Cost segregation - SFR acquired in 2021 followed by full reno

Pasadena, CA · Member since 2010 · 1 post · 1 vote

Scenario: We acquired an SFR in the Southern California mountains in 2021. Over the past 15 months we've been doing major renovations. Work is basically complete. First STR guest has booked for the last week of 2022, so we'll be able to place the asset into service for 2022. Acquisition cost was $700k; reno costs about $165k; furnishings about $35k. How does our renovation and furniture expense factor into a cost segregation study? Do we use the current basis (acquisition plus reno cost) as the starting point? Thanks in advance.

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Bryan MartinBusiness Member

Accountant · Springfield, IL · Member since 2022 · 190 posts · 100 votes

Quote from @Charles Baker:

In a cost segregation study, the starting point for determining the value of the property is typically the acquisition cost, which in your case would be $700,000. Renovation costs, such as the $165,000 you spent on major renovations, would typically be included in the cost of the property and would be used to determine the overall value of the property. Furnishings, such as the $35,000 you spent on furnishings, would generally be considered personal property rather than real property and would not be included in the cost of the property.

In a cost segregation study, the goal is to identify and classify the various components of a property as either real property (land and buildings) or personal property (furnishings, equipment, etc.). Real property is typically depreciated over a longer period of time, while personal property can often be depreciated more quickly. By identifying and classifying the various components of a property, it may be possible to accelerate the depreciation of certain items and potentially reduce your tax liability.

It is important to note that the rules around cost segregation and depreciation can be complex, and it may be beneficial to work with a qualified tax professional to determine the best approach for your specific situation. They can help you identify the various components of your property and determine the appropriate depreciation periods for each item.

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
3y
The nice thing about rehab is you should have a good list of the components. For example, any expenditures on carpeting will go into a different depreciation bucket than concrete sidewalks.
The harder part is the cost segregation of the original structure and you can follow one of the half-dozen ways the IRS allows you to do cost segregation. Of course, land always comes out as non-depreciable.
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Bryan MartinBusiness Member
Accountant · Springfield, IL · Member since 2022 · 190 posts · 100 votes
3y
Quote from @Charles Baker:

Scenario: We acquired an SFR in the Southern California mountains in 2021. Over the past 15 months we've been doing major renovations. Work is basically complete. First STR guest has booked for the last week of 2022, so we'll be able to place the asset into service for 2022. Acquisition cost was $700k; reno costs about $165k; furnishings about $35k. How does our renovation and furniture expense factor into a cost segregation study? Do we use the current basis (acquisition plus reno cost) as the starting point? Thanks in advance.
In a cost segregation study, the starting point for determining the value of the property is typically the acquisition cost, which in your case would be $700,000. Renovation costs, such as the $165,000 you spent on major renovations, would typically be included in the cost of the property and would be used to determine the overall value of the property. Furnishings, such as the $35,000 you spent on furnishings, would generally be considered personal property rather than real property and would not be included in the cost of the property.
In a cost segregation study, the goal is to identify and classify the various components of a property as either real property (land and buildings) or personal property (furnishings, equipment, etc.). Real property is typically depreciated over a longer period of time, while personal property can often be depreciated more quickly. By identifying and classifying the various components of a property, it may be possible to accelerate the depreciation of certain items and potentially reduce your tax liability.
It is important to note that the rules around cost segregation and depreciation can be complex, and it may be beneficial to work with a qualified tax professional to determine the best approach for your specific situation. They can help you identify the various components of your property and determine the appropriate depreciation periods for each item.

[email protected]217-788-0750
Taxstra PLLC4.9114 Reviews
Website View Page
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Julio GonzalezPro Member
Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
3y
@Charles Baker Bryan gave a great explanation. The study will look at your purchase price as well as major renovations and break it down into each items applicable useful life.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
Cost Segregation just analyzes what you purchased.

You don't do a cost segregation on items after purchase because you know what they are and can determine whether they need to be depreciated over 27.5 years or a shorter time period, in which case it would be eligible for bonus depreciation.
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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y
Quote from @Gian Pazzia:

For properties that small, you should budget $450 per property and use cost segregation software like the one below from a trusted brand that has been in business almost 25 years. KBKG was the first company ever to launch a self service software for properties this small and it has been through IRS audit numerous times. KBKG also offers FREE audit support and FREE use of their 481(a) depreciation software which produces the attachment schedules that are needed to file the IRS Form 3115. Tax preparers usually charge another $500 to prepare the 3115 calculation schedules per property so that saves you money. No other software on the market provides all of this for just $450.

In addition, KBKG has more Certified Cost Segregation Professionals (CCSP) in the country. You can check that at www.ASCSP.org and make sure you filter to search for the CCSP designation.

https://www.kbkg.com/residential-costsegregator

Great info to share here! I would also ensure you can even qualify for the cost seg by making sure you either qualify for REPS(real estate professional status) or STR loophole (short term rental loophole)
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