Cost Segregation Is Not a Scam. But Some Cost Segregation Providers Are.

Cost segregation is an IRS-endorsed tax strategy with decades of Tax Court precedent. The IRS published a 120+ page Audit Techniques Guide specifically about cost segregation — you do not publish a detailed guide for a strategy you consider fraudulent.

The problem is not the strategy. The problem is an unregulated industry where anyone can sell cost segregation studies with no certification, no licensing, and no accountability.

After reviewing hundreds of competitor studies from investors who came to us after bad experiences, we have catalogued the most common scams, the warning signs, and the standards that separate legitimate studies from dangerous ones.

Author's note (Sam Young, EA): I run a cost segregation company. I benefit when investors trust the industry enough to buy studies. I also benefit when bad providers are exposed, because they erode trust for everyone. This guide is my honest attempt to clean up the information landscape. Some of what I describe below applies to competitors. Some of it could apply to us if we are not careful — which is why we hold ourselves to these standards publicly.

The 5 Most Common Cost Segregation Scams

Scam 1: The Template Study Sold as "Engineering-Based"

How it works: The provider takes your property address and purchase price, plugs it into software that applies industry-average allocation percentages, and delivers a report that looks professional. The report may reference "engineering methodology" but the actual work is template-based with no property-specific analysis.

Why it is dangerous: If audited, the IRS will compare your reclassification to your actual property. A template that assigns 30% reclassification to every SFR regardless of age, construction type, or condition will not hold up when the auditor inspects a 1960s cinder block duplex that should have reclassified 20%.

How to spot it:

  • Ask for a sample report. Look for property-specific details (photos, construction observations, individual component listings)
  • Compare your reclassification percentage to industry averages. If it matches exactly, the report may be template-based
  • Ask who reviewed the study. If no named individual is identified, the "review" may be automated

What a legitimate study looks like: Individual component identification specific to your property. Photos or satellite imagery analysis. Construction-specific cost allocations. A named engineer or qualified professional who reviewed the classifications.

Scam 2: The Percentage-of-Savings Fee with Inflated Classifications

How it works: The provider charges 15–25% of your first-year tax savings. To maximize their fee, they aggressively reclassify as much of the property as possible — classifying structural components as personal property, using unsupported useful life assumptions, or applying reclassification percentages that exceed defensible ranges.

Why it is dangerous: Aggressive classifications increase your audit risk and may result in adjustments, penalties, and interest. You saved 15% on the study fee but may owe 120%+ of those "savings" back to the IRS after penalties.

How to spot it:

  • Reclassification percentages significantly above industry averages (e.g., 45%+ for a standard SFR)
  • No discussion of the trade-off between aggressive and conservative classifications
  • The provider resists explaining their methodology in detail
  • Your CPA or tax advisor flags the classifications as unusually high

Typical defensible reclassification ranges:

Property TypeConservativeModerateAggressive (Higher Risk)
Single-family rental20%–25%26%–32%33%+
Small multifamily22%–27%28%–34%35%+
Office25%–30%31%–38%39%+
Restaurant30%–38%39%–44%45%+

Numbers above the "moderate" range are not automatically wrong but require stronger documentation and property-specific justification.

Scam 3: The "Full Study for $299" Bait

How it works: A provider advertises "complete cost segregation studies" for $99–$299. The deliverable is a 2–5 page document with a single reclassification number and no supporting methodology.

Why it is dangerous: Engineering analysis cannot be performed at that price point. The cost of a qualified professional's time to review a single property exceeds $299. What you receive is a software output with no professional oversight.

How to spot it:

  • Price below $400 for a "full study" (not an estimate or calculator)
  • Deliverable is under 10 pages
  • No detailed component listing or depreciation schedule
  • No named professional on the report
  • No audit defense offered

The distinction matters: Free calculators and low-cost screening tools ($99–$300) are legitimate for estimation purposes. The problem is when these are sold as "studies" that investors then claim on their tax returns.

At Overline, our studies start at $499 because that is the minimum at which we can deliver engineering-reviewed, property-specific analysis with audit defense. Studies below that threshold raise questions about methodology depth.

Scam 4: The "Guaranteed Savings" Pitch

How it works: A salesperson guarantees a specific dollar amount of tax savings before analyzing your property. "We guarantee at least $50,000 in deductions" or "Every property saves at least 25%."

