Sample study — Detailed engineering cost estimate
1428 Maplewood Avenue (Sample Property)
residential rental · 2,350 sqft · $685,000 total · land $137,000 · placed in service 2026-03-15
Year-1 (bonus)
$138,187
Year-1 (no bonus)
$30,466
Reclassified
$126,040
Risk grade
45%
ELEVATED — honest, even on our sample
Executive Summary
This cost segregation study was prepared in connection with the acquisition of a residential rental property located at 1428 Maplewood Avenue (Sample Property), placed in service on March 15, 2026. The total project cost is $685,000, of which $137,000 has been allocated to non-depreciable land, yielding a depreciable basis of $548,000. The study was conducted using the detailed engineering cost estimate methodology, one of the six approaches recognized in IRS Publication 5653 (Cost Segregation Audit Techniques Guide), hereinafter 'Pub 5653.' As described in Pub 5653, Chapter 5, 'the methodology or approach utilized in allocating total project costs to various assets is critical to achieving an accurate cost segregation study.' The detailed engineering cost estimate approach satisfies the IRS's expectation that a cost segregation study constitute an engineering-based analysis supported by documented component identification, classification rationale, and reconciliation to total cost. The analysis identifies $126,040 in short-life depreciable assets allocable to the 5-year, 7-year, and 15-year Modified Accelerated Cost Recovery System (MACRS) recovery classes under section 168 of the Internal Revenue Code, with the remaining $421,960 allocated to the 27.5-year residential rental building class. The land allocation of $137,000 is excluded from depreciable basis in its entirety, consistent with the principle that land is never a depreciable asset. Estimated first-year depreciation deductions, inclusive of the section 168(k) additional first-year depreciation allowance (bonus depreciation) where applicable, total $138,187. Without bonus depreciation, estimated first-year deductions total $30,466. These figures reflect the allocation percentages and component-level classifications set forth in this report and are subject to adjustment upon completion of required preparer actions identified herein. Two ATG checklist items remain open and require action by the reviewing preparer before this study may be relied upon for filing: (1) attestation by a qualified individual with demonstrated expertise and experience in cost segregation, and (2) support for land value, consistency with any section 1060 purchase-price allocation, and reconciliation of prior-year depreciation if applicable. These open items are described in detail in the Limitations and Required Preparer Actions section of this report.
Property Description
The subject property is a single-unit residential rental property containing 2,350 square feet of building area, constructed in 2004, and situated at 1428 Maplewood Avenue (Sample Property). The property is classified as standard quality grade. The transaction giving rise to this study is an acquisition; the property was placed in service by the taxpayer on March 15, 2026. Because this is an acquisition and not new construction, contemporaneous contractor cost records, payment applications, blueprints, and change orders are not available. This evidentiary posture is the primary factor informing the selection of the detailed engineering cost estimate methodology, as discussed further in the Methodology section. A property manager, D. Alvarez, was interviewed on March 10, 2026, prior to the placed-in-service date. The interview confirmed the ages of appliances present in the property, the presence of luxury vinyl plank (LVP) flooring installed recently, and a resurfaced driveway completed in 2024. These observations are material to the identification and classification of short-life components and are incorporated into the component-level analysis. Photographs of the property are available and constitute part of the evidentiary record. A site inspection is possible and is required to validate the benchmark-derived component estimates against actual conditions observed at the property.
