Cost Seg DIY Checklist: Everything You Need for a Self-Directed Study

Doing cost seg DIY can be a cost-effective way to accelerate depreciation on your rental properties. But success requires careful preparation and attention to detail. Use this comprehensive checklist to guide your self-directed cost segregation study.

Before You Start: Eligibility Check

Before diving into a cost seg DIY project, confirm your situation:

[ ] Property is used for business purposes (rental income qualifies)
[ ] Property is being depreciated on your tax returns
[ ] Property value justifies the time investment
[ ] You understand basic depreciation concepts
[ ] Your CPA is on board with implementing the results

Ideal candidates for cost seg DIY:

Residential rental properties under $500,000
Standard construction (not specialty buildings)
Properties where professional study costs seem high relative to potential savings

Phase 1: Document Gathering

Collect these documents before you begin your analysis:

Purchase Documents

[ ] Closing statement (HUD-1 or CD)
[ ] Purchase contract
[ ] Property appraisal
[ ] Title insurance documents

Property Information

[ ] Property tax records showing assessed values
[ ] Square footage documentation
[ ] Year built information
[ ] Any building permits on file

Improvement Records

[ ] Renovation invoices and receipts
[ ] Contractor proposals/bids
[ ] Before/after photos of improvements
[ ] Appliance purchase receipts

Current Tax Records

[ ] Previous depreciation schedules
[ ] Prior tax returns showing the property
[ ] Current basis calculations

Phase 2: Basis Calculation

Accurately determine your depreciable basis:

Calculate Total Acquisition Cost

[ ] Purchase price
[ ] Closing costs that must be capitalized
[ ] Any immediate improvements before placing in service

Subtract Land Value

[ ] Review property tax assessment (land vs. improvements)
[ ] Check appraisal for land allocation
[ ] Use local comparables if needed
[ ] Document your methodology

Final Depreciable Basis

[ ] Total acquisition cost minus land value
[ ] Add any capitalized improvements
[ ] This is the amount you'll be reclassifying

Phase 3: Asset Identification

Walk through your property (physically or via photos) to identify reclassifiable assets:

5-Year Property (Personal Property)

Kitchen:

[ ] Refrigerator
[ ] Stove/range
[ ] Dishwasher
[ ] Microwave (built-in)
[ ] Garbage disposal
[ ] Range hood

Flooring:

[ ] Carpet and padding
[ ] Vinyl flooring
[ ] Laminate flooring
[ ] Area rugs (if purchased with property)

Window Treatments:

[ ] Blinds
[ ] Curtains/drapes
[ ] Shutters (decorative)

Other Interior:

[ ] Ceiling fans
[ ] Light fixtures (decorative)
[ ] Smoke detectors
[ ] Carbon monoxide detectors
[ ] Bathroom accessories (towel bars, etc.)
[ ] Mirror (decorative, not medicine cabinet)

7-Year Property

[ ] Built-in furniture
[ ] Security system equipment
[ ] Office furniture (if furnished rental)

15-Year Property (Land Improvements)

Exterior Hardscaping:

[ ] Driveway
[ ] Walkways/sidewalks
[ ] Patio/deck
[ ] Retaining walls (non-structural)

Landscaping:

[ ] Trees and shrubs
[ ] Sod/lawn
[ ] Flower beds
[ ] Irrigation system
[ ] Garden borders/edging

Fencing and Enclosures:

[ ] Privacy fence
[ ] Chain link fence
[ ] Gates
[ ] Outdoor storage shed

Site Utilities:

[ ] Outdoor lighting
[ ] Mailbox
[ ] Address signage

Phase 4: Cost Allocation

Assign dollar values to each identified asset:

Methods for Determining Cost

[ ] Actual invoices: Best if you have them
[ ] Replacement cost: What would it cost to install new?
[ ] Contractor estimates: Get quotes if needed
[ ] Industry percentages: Use construction cost data

Allocation Guidelines

For assets without specific invoices, use these general approaches:

[ ] Document your allocation methodology
[ ] Be conservative when estimating
[ ] Use multiple sources to verify reasonableness
[ ] Keep your total personal property typically under 15-25% for residential

Create Your Asset Schedule

Build a spreadsheet with:

[ ] Asset description
[ ] Classification (5-year, 7-year, 15-year, 27.5/39-year)
[ ] Allocated cost
[ ] Source of cost information
[ ] Photos or documentation reference

Phase 5: Depreciation Calculation

Calculate depreciation for each asset class:

Apply MACRS Rates

5-Year Property:

[ ] Use 200% declining balance
[ ] Half-year convention (usually)
[ ] Reference IRS Publication 946 tables

15-Year Property:

[ ] Use 150% declining balance
[ ] Half-year convention (usually)
[ ] Reference IRS Publication 946 tables

Building (27.5 or 39 year):

[ ] Straight-line depreciation
[ ] Mid-month convention
[ ] Remaining basis after reclassifications

Consider Bonus Depreciation

[ ] Check current year bonus depreciation rate
[ ] Apply to eligible 5-year, 7-year, and 15-year property
[ ] Calculate immediate deduction amount
[ ] Document your bonus depreciation election

Phase 6: Documentation

Create an audit-ready file:

Study Report

[ ] Property description and photos
[ ] Methodology explanation
[ ] Asset detail with classifications
[ ] Cost allocation summary
[ ] Depreciation schedules

Supporting Documents

[ ] Copies of all source documents used
[ ] Photographs of major assets
[ ] Calculation worksheets
[ ] Notes explaining your decisions

Organization

[ ] Create a dedicated folder (digital or physical)
[ ] Label everything clearly
[ ] Keep for at least 7 years (IRS retention requirements)

Phase 7: Implementation

Work with your CPA to file correctly:

Current Year Properties

[ ] Provide depreciation schedules to CPA
[ ] Review Form 4562 before filing
[ ] Ensure correct asset classifications
[ ] Verify bonus depreciation is applied correctly

Prior Year Properties (Look-Back)

[ ] Prepare Form 3115 (Change in Accounting Method)
[ ] Calculate catch-up adjustment (Section 481(a))
[ ] File with current year return
[ ] No amended returns needed

Post-Filing

[ ] Keep copies of filed returns
[ ] Update your records
[ ] Track ongoing depreciation
[ ] Note asset dispositions

Cost Seg DIY Quality Checklist

Before finalizing, verify your work:

[ ] Total reclassified assets seem reasonable (typically 15-35% for residential)
[ ] Every allocation has documented support
[ ] Calculations have been double-checked
[ ] CPA has reviewed methodology
[ ] You could explain your decisions if questioned

When to Upgrade to Professional Help

Consider hiring a cost seg service if:

[ ] Property value exceeds $500,000-$1,000,000
[ ] You're uncertain about significant allocations
[ ] Property has unusual or complex features
[ ] Total potential savings exceed $25,000
[ ] You've been audited before or expect scrutiny

Final Thoughts on Cost Seg DIY

Doing cost seg DIY requires effort, but it can be worthwhile for smaller properties where professional fees would consume too much of your savings. The keys to success are:

Be thorough: Don't miss assets that qualify

Be conservative: Don't overreach on allocations

Be documented: Keep records of everything

Be collaborative: Work with your CPA throughout

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