About the Author
This guide was written by Matthew Gigantelli, a cost segregation engineer who has completed engineered studies on over 3,000 properties. Gigantelli holds a B.A. in Finance (summa cum laude) from Rasmussen University and a certification from Boon Tax Educators (2026).
Matthew Gigantelli on why this matters: "The Closing Disclosure is the first document I look at for every acquisition study. It establishes three things that determine the entire study: the depreciable basis, the placed-in-service date, and the property address. Get any of these wrong and every number in the study is wrong. Yet most investors have never read their Closing Disclosure with depreciation in mind."
Why Your Closing Disclosure Matters for Cost Segregation
The Closing Disclosure (CD) — formerly the HUD-1 Settlement Statement — is the official record of your real estate transaction. For cost segregation purposes, it is the source of truth for:
- Sale price — the starting point for your depreciable basis
- Closing date — your placed-in-service date for depreciation
- Property address — must match the study exactly
- Certain closing costs — some add to your depreciable basis, increasing your deductions
Every cost segregation study begins with the Closing Disclosure. If you cannot locate yours, request a copy from your title company or settlement agent.
The Closing Disclosure: Section by Section
A standard ALTA Closing Disclosure is 5 pages. Here is what each section means for your cost segregation study.
Page 1: The Three Numbers That Matter Most
Page 1 contains the transaction summary. Three fields drive your entire depreciation calculation:
1. Sale Price
| Field | Example | What It Means for Cost Segregation |
|---|---|---|
| Sale Price | $180,000 | The starting point for your depreciable basis. This is the total consideration paid for the property. |
The sale price is not your depreciable basis — you must subtract land value and may add certain closing costs. But it is the anchor number.
2. Closing Date
| Field | Example | What It Means for Cost Segregation |
|---|---|---|
| Closing Date | 4/15/2013 | Your "placed in service" date. Depreciation begins on this date. For bonus depreciation, the property must be placed in service during the tax year you claim the deduction. |
The closing date determines which tax year the depreciation starts. If you close on December 28, your first-year depreciation is for that tax year — even though you only owned the property for 3 days. This is why many investors time closings to maximize first-year deductions.
3. Property Address
| Field | Example | What It Means for Cost Segregation |
|---|---|---|
| Property | 456 Somewhere Ave, Anytown, ST 12345 | Must match the cost segregation study exactly. The address is used for RS Means location factor lookup and property tax records. |
Page 1: Loan and Transaction Details
Other Page 1 fields relevant to cost segregation:
| Field | Relevance |
|---|---|
| Loan Amount | Not directly relevant to cost segregation (depreciation is based on total purchase price, not loan amount) |
| Loan Type (Conventional, FHA, VA) | Not relevant to cost segregation |
| Borrower / Seller names | Used for study documentation |
| Settlement Agent | Contact for obtaining copies of closing documents |
Page 2: Closing Costs — Which Ones Add to Your Basis?
This is where most investors and even some CPAs make mistakes. Certain closing costs are added to your depreciable basis (increasing your deductions), while others are expensed or non-deductible.
