Who Should Prepare a Cost Segregation Study? What the ATG Says

Choosing who prepares a cost segregation study is more important than simply choosing a company name. The 2025 IRS Cost Segregation Audit Technique Guide says preparing a study requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. It also says there are no prescribed qualifications for cost segregation preparers, while noting that credentials and expertise can affect the accuracy and quality of a study. For commercial real estate investors, the better question is not simply who can produce a report. It is whether the person preparing the study has the engineering, construction, estimating, allocation, and tax knowledge needed to support the conclusions.

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Key Takeaways

• The ATG says cost segregation requires knowledge of both construction and tax law involving property classifications.
• A strong preparer connects engineering observations, cost estimating, documentation, asset classification, and tax treatment.
• The ATG says credentials and expertise can affect the overall accuracy and quality of a study.
• Construction engineers can be particularly valuable when studies involve complex assets or estimated allocations between § 1245 and § 1250 property.
• Investors should evaluate the preparer's experience, methodology, documentation, and ability to explain the engineering behind the conclusions.
• The cost of a study should be evaluated against the quality and support of the resulting allocation, not simply the price of the report.
• A quality cost segregation study requires more than knowing buildings or knowing tax. It requires connecting the two through engineering and cost analysis.

What Does the ATG Say About Cost Segregation Preparers?

The 2025 ATG addresses preparer expertise directly as one of the principal elements of a quality cost segregation study.

Its starting point is important.

Preparing a cost segregation study requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes.

The ATG also says there are no prescribed qualifications for cost segregation preparers.

That means the IRS does not establish one specific license, professional designation, or credential that every preparer must possess.

But the ATG immediately adds an important qualification: the preparer's credentials and level of expertise may affect the overall accuracy and quality of the study.

The ATG then makes a practical observation.

In general, a study prepared by a construction engineer is more reliable than one prepared by someone with no engineering or construction background.

But construction knowledge alone is not enough.

The ATG specifically identifies three areas as important:

• Construction knowledge
• Experience in cost estimating and allocation
• Knowledge of applicable tax law

That combination is important because cost segregation sits at the intersection of physical property, construction cost, engineering analysis, and tax classification.

How Does Expertise Affect the Study?

A cost segregation study starts with a physical property.

Someone has to determine what is actually there.

That requires understanding construction.

Someone then has to determine what the assets cost.

That requires cost estimating, allocation, or analysis of actual project costs.

Someone also has to determine the appropriate depreciation classification.

That requires knowledge of the applicable tax rules and supporting legal authorities.

These tasks are connected.

Consider a commercial building's electrical system.

An electrical contractor may know how the system was installed.

A tax professional may know the depreciation rules.

But the cost segregation analysis may require someone to determine which portions of the electrical distribution system support § 1245 property and which portions support the building.

The ATG specifically recognizes that studies allocating estimated costs between § 1245 and § 1250 property, particularly electrical or plumbing component systems, typically require an engineer experienced in construction and construction estimating.

This is why the engineering cost segregation process begins with understanding the property rather than starting with a desired tax result.

At CostSegRx, that means asking:

• What exists?
• Why does it exist?
• What business activity does it support?
• How is it installed?
• What documentation supports it?
• How should the cost reasonably be allocated?

Engineering produces the supportable conclusion.

Tax treatment follows that conclusion.

Why Does the Preparer's Background Matter?

Cost segregation is factually intensive.

The classification of an asset cannot always be determined simply by its name.

The same general type of system can serve different functions in different properties.

That means the person preparing the study needs to understand the facts behind the asset.

The ATG says the determination of § 1245 property is factually intensive and must be supported by corroborating evidence. It also identifies qualified individuals and professional firms competent in design, construction, auditing, and estimating procedures relating to building construction as an underlying assumption of a proper study.

That does not mean every study requires a large team of specialists.

It means the complexity of the property and the methodology should be matched by appropriate expertise.

The ATG's examination guidance reinforces this point. Studies with significant tax impact or complex assets may require specialist assistance, and studies involving estimated allocations between § 1245 and § 1250 property typically require an engineer experienced in construction and construction estimating.

For investors, this is a useful distinction.

The question is not:

“Does the preparer have a tax background?”

It is:

“Does the preparer have the expertise necessary to understand, classify, and cost the property being studied?”

