IRS Cost Segregation Rule Changes Challenge Residential Real Estate Investors

The IRS published a new edition of its Cost Segregation Audit Techniques Guide on February 6, 2025, and the industry is still catching up to what it means. The update expanded the guide’s use of the Amerisouth case, a 2012 tax court ruling the IRS won largely because the taxpayer stopped responding mid-litigation. IRS examiners are now citing Amerisouth more frequently to challenge reclassifications of items like sinks, kitchen cabinetry, and similar components in residential cost segregation studies, items that have historically been treated as short-life personal property eligible for accelerated depreciation.

Brian Kiczula, founder of CostSegRx and a member of the American Society of Cost Segregation Professionals, has been fielding the fallout firsthand. “Every property is different,” he says. “Certain items can still be reclassified if the facts and circumstances support it. But that determination has to be made at the individual property level, not with a blanket estimate.” The distinction matters more now than it did two years ago. With 100% bonus depreciation permanent under the One Big Beautiful Bill for property acquired and placed in service after January 19, 2025, investor interest in cost segregation has surged. But the same conditions that make the strategy valuable also raise the stakes for getting it wrong.

Not all providers approach the analysis the same way. Engineering-based studies, which review the specific property, its individual assets, and their condition, represent the defensible standard the ATG itself describes. Modeling approaches that estimate depreciation by property type, and DIY online tools that generate instant reports without professional review, do not. “If you’re generating an instant report online and can’t get anyone on the phone, that’s probably not a study I’d move forward with,” Kiczula says.

For investors who acquired property in 2022, 2023, or 2024, look-back studies remain available. For those doing renovations or capital improvements, those projects may qualify for a separate capital expenditure study, a category Kiczula says is frequently overlooked. The process at CostSegRx starts with a complimentary estimate of benefit, reviewed individually for each property, delivered with a Loom video walkthrough and a consistent recommendation: take it to your CPA before committing to anything. The ATG is not law. It is a roadmap for how examiners evaluate studies. Investors who understand the difference, and work with providers who do, are in a stronger position regardless of where the IRS looks next.