Cost Segregation for a Condo/Townhouse?

Question

I am a newbie investor/landlord and trying to understand the cost segregation aspect of owning. My understanding is this is the last year for 100% bonus depreciation (assume it relates to cost segregation?).

1) Is a cost segregation worth it for a 3BR/3BA townhouse/condo? I spent quite a lot of money on the renovation.

2) Does it make sense since I bought it 2 years ago and am renting it out now? Is it too late?

3) Any other tips/advices?

Thank you in advance

Julio Gonzalez · Answer

@Alan Fong

Your property definitely has the potential to benefit from a cost segregation study. The bonus depreciation is based on when the property was placed in service rather than when you have the study performed. Determining whether to do a cost segregation study or not has a lot variables. What was the purchase price of your property? Are you in an area where land is very valuable leaving you with less to depreciate? Some other factors to consider - 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!

James Parrish · Answer

@Alan Fong Often cost segregation studies do make sense even if the property was purchased years ago. What you should be thinking about however is if you can use losses created from a cost seg study to offset W2 or other income, referred to as non-passive income. These losses can be locked up if you're not a real estate professional (REPs). If you plan on adding more properties to your portfolio, or plan on spending more time on your real estate in the future it may make more sense to do a cost seg study down the line, so your losses aren't suspended. Remember, bonus depreciation is still 80% next year, which is still significant.

Nevertheless, most cost segregation professionals will provide you with a free analysis that shows you whether or not it's worth it. Hope this helps!

Nevertheless, most cost segregation professionals will provide you with a free analysis that shows you whether or not it's worth it. Hope this helps!

Alan Fong · Answer

Thanks James. I wasn't sure if it was worth the time/$ to do one. I didn't realize they do free analysis to show whether or not it's worth it. Thank you so much much!

Chris McCormack · Answer

Biggest thing to consider is whether you can use real estate losses to offset other income. If you're W2 the benefit will be limited. While you would generate the losses on paper, you would have to carry them forward until you can offset with other passive income.

Alan Fong · Answer

When I purchased it from the previous owner, it was occupied. Then I started to a 6-month renovation and moved in right after. I am just not sure if it worth the effort/$ to perform one since it's a townhouse (not a single family house or apartment building).

Thank you for the helpful tip! I will look into a no-cost pre-analysis/estimate.

Cost Segregation for a Condo/Townhouse?

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