How to Report Cost Segregation on Your Tax Return
Report cost segregation on Form 4562 (depreciation and amortization) with the reclassified components on their proper recovery periods. The bonus depreciation portion goes on Part II line 14. Regular MACRS goes on Part III. The resulting depreciation flows to Schedule E (rental income). For look-back studies, Form 3115 is filed separately and the Section 481(a) catch-up posts to Schedule E.
Year-of-acquisition reporting
Form 4562 is filed with the tax return for the year the property is placed in service. The bonus depreciation portion (100% for post-Jan-19-2025 acquisitions) goes on Part II Line 14. The remaining basis depreciates on its regular MACRS schedule reported on Part III.
Attach a supporting schedule listing each reclassified asset class from the cost seg report: 5-year personal property total, 15-year land improvements total, real property total.
Schedule E rental income reporting
Schedule E Part I reports rental income, expenses, and depreciation for each rental property. Box 18 (depreciation expense or depletion) carries the depreciation from Form 4562.
The amplified depreciation under cost seg flows to Box 18 and reduces rental income, potentially producing a rental loss. Loss usability depends on passive activity rules under Section 469.
Look-back reporting via Form 3115
Form 3115 with DCN 7 under Rev. Proc. 2022-14 is filed in duplicate with the year-of-change return. The original attaches to the return. The duplicate mails to the IRS Ogden, Utah service center under Rev. Proc. 2015-13.
The Section 481(a) catch-up adjustment posts on Schedule E in the year of change. Negative adjustments (the typical look-back direction) deduct entirely in that year.
Multi-entity reporting
Property held in a single-member LLC: report on the owner's individual Schedule E. Property held in a multi-member LLC or partnership: report at the entity level (Form 1065) with the loss flowing through K-1 to members.
S-corp: Form 1120-S, K-1 to shareholders. C-corp: Form 1120, depreciation reduces corporate taxable income.
Frequently asked questions
- How does WeCostSeg coordinate with my CPA?
- Every engagement follows the three-touch CPA Coordination Protocol. Preliminary analysis CC'd to your CPA on intake, draft report shared five business days before final delivery, and Form 3115 filing coordinated when a Section 481(a) adjustment applies.
- Does OBBBA's 100% bonus apply to my acquisition?
- 100% applies to property under a binding contract on or after January 20, 2025 per Public Law 119-21. Property under a binding contract on or before January 19, 2025 stays on the legacy phase-down: 40% in 2025, 20% in 2026, 0% in 2027 and after.
- Is audit defense included?
- Yes. Every WeCostSeg engagement includes five years of written audit defense at no extra charge, aligned to the 13 Principal Elements of a Quality Cost Segregation Study under IRS Publication 5653 Chapter 4.
- Can I get a free preliminary analysis?
- Yes. Submit property details via the free proposal form or WhatsApp. Engineer-reviewed estimate returned within four business hours during US Eastern hours.
Zawwad Ul Sami, Founder
Zawwad Ul Sami is the founder of WeCostSeg, a founder-led cost segregation firm serving real estate investors across the US. He focuses on strategy, pricing, and the firm's overall direction.