Checking cost Seg and depreciation across a complicated portfolio

Member since 2009 · 1 post · 1 vote

How do you sanity-check your cost seg and depreciation?

Once a portfolio gets past a few properties, and several 1031's with TIC's etc, the return gets complicated: cost seg studies, passive loss limits, a few entities, maybe an SDIRA. Beyond trusting your preparer, what do you actually do to make sure it's right?

Do you have a second set of eyes, a checklist, or a question you always ask? And has anything ever slipped through that you caught later, or wish you had?

Curious how other investors handle this.

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
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I have a couple of clients who delegated this task to Claude. It was helpful, but Claude cannot replace a tax pro as of today. It can only point out a potential area to verify, but the verification has to be done by a tax pro.
And, having reviewed countless complex tax returns prepared by investors themselves, by H&R Block, and by CPAs - it is sadly very rare to find one without drastic mistakes. Not what you wanted to hear, but it is the truth, especially when you have a large portfolio with cost seg and 1031s.
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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
3d
I generally trust my CPA, but occasionally review our 1040 form 8582. Looking over your depreciation schedules can also be useful.
I've not done a 1031 so am not sure how that is carried on the 1040.
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Kasing Ng
Accountant · San Francisco, CA · Member since 2026 · 107 posts · 58 votes
3d
Honest answer, on a portfolio your size trusting the preparer isn't enough, and it's not really their fault. Complex returns just have too many hand-offs and stuff slips between the cracks.
First number I'd check is your suspended passive losses on the 8582. Michael and Greg already flagged it and they're dead on. That carryforward quietly compounds any mistake year after year. If a loss got dropped or mis-tracked three returns ago, it just rides along wrong until you sell something and go to release it, and suddenly the math doesn't foot. Pull the actual worksheets, not the summary, and check that this year's beginning number matches last year's ending number. Sounds dumb, breaks more often than you'd think.
Cost seg's the other usual suspect. The study hands you the 5, 7, 15 and 39 year buckets, but the return has to actually depreciate those same dollars over those same lives. The failure mode is the schedule lumping it back into 39 year because nobody re-keyed the allocation. Then you paid for the study and never got the benefit. Worth tying the study totals to the schedule line by line.
The 1031s are where the TICs really bite. Your basis today is a chain of carryovers from every prior exchange, so one broken link early on and every year since is off. That one's worth tracing all the way back once, even if it's a pain.
So to your actual question, no checklist magic, just tie the handful of numbers that carry forward (suspended losses, basis, the depreciation schedule) back to where they came from. Those are the ones that silently rot. A real second read once a year usually catches it before it snowballs. Happy to tell you what to pull if you want to run it yourself.
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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
3d
I would be having the preparer walk you through their work or at least get an understanding of how the numbers came together.
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Noah Hanson
Member since 2026 · 2 posts · 0 votes
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Kasing's point about the carryover numbers is a good one. The other half is the paper trail behind them. My partner runs several entities, and the biggest headache was the same number living in three places and not agreeing. What's helped is one folder per entity per year holding the documents behind every number that carries forward: closing statements, the exchange paperwork, the cost seg study. When something looks off, you can trace it yourself before you go back to the preparer, and that conversation goes a lot faster. How are the TIC interests held, in your own name or inside one of the entities?
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
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Trey, once a portfolio gets to this level of complexity, I think the biggest mistake is reviewing each item in isolation. A cost seg can be correct, a 1031 can be correct, and the passive-loss calculations can be correct, but the way everything carries through the return still needs to tie together.
My checklist would start with reconciling the depreciation schedules back to the actual properties and making sure the 1031 basis and depreciation history carried over correctly. Then I'd look at suspended passive losses, TIC interests, and each entity to make sure nothing is being duplicated or left behind.
I’d also want to compare the current return against the prior year. That’s often where you catch something that looked fine on the current return but doesn't reconcile with what happened previously. For a complicated portfolio, having a second set of eyes isn't necessarily about assuming your preparer made a mistake. It's about making sure the whole picture ties together across properties, entities, and years.
Feel free to DM me, I’d be happy to send over a few resources that might be helpful.
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Sagiv O.
Real Estate Investor · Austin, TX · Member since 2017 · 102 posts · 25 votes
3d
One check that catches real errors: tie three numbers together — the cost seg study's reclassified total, the depreciable basis on Form 4562, and the purchase allocation on your closing statement. If the study reclassified more than you actually paid, or never adjusted for the closing statement, the return is wrong even when every depreciation bucket looks tidy. On 1031s specifically, ask which basis number the study started from — I've seen exchange replacement properties where the study used the full purchase price instead of the carried-over exchange basis.
And ask for the actual engineering report, not just the summary page: photos, methodology, who signed it. The IRS cost segregation audit techniques guide is clear that a real study documents the site visit and how each asset was classified — a one-page summary without that backing is hard to defend. If all your CPA got was the one-pager, you don't really know what you have. Run the details by your CPA before relying on it.
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