Why it is dangerous: The savings depend on your property's specific construction, your tax bracket, your ability to use the deductions (passive activity rules), and your hold period. Nobody can guarantee a specific number before analyzing these factors.

How to spot it:

  • Specific dollar guarantees before a study is completed
  • No questions about your tax situation, hold period, or passive activity status
  • "Every property qualifies" claims
  • High-pressure sales tactics with urgency ("this offer expires Friday")

What honest providers say: "Based on your property type and purchase price, we estimate your reclassification at 25%–32%. Your actual savings depend on your tax bracket and ability to use the deductions. Here is how to evaluate whether it makes sense for your situation."

Scam 5: The Resold or Rebranded Third-Party Report

How it works: A financial advisor, real estate agent, or "tax strategist" sells you a cost segregation study. They are not the provider — they are a reseller who marks up a third-party study by 50%–200%. You pay $6,000 for a study that actually costs $2,000, and the intermediary has no engineering expertise.

Why it is dangerous: The intermediary cannot answer technical questions, cannot provide audit defense, and may not even understand the report they are selling. If the underlying provider is legitimate, you overpaid. If the underlying provider is a template shop, you overpaid for a bad product.

How to spot it:

  • The person selling you the study is not the company performing it
  • They cannot explain the engineering methodology
  • They receive a referral fee or commission based on your purchase
  • The actual study provider is not identified until after you pay

What to do instead: Go directly to the cost segregation provider. Eliminate the intermediary.

What the IRS Actually Requires

The IRS Cost Segregation Audit Techniques Guide establishes 13 principal elements for a quality study. These are not optional recommendations — they are the criteria IRS auditors use to evaluate whether a study is legitimate:

  1. Preparation by qualified individuals — Engineering and tax expertise required
  2. Detailed methodology description — How were classifications determined?
  3. Appropriate documentation — Blueprints, photos, site data
  4. Interviews with relevant parties — Owner, contractor, property manager
  5. Identification of all property components — Component-by-component analysis
  6. Determination of IRC section 1245 vs 1250 property — Personal property vs real property classification
  7. Application of appropriate tax law — Correct code sections applied
  8. Correct recovery period assignment — 5, 7, 15, 27.5, or 39-year
  9. Proper unit cost documentation — Cost basis for each component
  10. Reconciliation to total basis — All costs accounted for
  11. Quality review procedures — Internal review process
  12. Preparer qualifications stated — Named and credentialed
  13. Statement of assumptions and limitations — Transparency about methodology limits

A legitimate study addresses all 13 elements. A scam addresses few or none.

Real Examples of Bad Studies (Names Removed)

Example 1: The Three-Page "Study"

An investor paid $2,500 for a cost segregation study on a $1.2M multifamily property. The deliverable was three pages:

  • Page 1: Cover page with property address
  • Page 2: A table showing 32% reclassification with dollar amounts by recovery period
  • Page 3: A disclaimer

No methodology. No component listing. No engineer. No photos. No reconciliation to total basis.

What happened: The investor's CPA refused to use it. The investor paid again for a legitimate study.

Example 2: The Identical Reclassification

An investor group had five different properties studied by the same "provider." All five received exactly 28.7% reclassification — a 1985 brick warehouse, a 2019 luxury SFR, a 2005 strip mall, a 1970s apartment building, and a new-construction STR.

The problem: These property types have wildly different component profiles. The warehouse should have been 15%–22%. The restaurant-attached strip mall should have been 32%–40%. The identical percentage reveals template-based analysis, not property-specific engineering.

Example 3: The Aggressive Classification

A cost segregation firm reclassified 52% of a standard SFR as personal property (5-year and 15-year assets). The investor claimed $180,000 in bonus depreciation on a $500K property.

What happened: The IRS audited the return. The auditor applied the ATG methodology and determined the defensible reclassification was 26% — roughly half what was claimed. The investor owed back taxes plus a 20% negligence penalty under IRC section 6662. The cost segregation firm that prepared the study offered no audit defense.

