Cost segregation, best type of property.

Tax, SDIRAs & Cost Segregation
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Cost segregation, best type of property.

Konkova Irina
Member since 2020 · 11 posts · 4 votes

Hi Everyone,

Want to try cost segregation for airbnb this year. Have couple of questions in terms of what type of property is best suited for cost segregation. Obviously, not to the point where it makes no sense as airbnb anymore. 

1. Condition: Does it matter if its new or old? Do you get more if the house is newer?
2. Appliances. From the description of cost segregation I would assume the more appliances the bigger the depreciation? Does it make any difference if its a high end appliances? 
3. I see that people online or podcast throw around numbers like ~20% eligibile to be bonus depreciated with cost segregation study. What if I want to buy a huge 2MM house with large land. Is it still possible to hit 20% mark? I am just thinking in terms of applicances, electric, pipes? Can that possibly add up to 400k?

Apologies if I completely misunderstand cost segregation study.

Thanks a lot!

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Yonah WeissPro Member
Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
4y

@Konkova Irina I agree with @Michael Plaks that the tax benefits should not be the driver of any real estate investment. STRs are getting a lot of attention when it comes to cost seg, because if done properly by self-managing and having enough material participation hours, you may not be subject to the passive loss limitation. In short, STRs are the one type of property that even without having real estate professional status (REPS), you cold potentially use those losses against your W2 or active income. Make sure to discuss this with your tax advisor to see if it works for your specific situation.

Now to answer your questions:

1. Condition: Does it matter if its new or old? Do you get more if the house is newer? It does matter, but not that much. Typically new construction properties will have more value placed in the structural components (27.5 or 39 year), which will leave less to be eligible for bonus depreciation in the faster depreciation categories (5 & 15 year)

2. Appliances. From the description of cost segregation I would assume the more appliances the bigger the depreciation? Does it make any difference if its a high end appliances? It does make a difference, as the more appliances, the more can be eligible for cost seg. However, as Michael Plaks mentioned above, if those appliances are purchased and placed in service separately than the acquisition of the property, they can likely be deducted, or depreciated separately from the house, and not included in the cost seg. Only that which was part of the property at the time of purchase can be broken out with cost segregation.


3. I see that people online or podcast throw around numbers like ~20% eligibile to be bonus depreciated with cost segregation study. What if I want to buy a huge 2MM house with large land. Is it still possible to hit 20% mark? I am just thinking in terms of applicances, electric, pipes? Can that possibly add up to 400k? Remember, the amount you can depreciate is the purchase price minus the land value. Some places may have a 10% land value, whereas other high end locations (like beachfront, or CA) can sometimes have upwards of 50% land value, which leaves less to depreciate. Let's say you have an average land value 15-20%, and you could get 20% of your $2M purchase after land ($2M-$400k= $1.6M) $1.6M x 20% = $320k of bonus depreciation. Sometimes it's higher, but always make sure you reach out to a cost seg company to get a free upfront analysis.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    4y

    Cost segregation is most useful when you have a high value of the improvements vs the value of the land.  (Land cannot be depreciated.  As a result, you cannot do cost segregation on vacant, unimproved land.)  It would be foolish to do a cost segregation on a small structure on a large tract of unimproved land. You could do a cost segregation on a single family but cost is probably higher than the tax benefits.

    Talk to a cost segregation company and ask them to estimate costs of the study vs. the potential tax benefits.

    3Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    4y

    @Konkova Irina

    I would advise against thinking about cost segregation when buying a short-term rental. The first consideration should be cash flow: how much income it can generate versus acquisition, financing and maintenance costs. This is where your decisions on the type of property and its rehab, appliances etc. should come from. 

    The second consideration is its potential for future appreciation. Only then you may throw tax consideration into the mix, including cost seg. 

    If you buy appliances and furniture for this property, the cost is always deductible, and you do not need cost segregation for that. Cost seg is looking at the structural components of the property that come with purchase, not at the items you buy after you acquire the property.

    4Reply
  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    4y

    @Konkova Irina I agree with @Michael Plaks that the tax benefits should not be the driver of any real estate investment. STRs are getting a lot of attention when it comes to cost seg, because if done properly by self-managing and having enough material participation hours, you may not be subject to the passive loss limitation. In short, STRs are the one type of property that even without having real estate professional status (REPS), you cold potentially use those losses against your W2 or active income. Make sure to discuss this with your tax advisor to see if it works for your specific situation.

    Now to answer your questions:

    1. Condition: Does it matter if its new or old? Do you get more if the house is newer? It does matter, but not that much. Typically new construction properties will have more value placed in the structural components (27.5 or 39 year), which will leave less to be eligible for bonus depreciation in the faster depreciation categories (5 & 15 year)

    2. Appliances. From the description of cost segregation I would assume the more appliances the bigger the depreciation? Does it make any difference if its a high end appliances? It does make a difference, as the more appliances, the more can be eligible for cost seg. However, as Michael Plaks mentioned above, if those appliances are purchased and placed in service separately than the acquisition of the property, they can likely be deducted, or depreciated separately from the house, and not included in the cost seg. Only that which was part of the property at the time of purchase can be broken out with cost segregation.


    3. I see that people online or podcast throw around numbers like ~20% eligibile to be bonus depreciated with cost segregation study. What if I want to buy a huge 2MM house with large land. Is it still possible to hit 20% mark? I am just thinking in terms of applicances, electric, pipes? Can that possibly add up to 400k?     Remember, the amount you can depreciate is the purchase price minus the land value. Some places may have a 10% land value, whereas other high end locations (like beachfront, or CA) can sometimes have upwards of 50% land value, which leaves less to depreciate. Let's say you have an average land value 15-20%, and you could get 20% of your $2M purchase after land ($2M-$400k= $1.6M) $1.6M x 20% = $320k of bonus depreciation. Sometimes it's higher, but always make sure you reach out to a cost seg company to get a free upfront analysis.

    4Reply
  • Konkova Irina
    OP
    Member since 2020 · 11 posts · 4 votes
    4y

    Thanks a lot guys, wealth of information. 

    0Reply
  • Julio GonzalezPro Member
    Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
    4y

    @Konkova Irina I agree with Michael and Yonah above. STRs can benefit from engineered cost segregation studies but it can be a case by case basis. Most cost segregation study companies will provide you with a free cost/benefit analysis quote to help you decide whether the benefits are worth the cost. If you're considering a study, I'd definitely recommend getting quotes from a few companies to help you make your decision.

    561-253-6640
    1Reply
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