Your Reference Guide to
Cost Segregation Terminology.

The most methodical and accurate cost segregation methodology, using detailed engineering analysis of all available construction records, blueprints, and documentation. Every component individually identified, measured, and valued.

For a $3M medical office building, an Approach 1 study reviews all architectural drawings, identifies 847 individual components, assigns cost to each from actual contractor invoices, and cites a published source for each classification. The study is 60+ pages.

Your specific building was analyzed component by component. Every item that can be reclassified was found and documented. The IRS rates this as the most accurate approach available.

A detailed engineering methodology using estimates where complete records are not available, recognized by the IRS as highly accurate and defensible. Cost Seg America uses IRS Approaches 1 and 2 on every study.

For an acquired building where original contractor invoices are unavailable, Approach 2 uses current-cost estimating to assign values to each individually identified component, with published source citations throughout.

Sometimes the original paperwork doesn't exist. Approach 2 fills those gaps with engineering estimates rather than software averages - still individual, still documented, still defensible.

A partial engineering cost segregation methodology that applies engineering analysis to identify obvious personal property items but assigns remaining components to the 39-year residual category in bulk, without individually identifying or valuing them. The IRS recognizes this approach but considers it less accurate than Approaches 1 and 2.

An Approach 4 study on a $2M commercial building identifies carpet, specialty lighting, and appliances as 5-year property  obvious items any inspector would catch. The MEP systems, site improvements, and dozens of harder-to-find components are bundled into the 39-year residual. An Approach 1 & 2 study on the same building finds $60,000$80,000 more in reclassified property by identifying what Approach 4 left in the 39-year bucket.

Approach 4 finds the easy stuff. It misses the harder-to-find components  the MEP systems, the detailed site infrastructure, the purpose-built electrical ecause it stops at "good enough" instead of going component by component. Some firms use Approach 4 because it's faster to produce. The gap between Approach 4 and Approaches 1 & 2 is typically $60,000$80,000 per $1 million of property value.

A cost segregation methodology using software to apply national cost averages to a property's cost basis. No individual component analysis. No published source citations. Gaps are filled with modeling software rather than engineering documentation.

A $2,900 cost segregation study. The software takes your $2 building, applies industry-average percentages, and produces a report showing $280,000 in reclassified property. An Approach 1 & 2 study on the same building finds $400,000.

The cheap study. Your building was never individually analyzed. A software model guessed what buildings like yours typically contain. The gap between that guess and what is actually in your building is money you never recovered - typically $60,000–$150,000 per $1,000,000 of property value.

The line-by-line asset listing produced by a fully engineered cost segregation study, showing every individually identified component with its name, quantity, unit cost, total value, depreciation classification, and source citation. This is the document an IRS examiner looks for when auditing a cost segregation study.

A Cost Seg America study on a $3M hotel produces a component unit detail schedule with 1,200+ line items. Line 847: "Guest Room Vinyl Plank Flooring - 14,200 SF - $3.85/SF - $54,670 - 5-year MACRS — Source: RS Means 2024." Every value traceable. Every classification supported. Every item on its own line. This is the document 125+ IRS examinations have reviewed without a single loss.

If an IRS agent opens your cost segregation study and asks "where is the list of every individual component?" - this is that document. Studies that use IRS Approach 5 software don't have it. Studies built on Approaches 1 and 2 do. The presence or absence of this schedule is the single clearest indicator of whether a study will survive an audit.

The most methodical and accurate cost segregation methodology, using detailed engineering analysis of all available construction records, blueprints, and documentation. Every component individually identified, measured, and valued.

For a $3M medical office building, an Approach 1 study reviews all architectural drawings, identifies 847 individual components, assigns cost to each from actual contractor invoices, and cites a published source for each classification. The study is 60+ pages.

Your specific building was analyzed component by component. Every item that can be reclassified was found and documented. The IRS rates this as the most accurate approach available.

A detailed engineering methodology using estimates where complete records are not available, recognized by the IRS as highly accurate and defensible. Cost Seg America uses IRS Approaches 1 and 2 on every study.

For an acquired building where original contractor invoices are unavailable, Approach 2 uses current-cost estimating to assign values to each individually identified component, with published source citations throughout.

Sometimes the original paperwork doesn't exist. Approach 2 fills those gaps with engineering estimates rather than software averages - still individual, still documented, still defensible.

A partial engineering cost segregation methodology that applies engineering analysis to identify obvious personal property items but assigns remaining components to the 39-year residual category in bulk, without individually identifying or valuing them. The IRS recognizes this approach but considers it less accurate than Approaches 1 and 2.

