Bonus Depreciation and My CPA’s Advice

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2 Reply

John Malone

Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes

3y

Quote from @Kyle Swengel:

Hello BP,

I have a fourplex in Tucson that I bought a couple years ago now. I’ve been renovating it and am almost done.

I asked my CPA about bonus depreciation and doing a Cost Seg study on the property so I could get the 80% bonus depreciation but this is what she said:

“Note that I don’t do that kind of work because it requires engineering knowledge that I don’t have. Also, I am not sure it’s worth the costs since you have small homes: the studies are usually reserved for large buildings with multiple units. Depreciation sounds good but it’s reversed when the building is sold so the benefits are probably minor at best. Note that the best tax advantage is expensing the repairs when possible rather than capitalizing and depreciating them.”

I bought my property for $400K and it’s worth close to $600K now. Am I going about this wrong? I thought that taking bonus depreciation was a no brainer? And most people I talk to say I should do it. What am I not considering and why is my CPA not wanting to go for it? Is my building really not expensive or big enough to where it makes sense?

Any help would be great. Thanks!

Are they experienced in real estate? The answer seems very broad vs specific to your circumstances.

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Curt Riffel

Accountant · Dallas, TX · Member since 2016 · 161 posts · 75 votes

3y

I am a CPA also and I'm on the fence for a property at this price point. I think a Cost Seg makes more sense when the property value is greater than a certain amount. But what is that amount?

You wouldn't do a Cost Seg on a SFH that was purchased for $45,000 that you plan to hold 2 years. I would anticipate you would do one for a property that costs greater than $1,000,000. Somewhere in between those I would do some back of the envelope calculations to determine if it makes sense. You also need to figure in the holding period of the properties and how quickly you plan to exit, those should weigh in the calculation as well. Also what is the price of doing a Cost Segregation? Over what time frame will you recapture the cost of doing a Cost Seg study? What amount of depreciation recapture do you anticipate paying at ordinary rates?

2 Reply

Joseph PalmieroBusiness Member

CPA · PA · Member since 2023 · 151 posts · 115 votes

3y

One thing to consider before looking into the cost segregation is to see if you would be able to use the loss generated on your tax return. Depending on your income you might qualify for the "Small Landlord Exception" to take the loss. You also can take the loss if you have other passive income or if you (or your spouse, if married) work in a real property trade or business and you materially participate in the rental.

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

3y

1 - CPAs don't do cost segregation studies. She is correct that it requires specialized knowledge. So we refer clients to companies/experts that specialize in cost segregation: @Bernard Reisz, @Yonah Weiss or @Julio Gonzalez can all help you. We then incorporate their results into your tax return.

2 - The price point is subjective, but it certainly can make sense for a $400-600k 4-plex if you're planning to keep it for a few years.

3 - Most importantly - understand how cost seg actually works: https://www.biggerpockets.com/...

4 Reply

Chris Picciurro

Accountant · Franklin, TN · Member since 2023 · 204 posts · 91 votes

3y

The fair market value does not play a role in cost segregation. The cost basis is key. Are you a REP status person? Is this an STR? Cost segs are one of my favorite tax planning tools yet the tax benefit is dependent on facts and circumstances.

Bernard ReiszPro Member

CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes

3y

@Kyle Swengel Kudos for being thoughtful and proactive about your taxes!

As someone with a CPA background, I emphasize more than anyone (perhaps with the exception of the truly amazing @Michael Plaks) that a nuanced approach is required for tax tool implementation. The ROI on tax tools varies greatly from investor to investor and hinges on several variables, some of which can be objectively analyzed by a real estate tax expert and some of which require some subjective analysis (for which a real estate tax expert can provide valuable context).

There are really 2 "no brainer" steps to take to get clarity for an informed decision:

1 - Read Michael Plaks' posts about this topic. With just a bit of reading you will be way more informed than any non real estate focused accountant.

2 - Get a free Cost Seg feasibility analysis for your property.

Armed with the info from those steps you'll be able to make informed decisions about how to move forward.

[email protected]

2 Reply

OP

Rental Property Investor · Tucson, AZ · Member since 2020 · 85 posts · 51 votes

3y

@Chris Picciurro

I’m not a real estate professional and the 4plex units are all furnished and I rent them to travel nurses so there is a lot of furnature I own in there.

