What happens after the period of cost segregation study completes?

Question

Hey folks,

I have a fun question on cost segregation study, around which I am trying to build a house hack thesis.

ScenarioLets say, we have a $1M property ==> Building cost : $800k, land cost : $200kNow we do a cost segregation study, with following outcome- $100,000 of interior fixtures and finishes that can be depreciated over 5 years- $100,000 of interior fixtures that can be depreciated over 7 years- $100,000 of land improvements that can be depreciated over 15 years

Using a straight line depreciation on cost segregation data, we get- Building ($500,000 / 27.5 years): $18k- 5-year property bucket ($100,000 / 5 years): $20k- 7-year property bucket ($100,000 / 7 years): $14k- 15-year property bucket ($100,000 / 15 years): $5k

Total first-year depreciation : $57k

Questions- Do my 5, 7, 15 year property materials cease to provide depreciation after their relevant cost segregation depreciation period is over? (For example in Year 6, I cannot use any depreciation from 5 year bucket)?- After year 15, am I just depreciating the building?- Is the attached screenshot a correct way to understand the cost segregation study?- Is cost segregation study performed only once in year-1 and its values used over and over until 29.5 yrs OR can I perform the study every year? Does it even make sense to perform every year if there's no material change in artifacts used in 5/7/15 yr buckets?

Many thanks!

Michael Plaks · Answer

@Mayank Jain

You're missing the very concept of depreciation. It is deducting the cost of something.

If you have $10,000 worth of something, say appliances and carpets, you can deduct it immediately or over 5 years. But once it's deducted, it's gone. Nothing left to depreciate. You can eat the entire pizza right away or one slice every hour. After that, there's no pizza left, and you need to buy a new one. You cannot cut it again into slices, because it's gone.

Also, it may not work at all on a house hack, which is a completely different conversation.

Please read this post and don't get seduced by tax hype podcasts: https://www.biggerpockets.com/forums/51/topics/1075919-five-common-myths-of-cost-segregation-and-100-bonus-depreciation

Ashish Acharya · Answer

-If you are doing the cost seg, then you are probably taking the bonus depreciation on your segregated assets, not the 5/7/15 years. -After bonus/15, yes. -No, SS is not what is going to happen. High-level statement. -You can perform every year on different properties. Not the same.

Julio Gonzalez · Answer

@Mayank Jain Most people get a cost segregation study performed one time on their property, but it can be useful to have the study updated if you are making significant improvements to the property. Depreciation is a simpler concept if you think about it in terms of dollars. For example, you have $5,000 of property that has a useful life of 15 years. After 15 years, that property should have no useful life left, and you should've fully depreciated the $5,000 over the past 15 years so there's no cost basis left to depreciate.

Mayank Jain · Answer

i did some more research and found that if I live in the same residence that I'm trying to STR with, then it can only offset my income from the STR - until I keep a space in the residence (room or ADU, etc) specifically marked for STR. However in that case, the deductions are minimal as the whole cost basis is significantly reduced.

Thanks!

Michael Plaks · Answer

@Mayank Jain

Correct on the depreciation. Again, if you ate the pizza, it's gone. It can no longer "be eaten."  I wish.

You will NOT qualify for the damn "STR loophole" by renting your residence for a few weeks.

Your intention to lower costs is understandable. But you're searching for some magic trick to do that, and there's plenty of this crap online. It does not work. Get yourself a tax professional if you want to explore available tax strategies. YouTube will not do it for you.

Mayank Jain · Answer

Hi Michael, thanks for that very informative link.

So if I understood it correctly, once the depreciation schedule has been completed, the objects in question can no longer be depreciated. I think this is in line with what I was thinking (shown in the screenshot in my original post).

My high level plan is : If I live in a Single Family Residence and put it up for STR for a few weeks in the year to qualify for STR tax loophole (Avg 7 days rental + show 100 hours of my participation + showcase my material participation), can I deduct relevant STR related expenses and depreciate my property via cost segregation study as if the entire house is being used for STR?

The intention is to lower my cost of ownership for my primary residence. Any cashflow from STR is a bonus on top.

Does this plan seem logical?

Many thanks!

Mayank Jain · Answer

Hi Ashish, thanks for helping out with a response.

Hypothetically, lets say I don't want to bonus depreciate, but want to use the depreciation to its full number of years.

If I understood your response correctly, you are saying that after the depreciation years are completed (say 5 years completed for the 5 year bucket), their depreciation value is 0?

Thanks!

What happens after the period of cost segregation study completes?

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