Methodology
Pub 5653, Chapter 5, describes six recognized approaches to cost segregation analysis: (1) detailed engineering from actual cost records; (2) detailed engineering cost estimate; (3) survey or letter approach; (4) residual estimation approach; (5) sampling and modeling; and (6) rule-of-thumb. The approach selected for this study is the detailed engineering cost estimate, the second of those six recognized methodologies. The detailed engineering cost estimate approach is appropriate where, as here, actual contractor cost records are not available because the property was acquired rather than constructed by the taxpayer. Under this approach, the engineer identifies each short-life component category, determines quantities through a combination of interview data, photographic evidence, and site inspection, and values those components by reference to published construction cost estimating sources. The resulting component-level values are then aggregated by recovery class and reconciled to total project cost. Pub 5653, Chapter 5, acknowledges that for acquired property 'the available cost and construction information may range from' limited to extensive, and recognizes estimation-based approaches as a legitimate response to that evidentiary environment. The detailed engineering cost estimate approach carries a higher degree of ATG rigor than the residual estimation approach because each component is independently identified and valued rather than derived by subtraction from a total. This distinction is significant: the residual estimation approach is acknowledged by the ATG to be less rigorous because the long-life residual is never independently reconciled, and errors in that approach tend to bias toward over-allocation to short-life classes. By contrast, the detailed engineering cost estimate approach requires the preparer to support each allocation affirmatively, which strengthens the study's defensibility under examination. The rule-of-thumb approach was generated for comparative purposes only and is not adopted. Pub 5653 gives rule-of-thumb studies 'little to no weight' because they lack the engineering support that the IRS expects a defensible cost segregation study to contain. The section 168(k) bonus depreciation provisions are applied to qualifying 5-year and 7-year personal property placed in service in 2026. The applicable convention is the mid-month convention for the 27.5-year residential rental building under section 168(d)(2), and the half-year convention for personal property and 15-year land improvements under section 168(d)(1), subject to the mid-quarter convention if more than 40 percent of depreciable personal property is placed in service during the final quarter of the taxable year. The reviewing preparer must confirm which convention applies based on the taxpayer's full-year asset additions.
Analysis and Findings
The total project cost of $685,000 is allocated as follows: $137,000 to non-depreciable land; $76,720 (14.0% of total cost) to 5-year MACRS personal property under section 1245; $5,480 (1.0%) to 7-year MACRS personal property under section 1245; $43,840 (8.0%) to 15-year MACRS land improvements under section 1250; and $421,960 (77.0%) to the 27.5-year residential rental building class under section 1250. Short-life depreciable assets in the aggregate total $126,040. Each component category and its classification rationale is addressed below. Carpeting, vinyl, and specialty flooring ($21,481.60, 5-year, section 1245): Luxury vinyl plank flooring was confirmed by the property manager interview and is visible in available photographs. Movable or removable floor finishes that do not constitute a structural component of the building are treated as personal property classified under Rev. Proc. 87-56, asset class 57.0. The ATG, Chapter 6.3, similarly identifies movable floor finishes as a category of 5-year personal property. These items are not inherently permanent structural components and retain their identity as tangible personal property under the analysis descending from Hospital Corp. of America v. Commissioner, 107 T.C. 116 (1996), which established that components serving a function other than the general structural or operational function of a building may be classified as personal property. Decoration millwork, cabinetry, and counters ($16,878.40, 5-year, section 1245): Removable casework that serves a decorative or equipment-support function, rather than a load-bearing or permanent structural function, is classified as section 1245 personal property. Such items are not inherently permanent fixtures within the meaning of Treas. Reg. § 1.48-1(e) and are analogous to the removable casework line recognized in the Hospital Corp. of America line of authority. Rev. Proc. 87-56, class 57.0, supports a 5-year recovery period for property used in the distributive trades and services context applicable to residential rental operations. Appliances and equipment ($12,275.20, 5-year, section 1245): Appliances present in a residential rental unit—including ranges, refrigerators, dishwashers, and similar items—are tangible personal property that are neither structural components of