Depreciation and cost segregation: what actually decides your schedule

First question: when did the clock start?

Depreciation begins when the property is placed in service, and placed in service does not mean rented. Publication 527's own example is a house repaired and made ready for rent on July 5, advertised in July, actually rented from September 1 — and the house is considered placed in service in July, when it was ready and available for rent. The lesson for anyone finishing a renovation in the fall: document the date the unit was ready and available, with photographs, a listing screenshot and the cleaning invoice.

Second question: is it residential rental property at all?

• A dwelling unit does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis.
• If you live in any part of the building, the gross rental income includes the fair rental value of the part you live in, which changes the 80% arithmetic.

So a duplex where you occupy one side, or a building run much like a small inn, is not automatically on the 27.5-year schedule. Where a property falls outside residential rental property, the recovery period is the longer nonresidential one, and the figure and the mechanics belong to your preparer with Publication 946 open in front of them, not to an article. What matters is that you raise the question. Owners of heavily transient properties depreciating over 27.5 years without ever testing the definition carry a risk they have never priced.

What cost segregation actually is

Strip away the marketing and cost segregation is an allocation exercise: a building is a structure plus components with shorter lives — appliances, carpet, cabinetry, specific fixtures, certain land improvements. A cost segregation study assigns your purchase or construction basis across those categories so each is depreciated over its own period instead of all of it crawling along on the building's schedule. The total deduction over the asset's life does not change; the timing does, and timing is worth money in a high-income year.

The limits that quietly cap the benefit

A big first-year deduction is only useful if you can use it, and three provisions decide that.

What we tell owners to do, in order

One: settle the classification question before the first return, not in year four. Two: if you are buying, keep the acquisition documents that establish the acquisition date and the allocation between land, building, and personal property — a closing statement that lumps everything together costs money later. Three: get a cost segregation quote only after your CPA has confirmed you can actually use the accelerated deductions this year; a study that produces deductions you must carry forward is an expense with a delayed, discounted benefit. Four: remember the exit. What you deduct now changes the arithmetic when you sell, and that computation lives in Publication 544 — so a decision that looks purely beneficial in year one is really a decision about which year you would rather pay in.

None of this substitutes for a preparer who has seen your numbers. What we can do is make sure the operating records support whatever position your CPA takes: dates a unit was ready and available, nights let and nights used privately, capital work separated from repairs, and receipts filed by asset rather than by month. If your records do not look like that, send us the property address: we study every request and tell you honestly whether and how we can help.