“It is a red flag with the IRS”
The IRS publishes a guide describing what a quality study contains. Strategies the Service writes a manual for are not red flags. Poorly documented studies are a different matter, which is a statement about method, not about the strategy.
“You have to do it in the first year”
You do not. A look-back reaches to the placed-in-service date on any property still owned and placed in service after 1986, with the catch-up landing on the current return via Form 3115. This misconception costs owners more than any other on this list.
“You have to amend prior returns”
The opposite. Depreciation on an impermissible method for two or more consecutive years is a method of accounting, and methods are corrected prospectively, not by amending.
“It only works on big commercial buildings”
It works best on them, but with 100% bonus permanent the economics reach well down into single-family rentals and small multifamily — particularly across a portfolio where one engineering model applies to many similar assets.
“The parking lot is part of the land”
Land is not depreciable. Paving on top of it is a 15-year land improvement and fully bonus eligible. On retail, industrial and multifamily properties this is frequently the single largest reclassified category, and it is the second most expensive misconception on this list.
“Recapture wipes out the benefit”
Recapture reduces the benefit; it rarely wipes it out. You have had use of the deferred tax in the meantime, part of the gain is capped at 25% rather than ordinary rates, and three common exits — death, a 1031 exchange, and simply continuing to hold — largely avoid it.
“My CPA would have mentioned it”
Many do. Many are also preparing several hundred returns between January and April and are not engineers. Cost segregation is a specialist discipline that sits alongside tax preparation rather than inside it, which is precisely why firms like ours exist and why most of our work comes through accountants.
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