Most Cost Seg Firms Are Getting This Wrong in 2025
Introduction
Multifamily investors, take note: a quiet change in the IRS Audit Technique Guide could blow a hole in your tax strategy and most people haven’t even noticed.
As of 2025, the IRS has clarified its stance on kitchen cabinets, countertops, and sinks in residential rental properties: they’re real property and must be depreciated over 27.5 years (or 39 years for commercial). No more allocating them to 5-year property in your cost segregation study.
The new guidance comes directly from the IRS Audit Technique Guide, pages 298, 305, and 311. If your engineer or CPA is still treating these components as short-life assets, you could be setting yourself up for an audit.
As of 2025, the IRS has clarified its stance on kitchen cabinets, countertops, and sinks in residential rental properties: they’re real property and must be depreciated over 27.5 years (or 39 years for commercial). No more allocating them to 5-year property in your cost segregation study.
The new guidance comes directly from the IRS Audit Technique Guide, pages 298, 305, and 311. If your engineer or CPA is still treating these components as short-life assets, you could be setting yourself up for an audit.
Why This Matters
Historically, many cost segregation firms have treated kitchen components like cabinets and countertops as 5-year property. For years, it was a gray area. If the items were removable or tenant-specific, they could sometimes qualify for accelerated treatment.
But now, the IRS has drawn a line: kitchen cabinets in residential buildings are structural components. They are considered part of the building's shell and must be treated as Section 1250 property.
If your last cost seg study accelerated these items and you're audited? The IRS could not only disallow the deductions but also trigger penalties, interest, and future scrutiny.
But now, the IRS has drawn a line: kitchen cabinets in residential buildings are structural components. They are considered part of the building's shell and must be treated as Section 1250 property.
If your last cost seg study accelerated these items and you're audited? The IRS could not only disallow the deductions but also trigger penalties, interest, and future scrutiny.
What About Removable or Tenant-Specific Cabinets?
There are some exceptions, but they come with strict documentation requirements and audit risk.
According to IRS guidance, certain conditions may still support classifying cabinets as 5-year personal property:
According to IRS guidance, certain conditions may still support classifying cabinets as 5-year personal property:
- Removability:If the cabinets are surface-mounted (not built into framing or walls) and can be removed without damage to the structure, they may qualify.
- Tenant-Specific Use:Cabinets installed for a unique commercial use (e.g., a lab or tech setup in a live/work loft) may be argued as personal property.
- Function-Based Classification:If the cabinets serve a non-building function (e.g., custom millwork for display or sales purposes), and are not permanent, some firms argue they should be accelerated.
But here's the catch: You must be able to prove these conditions. That means photographic documentation, engineering notes, and possibly signed tenant agreements.
Even then, you’re operating in a gray area. The burden of proof is on the taxpayer and if the IRS disagrees, you're the one on the hook.
Even then, you’re operating in a gray area. The burden of proof is on the taxpayer and if the IRS disagrees, you're the one on the hook.
Not Everyone Is Paying Attention
Here’s the problem: many firms are still doing it the old way.
Some engineers and CPAs haven’t updated their process. Others are simply ignoring the guidance, betting that the IRS won’t notice.
A few firms are taking a middle-ground approach. They'll still allocate cabinets to 5-year property if the client signs a disclaimer acknowledging the risk. In this case, the question becomes: how aggressive do you want to be?
The IRS has made this a recurring audit issue for a reason. If you’re planning to refinance or sell, the last thing you want is to have to refile or restate depreciation numbers because of a misclassification.
Some engineers and CPAs haven’t updated their process. Others are simply ignoring the guidance, betting that the IRS won’t notice.
A few firms are taking a middle-ground approach. They'll still allocate cabinets to 5-year property if the client signs a disclaimer acknowledging the risk. In this case, the question becomes: how aggressive do you want to be?
The IRS has made this a recurring audit issue for a reason. If you’re planning to refinance or sell, the last thing you want is to have to refile or restate depreciation numbers because of a misclassification.
What You Should Ask Your Cost Seg Provider
If you own or are buying a multifamily property, here are three quick questions to ask:
- How are you classifying kitchen cabinets, countertops, and sinks?
- Are you following the latest 2025 IRS Audit Technique Guide guidance?
- What documentation are you providing in case of audit?
If your provider can’t answer clearly, then it’s worth digging into.
Final Thoughts
I get it. Most investors don’t read IRS audit manuals for fun. But this kind of nuance is where your tax strategy can either hold up under pressure or get burned.
Whether you’re planning your first cost seg study or reviewing a past one, it's worth making sure your provider is staying current with the latest guidance.
Whether you’re planning your first cost seg study or reviewing a past one, it's worth making sure your provider is staying current with the latest guidance.
Want a second opinion on your property?
We’ll run a no-cost review and show you exactly what’s changed, what’s risky, and what’s still safe to accelerate. Book A Call
We’ll run a no-cost review and show you exactly what’s changed, what’s risky, and what’s still safe to accelerate. Book A Call
About the Author
Sean Graham, CPA specializes in cost segregation, tax depreciation, and real estate tax savings. As the Chief Technical CPA at Maven Cost Segregation: Tax Advisors, he has overseen 1000+ cost segregation studies, helping investors maximize deductions.