When Is Engineering Expertise Especially Important?

Some properties are relatively straightforward.

Others contain complex systems, specialized equipment, extensive infrastructure, or large numbers of individual assets.

The ATG identifies several circumstances where specialist expertise may be important.

A study with significant tax impact generally requires specialist assistance. These studies may involve a large number of assets or complex assets.

Engineering expertise becomes particularly relevant when the study requires estimating or allocating costs between § 1245 and § 1250 property.

Electrical and plumbing systems are examples.

An engineer may need to understand:

• How the system was designed
• Where the system is located
• What equipment or spaces it serves
• How components are connected
• Which portions support specific business activities
• What construction documentation supports the analysis
• How the costs should be allocated

That type of analysis is fundamentally different from simply applying an industry percentage.

The ATG's quality-study guidance also calls for engineering take-offs when determining unit costs. These take-offs should be documented and individual property units should be identified on as-built drawings.

The complexity of the property should therefore influence the depth of the study.

What Should Investors Look for in a Preparer?

The ATG provides a useful framework for evaluating the quality of a study.

First, identify the person who actually prepared the analysis.

The ATG says a quality study should identify the preparer and reference their credentials, experience, and expertise in cost segregation.

Second, understand the methodology.

The ATG says a quality study should describe the methodology used and detail the steps taken to classify assets and determine costs.

Third, ask what documentation supports the conclusions.

The ATG says a quality study uses the best available documentation to classify assets and determine costs, with contemporaneous documentation considered the most reliable and trustworthy.

That documentation may include:

• Construction drawings
• Architectural plans
• Mechanical drawings
• Plumbing drawings
• Electrical plans
• Equipment schedules
• Specifications
• Contractor documentation
• Vendor invoices
• Photographs
• Site observations
• Cost reconciliation records

Fourth, ask how the study connects costs to specific assets.

The ATG identifies engineering take-offs, asset organization, cost reconciliation, legal analysis, and documentation as principal elements of a quality study.

That is also why what defines a quality cost segregation study matters when evaluating a provider.

The report should allow a qualified reviewer to understand how the preparer moved from the physical property to the final cost allocation.

Does a Lower Study Fee Mean a Better Investment?

Illustrative example only. Figures shown are estimated for demonstrative purposes only. Actual land allocations, asset classifications, depreciation, and tax results depend on the specific property, supporting documentation, engineering analysis, and taxpayer circumstances.

Assume an investor is comparing two cost segregation proposals for a $10 million commercial property.

Provider A charges $5,000.

Provider B charges $8,000.

The initial price difference is:

$8,000 − $5,000 = $3,000

Now assume the lower-cost study uses limited documentation and produces a $1.5 million allocation to shorter recovery-period property.

The higher-cost study uses a site inspection, construction documentation, engineering analysis, cost reconciliation, and asset-specific classifications and produces a $1.8 million supportable allocation.

The difference in allocated cost is:

$1,800,000 − $1,500,000 = $300,000

The example does not establish that the higher allocation is correct or that the more expensive study is always better.

It demonstrates the more important point:

Study price and study quality are different questions.

The ATG focuses on accuracy, documentation, methodology, expertise, and substantiation rather than establishing a required fee or a required percentage result.

Investors should therefore evaluate what is included in the analysis rather than comparing proposals based only on the upfront price.

What Is the Most Important Lesson?

The 2025 ATG does not establish one mandatory credential for cost segregation preparers.

Instead, it emphasizes expertise.

The preparer needs to understand construction and tax classification.

The study needs appropriate cost estimating and allocation.

The conclusions need documentation.

The methodology needs to be explained.

The asset classifications need to be supported.

And the level of expertise should match the complexity of the property and the issues being analyzed.

This is why the ATG identifies preparation by an individual with expertise and experience as one of the 13 principal elements of a quality cost segregation study.

For investors, the practical lesson is simple.

Do not evaluate a cost segregation provider solely by the report's price, the projected percentage, or the speed of delivery.

Ask who is doing the engineering.

Ask how the property was analyzed.

Ask what documentation supports the conclusions.

Ask how costs were determined.

Ask how the final allocation was reconciled.

For CostSegRx engineers, the principle is straightforward:

A quality cost segregation study requires more than knowing buildings or knowing tax. It requires connecting the two through engineering and cost analysis.