Cost segregation study, yay or nay?

Question

Hi everyone,

Just closed on my first rental property (new construction), wondering what everyone's thoughts are on obtaining a cost segregation study for my property. I'm not 100% sure if I will qualify to be a real estate professional this year, but doing the study seems beneficial either way. What have you all done?

Thanks,

Eric

Alex Pelletier · Answer

Hey Eric,

Congrats on closing on your property. Depending on the details of the property, you could have significant tax savings. I'd recommend consulting your CPA, but if you want to explore options, there are a couple of names that are commonly recommended:

KBKG ELB Cost Seg

If you have any questions feel free to connect with me!

Julio Gonzalez · Answer

To add to the above, I recommend reaching out to a professional and having them run an analysis to find out what benefits a cost segregation could provide to you based on your exact scenario. A lot of companies will offer this free of charge. These posts may be helpful to you as well:

Cost Segregation Methodologies - Key Differences

Cost Segregation - what to consider when looking for a firm?

Cost Segregation FAQ

Bonnie Griffin Kaake · Answer

Hi Eric, You do not have to be a RE Professional to benefit from a cost segregation study. You can usually count on about 6-8% of your purchase price in after-tax cash-flow...taxes you do not have to pay. If you can't use all the benefits in year one of doing the study, you can always roll the benefits forward until they are exhausted. Your best option is an engineering-based study unless you don't mind spending time with auditors. ;-)  Estimates are at no cost and give you the information you need to decide how it can benefit your tax situation. Beware of companies that over-promise and under-deliver. Experience and audit protection are important.

Hunter Reed · Answer

Eric, Cost Segregation is a great way to defer and avoid paying taxes on your property. In the comments above no one has mentioned the cost of having an experienced professional asses the property. With that being said I would wait until you have acquired at least 10 units. If this is your first investment property then it is simply not worth accompanying a cost segregation. It cost anywhere from 5k - 10k for the study depending on the effusiveness of the property. With this being your first and only property you would take a loss. The cost segregation study would cost more than the amount you would save on taxes. Grow your portfolio and choose the property with the greatest value. This will ensure a higher return on your cost segregation study. Once you do this you will have tax money left over to roll into other properties. Remember, once you complete a cost segregation on the property you no longer can do it again unless the study is done on another property in your portfolio.

Basit Siddiqi · Answer

Whether you should get a cost segregation study done is an easy determination.Will you benefit from the study between years 1-5 = Yes, get it done.Will you not benefit from the study between years 1-5 = No, do not get it done.I find it that most people(more than 50%) will not benefit from a cost segregation study immediately. Talk to your CPA if you are unsure.

Jacoby Atako · Answer

This was the first year I needed to look into a cost segregation on one of my properties because of a significant tax bill I was looking at.  I found a company, they reviewed my properties to see which (if any) would make sense to do for the year and they sent me analysis on the ones they thought would make sense.  I then coordinated them with my CPA and they are putting everything together.  Best thing you can do is just call a few companies and have them give you some numbers that you can get back to your CPA.

Conner Olsen · Answer

I think it's most beneficial when you qualify as a REP. I waited an extra year until I qualified.

Eric Gorostiza · Answer

Thanks for the replies everyone! I do have a CPA and will reach out to them, just curious how beginners like me approach it, or do they wait until they get to bigger multi-family or commercial properties.

Cost segregation study, yay or nay?

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