer.
Ten dollars of benefit for every dollar of fee, or the study is not worth doing. That test is run at the screen above, before an engagement letter exists, and it is the most common reason this desk declines work. It is a test about the owner's actual position — the deduction they can use this year — and not about the size of the reclassification.
A $3,500 minimum, and buildings of $500,000 of basis or more. Below that the arithmetic in the rule above stops working, and the honest answer is that the property is too small for an engineering-based study rather than that the fee can be cut.
Independence on a transaction. A cost segregation study is never sold to a buyer before the quality of earnings is delivered and the lender has decided. The Institute performs independent quality of earnings reports that lenders rely on for a credit decision, and a desk that sold a tax engagement to the buyer in the middle of that work would have something to gain from the transaction closing. The sequence is the safeguard, and it is not waivable at the client's request.
Recapture is explained in every engagement letter. In writing, before signing, and in terms rather than by citation — see the section below. An owner who learns about recapture at the closing of a sale learns it from the wrong document.

Scope — what this work is, and what it does later

Tax work signed by a CPA, and what recapture means when the building sells

A cost segregation study is tax work. It is performed by Baratelli CPA & Accounting, PLLC, reviewed and signed by a US CPA, and it produces a depreciation position taken on a filed return. That is a different kind of engagement from the Institute's quality of earnings work, which is performed by a separate firm for lenders and buyers, and the two are not interchangeable or jointly staffed on the same transaction.

Depreciation recapture, stated before the engagement rather than after the sale. Accelerated depreciation is not forgiven when the building is sold — it comes back. Depreciation taken on the reclassified personal property is recaptured as ordinary income on a sale, at ordinary rates rather than at the rates that apply to real property gain. The study therefore changes when deductions are taken and what character some of the later gain carries. For most owners the timing is worth more than the character costs, because a deduction now funds something and a tax later is discounted. For an owner who intends to sell soon, it may not be. That is a question to answer before signing, and this desk raises it rather than waiting to be asked.

A study is a measurement of a property, not a prediction about an examination. It is documented to the standard the IRS Cost Segregation Audit Techniques Guide describes, which is the right way to build one and is not a guarantee of any outcome. No one can promise how a return will be examined, and a provider who does should be read carefully.
The deduction depends on the owner, not only on the building. Passive activity limitations, basis limitations, at-risk rules, filing status, state treatment that may not follow the federal rules, and whether there is income to absorb the deduction all sit between a reclassification and a dollar of tax saved. The study produces the reclassification. The return produces the benefit.
The study does not prepare the return. It is built to be handed to whoever does. Where the Institute also prepares the return, that is a separate engagement under its own letter.
Land is not depreciable and the allocation is not a lever. The land allocation is supported from the appraisal and the property record. A study that reaches a larger deduction by shrinking the land is not a better study.
Nothing on this page is tax, legal or accounting advice. Orientation on a service is not the service. Advice arises under a signed engagement letter and nowhere else, and the figures in the worked illustration above are arithmetic rather than a representation about any reader's return.

Questions this desk is asked first

Four answers worth having before you call

The building was bought six years ago. Is it too late?

No, and this is the most common misunderstanding about cost segregation. The missed depreciation is not forfeited and the prior returns do not have to be amended. The correction is made on the current return as a change in accounting method, which brings six years of cumulative shortfall forward into one year. The catch-up on an older building is frequently larger than the first-year deduction on a new one, which is why the look-back engagement is worth asking about rather than assuming past.

A method change has its own filing requirements and its own timing. Whether a specific property and year qualify is a question for an engagement, not for a page.

Why not take a percentage of the tax saved? It would cost nothing up front.

Because the fee would then depend on how aggressively the components are classified, and the person making those classifications would have a stake in the answer. A contingent fee on a tax position also conflicts with the contingent-fee rules a CPA practices under, and it draws scrutiny toward the position it was meant to make painless. The fixed fee is quoted before anything is signed and does not move with the result — which is the same discipline the Institute's quality of earnings work runs on, and for the same reason.

Does this work on a residential rental, or only on commercial property?

Both. Residential rental property carries a twenty-seven and a half year building life rather than thirty-nine, and the components inside it — appliances, carpet, cabinetry, unit finishes — are frequently a larger share of the basis than in a commercial shell, along with extensive site work on a multi-unit property. What governs is the depreciable basis rather than the property type: $500,000 or more, and a deduction the owner can use.

The building is part of a business acquisition. Does the lender care?

Not about the study. A cost segregation study is a tax engagement for the buyer and sits outside the credit file. The sequence does matter, though: where the Institute is performing the lender's quality of earnings on the same transaction, no study is sold to the buyer until that report is delivered and the lender has decided. That is the independence rule above and it is not negotiable, because the value of an independent earnings report is exactly that nobody performing it has anything riding on the close.

Engage

Ask for the sample study

A sample cost segregation study and its depreciation schedule are available on request. Reading an actual deliverable is a better basis for a decision than reading a page about one — and for this work the schedule is the part to read, because that is what a preparer will be handed.

Bring the basis, the placed-in-service year and the property type, and the screen above can be run on a first call at no cost. An engagement that will not clear the benefit test is better declined in ten minutes than quoted in writing.

Baratelli CPA & Accounting, PLLC
Philip A. Baratelli, CPA
philbaratelli@gmail.com
904-846-3011
baratelliinstitute.com

Email this desk Quality of earnings The full engagement catalogue What the Institute does

This page describes professional services and is orientation only — it is not legal, tax, accounting, or investment advice, not an engagement, and not a recommendation to buy or sell any security. Engagements arise under a signed engagement letter, which governs scope. A cost segregation study is tax work performed by Baratelli CPA & Accounting, PLLC and signed by a US CPA; it is not an audit, review, compilation or attestation engagement, and no opinion is expressed on any financial statements. Accelerated depreciation is subject to recapture on a later sale. The worked illustration assumes a 37% top marginal rate and 100% first-year bonus depreciation on qualifying property acquired after January 19, 2025; both are assumptions of the illustration and neither is a representation about any reader's return. Method references are read against the IRS Cost Segregation Audit Techniques Guide as published; verify the current text for any specific engagement. Fees stated as of October 11, 2026. © 2026 The Baratelli Institute.