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IRS Expectations for Cost Segregation Analysis

The IRS has 3 primary expectations for cost segregation reports:

  1. Credible method of analysis; either the appraisal or engineering method
  2. Credible results
  3. Documentation supporting conclusions

Credible Method

The appraisal and engineering methods are the two most widely used methods. Statistical modeling is considered an acceptable option for a large number of identical or extremely similar buildings. We believe these are the only credible methods.

Credible Results

Credible results need to be supported by documentation, analysis and calculations that apply specifically to the subject property. The IRS requires that, “to calculate depreciation for Federal income tax purposes, taxpayers must (emphasis added) use the correct method and proper recovery period for each asset…”
We believe it is impossible to prepare a credible report by simply employing a statistical model. At a minimum, the researcher and analysis need to review public records data, data available from private data sources and aerial and street photography. Ideally, this data will be supplemented by video of the property, brochures, site plans and other information available directly or indirectly through the owner.


Analysis from a site visit or video and public records are adequate to prepare a credible cost segregation report. The more intense the review of the property, the more short-life property will be identified and the results will become more accurate.

Aerial photography programs make it possible to measure site improvements, typically for four different views.
The IRS likes cost segregation, but they do not like abuse or estimates higher than actual.

O’Connor has been preparing preliminary analysis and then doing cost segregation reports afterwards for 25 years. Our database of preliminary versus actual results ranges over several continents, all 50 U.S. state, U.S. territories, and virtually every imanageable property type over 10,000 cost segregation studies.

This experience makes us comfortable that in most cases, it will be possible to gather adequate data to complete a credible cost segregation report without a site visit. (If a site visit is ultimately required, we will send an analyst at our expense.)

O’Connor provides a credible method, credible results and detailed documentation.