Cost Segregation - After regular long term depreciation?

Question

I have a single family rental property that has been rented for two years. I've done the normal long term depreciation of the property.

My question: Can I do a cost segregation even though in previous years I've taken the standard depreciation

I am a real estate agent, self manage the property, should qualify for all the benefits of being full time in the business of real estate. I'm hoping to wipe out a substantial amount of my taxable income this year.

Any advice would be lovely

Yonah Weiss · Answer

@Spencer Dixon Yes. You will need to file a form 3115, change of accounting method to catch up the accelerated depreciation that you missed over the last two years.

Natalie Kolodij · Answer

@Yonah Weiss is able to do cost segregations for clients all over the united states and does a great job. I'd start with reaching out to him.

It sounds like you will likely qualify for real estate profesional status which means a cost seg could benefit you. As mentioned form 3115 will need to be filed to adjust the acocunting method with the IRS. This form is fairly substantial and will add cost to the return, as will the cost of having the cost seg done.

Make sure to run down the potential write-off/savings benefits against the costs and see if it makes sense.

Daniel Dietz · Answer

Some good info being shared here!

I have a similar but slightly different question. I DO qualify as a REP (contractor doing my own maintenance and PM on my own properties. But my income is not that high to really worry about offsetting.

BUT, what I would like to do it 'convert' some properties that I own in my SOLO401K from 'Traditional' to 'ROTH'. Just like a regular IRA or SOLO, that would be a 'taxable event'.

If I did a SOLO401K Roll-over of say 100K that would normally be counted as Ordinary Income Tax (I think). Would the Cost Segregation Study, IF it produced 100K of "Accelerated Depreciation", 'offset' that 'extraordinary income' from the SOLO401K roll-over?

I hope that makes sense :-)

Thanks, Dan Dietz

Julio Gonzalez · Answer

@Spencer Dixon Yes, you can! Do you have REPs status and meet the requirements for material participation? Here's a great article that walks through the requirements: https://www.aicpa.org/resource... Most cost segregation companies provide a free cost/benefit analysis quote to help you determine if you'd benefit from a cost seg study.

Yonah Weiss · Answer

The answer for you, because you have REPS is YES.

I'll let one of our resident tax experts like @Natalie Kolodij correct me if I'm wrong.

Bonnie Griffin Kaake · Answer

@Spencer Dixon  Yes, Spencer, you can do cost segregation and accelerate that depreciation going forward, most likely as a RE Professional. And, the best part is that if you started renting the property between late 2017 and Dec. 2022, you will get 100% of that depreciation up-front/first year the study is done. You will need the change of accounting form 3115 481a completed to change from straight-line to accelerated but we do that for you and your CPA/tax professional.

On the other issue, local for cost seg studies, it may not be in your best interests. The most experienced companies that do "quality" engineering-based studies work nationally, not locally.

Spencer Dixon · Answer

@Julio Gonzalez

That is a good article. Thank you for sharing.

I'm 99% sure I qualify for the REP status.

Any chance you could recommend a company nearby Madison, WI to preform that cost benefit analysis?

Thanks again

Spencer Dixon · Answer

@Yonah Weiss

Thank you,  would that vary state by state? I'm struggling to find a company in the Madison, wi area that can facilitate this.

Cost Segregation - After regular long term depreciation?

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