the building nor inherently permanent. Their ages were confirmed by the property manager interview. Rev. Proc. 87-56, class 57.0, provides a 5-year recovery period for such property. Decorative and accent lighting ($9,206.40, 5-year, section 1245): Lighting that serves a decorative or accent function, as distinguished from general-illumination lighting that is integral to the building's operation as a structure, is classified as section 1245 personal property. This distinction follows the analysis in Hospital Corp. of America and its progeny, under which lighting serving a specialized purpose beyond the general building function is not a structural component and therefore does not constitute section 1250 property. Specialty electrical—equipment feeds and dedicated circuits ($7,672.00, 5-year, section 1245): Electrical distribution wiring and panels allocated by load study to serve specific equipment rather than the general building power distribution system are classified as personal property. This allocation is supported by the principle, recognized throughout the cost segregation case law and addressed in Pub 5653, that electrical work serving equipment rather than the building shell follows the character of the equipment it serves. Rev. Proc. 87-56, class 57.0, applies. Specialty plumbing—equipment connections ($5,370.40, 5-year, section 1245): Plumbing serving specific equipment connections, rather than the general domestic water supply and sanitary drainage serving the building, is classified as section 1245 personal property on the same rationale as specialty electrical. The plumbing must be traced at inspection to confirm that it serves equipment rather than general building function. Communications and data cabling ($3,836.00, 5-year, section 1245): Low-voltage communications and data cabling systems are classified under Rev. Proc. 87-56, asset classes 00.12 and 57.0, as 5-year personal property. These systems are not structural components of the building and are removable without material damage to the structure. Furniture and fixtures ($5,480.00, 7-year, section 1245): Furniture and fixtures placed in service in connection with the property are classified under Rev. Proc. 87-56, asset class 00.11 (Office Furniture, Fixtures, and Equipment), which carries a 7-year recovery period. These items constitute section 1245 personal property. Site paving, parking, and curbs ($14,905.60, 15-year, section 1250): Paved surfaces, parking areas, and curbing located outside the building footprint are land improvements classified under Rev. Proc. 87-56, asset class 00.3 (Land Improvements), with a 15-year recovery period under section 168(c). The resurfaced driveway confirmed by the property manager in 2024 is included in this category. These assets are section 1250 property because, unlike personal property, they are not tangible personal property within the meaning of section 1245(a)(3); however, they are distinguishable from non-depreciable land because they constitute depreciable improvements to land rather than the underlying land itself. Depreciable landscaping and irrigation ($9,644.80, 15-year, section 1250): Landscaping elements that are not mere grading or clearing—such as plantings and irrigation systems—are depreciable land improvements under Rev. Proc. 87-56, class 00.3. Non-depreciable grading and clearing costs are excluded from this component and absorbed into the land allocation. Site utilities to the building line ($7,014.40, 15-year, section 1250): Underground utility lines from the public right-of-way to the building's point of connection are depreciable land improvements under Rev. Proc. 87-56, class 00.3, and are section 1250 property. Sidewalks and hardscape ($4,384.00, 15-year, section 1250): Concrete or paved walkways and hardscape elements located exterior to the building are land improvements under Rev. Proc. 87-56, class 00.3. Fencing and gates ($3,507.20, 15-year, section 1250): Perimeter fencing and gates are classified under Rev. Proc. 87-56, class 00.3, as 15-year land improvements. Exterior site and pole lighting ($2,630.40, 15-year, section 1250): Exterior lighting affixed to poles or site structures for general site illumination is a land improvement under Rev. Proc. 87-56, class 00.3. This category is distinguished from the decorative interior accent lighting classified as 5-year personal property. Pool and site amenities ($1,753.60, 15-year, section 1250): Swimming pools and similar outdoor recreational amenities are land improvements classified under Rev. Proc. 87-56, class 00.3. Building shell, structure, roof, and general mechanical systems ($421,960.00, 27.5-year, section 1250): All costs not allocated to a shorter-life class—including the structural frame, exterior envelope, roof system, general HVAC distribution, general electrical service and distribution, and general plumbing—are classified as section 1250 real property recoverable over 27.5 years under section 168(c) as residential rental property. This is consistent with the half-month convention applicable to real property placed in service on March 15, 2026, yielding 10.5 months of recovery in the first taxable year.
