As the tax year draws to a close, real estate investors often scramble to reconstruct their property-related expenses from bank statements and inboxes. According to CostSegRx, an engineering-based cost segregation firm, this last-minute approach can lead to lost details that significantly affect depreciation and tax outcomes. Brian Kiczula of CostSegRx advises, "Property owners should really document all of their capital improvements and expenses throughout the year. It’s not just at the year-end." The goal is not a perfect filing system but a clear record of what work was done, when it was completed, and what it cost.
Many investors mistakenly lump all property costs together and attempt to expense them immediately. However, for tax purposes, costs must be classified as either capital improvements or repairs. When a CPA or cost segregation professional reviews spending, they typically apply the BAR test—betterment, adaptation, or restoration—to determine if a cost must be capitalized. Capitalized costs are depreciated over 27.5 years for residential rental property, 39 years for commercial property, or shorter lives of 15, 7, or 5 years depending on the asset. Costs that fail the BAR test usually qualify as repairs and maintenance, deductible in the year incurred. This distinction makes accurate records essential; without them, properly categorizing expenses is nearly impossible.
In CostSegRx’s experience, the most common documentation gaps involve individual receipts and clear descriptions of work performed. Owners often fall into two groups: those who meticulously track every improvement with dates and receipts, and those who know only a total annual spend without a breakdown. The latter is often not at fault, as many contractors bill in lump sums without itemizing costs. For such situations, CostSegRx uses construction cost estimating to rebuild contractor costs from owner descriptions and property images, allowing each improvement to be classified correctly. For the remainder of this year and beyond, the firm recommends simple habits: save each receipt or invoice, note what was done, record the completion date, and photograph the finished work.
Timing becomes especially important when a property is acquired and renovated in the same year. Owners must document when improvements were placed into service relative to the property itself. If renovations are completed before the property goes into service, the original cost segregation study may need adjustment. For example, replacing all carpet before the building is placed in service means the old carpet had no value and should be removed from the purchase price allocation, with the new carpet added. If the property is placed in service first and a major remodel follows months later, the tax preparer would typically receive two separate fixed asset schedules—one for the acquisition and one for the remodel. This pattern is common with hotels, where an owner buys a property and begins updating rooms the following year.
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 be performed. 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. For more information, visit costsegrx.com.