Costs that ADD to your depreciable basis:
| Closing Cost | Section on CD | Added to Basis? | Why |
|---|---|---|---|
| Transfer taxes | Section E (Taxes and Government Fees) | Yes | Tax paid to acquire the property — capitalized |
| Recording fees | Section E | Yes | Cost of recording the deed — capitalized |
| Title insurance (owner's policy) | Section H (Other) | Yes | Cost of acquiring clear title — capitalized |
| Title search fees | Section C (Services Borrower Shopped For) | Yes | Cost of verifying title — capitalized |
| Settlement/closing agent fee | Section C | Yes | Transaction cost — capitalized |
| Survey fee | Section C | Yes | Cost of verifying property boundaries — capitalized |
| Attorney fees (for purchase) | Section C or H | Yes | Legal cost of acquisition — capitalized |
Costs that DO NOT add to your basis:
| Closing Cost | Section on CD | Added to Basis? | Why |
|---|---|---|---|
| Loan origination fees (points) | Section A (Origination Charges) | No — deductible as interest | Financing cost, not acquisition cost |
| Appraisal fee | Section B | No — deductible as expense | Financing requirement |
| Credit report fee | Section B | No | Financing cost |
| Flood determination/monitoring | Section B | No | Financing cost |
| Homeowner's insurance premium | Section F (Prepaids) | No — deductible as expense | Operating expense |
| Property tax prepaid | Section F | No — deductible as expense | Operating expense |
| Prepaid interest | Section F | No — deductible as interest | Financing cost |
| Mortgage insurance | Section F | No | Financing cost |
| HOA dues | Section H | No — deductible as expense | Operating expense |
| Home inspection fee | Section H | No — deductible as expense | Due diligence cost |
| Home warranty | Section H | No — deductible as expense | Operating expense |
| Real estate commissions | Section H | No — seller's cost | Reduces seller's proceeds, not buyer's basis |
Example basis calculation from a Closing Disclosure:
| Line Item | Amount |
|---|---|
| Sale price | $180,000 |
| + Transfer tax | $950 |
| + Recording fees | $85 |
| + Title insurance (owner's) | $1,000 |
| + Title search | $800 |
| + Settlement agent fee | $500 |
| + Survey fee | $85 |
| = Total acquisition cost (adjusted basis) | $183,420 |
| - Land value (20% estimate) | ($36,684) |
| = Depreciable basis | $146,736 |
This $146,736 is the number your cost segregation study allocates across MACRS recovery periods. The $3,420 in capitalized closing costs increased your depreciable basis — and therefore your total depreciation deductions — by that amount.
Matthew Gigantelli: "I review the Closing Disclosure for every study and I consistently find $1,000-$5,000 in closing costs that should be added to basis but were not. On a $500,000 property, that is $500-$2,500 in additional tax savings that most investors miss because no one told them which closing costs are capitalizable."
Page 3: Transaction Summary
Page 3 shows the borrower's and seller's transaction summaries. For cost segregation, the key items are:
| Field | What to Check |
|---|---|
| Sale price of property | Must match Page 1 |
| Deposit | Your earnest money — part of the total purchase price, not a separate cost |
| Seller credits | If the seller gave you a credit (e.g., $2,500 for repairs), this reduces your acquisition cost and therefore your depreciable basis |
| Prorated taxes | Tax proration adjustments — not added to basis |
| HOA proration | Not added to basis |
Seller credits reduce your basis. If the seller credited you $5,000 at closing for needed repairs, your effective purchase price is $5,000 lower — and your depreciable basis decreases accordingly. However, if you then spend that $5,000 on the repairs, those costs may be added back as capital improvements with their own depreciation schedule (and potentially their own cost segregation study).
Pages 4-5: Loan Disclosures and Contact Information
Pages 4 and 5 contain loan terms, escrow details, and contact information. These pages are not directly relevant to cost segregation, but two items are worth noting:
| Field | Relevance |
|---|---|
| Escrow account details | Shows property tax and insurance amounts — useful for cash flow analysis but not for cost segregation |
| Settlement agent contact | If you need a copy of the Closing Disclosure later, this is who to call |
How to Use Your Appraisal for Cost Segregation
The appraisal is the second most valuable document for a cost segregation study. While it is optional (the engineer can estimate land value from other sources), it provides independent data that strengthens the study.
What the Appraisal Tells Your Engineer
| Appraisal Section | What It Provides for Cost Segregation |
|---|---|
| Appraised value | Independent property valuation — useful for validating the purchase price |
| Land value | The single most important number. Land is not depreciable. The appraisal's land allocation directly determines your depreciable basis. |
| Building description | Construction type, square footage, year built, number of rooms — confirms property characteristics |
| Condition assessment | Physical depreciation affects RS Means cost estimates (RCNLD calculation) |
| Site description | Documents site improvements (paving, landscaping, fencing) that qualify for 15-year treatment |
| Comparable sales | Validates the purchase price and land allocation |
| Cost approach (if included) | Some appraisals include a cost approach that estimates replacement cost — directly useful for cost segregation |
The Land Allocation: The Most Important Number
Land is not depreciable. Every dollar allocated to land is a dollar you cannot depreciate — ever. The land allocation directly determines your depreciable basis:
Depreciable Basis = Purchase Price + Capitalizable Closing Costs - Land Value
| Land Allocation | Effect on $500,000 Property | Depreciable Basis | Impact on Cost Seg Savings (24% accelerated, 37% rate) |
|---|---|---|---|
| 15% | $75,000 land | $425,000 | $37,740 |
| 20% | $100,000 land | $400,000 | $35,520 |
| 25% | $125,000 land | $375,000 | $33,300 |
| 30% | $150,000 land | $350,000 | $31,080 |
A 5-percentage-point difference in land allocation changes your first-year tax savings by approximately $2,200 on a $500,000 property. On a $2,000,000 property, that difference is approximately $8,900.
