The IRS cost segregation guide is officially called the Cost Segregation Audit Techniques Guide, or Publication 5653. It was first released in 2004 and last updated in February 2025. It's written to help IRS examiners review cost segregation studies, but it's also the best public roadmap for what the IRS expects a good study to look like.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.
What is the guide, exactly?
The IRS writes "audit techniques guides" for complicated topics so its examiners know what to look for. The cost segregation guide explains:
- The tax rules that allow different depreciation lives
- Common methods used to perform studies
- What makes a study "quality"
- How examiners should review and test a study
- Industry-specific guidance on how common assets are classified
You can download it free from the IRS website as Publication 5653.
A short history
| Year | What happened |
|---|---|
| 1997 | Tax Court decides Hospital Corporation of America, supporting cost segregation |
| 2004 | IRS releases the first Cost Segregation Audit Techniques Guide |
| Various years | Revisions follow tax law changes |
| June 2022 | Major update reflecting the PATH Act, the 2017 tax law, and the CARES Act |
| February 2025 | Latest update, with expanded guidance and documentation expectations |
The guide doesn't yet reflect every detail of the July 2025 One Big Beautiful Bill Act, so practitioners pair it with newer IRS guidance on bonus depreciation.
The main parts of the guide, simplified
Background and legal framework
Explains depreciation systems and the court cases that separate building parts from personal property. This is where the IRS lays out how it decides whether something is part of the structure.
Study approaches
Describes six common methods, from detailed engineering based on actual costs (most reliable) to rule of thumb (least reliable).
Elements of a quality study and report
Lists what examiners expect: qualified preparers, clear methods, solid documentation, legal analysis, unit costs, reconciliation, and handling of indirect costs.
Review and examination
Walks examiners through how to test a study, such as checking that totals tie to actual cost and spot-checking classifications.
Special topics
Covers issues like bonus depreciation eligibility, what counts as "inherently permanent," and accounting method changes for look-back studies.
Industry guidance
Includes tables showing how common assets are typically classified for specific industries, such as restaurants and retail.
Why property owners should care
Even though it's written for IRS staff, the guide tells you how your study will be judged if you're ever audited. Use it to:
- Vet providers. Ask whether their method and reports follow the guide.
- Review your report. Check it against the quality elements.
- Avoid aggressive positions. The guide shows where examiners push back.
Frequently asked questions
Is the guide the law?
Do I need to read the whole guide?
Where can I find the latest version?
See what your property may qualify for
Run our 2-minute STR Qualification Quiz or model your Low / Mid / High cost segregation range.
Related guides
Cost Segregation Audit Techniques Guide: How to Make Your Study Audit-Ready
Use the IRS Cost Segregation Audit Techniques Guide to audit-proof your study. A practical checklist of what examiners test and how to be ready.
Read guideIRS Cost Segregation Requirements: What a Quality Study Must Include
The IRS spells out what a quality cost segregation study looks like. Use this plain-English checklist to judge a study before you rely on it.
Read guideCost Segregation and the IRS: Is It Legal? Does It Raise Audit Risk?
Is cost segregation legal? Does it trigger an IRS audit? Here's how the IRS views cost segregation and what keeps a study on solid ground.
Read guideTypes of Cost Segregation Studies Compared
Engineering-based, residual, sampling, look-back, new construction: compare the main types of cost segregation studies and when each makes sense.
Read guideThis content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.