The Residential Cost Segregator is not built to handle this situation because there are too many possibilities related to the scope of the subsequent improvements. However, the Residential Cost Segregator can still be used to provide a reasonable estimate of each asset's tax breakdown (provided that the total aggregate depreciable tax basis for improvements is less than $500,000). We recommend only entering the tax basis for the original acquisition. When the report is complete, the allocation %'s of each tax category (5 year, 15 year, 27.5 year) from the analysis could be applied to the subsequent improvements costs.For example, consider a building represented by two assets on the original depreciation schedule with asset #1 for $400,000 and asset #2 for $100,000. Using the $400,000 basis in the Residential Cost Segregator software, let's say the cost segregation report identifies 5 year property of $60,000 (15% allocation of the total). For asset #2 ($100,000), you would apply the same 15% to get 5-year property of $15,000.After you import the Residential Cost Segregator results into KBKG's 481(a) Adjustment Software, you can simply add a second original asset with a different placed in service date to represent the subsequent improvements. In the example above, you would create a second original asset (for the subsequent improvements of $100,000) with a sub-asset for 5-year property totaling $15,000 (15% allocation) and a sub-asset for real property of $85,000.
Additionally- anytime better information exists, such as construction invoices, the classification of subsequent improvements should be based on what was actually done to the building. For example, if you spend $5,000 on new carpet it can all be classified as 5-year property. If you remodel the restroom, it should all be classified as 27.5-year property.