Cost Segregation- what kind of study is best?

[Jason Milko]

We recently purchased our first rental, and are approaching our first tax season as landlords. I just learned about the cost segregation study, and how it can save an investor a lot on taxes. From my research, I see that there are differing levels of detail and support available for these studies. The primary categories are 1) DIY, 2) hire someone for a virtual evaluation, and 3) hire someone to walk the property and evaluate. 

Obviously each of these 3 come at different price points and different levels of security. What is the sweet spot for someone just starting out with little cash at their disposal? I would prefer to save money but understand the long term trade off of a more expensive option. Is the added cost of option 2 or 3 worth it? How much risk is taken on by going with the cheap option?

[Sam Levine]

Great question!

The key distinction isn't necessarily between a virtual vs. physical walkthrough, but rather between a DIY study and a fully engineered study. A DIY approach relies heavily on general assumptions and data inputs, which can lead to less accurate results and 
typically won’t hold up under an IRS audit because they lack engineering-based support and documentation.

A fully engineered study evaluates the specific details of your property, resulting in a much more accurate and defensible report.

As for whether a virtual or in-person site visit is necessary, that depends largely on the type and complexity of the property. For larger or more complex commercial properties, an on-site inspection may be worthwhile despite the higher cost. But for something like a single-family rental, a qualified engineering team can often produce a highly accurate study remotely—especially if provided with supporting documents like an appraisal, inspection report, survey, and detailed photos.

Hope this helps!