New Investor Question: Should Deal #1 Really Get a Cost Seg?

Question

A lot of newer investors are hearing that bonus depreciation is back and assuming every first rental should get a cost seg study.

Maybe. Maybe not.

I’m all for smart tax strategy, but I think a lot of people are skipping the bigger questions:

Can you actually use the loss?Does the deal still make sense without the deduction?Are you building long term, or just chasing a year-one write-off?

That’s where people get into trouble.

Sometimes cost seg is a smart move. Sometimes it’s overkill on deal number one.

I’d rather see a new investor understand the numbers first, then use the tax strategy to support the deal, not the other way around.

Curious where everyone lands on this:

Should new investors focus on maximizing deductions early, or keep the first deal simple and build from there?

David Casper · Answer

I largely agree with this. Cost seg is a tax strategy, not a substitute for a good deal, and I think newer investors sometimes get overly focused on the deduction before they fully understand the investment itself.

Like any strategy, there are situations where it makes a lot of sense and situations where it may not. Whether it's a good idea really depends on how the investor plans to use it, their hold period, their ability to utilize the losses, and what their actual long-term goals are.

The ability to actually use the deductions, expected hold period, future income, and overall deal quality all matter more than simply hearing “100% bonus depreciation is back.”

That said, I also think people sometimes swing too far the other direction and act like cost seg on smaller properties is automatically overkill. In the right situation, even on a first or second property, it can create very meaningful savings relative to the study cost.

To me, the right approach is probably: learn the fundamentals first, make sure the deal stands on its own, then decide whether the tax strategy meaningfully improves an already good investment.

Greg Scott · Answer

I agree with your thoughts.  I would add that the expected hold time should be factored into the math.

I've come across people that sold an asset after 15 months and were surprised at the size of their tax bill from the depreciation recapture!