ADU Cost Segregation - How to assess?

Question

BP Friends - We built a detached ADU from scratch on our primary residence and placed it into service in Jan 2025 as a short-term / mid-term rental (Airbnb + VRBO). We qualify as Real Estate Professionals (REP).

Numbers: Purchase price (Oct 2022): $900K; ADU construction cost (Jan 2025): $120K (Incl. Permits/Plans/Structure/Appliances/Design/Furnishing etc.); Appraisal (Jan 2025): $1.057M

Question: For cost segregation / accelerated depreciation, should depreciation be based on:

• 1) Only the ADU build cost ($120K)or
• 2) Overall property basis, excluding land, using the ADU’s square-footage percentage?

Key point: ADU is a new build (not a conversion) and land was already owned. Would appreciate insight from anyone who’s done cost seg on new ADUs?

Thanks, HK

Sagiv O. · Answer

Good thread — to add a bit to what Michael and Malik covered:

You're right to focus on the ADU construction cost ($120K) as the depreciable basis. Since it's a new detached structure placed in service in 2025, you treat it like a newly acquired rental asset — the 2022 purchase price and overall property basis are irrelevant for this depreciation calculation.

On the cost seg question: at $120K construction cost, the math on a full engineering-based study might be tight depending on what's inside. The key items to look at are appliances, flooring, landscaping/hardscaping, and any specialty electrical or plumbing — those tend to be the biggest 5/15-year reclassification candidates in a new ADU. Your build invoices should have enough itemization to at least identify the major components.

One more thing worth confirming with your CPA: the STR vs. MTR classification for 2025 affects whether REPS allows you to deduct the losses against ordinary income. Average rental period under 7 days = STR (REPS doesn't apply in the same way), over 7 days = MTR where REPS does help. Given you said Airbnb + VRBO, that's often STR territory but depends on how long your bookings typically run. Worth nailing that down before you finalize the return.

Hemant Karira · Answer

Thankyou all for all the inputs, they are helpful!! 🙏

Malik Javed · Answer

@Hemant Karira Because this was a newly constructed, detached ADU placed in service in 2025, the depreciable basis for cost segregation is the 120,000 construction cost, not a square footage allocation of the original 900,000 purchase price.

The 2022 purchase established basis in the land and original dwelling. The ADU is a separate capital improvement, so its depreciable basis is its actual cost. Square footage allocation applies when converting existing space to rental use, which did not occur here.

Account Closed · Answer

I recently went through an engineered study and I’d focus on the actual ADU build cost, any improvements directly tied to it, not your original home purchase. Since it’s a new detached structure, that’s usually the cleanest way to approach the basis. What ended up mattering even more for me was how the rental was classified for the year. STR and MTR are treated differently, and REP doesn’t automatically solve it if it’s operating as a short-term rental. The classification really drives how useful the depreciation ends up being.

Michael Plaks · Answer

Cost segregation in your case is based on the ADU building costs, plus possibly a little bit of land improvements allocated to ADU.

As far as STR/MTR - step one is to determine whether the property was an STR or MTR for 2025, and it's calculated for the entire year. MTR does indeed obey the REP rules, but STRs have very different rules, and REP does not apply.

These two pointers are merely a prequel to a much longer conversation.

Christopher Tile · Answer

As @Michael Plaks stated, definitely ensure you are aware of the STR/MTR/LTR distinction and how that impacts the activity on your tax return. REPS will make MTR/LTRs non-passive, but not STRs

Being that the new build is just over 100k, ensure that the cost segregation will provide more value than the cost of the study. Being that it's new construction, you likely can identify most of the bonus depreciable assets without the need for a cost segregation (appliances, furnishings, etc). Not to say that a cost seg isn't recommended, however with all the receipts for payments, a cost seg company is likely going to rely on many of those to construct the study/determine the asset classes.