Is Cost Segregation Worth It for 7 unit $600k Apartment Building?

Question

Hello everyone! I have been gathering information and some people say cost segregation is only worth it for expensive buildings. Is this true? According to Turbotax, with 27.5 years depreciation, my $600k building depreciates by around $21k/year. Would cost segregation beat this figure? How much would cost segregation studies cost?

Thanks!

Jeff Nash · Answer

Are you a real estate professional and if you accelerated depreciation what would be the impact be relative to your entire portfolio and income from other sources? @Julio Gonzalez is a professional in this space and addressed some great considerations so you might strongly consider reaching out to him.

Brad Jacobson · Answer

If your primary source of income is real estate and you already own real estate, your tax liability will likely already be so low that you don't need a cost seg - just make sure you're using a top notch CPA.

If your primary income isn't real estate, and therefore come with a higher tax liability, then yes, doing a cost seg will probably be a solid option.

Really, you need to have your CPA or move to a really good CPA and let them answer the question for you. In my experience, very few CPAs really know their stuff on things like cost segregation and advanced RE tax strategies so I'd make finding the right CPA the priority and putting the question on them.

Good luck!

Account Closed · Answer

When I had my cost segregation study done for a mid-sized rental, I spent about $7,500 with cost seg guys. It wasn't a simple flat fee and the price was based on the property's value, its complexity, and the level of detail in the engineered report. My CPA found that their audit is clear without any complex variables.

Michael L. · Answer

@Julio Gonzalez, I like the way you broke this apart and brought it back together to make sense. I was not aware how effective cost seg could be when used properly👏🏻.

Julio Gonzalez · Answer

@Diane Tycangco We have worked with properties that have a purchase price as low as $150,000.

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. 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. Engineered cost segregation studies usually start around $3,000 for SFHs and go up from there depending on the property. 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!

Julio Gonzalez · Answer

@Jeff Nash Thanks for the mention!

Jason Malabute · Answer

It depends. Cost segregation is most valuable if you can actually use the accelerated depreciation. If you or your spouse qualify as a real estate professional, the losses may be fully deductible against active income. Otherwise, they’re generally passive and may be suspended unless your income is under the $150,000 phase-out threshold. Additionally, in years where 100% bonus depreciation applied, cost segregation was often more compelling, even on smaller properties. For a 7-unit, $600k building, it could make sense, but only after a deeper analysis of your income, tax bracket, passive activity rules, and timing of bonus depreciation.

Max Segal · Answer

As many have stated here, it depends on your tax situation. If you qualify for REPS status and can show material participation (in this property or grouped as a whole with your portfolio), then cost seg can be a powerful tool to reduce your active income. Otherwise, you need to have passive income as the excess losses from the cost seg study will be treated as such. If you don't qualify and you don't have the income to offset, then its unlikely to be worthwhile

Julio Gonzalez · Answer

@Michael L. Glad you found it helpful!

Adam Struss · Answer

I would definitely explore it. Typically, the sweet spot is usually around $300k purchase price to be worth it, but it also depends on what the building is. i.e. empty warehouse vs luxury hotel would be a big difference in savings. Also, when did you purchase the property and how long do you plan on holding it? I'd be happy to explore this with you, we can prepare you a projected tax savings report free of charge. If we don't save you money, you aren't charged either. We also provide audit defense which is included as part of our service. Feel free to reach out and we can chat or schedule a meeting.

Is Cost Segregation Worth It for 7 unit $600k Apartment Building?

Is Cost Segregation Worth It for 7 unit $600k Apartment Building?

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