Cost segregation studies are expensive, but a DIY cost segregation study can be costly in more ways than one. Here's what you need to know about performing a cost segregation study yourself.
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For property owners, cost segregation can help save thousands of dollars through accelerated depreciation. The required cost segregation study to realize these savings can be expensive, so can you bypass this expense with DIY cost segregation?
In this post, we’re going to break down everything you need to know about DIY cost segregation studies.
While not impossible to do a cost segregation study yourself, we still recommend researching and hiring a company that specializes in cost segregation services. Start your search with our list of the best cost segregation companies.
Table of Contents
There are two ways to do a cost segregation study: hire a cost segregation company or do the study yourself.
There are no laws or requirements that prohibit you from conducting a cost segregation study yourself. However, the IRS Cost Segregation Audit Technique Guide states this as one of the 13 principle elements of a quality cost segregation study:
The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. Unfortunately, there are no prescribed qualifications for cost segregation preparers. However, a preparer’s credentials and level of expertise may have a bearing on the overall accuracy and quality of a study.
The IRS also states that while cost segregation examiners may be able to complete a study for smaller projects without assistance, larger and more complex projects “may require specialists with expertise, industry experience, and specialized training.”
In short, while there is no law preventing you from completing your cost segregation study, it’s best to make sure the study is completed by someone with experience — whether that is you or a cost segregation company.
Before deciding to go the DIY cost seg study route, try checking how much your business could save from a cost seg study using our cost segregation calculator:
When it comes to do-it-yourself cost segregation, the drawbacks unfortunately outweigh the benefits.
Here’s what you should consider before going the DIY route.
Pros
Cons
The main advantage of doing a cost segregation study yourself is that you don’t have to hire a cost segregation company. If you hire a cost seg company, expect to pay anywhere from $5,000 to $15,000 to have the study completed. Doing a study yourself helps you avoid these costs.
On the other hand, you risk making costly mistakes. An error on your tax return could result in an IRS audit, penalties, or missed deductions. And with larger first-year write-offs now possible through bonus depreciation, the stakes are higher than ever. Misclassifying assets or applying the wrong treatment can have a much bigger impact than it did in the past.
Cost segregation can also involve tax elections and timing decisions that are difficult to correct later. Some elections must be made on a timely filed return, which makes accuracy especially important if you’re attempting a DIY study.
Errors in cost segregation are easy to make. The IRS Cost Segregation Audit Techniques Guide alone runs hundreds of pages. Certain assets may require a deep dive into tax law and classification rules, and some situations involve detailed documentation requirements that go beyond basic depreciation calculations.
Additionally, cost segregation studies are extremely time-consuming. Professional firms often use teams that may include CPAs, engineers, and cost estimators, while a DIY study can take much longer if you have no prior experience.
To understand what’s involved in a cost segregation study, look no further than the IRS Cost Segregation Audit Technique Guide.
This guide provides important information about the principal elements of a cost segregation study and a cost segregation report, which we’ve summarized below.
As you can see, there are many complex steps and requirements needed to complete a quality cost segregation study. We recommend reviewing Chapter 4 of the IRS Cost Segregation Audit Technique Guide for full details on the necessary elements of a cost segregation study. You’ll also need to know exactly how to report cost segregation on your tax return to get the most out of your study and avoid making errors.
If you plan to do a cost segregation study yourself, consider using cost segregation software.
Note that cost segregation software does not do all of the work for you. At a minimum, you are still required to do a field study to assess building components manually. Cost segregation software instead offers tools, such as tax calculators, that help simplify the creation of cost segregation reports.
Some software tools can help streamline parts of the cost segregation process, but features and pricing change frequently. Before relying on any platform, verify current capabilities, pricing, and the level of engineering or tax support included.
Some popular cost segregation software options include the following.
Instead of doing a cost segregation study yourself, you can hire a company that specializes in cost segregation services.
For a flat fee based on the size and complexity of the property, a cost segregation company will complete a cost segregation study from start to finish. This includes gathering the correct documentation, conducting a site visit, assessing and categorizing building components, and completing a cost segregation study report.
These studies can be expensive, but fortunately, most reputable cost segregation companies offer a free feasibility analysis. This analysis will give an estimate of potential tax savings and a quote for the fee required to complete the study.
Know what to look for in a cost segregation company, request a free feasibility analysis from reputable companies, and weigh out the financial benefits to determine if this strategy is right for you.
A DIY cost segregation study is only worth it if you have the experience and know-how to do the study properly. Failing to complete your study accurately may result in overlooked tax benefits or costly mistakes on your tax return.
For most property owners, working with an experienced cost segregation provider is the safer approach — especially given the larger deductions and added complexity under current tax rules. These companies are typically better positioned to identify and document costs accurately, which can help you maximize available tax benefits and reduce audit risk.
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