Cost segregation?? Pros vs cons
I bought a new construction SFR, smart home, energy efficient house for $520,000 last Nov 2021 and it is a LTR. I am trying to figure out if a cost seg study would be worth it or would any depreciation recapture I would have to pay down the line if I sell it. I will also speak to my CPA but her assistant is saying it may not be a good idea.
Be wary of CPAs who tell you the cost seg is not worth it. While there are pros and cons, it can be of great benefit when taxes are expected to be high. For example - if you're a real estate broker with a lot of income outside of rental income, cost seg can work wonders in bringing that down. However, if you're W2 and can't unlock passive losses, it may not be worth it. While your question requires more than a quick answer, that can provide you with a little more insight.
Hi Chris,
Thank you for your advice. I'm OR Nurse trying to pivot into real estate investing, so for a little while longer, W-2. I can't wait to talk to my CPA tomorrow to dig deeper. Thanks again.
Worth it. Get the tax advantages now if you plan on growing your portfolio quickly. You never know when certain tax savings tools/strategies will disappear in the future. It's not difficult and your accountant shouldn't charge much to do it. If your goal is long term rental the recapture is sort of irrelevant. And you can always do a cash out refi in the future instead of selling... or sell and do a 1031 exchange.... both will avoid/delay the tax man even further.
Thank you Salvatore,
Great advice…I agree with taking advantage of beneficial things when they present themselves. I hope to scale this year.
Quote from @Lara Stuart:Congrats on the property Lara! While cost seg can be a great tax tool, if you are a W2, there is usually little benefit on getting it done on a LTR. You will just create suspended passive losses, that will not be able to be unlocked against your active income when you do transition to going full time in real estate. Put it on the back burner, until you go full time in real estate and get REPS, that's when the magic happens.
Hi Chris,
Thank you for your advice. I'm OR Nurse trying to pivot into real estate investing, so for a little while longer, W-2. I can't wait to talk to my CPA tomorrow to dig deeper. Thanks again.
Hi Yonah,
Thank you! Thank you! I really appreciate your advice as well. I will talk to my CPA in a couple hours. It all makes sense and I will wait until a later time.
Your property definitely has the potential to benefit from a cost segregation study. Determining whether to do a cost segregation study or not has a lot variables. How much of the $520,000 purchase price is attributable to the land value? How long are you planning to hold this property? If less than two years, cost seg probably isn't a good route. Are you planning to do any renovations? If so, I always recommend getting the study done prior to rehabbing. What is your ROI and the amount paid for a cost seg study? Do you have a current need for that cash flow generated from the tax savings? Could you go reinvest it in another property to build even more income? Would you have net income or net loss without the cost seg study? Are your real estate investments active or passive? Are your losses locked up against your passive income? There are a lot of factors to consider when get a cost seg study to determine if the benefits outweigh the costs. If you are able to get REPS status, that would help tremendously. Have you obtained any detailed cost/benefit analysis quote? Most cost segregation study companies provide the quote for free. Is it a reputable company and will the documentation provided from the study hold up in an audit? If you need any help or have any questions, feel free to reach out!
- Engineered Tax Services
- (561) 253-6640
- http://www.Engineeredtaxservices.com
Hi Julio,
Wow, thank you for all you attention to detail and asking great questions. I really appreciate it. After discussing with my CPA, we will not be doing a cost seg. There is a chance I may sell in the next 2 years and they agree with you that would not be advantageous. But now I know more about this for later when I scale.
@Lara Stuart Absolutely. Always happy to help!
- Engineered Tax Services
- (561) 253-6640
- http://www.Engineeredtaxservices.com
There are several things to be lookd at when figuring out if a cost segregation will save you money:
- Is your AGI under $100k? If not you may not be able to deduct losses generated as @Yonah Weiss mentioned.
-Are you a real estate professional? If so there may be a tremendous benefit.
-Is there a chance you'll become a qualifying real estate professional in the future? If so you may not want to generate a large loss now, as losses created BEFORE you are a RE pro do not become deductible once you qualify. Whereas if you create a large loss after qualifying, they do.
-Is your Tax bracket higher this year than it will be going forward? Does it make more sense savings wise to have a loss in a later year instead and not necessarily do the cost segregation this year?
Hi Natalie,
Yes, AGI is under $100K and I may become a real estate professional down the line. I think I am going to wait. Thank you so very much for your response and insight. I really appreciate you and all the wonderful BP friends that have provided excellent advice.