Cost Seg SFR to offset capital gains?

Question

Can I cost 4 single-family homes to create a paper loss that offsets $2M in capital gains from an apartment complex? Where can I find more info on this (besides go talk to a CPA)

Bill B. · Answer

You’re looking at probably a million dollar tax bill and you think free answers from the internet are the answer? Give the best CPA you can find $10,000. (thats 1%). Even if you randomly found the absolute expert on cost seg you’re going to want a cpa who doesn’t have a financial incentive to sell you a cost seg involved in the decision.

What’s the penalty of a cost seg company says “We’re experts, we can wipe out that entire tax bill…”. And then you go to file your taxes and your cpa says this won’t work because they didn’t know about or think of this… you think that company will write you a check fir a million $’s? I bet you can’t even get a refund.

I’m paying an expert $1,000 to avoid a $61k tax bill, your consequences are much higher, pay a little more.

Michael Plaks · Answer

@Jon L.

You cannot generate $2M in losses from 4 single-family homes. You can partially offset your $2M but not all of it - provided cost segregation is applicable in your situation. That depends on when these properties are placed in service.

Yes, you made it clear that you don't want to spend money on a CPA. However, given the $2M in gains - you might want to reconsider.

Ashish Acharya · Answer

A business loss limitation allows you to only offset around 570k of capital gain if you have no other non-business income.

Jeff Nash · Answer

@Jon L. you’ll need to break down the numbers and do a proforma tax analysis, and to do it right and most effectively I don’t see how you can bypass one or more of the aforementioned professionals (CPA, cost seg, 1031 QI and maybe even a financial advisor to some extent).  More information is needed to understand your background, goals, and current financial and tax situation.

Julio Gonzalez · Answer

@Jon L. I'd recommend reaching out to your CPA as well as reaching out to a cost segregation company. Most companies can give you a free cost/benefit analysis to see how much you could potentially benefit from the cost segregation study. Have you already sold the apartment complex? If you have not sold it yet, as AJ mentioned, a 1031 exchange could be a great solution. Another option is a 721 exchange - it puts your money into passive real estate investments instead.

Basit Siddiqi · Answer

Please be mindful of the limitations set by Section 461 - Limitation of Business Losses.

Julio Gonzalez · Answer

@Jon L. Understandable. Unfortunately it's a tough market right now. Are you able to change up your strategy on the apartment complex you currently own and extend your hold period?

Jon L. · Answer

May sell next year. The problem with a 1031 right now is most of the properties we'd exchange into have 4-6% cap rates when the mortgage rates are 6.5-7%, even at 50% LTV on the exchange

Jon L. · Answer

Is it $570k of business loss per rental property?

Jon L. · Answer

The problem with a 1031 with a 50% LTV at 7% interest rates is that caps are 4-6%. The 4 single family homes are all rentals and worth about $1M each

Cost Seg SFR to offset capital gains?

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