Are DIY cost segregations a good idea?

[Wiley Hood]

Recently, I've decided to do a cost segregation study on a new $490K property that I purchased this year.  I came across a firm (KBKG) that offers a $400 DIY cost study (paying for a membership).  I enter the information, and they generate the report.  It looks fairly simple.  To have a professional do it, it will be about $3,500.  Has anyone used the DIY tool, and are there risks?

[Greg Scott]

The IRS publishes guidelines on what makes for a good cost segregation analysis. https://www.irs.gov/pub/irs-pd... Generally, cost segregation makes more sense on larger assets.  In the end, you have to decide the cost / benefit / risk / reward of doing one makes sense in your situation.

COST - You have outlined some of the costs, but not all.  Remember, if you decide to sell in a few years, any bonus depreciation comes back as ordinary income.  If your hold period is short, it may not make sense to take bonus depreciation.

BENEFIT - Clearly additional depreciation is the benefit, but only if you can use it.  Early in my investing career I wanted to cost seg my properties, but my accountant told me I was wasting my time because I was unable to use the full depreciation benefits I already had.   Check with your CPA if cost seg makes sense before proceeding

RISK - If the IRS disallows your cost seg, the risk will be the taxes previously due and any penalties.  Given the size of the asset, these won't be huge, but something to consider.

REWARD - In addition to the benefits stated above, the only other reason I could see doing one on an asset this size is if you wanted to offset a property sale that would have a large capital gains.  This might make sense, but again, you are just deferring the taxes and now pushing tax from capital gains to ordinary income.  Again, a CPA discussion might help.

[Basit Siddiqi]

The report is as good as the answers you provide to their questions.

The risk is that you answer a question incorrectly which generates an incorrect report.
I would have a discussion with your CPA to determine what the land basis is(required to start the cost segregation).
I would also have your home inspection / appraisal on hand to answer the questions more thoroughly. 

[Julio Gonzalez]

@Wiley Hood to be honest, with all the new regulations around documentation for cost segregation that has come out, I recommend having a professional do them. While it may seem like a simple concept, it's actually a very complex process that requires significant documentation as well as specific methodologies. If the proper reports and documentation are not completed, you run the risk of failing an IRS audit and the cost segregation not being honored. Here's a link to the IRS website noting specific items that are included in the cost segregation study report on page 24. Of course, I run a cost segregation company BUT I would recommend that regardless. The IRS is taking a more conservative approach and you want to ensure you have all your ducks in a row + a team behind you to back you up if something comes into question. Most cost segregation firms will provide a free cost/benefit analysis quote to help you determine if the tax benefits from the study will outweigh the costs. Do you have Real Estate Professional status?

[Lee Ripma]

I love algorithm based cost seg studies. I have used KBKG in the past but I currently use DIY cost segs, https://diycostseg.com/who-we-...

I like them better than KBKG because if you make a mistake you can correct it. Feel free to reach out to me for a friends and family discount code. I do this on all my properties-even small ones. 

This is not tax or legal advice, just what I personally do, consult your professionals! 

[Michael Plaks]

@Wiley Hood

Yes, there're risks:

1. Risk that you will not enter good data, resulting in a possibly seriously wrong results

2. Risk that the IRS will challenge it, which is far more likely than with a full-service professional report

3. Risk that you will short yourself by not maximizing your cost seg potential

That said, when full-service cost seg is not economically sensible, DIY is a valid alternative

[Kapono Kobylanski]

Quote from @Lee Ripma:

I love algorithm based cost seg studies. I have used KBKG in the past but I currently use DIY cost segs, https://diycostseg.com/who-we-...

I like them better than KBKG because if you make a mistake you can correct it. Feel free to reach out to me for a friends and family discount code. I do this on all my properties-even small ones. 

This is not tax or legal advice, just what I personally do, consult your professionals! 

How much does it cost? You cant correct the KBKG one? why would they do that? Thanks!

[Dana Yobst]

Quote from @Lee Ripma:

I love algorithm based cost seg studies. I have used KBKG in the past but I currently use DIY cost segs, https://diycostseg.com/who-we-...

I like them better than KBKG because if you make a mistake you can correct it. Feel free to reach out to me for a friends and family discount code. I do this on all my properties-even small ones. 

This is not tax or legal advice, just what I personally do, consult your professionals! 

