A study is a construction estimating exercise wearing a tax hat. An engineer determines what every component of your building cost, then determines which recovery period each one legally belongs in. From engagement to delivered report, that takes three to six weeks and asks almost nothing of you.
The short answer
- Six steps: feasibility, documents, the site inspection, takeoff and classification, reconciliation and report delivery, and your CPA's filing.
- Most studies take three to six weeks. The variables are how fast documents arrive and how quickly the site visit can be scheduled.
- The IRS Audit Techniques Guide describes six methodologies. The Detailed Engineering Approach from Actual Cost Records is the most defensible; the Cost Estimate Approach is standard for acquired buildings.
- Every credible study reconciles allocated costs to total actual cost. If the numbers do not tie to your closing statement, the study is not finished.
Step 1: The Provider Models Whether a Study Pays (1 to 3 Days)
Before anyone signs anything, the provider should model whether a study pays for itself. That takes four inputs: address, purchase or construction cost, placed-in-service date, and your approximate tax rate and passive activity position.
From those, an engineer estimates a reclassification range, applies the bonus rate tied to your placed-in-service year, and compares the projected benefit against the fee. It should be free, and the answer is sometimes no. A good provider says so here.
Step 2: You Send Documents, and That Is Your Whole Job
You send what you have: the closing statement and purchase agreement, the depreciation schedule, an appraisal or assessor records supporting the land allocation, any construction documents (pay applications, change orders, blueprints), and a list of improvements since acquisition.
Missing pieces are normal. Blueprints get lost, and sellers do not hand over construction ledgers; the engineer works around gaps with measured field data. Full checklist in what you need for a study.
Step 3: The Engineer Walks the Building and Measures It
This is the part software cannot replicate, and it is where the numbers come from. The engineer measures and counts. Linear feet of millwork. Square footage of carpet, vinyl plank, and tile room by room, because each carries a different unit cost and may fall in a different asset class. Fixture counts for decorative versus general lighting. Plumbing serving equipment rather than the building itself.
Then the electrical, where meaningful dollars hide. The engineer traces which circuits serve fixed equipment and documents connected load, because the 2025 ATG revision calls for allocating primary switchgear based on electrical load. That is not guesswork if someone opened the panel.
Outside, the site work gets measured: paving, curbs, fencing, retaining walls, site lighting, signage, and drainage. These 15-year land improvements are often the largest single reclassification, and everything is photographed and tied to a numbered asset list.
Step 4: Quantities Become Dollars, and Dollars Get a Recovery Period
Field quantities become dollars, by one of two methods.
Detailed Engineering Approach from Actual Cost Records. Used when you built the property and have the construction accounting. Costs trace directly from source documents to specific assets. Most reliable, and the benchmark the ATG measures against.
Detailed Engineering Cost Estimate Approach. Used for acquired buildings, which is most studies. With no invoices to trace, the engineer estimates each component from field-measured quantities and published unit cost data, then reconciles to actual basis.
Both are engineering approaches. What the ATG treats with suspicion is the other end: rule-of-thumb allocations with no measured basis, the subject of engineering-based versus software cost segregation. Each asset then gets a recovery period with a written rationale, and indirect costs such as architecture and permits are allocated across classes.
Step 5: Every Allocated Dollar Ties Back to Actual Cost
Allocated costs must tie back to total actual cost. Land comes out first, and the rest must sum exactly to depreciable basis.
Example: a $1,850,000 dental office placed in service in January Land allocated at $300,000, leaving $1,550,000 of depreciable basis. Operatory plumbing, dedicated equipment circuits, and extensive millwork push this above a generic office. The 39-year structure runs on the MACRS mid-month convention, a 2.461% first-year factor for a January placement.
| Asset class | Allocation | % of basis |
|---|---|---|
| 5-year personal property | $372,000 | 24.0% |
| 15-year land improvements | $124,000 | 8.0% |
| 39-year structure | $1,054,000 | 68.0% |
| Year-one deduction with a study | ~$521,900 | |
| Year-one deduction without a study | ~$38,100 |
Your result depends on your tax rate and whether you can use passive losses.
The deliverable includes methodology, an asset-by-asset schedule with standard numbering, unit costs, photographs, the legal analysis, the reconciliation, and a §1245 listing that supports a future partial disposition. Those are the elements the IRS Audit Techniques Guide calls for.
Step 6: Your CPA Puts the Schedule on the Return
For a current-year property, your CPA loads the asset schedule into the fixed asset system and depreciates accordingly. For a prior-year property, the catch-up runs through Form 3115, an automatic accounting method change, with a §481(a) adjustment capturing all missed depreciation. A taxpayer-favorable adjustment is taken entirely in the year of change, prior returns are not amended, and the form is filed in duplicate.
What Slows a Study Down
Three things cause most delays, and two are inside your control.
Documents. The most common holdup is a closing statement or construction ledger sitting in someone's archive. Getting documents out in week one is the best thing you can do.
Site access. Tenant-occupied space with notice requirements, site work under snow, and multi-building portfolios stretch the schedule.
Complications in the file. A murky land allocation, a §1031 exchange with carryover basis, or an undocumented renovation history add analysis time. None are dealbreakers, but they should surface during feasibility, not in week four.
Plan around your filing date. A study ordered two weeks before a deadline usually means an extension. Fees are covered in what a study costs, and the concept in what cost segregation is.
Frequently Asked Questions
How long does a cost segregation study take?
Three to six weeks is typical: about a week for documents, one to two weeks to schedule and complete the inspection, and two to three weeks for takeoff, classification, and reporting. Portfolios and complex industrial assets take longer, and field work is the wrong place to save days.
Can a study be done without a site visit?
For some small residential properties, a documented virtual inspection with guided video, confirmed measurements, and a full photo record can support a defensible study. For commercial or specialty facilities, a physical inspection is the right answer. Ask which one a provider is performing.
Does the study include audit support?
It should. Ask whether the provider will respond to IRS information requests about their own work product, at what cost, and whether the engineer who signed the report is the one who defends it. Get the answer in the engagement letter.
Find Out in 24 Hours Whether a Study Pays for Itself
Not every property justifies a study, and we will tell you when yours doesn't. Send Precision Cost Segregation the address, purchase price, closing date, and your rough tax rate, and we will come back with a modeled reclassification range and an estimated first-year benefit at no cost.
This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.