OP

Rental Property Investor · Tucson, AZ · Member since 2020 · 85 posts · 51 votes

3y

@Chris Picciurro

But to your point I cannot call it a STR for tax purposes and use the STR loophole unfortunately :/

OP

Rental Property Investor · Tucson, AZ · Member since 2020 · 85 posts · 51 votes

3y

@Bernard Reisz I just read the post from @Michael Plaks and it was very informative. Thanks @Michael for putting that together.

I asked my CPA to sit down and go over the math and the pros and cons for my specific situation and portfolio. They basically said they were too busy for consultations right now and to take their word for it. But I still think with the high NOI that my peppery brings in it could really help, even though I am not a tax professional and it's not a STR where I could apply it to mu W2 taxes to push those down.

John MorganPro Member

Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes

3y

@Kyle Swengel

Not worth the cost for something under a mil. I would cost seg some things maybe. You’ll get the benefits of all the write offs from your rehab eventually. It’s not like you’re losing out on all that $ you spent on the rehab.

Account Closed

Real Estate Investor · Chicago, IL · Member since 2017 · 29 posts · 11 votes

3y

I have done 2 cost segregations studies one for a 32 unit value 2.925mm and another for a smaller 1.25mm value deal. In my experience it will come out to be close to 15% of purchase price as bonus depreciation. Every CPA will want it done a bit differently. My CPA didnt want the 5 or 15 year to be over 15% because it could create a taxable event per their words.

Overall it doesn't cost you any money to engage a cost segregation specialist. They will request some details on the property and generate a round about idea of what the cost of the study will be and what the depreciation benefits will look like. Once you have that its just a decision based on numbers.

Most CPA's do not have the expertise in engineering to run a cost segregation study. Lastly in my experience most CPA's unless they themselves are RE investors wont give you the best guidance on RE. As for the recapture on the backend as long as you sell and 1031 it all gets kicked down the line.

I used KBKG they were fair.

Bernard ReiszPro Member

CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes

3y

@Kyle Swengel It's all about using an integrated suite of real estate tax tools, as applied to a particular investor's tax profile.

As you point out, Cost Seg and 1031 can complement each other very nicely. Of course, as you emphasize, having a real estate focused CPA is key to unlocking the upside, and avoiding unintended consequences, of tax tool implementation.

[email protected]

Peter MckernanBusiness Member

Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes

3y

Quote from @Kyle Swengel:

Hello BP,

I have a fourplex in Tucson that I bought a couple years ago now. I’ve been renovating it and am almost done.

I asked my CPA about bonus depreciation and doing a Cost Seg study on the property so I could get the 80% bonus depreciation but this is what she said:

“Note that I don’t do that kind of work because it requires engineering knowledge that I don’t have. Also, I am not sure it’s worth the costs since you have small homes: the studies are usually reserved for large buildings with multiple units. Depreciation sounds good but it’s reversed when the building is sold so the benefits are probably minor at best. Note that the best tax advantage is expensing the repairs when possible rather than capitalizing and depreciating them.”

I bought my property for $400K and it’s worth close to $600K now. Am I going about this wrong? I thought that taking bonus depreciation was a no brainer? And most people I talk to say I should do it. What am I not considering and why is my CPA not wanting to go for it? Is my building really not expensive or big enough to where it makes sense?

Any help would be great. Thanks!

The CPAs do not do the study as you mentioned in your post, here is one good company to go through that I just went through. https://coresolutionsgroup.net...

You can use any company though that specializes in working with investors that can work through this detailed analysis from the engineer that does the work. Some will know a little bit of what to do and some will know a lot. I would seek out another CPA in the meantime to see if there is someone else that will align with your taxable income, and you can benefit from using that person by decreasing your taxable income this year and going forward.

You can still do the Cost Seg without being a real estate professional, the status does help when it comes to your taxes however, you can still get the cost Seg done on your property without having that as your tax filing.

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Steven Hamilton IIPro Member

Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes

3y

Quote from @Kyle Swengel:

@Bernard Reisz I just read the post from @Michael Plaks and it was very informative. Thanks @Michael for putting that together.

I asked my CPA to sit down and go over the math and the pros and cons for my specific situation and portfolio. They basically said they were too busy for consultations right now and to take their word for it. But I still think with the high NOI that my peppery brings in it could really help, even though I am not a tax professional and it's not a STR where I could apply it to mu W2 taxes to push those down.

Depending upon your situation, it does matter. And it may be worth it to carry over those losses. Many of us accountants will actually run the numbers with you and we partner with engineers as mentioned. That is a reasonable price point to look at. Cost Segs are not as expensive as they used to be.

