As the tax year draws to a close, real estate investors in Long Beach and surrounding areas are often scrambling to gather receipts and bank statements to reconstruct their property expenses. According to CostSegRx, an engineering-based cost segregation firm, this last-minute approach can lead to missed details that significantly affect depreciation deductions. “Property owners should really document all of their capital improvements and expenses throughout the year,” said Brian Kiczula of CostSegRx. “It’s not just at the year-end.” The goal is not a perfect filing system but a clear record of what work was done, when it was completed, and what it cost.
Many investors lump all property costs together and attempt to expense them immediately, but tax treatment differs for capital improvements versus repairs. When a CPA or cost segregation professional reviews spending, they apply the BAR test—betterment, adaptation, or restoration. Costs that meet one of these definitions generally must be capitalized and depreciated over 27.5 years for residential rentals, 39 years for commercial properties, or shorter lives of 15, 7, or 5 years. Costs that fail the test typically fall under repairs and maintenance, which can be deducted in the year incurred. Without proper records, distinguishing between these categories becomes unreliable, potentially costing owners valuable tax benefits.
In CostSegRx’s experience, the most commonly missing records are individual receipts and clear descriptions of work performed. Owners often fall into two groups: those who keep every receipt in cloud storage and track improvements with dates in a spreadsheet, and those who know the total spent but cannot break it down by project components like flooring, windows, or lighting. The latter situation is often not the owner’s fault, as many contractors bill in lump sums without itemizing costs. For such cases, CostSegRx uses construction cost estimating, rebuilding contractor costs from owner descriptions and property images so each improvement can be properly classified. The firm recommends simple habits: save each receipt or invoice, note what was done, record completion dates, and photograph finished work.
Timing becomes especially important when a property is purchased and renovated in the same year. Owners must document when improvements were placed into service relative to the property itself. If renovations were completed before the property went into service, the original cost segregation study may need adjustment—for example, removing old carpet with no value and adding the new carpet. If the property went into service first and a major remodel followed, the tax preparer would typically receive two separate fixed asset schedules, one for the acquisition and one for the remodel. This pattern is common with hotels, where an owner acquires a property and begins updating rooms the following year.
Disorganization is common among landlords, but it is rarely too late to get organized. CostSegRx recently completed a study on a multi-year renovation of three buildings—a restaurant, a boutique bed and breakfast, and a group of shops—where the owner lacked original construction data, yet the team still produced a quality study. As long as an owner can document that improvements were made, a study can usually still be done. The practical takeaway is to stop treating documentation as a year-end task; keep records as work happens, share them with a CPA, and ask early how renovations will be classified. For more information, visit costsegrx.com.
