Cost Segregation: W2 Employee and Not REPS: Worth it?

Question

I'm wondering if it makes sense to do a cost segregation study if I'm a W2 employee and don't have REPS. I would be looking to do this for a townhome that became a rental in 2021 but I don't foresee myself moving into REPS within the next 3-5 years. From what I've read it only can offset your passive income if you don't aren't a real estate professional. Looking for some advice here if it makes sense to complete a cost segregation study at this point in time.

Jeff Nash · Answer

It would make sense perhaps if the property was also a short-term rental or you had other income to offset.  @Ryan Voccia is correct that the cost seg providers will give you a preliminary estimate, but you also have to work with a tax advisor as well to see if it makes sense.

Ryan Voccia · Answer

It's going to depend on personal tax situation (Joesph gives a good example of when it would make sense). You are right that the depreciation will only offset passive income if not a real estate professional. It may be worth reaching out to some of the cost segregation companies to discuss. I believe some of them will give you a free estimate.

Julio Gonzalez · Answer

@Ross Alcorn Cost segregation is a very case by case basis since all of our income and taxes are all so different. Is the property an STR? There's a tax loophole that would be helpful there. I'd recommend getting a free cost/benefit analysis from a cost segregation company to see what your potential tax benefits are compared to the cost of the study.

Chris McCormack · Answer

Be careful of the advice you take in. There are many accountants (including some in this thread) who will tell you it won't work and it'll never work and you should not even consider it. An accountant who is looking out for your best interests and knows your money is better used in your accounts than the governments will do a deep dive into your situation before providing any advice.

I suggest finding a real estate tax planning CPA who is willing to ask the tough questions before you make a decision.

Lane Kawaoka · Answer

@Ross Alcorn

It's important to consider your unique situation. Don't just focus on the short-term benefits, think about whether it's worth spending some money now if you plan to sell the property next year or within a few years. The timing varies for everyone, but if you hold onto a property for less than two to three years, it might not make sense to go for certain strategies.

Another thing to consider is your personal situation. Many passive investors make the mistake of chasing after deductions they don't actually need. You may not require passive activity losses if your income isn't high. Take a look at the tax brackets. If you're making over $364,000 (for married filing jointly in 2023), it might be worth pursuing strategies to lower your taxes, and having passive activity losses can help. But if you're below that threshold, you might not be paying a significant amount in taxes.

Remember, it's important to focus on finding good deals rather than getting caught up in the pursuit of passive losses. Don't let taxes dictate your investment decisions. Also, if you're not doing real estate professional status (rep status), even if you have a lot of passive activity losses, they might just end up suspended on your tax form and not help lower your adjusted gross income (AGI).

Lastly, for many accredited investors, owning rental properties might not be scalable or worth the high liability once your net worth increases. As you move up in the wealth-building journey, you'll likely consider selling those smaller rental properties sooner rather than later. Spending money on cost segregation studies might not be worth it if you plan to sell the property shortly after. So, keep your long-term goals in mind.

In the end, cost segregations can be beneficial, but it's not a one-size-fits-all solution. It depends on your specific circumstances, including your tax bracket and future plans. Feel free to reach out if you have any questions or want to discuss further.

Joseph Palmiero · Answer

Not worth it unless you are also planning to sell another property with a gain.

Basit Siddiqi · Answer

one of the reasons it may make sense is it you will make below $150,000 and the additional depreciation expense will allow you to increase your losses of which you can potentially utilize up to $25,000 against your other income.Your CPA will be better suited to guide you on whether you should get it done or not.Best of luck.

Isaac Weinberger · Answer

STR Tax Loopholes! Happy to send you an estimate!

Cost Segregation: W2 Employee and Not REPS: Worth it?

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