The response they gave you was not appropriate. Reach out to one of the accounting firms listed here: https://www.biggerpockets.com/...

Chris McCormack

Accountant · Edina, MN · Member since 2020 · 172 posts · 97 votes

3y

An investor friendly tax planning CPA will give you more than a generic answer as your current accountant did. I recommend meeting with a real estate specific tax specialist. As with any tax advice, it's dependent on your unique situation and a qualified tax planner will gather all the information and come to you with recommendations.

Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

3y

it's awesome that you discovered bonus depreciation. I wanted to mention that for smaller properties, there are some vendors out there who offer what they call "fake" cost segregations, where you have to get insurance along with it as opposed to the real ones that cost 5-15k. It might be worth taking a chance on that, but for our bigger projects of $10-20 million or more, we usually go with the more expensive real one.

But here's the thing, you gotta be aware that these cost segregation vendors are always emphasizing the benefits and not talking much about the downsides. I'll be honest with you, one of the cons of cost segregation is that when you sell the asset, you'll have to give back the depreciation in the form of depreciation recapture. So, if you're not planning to hold onto your properties for a long time, like maybe three to five years or less, spending money on cost segregation might not make much sense. Sometimes, on our larger syndications we even choose not to do it on our properties.

However, keep in mind that this is your individual situation. Most investors start with single-family homes, duplexes, or quadplexes, but as they become more experienced and creditworthy, they move up to larger syndication deals as passive LP partners. They leave behind the hassle of being landlords and dealing with rental properties - and litigation behind!

If you're like me, who used to own 11 turnkey rentals and sold them all, and many accredited investors go through a similar process, then doing a cost segregation may not be the best choice. It would mean giving up that benefit and spending money for little gain when you step up to those types of investments.

Of course, every situation is different. If you're pursuing real estate professional status or making over $360,000 a year, then cost segregation might make more sense. But if you're below that income threshold, it probably won't provide much benefit.

These are just some things for you to consider. Going into all the details might not be the best fit for a forum post, but it's important to think about these factors.

OP

Rental Property Investor · Tucson, AZ · Member since 2020 · 85 posts · 51 votes

3y

@Lane Kawaoka

Great explanation Lane. Thank you for the advice.

Julio GonzalezPro Member

Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes

3y

@Kyle Swengel I would definitely recommend working with a real estate investor friendly CPA in order to ensure you are taking advantage of all of the tax benefits available to you. Multiple great CPAs have commented on here or I'd be more than happy to recommend one. As far as a cost segregation goes, it can be super beneficial depending on your situation. We've seen houses with a purchase price as low as $150,000 benefit from a cost seg study, so I wouldn't say it's reserved just for large multi-family complexes.

561-253-6640

Gurleen B.

Member since 2022 · 38 posts · 8 votes

2y

Quote from @Account Closed:

I have done 2 cost segregations studies one for a 32 unit value 2.925mm and another for a smaller 1.25mm value deal. In my experience it will come out to be close to 15% of purchase price as bonus depreciation. Every CPA will want it done a bit differently. My CPA didnt want the 5 or 15 year to be over 15% because it could create a taxable event per their words.

Overall it doesn't cost you any money to engage a cost segregation specialist. They will request some details on the property and generate a round about idea of what the cost of the study will be and what the depreciation benefits will look like. Once you have that its just a decision based on numbers.

Most CPA's do not have the expertise in engineering to run a cost segregation study. Lastly in my experience most CPA's unless they themselves are RE investors wont give you the best guidance on RE. As for the recapture on the backend as long as you sell and 1031 it all gets kicked down the line.

I used KBKG they were fair.

Is there a CPA you do use/like and did they recommend KBKG for you?

Bill HamptonBusiness Member

Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 977 votes

2y

@Gurleen B.

I recommend finding an accountant that specializes in real estate taxation and provides cost segregation services. You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a tax strategist who is willing to work with you throughout the year, not just when preparing your tax return. You want an accountant that can help you strategize and who is responsive when you want to know the tax consequences of the decisions you are making throughout the year.

Good luck in your search.

404-482-3170

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Account Closed

Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes

2y

@Kyle Swengel,

I suggest you look into the negative effects of deprecation recapture, as well as if the losses generated from the cost seg you can even use to offset significant income. If your accountant doesn't want you to do it, they either do not know real estate well or have a good reason along these lines