An Approach 4 study on a $2M commercial building identifies carpet, specialty lighting, and appliances as 5-year property  obvious items any inspector would catch. The MEP systems, site improvements, and dozens of harder-to-find components are bundled into the 39-year residual. An Approach 1 & 2 study on the same building finds $60,000$80,000 more in reclassified property by identifying what Approach 4 left in the 39-year bucket.

Approach 4 finds the easy stuff. It misses the harder-to-find components  the MEP systems, the detailed site infrastructure, the purpose-built electrical  because it stops at "good enough" instead of going component by component. Some firms use Approach 4 because it's faster to produce. The gap between Approach 4 and Approaches 1 & 2 is typically $60,000–$80,000 per $1 of property value.

A cost segregation methodology using software to apply national cost averages to a property's cost basis. No individual component analysis. No published source citations. Gaps are filled with modeling software rather than engineering documentation.

A $2,900 cost segregation study. The software takes your $2 building, applies industry-average percentages, and produces a report showing $280,000 in reclassified property. An Approach 1 & 2 study on the same building finds $400,000.

The cheap study. Your building was never individually analyzed. A software model guessed what buildings like yours typically contain. The gap between that guess and what is actually in your building is money you never recovered — typically $60,000 - $150,000 per $1,000,000 of property value.

The line-by-line asset listing produced by a fully engineered cost segregation study, showing every individually identified component with its name, quantity, unit cost, total value, depreciation classification, and source citation. This is the document an IRS examiner looks for when auditing a cost segregation study.

A Cost Seg America study on a $3,000,000 hotel produces a component unit detail schedule with 1,200+ line items. Line 847: "Guest Room Vinyl Plank Flooring - 14,200 SF - $3.85/SF - $54,670 - 5-year MACRS - Source: RS Means 2024." Every value traceable. Every classification supported. Every item on its own line. This is the document 125+ IRS examinations have reviewed without a single loss.

If an IRS agent opens your cost segregation study and asks "where is the list of every individual component?" - this is that document. Studies that use IRS Approach 5 software don't have it. Studies built on Approaches 1 and 2 do. The presence or absence of this schedule is the single clearest indicator of whether a study will survive an audit.

An IRS designation under IRC §469(c)(7) allowing taxpayers who spend more than 750 hours per year in real estate activities AND more than 50% of their working time in real estate to treat rental losses as non-passive — deductible against ordinary income without limitation.

A physician who also manages rental properties does NOT qualify as a REP unless real estate constitutes more than 50% of total working hours. A full-time property investor who logs 800+ hours in real estate typically qualifies.

REP status is the key that unlocks cost segregation deductions for high-income earners with rental properties. Without it, the deductions remain passive. With it, they offset wages and business income immediately.

A provision under IRC §469 that removes a short-term rental property from the passive activity rules when the average rental period is 7 days or less AND the owner materially participates in the activity. When both conditions are met, depreciation losses generated by cost segregation can offset ordinary income without REP status.

A physician earns $600,000 per year and does not qualify as a Real Estate Professional. However, she owns a $900,000 Airbnb property where average stays are 4 nights and she manages it herself (material participation). A cost segregation study generates $270,000 in Year 1 deductions. Under the STR exception, the full $270,000 offsets her ordinary income - saving $99,900 in federal taxes at 37%.

If you own a vacation rental, rent it by the night, and manage it yourself, the IRS treats it differently from a regular rental. The passive activity rules don't apply — which means cost segregation deductions work against your full income, not just rental income. This is why Airbnb and VRBO owners are some of the highest-benefit candidates for cost segregation.

The portion of gain from a real property sale attributable to straight-line depreciation previously taken, taxed at a maximum rate of 25% - not at the standard long-term capital gains rate of 0%, 15%, or 20%.

You took $200,000 in §1250 depreciation over the years. When you sell, $200,000 of your gain is taxed at 25% rather than 20%. Cost: $10,000 extra vs. no depreciation. Benefit of the deduction while holding: far more.

The IRS caps the tax on real property depreciation recapture at 25%. If you deducted it at 37%, the 12% difference is permanent savings.

The total amount paid for a property including purchase price, closing costs, and improvement costs, used to calculate depreciation deductions and capital gains on sale. Land is excluded from depreciable basis.

You pay $2,000,000 for a building. The land is valued at $400,000. Depreciable basis = $1,600,000. That $1,600,000 is what cost segregation analyzes and reclassifies.

What you paid for the building (minus the land) is your cost basis. Depreciation is based on this number. Cost segregation does not change the number - it changes how fast you use it.