 Do you still reccomendd DIY COST SEG? Have you used the rapid report with Re Cost Seg? 

[Julio Gonzalez]

@Dana Yobst 

While it may seem like a simple concept, it's actually a very complex process that requires significant documentation as well as specific methodologies. If the proper reports and documentation are not completed, you run the risk of failing an IRS audit and the cost segregation not being honored. Here's a https://www.irs.gov/businesses/cost-segregation-audit-technique-guide-chapter-4-principal-elements-of-a-quality-cost-segregation-study-and-report to the IRS website noting specific items that are included in the cost segregation study report.

[Natalie Kolodij]

This is a long revived post- 

I'll add a little tax pro insight from what's happened in the last 2 years 

The IRS went from < 100 engineers on staff who were qualified to audit cost segregations to a few hundred. 

I have been able to review or been told of several audits (from other REI tax colleagues) related to cost segs in the last year or so- and of those none of DIY cost segs were allowed under audit.

[Sean Graham]

Quote from @Natalie Kolodij:

This is a long revived post- 

I'll add a little tax pro insight from what's happened in the last 2 years 

The IRS went from < 100 engineers on staff who were qualified to audit cost segregations to a few hundred. 

I have been able to review or been told of several audits (from other REI tax colleagues) related to cost segs in the last year or so- and of those none of DIY cost segs were allowed under audit.

That’s wild to think about! So many people did DIY. There are better options 

[Dana Yobst]

Quote from @Natalie Kolodij:

This is a long revived post- 

I'll add a little tax pro insight from what's happened in the last 2 years 

The IRS went from < 100 engineers on staff who were qualified to audit cost segregations to a few hundred. 

I have been able to review or been told of several audits (from other REI tax colleagues) related to cost segs in the last year or so- and of those none of DIY cost segs were allowed under audit.

 Oh WOW! That is not good.  

[Dana Yobst]

Quote from @Natalie Kolodij:

This is a long revived post- 

I'll add a little tax pro insight from what's happened in the last 2 years 

The IRS went from < 100 engineers on staff who were qualified to audit cost segregations to a few hundred. 

I have been able to review or been told of several audits (from other REI tax colleagues) related to cost segs in the last year or so- and of those none of DIY cost segs were allowed under audit.

Does the IRS consider Virtual Studies to be DIY? My STR is <$500k and my CPA advised the study....

[Sean O'Keefe]

Quote from @Natalie Kolodij:

This is a long revived post- 

I'll add a little tax pro insight from what's happened in the last 2 years 

The IRS went from < 100 engineers on staff who were qualified to audit cost segregations to a few hundred. 

I have been able to review or been told of several audits (from other REI tax colleagues) related to cost segs in the last year or so- and of those none of DIY cost segs were allowed under audit.

Yes, people see the low price tag on these self-service options (there are a few more being marketed here, not going to put them on blast) and ignore CPA guidance to go with in person option and it is now coming back to haunt them. Thanks for sharing @Natalie Kolodij

[Phil Bosma]

Quote from @Natalie Kolodij:

This is a long revived post- 

I'll add a little tax pro insight from what's happened in the last 2 years 

The IRS went from < 100 engineers on staff who were qualified to audit cost segregations to a few hundred. 

I have been able to review or been told of several audits (from other REI tax colleagues) related to cost segs in the last year or so- and of those none of DIY cost segs were allowed under audit.

Natalie - would you be able to provide color as to why the audits of DIY cost segregation studies were not allowed under IRS audit?   Was the reason due to input errors or general methodology used?   I have been doing a lot of research on cost segregation studies including the DIY option and any additional color would be helpful.  

One question I have is that I have heard that DIY cost segregations tend to be more conservative, meaning a full engineered study would likely return more in deductions.  Given when a return is audited some of these DIY firms note that (if audit protection is purchased) they will do a full engineered study to support the figures used within the audit.  Assuming no input errors by the client, I would assume that these studies would return more in deductions than the DIY.  In this case, would the IRS reject a prior return's use of a DIY if a full engineered study supports or exceeds the deductions that it reported?  

Thanks

[Christanne Wright]

@Natalie Kolodij I just downloaded IRS p5653, IRS Cost Segregation Audit Technique from the IRS website and it shows they are taking an interest in ensuring these cost segregation studies are legitimate. They are also ensuring the staff is fully trained on how to disallow cost segregation for those that haven't been careful and conservative in their analysis. I believe we will see an uptick in audits in the near future.

