Cost segregation study on a property from 2022
Hey everyone, I'm starting to dive deep into the tax benefits of REI and I had a question regarding a cost segregation study and accelerated depreciation.
I purchased a long term property in 2022 that has been run by a property manager this last year. Hypothetically, if in 2023, I plan on turning it into a STR with self management to meet the the material participation, how would the accelerated depreciation work?
From what I understand, you obtain the accelerated depreciation benefit based on the year the rental property went into service.
For example, if it was put into service in 2022, I would achieve 100% of the benefit even though during that year I did not start self managing, rather than 80% for 2023.
Let me know if I am understanding this properly, thanks!!
Quote from @Michael Mackney:
Hey everyone, I'm starting to dive deep into the tax benefits of REI and I had a question regarding a cost segregation study and accelerated depreciation.
I purchased a long term property in 2022 that has been run by a property manager this last year. Hypothetically, if in 2023, I plan on turning it into a STR with self management to meet the the material participation, how would the accelerated depreciation work?
From what I understand, you obtain the accelerated depreciation benefit based on the year the rental property went into service.
For example, if it was put into service in 2022, I would achieve 100% of the benefit even though during that year I did not start self managing, rather than 80% for 2023.
Let me know if I am understanding this properly, thanks!!
Hi Michael, I can answer most all your questions and more. I keep CPAs updated on this complex area of tax laws and regulations and did an hour Continuing Professional Education (CPE) class on STRs for 253 CPAs just last week.
First, your long-term rental was likely depreciated over 27.5 years if it is a residential rental. To change it into a STR, you will need your CPA/tax professional to do a 3115 change of accounting form to file with your taxes because all STRs must be done on 39-year depreciation. If you haven't done your 2022 taxes yet, I would recommend you do a cost segregation study on your current property for 2022 before you make the change to a STR. That will give you 100% bonus depreciation. If you can't use all of it for 2022, you can always roll it forward to following years.
Keep in mind that in order to qualify for material depreciation on your STR, your average rental number of days has to be 7 days or less. And, you must put in more hours than anyone else for managing the property. Regardless whether you meet the average of 7 days or are over that, a STR is still depreciated over 39 years. A good cost segregation study will bring your taxes up-to-date and make it easier on your tax pro.
There are a lot more considerations for your CPA/tax professional but that would be getting too far into the weeds for your current questions. I am here if you need more guidance.
@Michael Mackney agreed w Bonnie but 22 vs 23 depends. If you take it in 22, fact pattern likely shows a PAL carryover.
If you materially particpates in the STR properly in 23, then the results are likely greater than a large 22 PAL carryover since its possible for a nonpassive loss. We specialize in STRs and see this conundrum more and more, especially with 168k phasing down.
There are many factors here to consider though. Hope that is helpful!
@Michael Mackney There are additional considerations regarding doing the cost seg for 2022 versus 2023. Depending on your tax rate, if the paper loss created by a cost segregation study is $25K or less, you may take it against your active income as well for 2022. And, in that situation, you do not have to be a Real Estate Professional or materially participating. Your best option is to get the no-cost estimate and then discuss the results and how it fits your specific tax situation with a knowledgeable CPA/tax professional. This makes your decision easier and more clearly in your best interests.