Reconciliation and Indirect Costs
The total allocated cost, including land, reconciles precisely to the total project cost of $685,000, with a difference of $0.00. The allocated-including-land total of $685,000 equals the total project cost, and no unexplained variance exists within the study. Soft costs and indirect costs identified in the study record total $9,600, consisting of permit fees of $1,400 and financing costs of $8,200. Consistent with the cost segregation treatment described in Pub 5653, these indirect costs are allocated pro-rata over the direct-cost classes in proportion to each class's share of total direct costs. The resulting indirect cost allocation by class is as follows: $1,344 to 5-year property; $96 to 7-year property; $768 to 15-year land improvements; and $7,392 to the 27.5-year building class. This pro-rata allocation method is consistent with ATG guidance on the treatment of indirect costs and is documented in the study output. The land value of $137,000 was provided as a discrete input and is excluded from the depreciable basis in its entirety. The source and support for this land value must be documented by the reviewing preparer, as described in the Limitations and Required Preparer Actions section. The remaining depreciable basis is $548,000, which equals the sum of the 5-year ($76,720), 7-year ($5,480), 15-year ($43,840), and building ($421,960) allocations.
Documentation and Evidence on File
The following categories of evidence are available or have been obtained in connection with this study, and constitute the evidentiary record as of the date of this report. Interview record: A formal interview was conducted on March 10, 2026, with D. Alvarez, property manager, prior to the placed-in-service date. The interview confirmed appliance ages, the recent installation of luxury vinyl plank flooring, and the 2024 resurfacing of the driveway. This interview is documented in the study record and satisfies the ATG element requiring interviews with appropriate parties, including the owner or manager. Pub 5653, Chapter 5, identifies interviews with appropriate parties as a required characteristic of a quality cost segregation study. Photographs: Photographs of the property are available and are to be incorporated into the study file. Photographs should specifically document each significant reclassified component category—including flooring, cabinetry, appliances, decorative lighting, specialty electrical and plumbing terminations, and all 15-year site improvement categories—to provide visual corroboration of the component identifications made in this analysis. Site inspection: A site inspection is possible and has been identified as a required step. The site inspection must be performed, dated, and documented with field notes reflecting the conditions observed and quantities verified for each component category. The benchmark-derived component estimates in this study must be validated against actual conditions at the property. As the ATG notes, a site visit is a hallmark of a quality cost segregation study. Estimating source workpapers: Component costs are derived from published construction cost estimating benchmark data. The estimating sources used for each component must be identified and retained in the study workpapers, with per-unit quantities and unit costs traceable to a recognized cost database. Purchase agreement and closing statement: The purchase agreement and closing or settlement statement supporting the total acquisition cost of $685,000 must be retained in the study file to substantiate the cost basis from which all allocations are derived. Land value support: Documentation supporting the land allocation of $137,000—whether in the form of a current property tax assessment ratio, an independent appraisal, or another defensible allocation method—must be obtained and retained. This item is currently open. The following records are not available for this property and their absence is noted: contractor invoices, blueprints, payment applications, change orders, and cost records from construction. This absence is expected for an acquired property and is the basis for the selection of the detailed engineering cost estimate methodology rather than a methodology dependent on actual cost records.
