Cost Segregation Decision Checklist

Use this checklist to work through the decision in order. Each item links to a page with more detail. Print it, fill it in, and hand a copy to your tax professional. Nothing here is advice; it is a framework for organizing your own facts.

Part 1: The property

1. Placed-in-service date. Write the date the property was ready and available for its intended use. See Year of Acquisition: Why Timing Matters for a Study.
2. Property type. Residential rental, short-term rental, commercial, mixed use. See Depreciation Classes: 5, 7, 15, 27.5, and 39 Years.
3. Purchase price or construction cost, and closing costs.
4. Land allocation. Write your best estimate of land value and its source. See Land Versus Building Allocation and Why It Comes First.
5. Improvements and renovations, with dates and invoices.
6. Site work and land improvements. Paving, fences, landscaping. See Land Improvements and the 15 Year Class.
7. Contents and equipment. Appliances, furnishings, fixtures. See Examples of 5 and 7 Year Property in Rentals and Commercial Buildings.

Part 2: The owner

1. Who owns it for tax purposes? Individual, partnership, LLC, other. See Entities and Who Gets the Deduction.
2. Participation category. Passive, active, materially participating, real estate professional. See Material Participation Tests in Plain Language and Real Estate Professional Status and Study Decisions.
3. Hours and records. Do you keep a log? A contemporaneous log is far easier to defend later.
4. Expected taxable income this year and next. Include other income sources.
5. Other limits. Passive, at-risk, excess business loss. See At-Risk and Excess Business Loss Limits.
6. Existing suspended losses. See Suspended Losses and Carryforwards.

Part 3: The economics

1. Building basis estimate.
2. Cautious estimate of the share that might shift. Use a low placeholder until a study is done.
3. Fee quote in writing. See Cost Segregation Study Fees: General Ranges.
4. Added preparation costs.
5. Tax rate at which deductions would be used.
6. Three cases prepared. See Cost Versus Benefit Without Guarantees.

Part 4: The exit

1. Expected hold period and what could shorten it. See Hold Period and the Decision.
2. Sale, exchange, or hold plan. See Section 1031 Exchanges and Depreciation Recapture.
3. Recapture estimate for a sale scenario. See Depreciation Recapture on Sale: What Comes Back.

Part 5: The law and the method

1. Bonus depreciation status for this property. Verify with current law. See Bonus Depreciation: Rules as Currently Understood (Verify).
2. State conformity. See State Conformity to Federal Bonus Depreciation.
3. Current-year filing or catch-up via Form 3115. See Catch-Up Depreciation With Form 3115.
4. Deadlines confirmed with preparer.

Part 6: The provider and support

1. Engineering involvement and site visit. See Engineering-Based Versus Software-Only Studies.
2. Sample report reviewed. See What a Cost Segregation Report Should Contain.
3. Audit support terms. See Audit Defense and Documentation for Cost Segregation.
4. Red flags reviewed. See Red Flags in Cost Segregation Study Proposals.

Scoring yourself

Count the items you could answer with evidence. If you answered fewer than about two thirds, the decision is probably not ready, which is a legitimate finding. If you answered most but the usability items (9 through 13) are unresolved, resolve those first, since they are decisive. If everything is answered, compare your three cases.

Recording the decision

Write one paragraph stating the decision, the date, your key assumptions, and what would cause you to revisit. Keep it with the return workpapers. For a labeled hypothetical of a full run-through, see Hypothetical: A Single Rental With Usable Deductions.

How to use the checklist in a meeting

Bring a printed copy and mark each item as known, estimated, or unknown. In a meeting with your preparer, go through the unknowns first. Ask who will find each answer and by when. Circulate the completed list afterward so everyone works from the same facts.

What a strong yes looks like

A strong yes usually has most of these features: a building basis that is large relative to the fee, deductions that are usable in the near term, a hold period that is long or an exit plan that defers recapture, records that make analysis straightforward, a provider with a documented method and a sample report, and a preparer who is comfortable with the position. When several of these are weak, the yes is fragile.

What a strong no looks like

A strong no usually has these features: a small basis, deductions that would be suspended for a long period, an expected near-term sale without an exchange, or a preference for simplicity. Documenting the no with a note and a revisit trigger is good practice.

What an undecided result means

If you end up undecided, identify the one or two unknowns that would tip the decision and resolve those. It is usually the usability question or the hold period. Resolve them, and the rest often falls into place.

Keeping the checklist alive

Update the checklist when the facts change: a new property, a new role, a change in the law, or the start of a renovation. Save each version with a date. Over time, the sequence of versions becomes a record of your reasoning that can be handy when advisors change.

A note on evidence

For each item, note where the answer comes from. A closing statement, a lease, a tax return, a log, or an email from your preparer is evidence. A memory is not. When an item has no evidence, mark it as an assumption. Assumptions are fine, but they should be visible.

Next step

If you would like help working through this list, AE Tax Advisors offers a discovery conversation. It is educational and not a commitment. Use the link at the bottom of this page.