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Updated almost 5 years ago on . Most recent reply

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Kyle Robertson
  • Rental Property Investor
  • Eugene, OR
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Cost segregation? When?

Kyle Robertson
  • Rental Property Investor
  • Eugene, OR
Posted

We are under contract on our 4th small(ish) apartment building. Our total doors after closing will be 50. I’m trying to learn more advanced tax strategies and this one is something I don’t quite get.

This building will be a complete remodel/value-add. We are doing some structural repairs and a lot of cosmetic updates. That being said, at what point do we tackle cost segregation for tax benefits? What did you do? Thanks!

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Steve Morris
  • Real Estate Broker
  • Portland, OR
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Steve Morris
  • Real Estate Broker
  • Portland, OR
Replied

Usually on fixed improvements on  property (not land), you take depreciation = value of improvement / 27.5 years as a set off against income.

With cost segregations, some property improvements can be accelerated (instead of a new roof over 10 years, you do it over 5 years).  The idea being to make your depreciation number as big as possible upfront.

Usually, this gets used on syndications where you know you're going to sell it in 5-7 years.  This way you get the most tax shelter on income you can as soon as you can.

They have experts in the business that do these studies for $5000 +/-.

If you sell and do NOT take 1031 for deferral, you'll have to recapture (ie pay taxes on) all the depreciation you took however, so it's not a give away.

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