Where to Find the Land Allocation
In order of reliability:
- Appraisal — the appraiser's land value estimate is the most defensible source
- Property tax assessment — county assessor's breakdown of land vs. improvement value (publicly available, but often outdated)
- Comparable land sales — recent sales of vacant lots in the same area
- Purchase price allocation — if the purchase contract specifies a land allocation (rare for residential)
If no appraisal is available, the engineer typically uses the county tax assessment ratio as a starting point and adjusts based on comparable data. Common land allocations by property type:
| Property Type | Typical Land Allocation |
|---|---|
| Suburban single-family residential | 15%-25% |
| Urban residential (high land value) | 25%-40% |
| Rural residential | 10%-15% |
| Suburban commercial (office, retail) | 20%-30% |
| Urban commercial (CBD) | 30%-50% |
| Industrial / warehouse | 15%-25% |
| Agricultural with improvements | 40%-70% |
Matthew Gigantelli: "The land allocation is the most contested number in a cost segregation study. A 20% land allocation on a $1,000,000 property gives you $800,000 in depreciable basis. A 30% allocation gives you $700,000. That $100,000 difference is worth $8,880 in first-year tax savings at a 24% accelerated rate and 37% tax bracket. If your appraisal shows 20% land and your tax assessor shows 30%, use the appraisal — it is a more defensible, property-specific valuation."
Putting It All Together: From Closing Disclosure to Cost Segregation
Here is the complete flow from closing documents to cost segregation deductions:
Step 1: Gather Your Documents
- Closing Disclosure (required)
- Appraisal (recommended)
- Property photos or video tour (required for engineering-based study)
- Construction cost ledger (if renovation — see our Construction and Renovation Guide)
Step 2: Calculate Your Depreciable Basis
| Line | Source | Amount |
|---|---|---|
| Sale price | Closing Disclosure, Page 1 | $500,000 |
| + Capitalizable closing costs | Closing Disclosure, Page 2 (transfer tax, recording, title, survey, settlement) | $4,200 |
| = Adjusted basis | $504,200 | |
| - Land value | Appraisal or tax assessment (20%) | ($100,840) |
| = Depreciable basis | $403,360 |
Step 3: Apply Cost Segregation
| Category | % of Basis | Amount | MACRS Life |
|---|---|---|---|
| 5-Year Personal Property | 16% | $64,538 | 5-year |
| 15-Year Land Improvements | 8% | $32,269 | 15-year |
| 27.5-Year Real Property | 76% | $306,553 | 27.5-year |
| Total | 100% | $403,360 |
Step 4: Calculate First-Year Deductions
| Component | Depreciation Method | Year 1 Deduction |
|---|---|---|
| 5-Year Property ($64,538) | 100% bonus depreciation | $64,538 |
| 15-Year Property ($32,269) | 100% bonus depreciation | $32,269 |
| 27.5-Year Property ($306,553) | Straight-line over 27.5 years | $11,147 |
| Total Year 1 Depreciation | $107,954 |
At a 37% marginal tax rate: $39,943 in first-year federal tax savings.
Without cost segregation, the entire $403,360 would be depreciated straight-line over 27.5 years ($14,668/year), producing only $5,427 in first-year tax savings. Cost segregation increased Year 1 savings by $34,516.