Limitations and Required Preparer Actions
This study was generated by an analytical engine and constitutes a cost segregation analysis for inclusion in the study file. It is not, standing alone, a completed cost segregation study for purposes of filing. Pub 5653 states that a quality cost segregation study requires 'preparation by an individual with expertise and experience' in cost segregation. The engine output must be reviewed, validated, and attested by a qualified preparer—an individual with demonstrated engineering, appraisal, or tax expertise in cost segregation—before the study may be relied upon for filing or disclosed to the Internal Revenue Service. The platform generates the analysis; it is not the qualified individual. The following specific preparer actions are required before this study may be considered complete. First, all component-level benchmark estimates must be validated against actual conditions observed during a site inspection. The cost estimates presented herein are engineering estimates derived from published benchmark data and represent a starting allocation profile. The on-site engineer or qualified preparer must adjust component quantities and values to reflect what the property actually contains. Estimates that have not been field-validated do not satisfy the ATG's documentation requirements. Second, the land value of $137,000 must be supported by a documented allocation method. Acceptable support includes a current property tax assessor's allocation between land and improvements, an independent appraisal, or a reasoned allocation consistent with the purchase price. The reviewing preparer must also confirm that this allocation is consistent with any section 1060 purchase-price allocation made in connection with the acquisition if the transaction involved the acquisition of a trade or business. Third, if the taxpayer previously claimed depreciation on this property under an incorrect or non-segregated method prior to this study—which is not indicated by the current study record but should be confirmed—a Form 3115 (Application for Change in Accounting Method) with a section 481(a) catch-up adjustment will be required to claim the benefit of reclassification for prior tax years. The lookback field in this study record is null, indicating this is not currently treated as a look-back study; the preparer should confirm whether any prior depreciation history exists. Fourth, the reviewing preparer must confirm which depreciation convention applies to the personal property and 15-year land improvements placed in service in 2026. The half-year convention is assumed, but if more than 40 percent of the taxpayer's depreciable personal property additions for the tax year are placed in service during the fourth quarter, the mid-quarter convention applies under section 168(d)(3), which would alter first-year deduction amounts from those presented herein. Fifth, the section 168(k) bonus depreciation percentage applicable to property placed in service in 2026 should be confirmed by the reviewing preparer in light of any legislative changes enacted after the date of this study. The first-year deduction with bonus of $138,187 reflects the bonus percentage incorporated in the analytical engine at the time of generation. Finally, the reviewing preparer should be aware that the short-life personal property reclassified in this study—totaling $126,040 of section 1245 property—will be subject to recapture at ordinary income rates under section 1245 upon a subsequent disposition of the property. The taxpayer should be advised of this recapture exposure in connection with any disposition planning.
Component listing
| Component | Class | Cost | Character |
|---|---|---|---|
| Carpeting / vinyl and specialty flooring | 5yr | $21,482 | sec. 1245 personal property |
| Decorative millwork / cabinetry / counters | 5yr | $16,878 | sec. 1245 personal property |
| Appliances / equipment | 5yr | $12,275 | sec. 1245 personal property |
| Decorative / accent lighting | 5yr | $9,206 | sec. 1245 personal property |
| Specialty electrical (equipment feeds/dedicated circuits) | 5yr | $7,672 | sec. 1245 personal property |
| Specialty plumbing (equipment connections) | 5yr | $5,370 | sec. 1245 personal property |
| Communications / data cabling | 5yr | $3,836 | sec. 1245 personal property |
| Furniture and fixtures | 7yr | $5,480 | sec. 1245 personal property |
| Site paving / parking / curbs | 15yr | $14,906 | sec. 1250 land improvement |
| Depreciable landscaping / irrigation | 15yr | $9,645 | sec. 1250 land improvement |
| Site utilities (to building line) | 15yr | $7,014 | sec. 1250 land improvement |
| Sidewalks / hardscape | 15yr | $4,384 | sec. 1250 land improvement |
| Fencing / gates | 15yr | $3,507 | sec. 1250 land improvement |
| Exterior site / pole lighting | 15yr | $2,630 | sec. 1250 land improvement |
| Pool / site amenities | 15yr | $1,754 | sec. 1250 land improvement |
| Building shell, structure, roof, general HVAC/electrical/plumbing | building | $421,960 | sec. 1250 real property |
Educational analysis generated by the 2911Tech Intelligence Atlas Cost Seg engine. Not tax advice and not a signed cost segregation study - a qualified preparer must review, complete the user-action checklist items, and sign before any filing position is taken.