[Dana Yobst]

Quote from @Julio Gonzalez:

@Dana Yobst 

While it may seem like a simple concept, it's actually a very complex process that requires significant documentation as well as specific methodologies. If the proper reports and documentation are not completed, you run the risk of failing an IRS audit and the cost segregation not being honored. Here's a https://www.irs.gov/businesses/cost-segregation-audit-technique-guide-chapter-4-principal-elements-of-a-quality-cost-segregation-study-and-report to the IRS website noting specific items that are included in the cost segregation study report.

 hmm, that website is a 404 error. 

[Sean O'Keefe]

Quote from @Dana Yobst:

Quote from @Julio Gonzalez:

@Dana Yobst 

While it may seem like a simple concept, it's actually a very complex process that requires significant documentation as well as specific methodologies. If the proper reports and documentation are not completed, you run the risk of failing an IRS audit and the cost segregation not being honored. Here's a https://www.irs.gov/businesses/cost-segregation-audit-technique-guide-chapter-4-principal-elements-of-a-quality-cost-segregation-study-and-report to the IRS website noting specific items that are included in the cost segregation study report.

 hmm, that website is a 404 error. 

I have a copy of the IRS Cost Segregation Audit Technique Guide (Publication 5653) if you want one.

[Sean O'Keefe]

@Michael Plaks interesting feedback, thanks for sharing. 

[V.G Jason]

You'll cost yourself more than the differential with time and mistakes. Why bother?

Can someone refute that?

[Julio Gonzalez]

Quote from @Dana Yobst:

Quote from @Julio Gonzalez:

@Dana Yobst 

While it may seem like a simple concept, it's actually a very complex process that requires significant documentation as well as specific methodologies. If the proper reports and documentation are not completed, you run the risk of failing an IRS audit and the cost segregation not being honored. Here's a https://www.irs.gov/businesses/cost-segregation-audit-technique-guide-chapter-4-principal-elements-of-a-quality-cost-segregation-study-and-report to the IRS website noting specific items that are included in the cost segregation study report.

 hmm, that website is a 404 error. 

 Sorry about that. Try this link: 

Publication 5653 (6-2022)

[Sean Graham]

Plenty of good thoughts on this thread. 

Yes, you can do DIY, but it does come at a higher risk of IRS challenge as @Michael Plaks mentions. 

No, DIY is not the same as a virtual site visit or a study done by engineers @Dana Yobst

As @V.G Jason said, you could very likely cost yourself more in time and money. Why bother? 

Having engineers complete and back your study goes along away and minimizes errors. 

[Jordan Kapper]

Worth noting that most firms will do two types of studies (although they may be named differently) - detailed engineering and modeling.

Detailed studies break down every component for maximum depreciation ($3,000–$10,000). Modeling uses templates to estimate allocations although some firms still dig very deep on these types of studies, costing $1,000–$1,250.

DIY tools are cheaper but often miss deductions and lack audit-ready documentation. For a $490K property, maybe consider a company that does modeling studies? 

[Gian Pazzia]

I created KBKG's Residential Cost Segregator software. Someone said you cannot make changes to the report after completion.  For the record, if you contact us, we will help you with a change like that.  We do recommend making sure all your data is accurate before finalizing your report.  

I also saw somebody post that the IRS is disallowing all DIY cost segregation studies.  Maybe that is the case for other tools, but not the KBKG Residential Cost Segregator. I can tell you with certainty, we have gone through several extensive IRS audits without any changes to our KBKG Residential Cost Segregator reports. 

We are currently at a 100% IRS audit success rate since we launched the software in 2016.  When the IRS audits us, it helps that we have more Certified Cost Segregation Professionals (CCSP's) than any other company in the country. 

[Ashish Acharya]

@Wiley Hood DIY cost segregation tools like KBKG can be cost-effective for simple properties, but they lack the precision and audit defense of professional studies. A professional study, though more expensive, often identifies more deductions and is better for IRS scrutiny. For higher-value or complex properties, a professional study's potential tax savings can outweigh its cost. Use DIY tools for straightforward cases but consider professional help for maximum savings and audit protection.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Chandra Venkataraman]

Please share your experience with me Chandra 918.749.8314