As the tax year closes, real estate investors often find themselves piecing together property expenses from inboxes and bank statements. That last-minute scramble is exactly where owners lose the details that shape their depreciation, according to CostSegRx, an engineering-based cost segregation firm. Brian Kiczula of CostSegRx emphasizes that property owners should document all capital improvements and expenses throughout the year, not just at year-end. The goal is not a perfect filing cabinet but a clear record of what work was done, when, and at what cost.
The stakes are high because capital improvements and repairs are treated differently for tax purposes. Many investors lump every property cost into one category and try to expense it all, but that is not how the tax code works. When a CPA or cost segregation professional reviews spending, they typically apply the BAR test—asking whether each cost is a betterment, an adaptation, or a restoration. Costs that meet one of those definitions generally must be capitalized and depreciated over 27.5 years for residential rental property, 39 years for commercial property, or shorter lives of 15, 7, or 5 years. Costs that do not meet the test usually fall into repairs and maintenance, which can be deducted in the year incurred. Without proper records, there is no reliable way to tell which bucket a cost belongs in, potentially leading to missed deductions or improper filings.
In CostSegRx’s experience, the gap almost always comes down to individual receipts and a clear description of the work performed. Owners tend to fall into two groups: one keeps every receipt in a cloud folder and tracks each improvement with dates in a spreadsheet; the other knows roughly how much they spent but cannot say how that money was divided among new flooring, windows, lighting, or a bathroom remodel. The second group is often not at fault. Many contractors bill in lump sums without breaking out what each part of the project cost. For owners in that position, CostSegRx uses construction cost estimating, working from the owner’s description and images of the property to rebuild the contractor’s costs so each improvement can be classified.
For the rest of this year and going forward, the most useful habits are simple: save the receipt or invoice for each project, write a short note on what was actually done, record the date the work was completed, and take photos of the finished improvement. Timing also matters when an owner buys and renovates in the same year. If renovations were finished before the property went into service, the original cost segregation study may need to be adjusted—for example, if carpet was replaced before the building was placed in service, the old carpet had no value and would be removed from the purchase price allocation. If the property went into service first and a major remodel followed, the tax preparer would typically receive two separate fixed asset schedules, one for the acquisition and one for the remodel.
Disorganization is common among landlords, but it is rarely too late to get organized. CostSegRx recently completed a study on a multi-year renovation of three buildings—a restaurant, a boutique bed and breakfast, and a group of shops—where the owner lacked original construction data, yet the team still produced a quality study. As long as an owner can document that improvements were made, a study can usually still be done. The practical takeaway is to stop treating documentation as a year-end task: keep records as work happens, share them with your CPA, and ask early how renovations will be classified. Investors can learn more at costsegrx.com.
