As the tax year winds down, real estate investors often scramble to reconstruct property expenses from inboxes and bank statements. That last-minute approach can lead to lost details that directly affect depreciation, according to CostSegRx, an engineering-based cost segregation firm. Brian Kiczula of CostSegRx emphasizes that owners should document capital improvements and expenses throughout the year, not just at year-end. The goal is not a perfect filing cabinet but a clear record of what work was done, when it was done, and what it cost.
The distinction between capital improvements and repairs is critical. Many investors lump all property costs together and try to expense them, but tax treatment differs. When a CPA or cost segregation professional reviews spending, they typically apply the BAR test—asking whether each cost is a betterment, an adaptation, or a restoration. Costs meeting one of those definitions generally must be capitalized and depreciated over 27.5 years for residential rental property, 39 years for commercial property, or shorter lives of 15, 7, or 5 years. Costs that do not meet the test usually fall into repairs and maintenance, which can be deducted in the year incurred. Without proper records, there is no reliable way to determine which bucket a cost belongs in.
In CostSegRx’s experience, the most common gaps are individual receipts and clear descriptions of work performed. Owners tend to fall into two groups: those who keep every receipt in a cloud folder and track each improvement with dates in a spreadsheet, and those who know roughly how much they spent but cannot say how that money was divided among new flooring, windows, lighting, or a bathroom remodel. The second group is often not at fault, as many contractors bill in lump sums without breaking out costs. For owners in that position, CostSegRx uses construction cost estimating, rebuilding contractor costs from the owner’s description and images so each improvement can be classified. For the rest of this year and going forward, useful habits include saving each receipt or invoice, writing a short note on what was done, recording the completion date, and taking photos of the finished improvement.
Timing matters when buying and renovating in the same year. Owners who acquired a property this year need the same documentation plus one more detail: when improvements were placed into service compared with the property itself. If renovations were finished before the property went into service, the original cost segregation study may need adjustment. For example, if an owner replaced all the carpet before the building was placed into service, the old carpet had no value and would be removed from the purchase price allocation, with the new carpet added in its place. If the property went into service first and a major remodel followed months later, the owner’s tax preparer would typically receive two separate fixed asset schedules, one for the acquisition and one for the remodel. The same approach applies when a property is bought one year and renovated the next—a pattern CostSegRx often sees with hotels.
It is rarely too late to get organized. Disorganization is common among landlords, who are running the business of their properties without a team tracking every expense. According to CostSegRx, being disorganized is usually the rule rather than the exception, but that does not mean the opportunity is lost. The firm recently completed a study on a multi-year renovation of three buildings—a restaurant, a boutique bed and breakfast, and a group of shops—where the owner lacked original construction data, and the team still produced a quality study. As long as an owner can document that improvements were made, a study can usually still be done. The practical takeaway is to stop treating documentation as a year-end task: keep records as work happens, share them with your CPA, and ask early how renovations will be classified.
