Cost segregation for the purpose of expediting depreciation (SFR)

4 Reply

Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

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Quote from @Uri E.:

Hello,

I buy, hold and rent out single family residences. Each new acquisition I then depreciate using a standard straight depreciation - total cost of land improvements. I recently learned that I could expedite some of the depreciations through cost segregation which can be then depreciate over 5,7, or 15 years, depending on the item.

Asking for your advice and guidance on the following:

1. Is there a downside to doing cost segregation, to expediate depreciation?

2. Hiring someone to do the cost segregation analysis and report can cost $10K-$15K. When is such expense of hiring a team to do the segregation analysis, actually worth it?

3. Can I do these cost segregation estimates myself?

4. If I do these estimates myself, will that be in violation of IRS rules?

5. And finally, can I do cost segregation to expedite depreciation for properties I already owned for a few years?

Thank you!

1. Is there a downside to doing cost segregation, to expediate depreciation? - you will have to recapture the depreciation when you sell, but this can be managed with correct tax planning. If you want to do a 1031 exchange, there might be some tax implications.

2. Hiring someone to do the cost segregation analysis and report can cost $10K-$15K. When is such expense of hiring a team to do the segregation analysis, actually worth it? - Depends on what kinds of assets you own. There are DYI tools for cheap as well.

3. Can I do these cost segregation estimates myself? - Yes, but needs to be analyzed

4. If I do these estimates myself, will that be in violation of IRS rules? - Not necessarily. There are many other factors involved to decide this.

5. And finally, can I do cost segregation to expedite depreciation for properties I already owned for a few years? - Yes.

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1 Reply

Christopher Smith

Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes

At 10 to 15 K for an SFR really hard to imagine how a mere timing difference could be worth it (even for a pricey CA property like most of mine). Time might be better off securing well thought economics on your deals. Don't get me wrong, I only pay current tax on about 5% of my total RE earnings (7 figure), so I'm all for exploiting sensible tax benefits. However in my opinion some of these products are vastly oversold and their presentation tax benefits vastly overstated (some might even say fraudulently misrepresented).

Jon Schwartz

Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes

Quote from @Uri E.:

Hello,

I buy, hold and rent out single family residences. Each new acquisition I then depreciate using a standard straight depreciation - total cost of land improvements. I recently learned that I could expedite some of the depreciations through cost segregation which can be then depreciate over 5,7, or 15 years, depending on the item.

Asking for your advice and guidance on the following:

1. Is there a downside to doing cost segregation, to expediate depreciation?

2. Hiring someone to do the cost segregation analysis and report can cost $10K-$15K. When is such expense of hiring a team to do the segregation analysis, actually worth it?

3. Can I do these cost segregation estimates myself?

4. If I do these estimates myself, will that be in violation of IRS rules?

5. And finally, can I do cost segregation to expedite depreciation for properties I already owned for a few years?

Thank you!

Uri,

I own a duplex in Los Angeles and used diycostseg.com to get a logarithmic cost seg analysis for under $1000. It racked up $76K in suspended losses for me. Killer deal.

Best,
Jon

1 Reply

Uri E.

OP

Rental Property Investor · Carmel, CA · Member since 2020 · 36 posts · 2 votes

Quote from @Natalie Kolodij:

Asking for your advice and guidance on the following:

1. Is there a downside to doing cost segregation, to expediate depreciation? If your AGI isover $150k you can't use passive losses, no reason to generate more of them. And the downside is you'll have less depreciation later.

2. Hiring someone to do the cost segregation analysis and report can cost $10K-$15K. When is such expense of hiring a team to do the segregation analysis, actually worth it? It won't cost $10-15k for single properties. KPKG does software based cost segs for about $700.

3. Can I do these cost segregation estimates myself? No. The IRS requires a reasonable method, cost seg is most upheld. Unless you're a structural engineer you're not really qualified to accurate allocate components of a property with adjusted values.

4. If I do these estimates myself, will that be in violation of IRS rules? Kind of

5. And finally, can I do cost segregation to expedite depreciation for properties I already owned for a few years? Yes then a form 3115 is required in year of filing and it's fairly complex. Woudln't do this without a tax pro.

Thanks, @Natalie Kolodij.

I thought of passive losses as the next best thing. Why not generate more of them (assuming less depreciation later is acceptable)?

Natalie KolodijBusiness Member

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Quote from @Uri E.:

Quote from @Natalie Kolodij:

Asking for your advice and guidance on the following:

1. Is there a downside to doing cost segregation, to expediate depreciation? If your AGI isover $150k you can't use passive losses, no reason to generate more of them. And the downside is you'll have less depreciation later.

2. Hiring someone to do the cost segregation analysis and report can cost $10K-$15K. When is such expense of hiring a team to do the segregation analysis, actually worth it? It won't cost $10-15k for single properties. KPKG does software based cost segs for about $700.

3. Can I do these cost segregation estimates myself? No. The IRS requires a reasonable method, cost seg is most upheld. Unless you're a structural engineer you're not really qualified to accurate allocate components of a property with adjusted values.

4. If I do these estimates myself, will that be in violation of IRS rules? Kind of

5. And finally, can I do cost segregation to expedite depreciation for properties I already owned for a few years? Yes then a form 3115 is required in year of filing and it's fairly complex. Woudln't do this without a tax pro.

Thanks, @Natalie Kolodij.

I thought of passive losses as the next best thing. Why not generate more of them (assuming less depreciation later is acceptable)?

You may want to rack up more on the front end.

Some people just don't realize they may not eb able to use the loss generated in the same year they do the cost seg.

Or if you're planning to become real esate professional IRS status in the future you may not want to accumlate losss, as RE pro only makes losses from the point you qualify FORWARD deductible- and those prior loses generated woudln't be freed up.

There's lots of different situations

Kolodij Tax & Consulting

Shiva Bhaskar

Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes

Quote from @Uri E.:

Hello,

I buy, hold and rent out single family residences. Each new acquisition I then depreciate using a standard straight depreciation - total cost of land improvements. I recently learned that I could expedite some of the depreciations through cost segregation which can be then depreciate over 5,7, or 15 years, depending on the item.

Asking for your advice and guidance on the following:

1. Is there a downside to doing cost segregation, to expediate depreciation?

2. Hiring someone to do the cost segregation analysis and report can cost $10K-$15K. When is such expense of hiring a team to do the segregation analysis, actually worth it?

3. Can I do these cost segregation estimates myself?

4. If I do these estimates myself, will that be in violation of IRS rules?

5. And finally, can I do cost segregation to expedite depreciation for properties I already owned for a few years?

Thank you!

Uri, we were able to get great cost segregation studies done for much less than the price you mentioned. It was very cost effective for us and our investors. Please feel free to DM me and happy to share the name of the team we worked with.

Yonah WeissPro Member

Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes