If you own multifamily property, it's worth checking how your cost segregation study handled the kitchens. The IRS's Cost Segregation Audit Techniques Guide (Publication 5653, revised February 2025) takes the position that standard apartment kitchen components (sinks and related plumbing especially, and usually cabinets and countertops) are structural components of a residential rental building, recovered over 27.5 years rather than as 5-year property.
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.
Section 1245 vs. Section 1250: How the IRS Classifies Kitchen Components
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 segregation 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 Is the Whiteco Test and How Does It Apply to Kitchen Cabinets?
The Whiteco test is a six-factor framework from the Tax Court case Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975), for deciding whether property attached to a building is inherently permanent or tangible personal property. For kitchen cabinets, it's the framework behind the removability argument, and it shows why removability alone usually isn't enough.
What Are the Six Whiteco Factors?
- Is the property capable of being moved, and has it actually been moved?
- Is it designed or constructed to remain permanently in place?
- Do the circumstances show it's expected or intended to be moved?
- How substantial and time-consuming is removal?
- How much damage does removal cause to the property or the building?
- How is it attached to the building?
Surface-mounted cabinets that unscrew from the wall help on factors 1 and 6. But a standard apartment kitchen is designed to stay in place for the life of the unit, cabinets are rarely moved in practice, and removing them usually damages countertops, plumbing connections, or walls. That's why removability alone rarely carries the analysis.
Does the Whiteco Test Still Apply Under the IRS's Current Audit Guide?
Yes. Whiteco is Tax Court case law, and an audit guide doesn't override it. But Whiteco addresses one question: whether an item is inherently permanent. The IRS also asks whether the item is a structural component that relates to the operation or maintenance of the building.
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:
- 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.
What Are the Real Audit Risks of Misclassifying Kitchen Cabinets?
If the IRS challenges 5-year treatment of kitchen cabinets, it can reclassify them as 27.5-year property, disallow the excess depreciation and any bonus depreciation claimed on them, and assess additional tax and interest. Penalties may also apply, depending on the support in the study, what was disclosed on the return, and whether the taxpayer has a reasonable position.
How exposed you are depends on how the study was built. Studies vary in how they handle apartment kitchens. Some still classify standard cabinets and countertops as 5-year property, and some do so only after the client signs an acknowledgment of the risk. A signed acknowledgment doesn't change the classification or the tax owed if the position is challenged; it documents that you accepted the risk.
Timing matters too. If you plan to refinance or sell, it's better to settle the classification on your own schedule than in the middle of an exam.
Not Everyone Is Paying Attention
The problem is 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.
What Questions Should You Ask Your Cost Seg Provider About Kitchen Component Classification?
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, and are they analyzed separately?
- How does your classification reflect the IRS's current Cost Segregation Audit Techniques Guide?
- If any kitchen components are classified as 5-year property, what Whiteco and structural-component analysis supports that?
- What documentation will you provide if the study is examined?
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.
Want a second opinion on your property? We'll review your existing study at no cost and show you which classifications are well supported, which carry audit risk, and what we'd change. Book A Call