Are DIY cost segregations a good idea?

[Wiley Hood]

Recently, I've decided to do a cost segregation study on a new $490K property that I purchased this year.  I came across a firm (KBKG) that offers a $400 DIY cost study (paying for a membership).  I enter the information, and they generate the report.  It looks fairly simple.  To have a professional do it, it will be about $3,500.  Has anyone used the DIY tool, and are there risks?

[Greg Scott]

The IRS publishes guidelines on what makes for a good cost segregation analysis. https://www.irs.gov/pub/irs-pd... Generally, cost segregation makes more sense on larger assets.  In the end, you have to decide the cost / benefit / risk / reward of doing one makes sense in your situation.

COST - You have outlined some of the costs, but not all.  Remember, if you decide to sell in a few years, any bonus depreciation comes back as ordinary income.  If your hold period is short, it may not make sense to take bonus depreciation.

BENEFIT - Clearly additional depreciation is the benefit, but only if you can use it.  Early in my investing career I wanted to cost seg my properties, but my accountant told me I was wasting my time because I was unable to use the full depreciation benefits I already had.   Check with your CPA if cost seg makes sense before proceeding

RISK - If the IRS disallows your cost seg, the risk will be the taxes previously due and any penalties.  Given the size of the asset, these won't be huge, but something to consider.

REWARD - In addition to the benefits stated above, the only other reason I could see doing one on an asset this size is if you wanted to offset a property sale that would have a large capital gains.  This might make sense, but again, you are just deferring the taxes and now pushing tax from capital gains to ordinary income.  Again, a CPA discussion might help.

[Basit Siddiqi]

The report is as good as the answers you provide to their questions.

The risk is that you answer a question incorrectly which generates an incorrect report.
I would have a discussion with your CPA to determine what the land basis is(required to start the cost segregation).
I would also have your home inspection / appraisal on hand to answer the questions more thoroughly. 

[Julio Gonzalez]

@Wiley Hood to be honest, with all the new regulations around documentation for cost segregation that has come out, I recommend having a professional do them. While it may seem like a simple concept, it's actually a very complex process that requires significant documentation as well as specific methodologies. If the proper reports and documentation are not completed, you run the risk of failing an IRS audit and the cost segregation not being honored. Here's a link to the IRS website noting specific items that are included in the cost segregation study report on page 24. Of course, I run a cost segregation company BUT I would recommend that regardless. The IRS is taking a more conservative approach and you want to ensure you have all your ducks in a row + a team behind you to back you up if something comes into question. Most cost segregation firms will provide a free cost/benefit analysis quote to help you determine if the tax benefits from the study will outweigh the costs. Do you have Real Estate Professional status?

[Lee Ripma]

I love algorithm based cost seg studies. I have used KBKG in the past but I currently use DIY cost segs, https://diycostseg.com/who-we-...

I like them better than KBKG because if you make a mistake you can correct it. Feel free to reach out to me for a friends and family discount code. I do this on all my properties-even small ones. 

This is not tax or legal advice, just what I personally do, consult your professionals! 

[Michael Plaks]

@Wiley Hood

Yes, there're risks:

1. Risk that you will not enter good data, resulting in a possibly seriously wrong results

2. Risk that the IRS will challenge it, which is far more likely than with a full-service professional report

3. Risk that you will short yourself by not maximizing your cost seg potential

That said, when full-service cost seg is not economically sensible, DIY is a valid alternative

[Kapono Kobylanski]

Quote from @Lee Ripma:

I love algorithm based cost seg studies. I have used KBKG in the past but I currently use DIY cost segs, https://diycostseg.com/who-we-...

I like them better than KBKG because if you make a mistake you can correct it. Feel free to reach out to me for a friends and family discount code. I do this on all my properties-even small ones. 

This is not tax or legal advice, just what I personally do, consult your professionals! 

How much does it cost? You cant correct the KBKG one? why would they do that? Thanks!