The IRS doesn't license cost segregation providers, but it does describe what a "quality" study looks like in its Cost Segregation Audit Techniques Guide. A quality study is prepared by someone with real expertise, uses a reliable and well-explained method, is backed by documents, explains the legal basis for each classification, and reconciles to your actual cost.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.
Where the IRS requirements come from
There's no single IRS form for cost segregation. Instead, the rules come from three places:
- The tax code, which sets depreciation lives for different property types
- Court cases, which established how to tell building parts from personal property
- The Cost Segregation Audit Techniques Guide (Publication 5653), which tells IRS examiners how to review studies
The guide is written for IRS staff, but it's the best roadmap you have for what the IRS expects.
The IRS's quality checklist, in plain English
The guide lists the principal elements of a quality study. Here's what they mean for you:
| IRS element | What it means in practice |
|---|---|
| Prepared by someone with expertise | Engineers, construction cost experts, or certified cost segregation professionals, with credentials listed |
| Detailed description of methodology | The report explains exactly how costs were assigned |
| Appropriate documentation | Blueprints, invoices, closing statements, appraisals, photos |
| Interviews with the right people | Talking to owners, builders, or managers about how the building is used |
| Common terms and numbering | Components named and coded consistently so they can be traced |
| Explanation of the legal analysis | Why each item is 5-, 7-, 15-year, or building property, with citations |
| Unit costs and quantities | Real measurements and cost data, not round guesses |
| Organized asset lists | Assets grouped clearly by class and life |
| Sound sampling (if used) | Any sampling across similar properties is statistically supported |
| Reconciliation | The total of all allocated costs ties back to your actual basis |
| Treatment of indirect costs | Fees, permits, and soft costs spread across assets in a logical way |
| Related issues addressed | Things like land vs. building, and Section 1245 vs. Section 1250 property |
Which methods does the IRS prefer?
The guide describes several approaches and how reliable each one is:
- Detailed engineering approach from actual cost records. The most accurate. Often used for new construction.
- Detailed engineering cost estimate approach. Used when actual records aren't available, such as for purchased buildings.
- Survey or letter approach. Less reliable.
- Residual estimation approach. Values short-life items and assigns the rest to the building. Can be acceptable if done carefully.
- Sampling or modeling approach. Uses data from similar properties.
- Rule of thumb approach. The least reliable. It applies a fixed percentage with little support.
For most acquired properties, an engineering-based estimate with a site inspection is the common standard.
Red flags the IRS looks for
- Studies with no named preparer or no credentials
- Percentages copied from other buildings with no support
- Missing reconciliation to actual cost
- Structural items, like load-bearing walls or main HVAC, classified as 5-year property
- Land costs mixed into depreciable assets
Frequently asked questions
Does the IRS approve studies in advance?
Is a software-generated study acceptable?
Who has to sign the study?
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 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 guideThe IRS Cost Segregation Guide (Publication 5653) in Plain English
The IRS Cost Segregation Audit Techniques Guide, Publication 5653, explained simply: what it covers, what changed in 2025, and why property owners should care.
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 guideWhat's in a Cost Segregation Report (and How to Read One)
A cost segregation report should be more than a summary page. Learn the sections a quality report includes and what to check before you file.
Read guideThis content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.