Worth doing a Cost Segregation on a my quadruplex?

Question

Hi BP Community,

I'm not too familiar with Cost Segregation and was hoping to get a little input from someone who is... I inherited a quadruplex in 2018 and assumed the mortgage which was right around $500k. I had an appraisal done at the time which appraised it at $800k. The property is now worth roughly $1.4mm and cash flows nicely. I own 3 rental properties currently and am a Realtor so I'm labeled a "real estate professional" in the eyes of the IRS. I did well last year with real estate sales but was killed when it came time to pay taxes. I'm trying to think of ways to bring my tax liability down and thought doing a cost segregation on the quad might be beneficial. However I'm not sure where to start...

I have put roughly $150k into the quad since purchasing it (roof, siding, lift station, interior remodel, HVACs, etc).

I'm meeting with my CPA tomorrow to discuss the benefits of doing a cost segregation study on the quad. I'm not sure he's too familiar with this process so I wanted to do more research before meeting with him. Any suggestions on where I should start? Any guidance is much appreciated!

Bill B. · Answer

Remember: you are simply pulling depreciation forward. You aren’t creating extra deductions so BEST case you are getting tax deductions sooner, if your property shows a taxable gain, otherwise you’ll just be carrying forward that early deduction. So you paid for nothing. It is common for properties to show a paper loss for the first 5 years.

All this is assuming you have a regular job and aren’t a real estate professional. If you want a preview of your savings, ask your cpa how much you would save in taxes if you had an extra $100k in rental expenses. You might find out the answer is zero as you’d be carrying ti all forward.

If this is long term hold, don’t forget you’ll owe more taxes in the future as you’ll have reduced expenses, maybe at a higher tax rate.

Julio Gonzalez · Answer

@Kevin Howard I would definitely recommend looking into a cost segregation study, especially considering you have REP status. This way your losses aren't limited to your passive income. Most cost segregation companies will provide a free cost/benefit analysis quote for you so you can determine if the benefits of the study outweigh the cost. An engineered cost segregation study is typically between $3,000-$15,000 depending on if your property is a single family home, apartment complex, commercial building, etc. A cost seg study would help you accelerate your depreciation, reducing taxable income. Additionally, it's great for partial asset disposition. So let's say you need to replace your roof - because you had a cost seg study done, when it comes time to replace the roof, you have the specific value that you can write-off for that roof. Here are some articles that I've written on cost segregation studies. Let me know if you have any questions!

https://www.biggerpockets.com/...

Dave Foster · Answer

@Kevin Howard, REP and a user of 1031!!!  Take advantage of every bit of depreciation you can squeeze out of it now while your income is high.  You'll keep that depreciation recapture at bay indefinitely.  You'll use the 1031 to purchase additional depreciable basis to keep the train moving forward.  And your REP status is the golden key that unlocks that depreciation right now.

Kevin Howard · Answer

@Julio Gonzalez I appreciate your response. I met with my accountant and he was going to attempt to assist with the study but after reading your articles I think I'm better off reaching out to a company who specializes in it to get a consultation. I'll certainly be doing them on the new construction projects I have going on...thanks again!

Kevin Howard · Answer

@Bill Brandt Thanks for the input Bill. It was really to assist with getting my tax liability down in the immediate future. I'm a Realtor so REP status which certainly helps. I do plan on holding the property long term though so that's something to consider. If I ever sold I would 1031 into a different property. Kicking the can down the road

Basit Siddiqi · Answer

Cost segregation = breaking a piece of real estate into more components than just building and land.The different components will normally be depreciated as a faster rate and potentially eligible for bonus depreciation.Given that the property was placed into service in the past, you will need to do a 'change in accounting method'.Also, the cost segregation may be harder to determine as only assets at the time of purchase count. Any improvements made after purchase should have been properly expensed/depreciated.Best of luck!

Julio Gonzalez · Answer

Absolutely. Feel free to reach out if you have any questions. I'm more than happy to help!

Worth doing a Cost Segregation on a my quadruplex?

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