Common Mistakes with Closing Documents and Cost Segregation
1. Using Loan Amount Instead of Purchase Price
Your depreciable basis is based on the total purchase price, not the loan amount. A $500,000 property with a $400,000 loan has a depreciable basis calculated from $500,000 (minus land), not $400,000.
2. Ignoring Capitalizable Closing Costs
Transfer taxes, recording fees, title insurance, and settlement fees add to your basis. On a $500,000 property, these typically total $3,000-$8,000 — worth $700-$1,900 in additional first-year tax savings through cost segregation.
3. Using Tax Assessment for Land Instead of Appraisal
County tax assessments are often outdated and may not reflect current market conditions. If your appraisal shows 18% land and the tax assessment shows 28%, the appraisal is more defensible and gives you a higher depreciable basis.
4. Wrong Placed-in-Service Date
The closing date on the Closing Disclosure is your placed-in-service date — not the date you moved in, not the date you listed it for rent, and not the date you received your first tenant. Using the wrong date can shift your depreciation to the wrong tax year.
5. Not Accounting for Seller Credits
If the seller credited you $10,000 at closing, your effective purchase price is $10,000 lower. Your depreciable basis must reflect this reduction.
Frequently Asked Questions
Q: How do I determine my depreciable basis for cost segregation?
A: Your depreciable basis equals: Purchase Price + Capitalizable Closing Costs - Land Value. The purchase price comes from your Closing Disclosure (Page 1, Sale Price). Capitalizable closing costs include transfer taxes, recording fees, title insurance, title search, settlement agent fees, and survey fees (Page 2, Sections C, E, and H). Land value comes from your appraisal, county tax assessment, or comparable land sales. A typical residential property has 15%-25% land allocation, meaning 75%-85% of the adjusted purchase price is depreciable.
Q: Which closing costs can I add to my depreciable basis?
A: Closing costs that are directly related to acquiring the property (not financing it) are added to your depreciable basis. These include: transfer taxes, recording fees, owner's title insurance, title search fees, settlement/closing agent fees, survey fees, and attorney fees for the purchase. Costs related to financing (loan origination, appraisal fee, credit report, mortgage insurance) and operating expenses (property tax prepaids, homeowner's insurance, HOA dues) are not added to basis — they are either deductible as expenses or amortized separately.
Q: How is land value determined for cost segregation?
A: Land value is determined using one of four methods, in order of reliability: (1) the appraisal's land value estimate (most defensible), (2) the county property tax assessment's land-to-improvement ratio, (3) comparable vacant land sales in the same area, or (4) the purchase contract's price allocation (rare for residential). Typical land allocations range from 15%-25% for suburban residential to 30%-50% for urban commercial. The land allocation directly determines your depreciable basis — every dollar allocated to land is a dollar you cannot depreciate.
Q: What is the placed-in-service date for cost segregation?
A: The placed-in-service date is the closing date shown on your Closing Disclosure. This is the date depreciation begins, regardless of when you moved in, listed the property for rent, or received your first tenant. For bonus depreciation, the property must be placed in service during the tax year you claim the deduction. The placed-in-service date also determines the applicable depreciation convention (mid-month for real property, half-year for personal property).
Q: Do I need an appraisal for cost segregation?
A: An appraisal is helpful but not required. It provides the most defensible land allocation and an independent property valuation. If no appraisal is available, the cost segregation engineer can estimate land value using the county tax assessment ratio, comparable land sales, and professional judgment. However, if the county assessment shows a significantly higher land allocation than you believe is accurate, obtaining an appraisal can increase your depreciable basis and therefore your cost segregation savings.
Q: Can I do cost segregation if I lost my Closing Disclosure?
A: Yes. Contact your title company or settlement agent (listed on Page 5 of the original Closing Disclosure) to request a copy. If the title company is no longer in business, your county recorder's office has the recorded deed, which shows the sale price and date. Your lender also has a copy in the loan file. The Closing Disclosure is essential for establishing your depreciable basis — the cost segregation study cannot proceed without confirming the purchase price, closing date, and property address.
For a quick cost segregation estimate on your property, try Modern CFO's free calculator. For how closing documents drive cost segregation analysis, see Modern CFO's closing disclosure cost segregation guide.
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