How the engineered study holds up under examination.
IRS Publication 5653 framework plus Revenue Procedure 87-56 MACRS class lives, applied to multifamily-specific component patterns. The standard partnership CPAs and IRS examiners both accept.
Authority and the methodology stack
Cost segregation is a methodology, not a special tax election. The Internal Revenue Code already permits accelerated depreciation on personal property and land improvements under MACRS — what the engineered study does is identify those components inside a building purchase and document the allocation defensibly.
- IRC §168 — the MACRS depreciation system. §168(e) defines property classes; §168(k) is bonus depreciation (permanently restored to 100% under OBBBA 2025).
- Revenue Procedure 87-56 — the IRS's MACRS class life table.
- IRS Publication 5653 — the Cost Segregation Audit Techniques Guide.
- Treas. Reg. §1.168(i)-8 — Partial Asset Disposition rules.
- Hospital Corp. of America v. Commissioner (1997) — the foundational Tax Court case establishing that building components meeting §1245 personal-property criteria can be reclassified.
For deeper reference material on each of these, see irsdepreciationrules.com.
What gets identified inside a multifamily property
An engineered MF study identifies and prices components at the asset class level. The four buckets, with multifamily-typical examples:
Component pricing draws from RSMeans construction-cost data adjusted for regional cost factors, building age, and finish-level grade derived from the property's measurable characteristics.
What reclass percentages look like for institutional MF
Reclassification percentages for multifamily are driven by amenity buildout, finish level, and unit-mix density.
| Deal shape | 5-yr | 15-yr | 27.5-yr |
|---|---|---|---|
| Stabilized core, basic finishes | 6–8% | 5–7% | 85–89% |
| Value-add, mid-tier finishes | 8–11% | 6–9% | 80–86% |
| Class-A new construction | 10–14% | 7–10% | 76–83% |
| Garden-style, older vintage | 5–7% | 4–6% | 87–91% |
RANGES REFLECT TYPICAL OUTCOMES FROM ENGINEERED STUDIES ACROSS THE COST SEG SMART NETWORK. INDIVIDUAL PROPERTIES VARY.
Form 3115 §481(a) for prior-year acquisitions
Multifamily acquired in a prior year doesn't lose access to cost segregation. Section 481(a) permits a catch-up adjustment: all previously-missed accelerated depreciation lands in a single year on the current return, with no amended prior-year returns required.
- Engineered study runs the same way — components identified as if the study had been done at acquisition.
- The §481(a) calculation determines the cumulative depreciation difference between what was claimed and what would have been claimed with cost segregation.
- Form 3115 is filed with the partnership's current-year return (Application for Change in Accounting Method, automatic procedure).
- The §481(a) adjustment flows to the K-1s in the year the change is made.
Common use: value-add MF acquired 2–4 years prior where the original tax preparer ran straight-line 27.5-year only.
What lands in the CPA's inbox
Engagement output is a workpaper package, not just a report PDF.
- Engineered study report (40+ page PDF) — component breakdown, methodology citation, basis allocation, property characteristics
- Basis schedule (Excel) — formatted for partnership return integration
- MACRS reclassification tables — broken by recovery class with §1245/§1250 designation
- Form 3115 §481(a) calculation (if applicable) — formatted for direct attachment to the partnership return
- Methodology memo — short narrative explaining the framework
What happens if the partnership return is examined
IRS examination of a partnership return rarely focuses on cost segregation specifically — depreciation is a methodology question, not a facts question. When it does come up, the examiner works from Publication 5653 (their own playbook).
- Component-level documentation tied to verifiable property characteristics
- Construction-cost data references (RSMeans + regional cost factors)
- Citation framework mapping each reclassification to Rev. Proc. 87-56 asset classes
- §1245 vs §1250 designation logic per component
- Hospital Corp. of America and subsequent case-law alignment
Audit defense for the specific study is an hourly engagement quoted separately if a deal is selected for examination. Historically rare; the standard methodology has been settled law since the late 1990s.