How to Protect Yourself

Before Purchasing a Study:

  1. Ask for a sample report. Every legitimate provider should have a redacted sample showing their methodology, component detail, and report structure.
  2. Ask who reviews the study. Get a name and credentials. "Our engineering team" is not sufficient.
  3. Ask about the 13 ATG elements. A qualified provider will know what you are talking about.
  4. Ask about audit defense. Is it included? What does it cover? Who participates?
  5. Check the fee structure. Flat fee providers have no incentive to inflate classifications.
  6. Get a second opinion from your CPA. Share the sample report before purchasing.

After Receiving a Study:

  1. Check the page count and detail level. A legitimate study on a $500K property should be 15–40+ pages with component-level detail.
  2. Verify reconciliation. The reclassified amounts plus remaining 27.5/39-year property should equal your total depreciable basis.
  3. Compare to benchmarks. If your reclassification is 15+ percentage points above the typical range for your property type, ask why.
  4. Have your CPA review before filing. Your CPA is the last line of defense.

When to Question Even "Legitimate" Providers

Honest providers are not perfect. Watch for these issues even with established firms:

  • Upselling additional services before completing the cost segregation study
  • Reluctance to share methodology when asked specific questions
  • Dismissing your CPA's concerns rather than engaging with them
  • Inflating the "savings" number by citing gross deductions rather than actual tax savings (a $100K deduction at a 35% rate saves $35,000, not $100,000)
  • Not discussing passive activity limitations for W-2 earners
  • Not mentioning depreciation recapture and exit planning

The Legitimate Provider Checklist

Use this to evaluate any cost segregation provider, including Overline:

  • Named engineer or qualified professional reviews and signs the study
  • Engineering-based methodology (not template-based)
  • Follows IRS ATG 13 principal elements
  • Property-specific analysis (not generic percentages)
  • Detailed component listing with cost allocations
  • Full depreciation schedule by MACRS recovery period
  • Reconciliation to total depreciable basis
  • Lifetime audit defense included
  • Transparent pricing (flat fee preferred)
  • Willing to tell you when cost segregation is NOT appropriate
  • Sample report available upon request
  • Clear explanation of passive activity rules for W-2 investors
  • Discussion of depreciation recapture and exit planning

If a provider checks all these boxes, they are likely legitimate regardless of their pricing model or technology approach.

Frequently Asked Questions

Q: Is cost segregation a scam? A: No. Cost segregation is an IRS-endorsed tax strategy supported by decades of Tax Court decisions, the IRS Audit Techniques Guide, and widespread use by institutional investors. What can be a scam: unqualified providers selling template-based reports as engineering studies, aggressive classifications that will not survive audit, and intermediaries reselling marked-up third-party reports. The strategy is legitimate. Some providers are not.

Q: How do I know if my cost segregation study is legitimate? A: Check for: a named engineer or qualified professional on the report, property-specific component analysis (not generic percentages), methodology documentation referencing the IRS ATG, reconciliation to your total depreciable basis, and a detailed depreciation schedule by recovery period. If your study is a 3-page summary with a single reclassification percentage and no supporting detail, it may not be defensible.

Q: What happens if I claim deductions from a bad cost segregation study? A: If audited, the IRS may disallow some or all of the reclassified deductions and assess additional tax, interest, and potentially a 20% negligence penalty under IRC section 6662. The penalty applies when the taxpayer (or their advisor) did not exercise reasonable care in determining the tax position. A properly engineered study from a qualified provider is considered reasonable basis for the claimed position.

Q: Can I get a new cost segregation study if my first one was bad? A: Yes. You can commission a new study from a qualified provider at any time. If the new study results in different classifications, you can adjust your depreciation going forward. If you overclaimed in prior years based on the deficient study, consult your CPA about whether a correction (potentially via Form 3115) is advisable.

Q: Why do some cost segregation studies cost $99 and others cost $10,000? A: The price reflects the methodology. A $99 output is typically software-generated with no professional review — useful for screening but not filing. A $499–$4,500 study (like Overline's) uses modern data-driven engineering with licensed engineer review and optional physical inspections — defensible and suitable for filing. A $5,000–$15,000+ study from a traditional firm includes mandatory on-site inspection — the most comprehensive option, though often unnecessary for standard property types. The question is which level of analysis your property and risk tolerance require.

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Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or financial advice. The examples described are composites based on general industry observations and do not reference specific companies or individuals. Consult qualified tax and legal professionals regarding your specific circumstances.