Cost Segregation ?

Question

Julio Gonzalez · Answer

@Jim Macris

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. What was the purchase price of your property? 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. Have you obtained any detailed cost/benefit analysis quote? Most cost segregation study companies provide the quote for free. If you need any help or have any questions, feel free to reach out!

Sean O'Keefe · Answer

This question was already answered recently by Michael here

https://www.biggerpockets.com/forums/51/topics/1136752-expla...

DIY Cost Seg or KBKG ($500 - $1,000)

Engineering firm ($2,000 - $6,000)

Michaels post explains difference btwn DIY vs Engineering firm.

Should you do one? That depends on your situation, what you want to get out of it, property type, how much you participate, if you plan ti sell soon and the nature of sale (e.g 1031), etc.

Sagiv O. · Answer

@Jim Macris - Great question. As @Sean O'Keefe mentioned, there are different options depending on your budget and property value. For a condo in that price range, traditional engineering firms charging $2-6k might eat too much into the benefit.

One option worth considering for smaller residential properties is newer platforms like room42.io that can deliver IRS-defensible studies for around $500-600. The methodology is rules-based and consistent, which is what matters for audit defense. For a 2BR condo, you'd likely see $15-20k accelerated into year 1, which at typical tax rates translates to $4-6k in tax savings.

The key question is timing - if you're planning to hold it 5+ years and can use the deductions now, it usually pencils. If you're flipping in 2 years, probably not worth it.

Lane Kawaoka · Answer

Just taking the other side of the coin here although we do cost seg our apartments:

Thinking of selling within the next 5 years? Maybe hold off on that cost segregation.

Can't use the losses? Remember to plan 5 years ahead and also look back 5 years for taxes. If your income isn't high enough or you're limited with your PALs or limited suspended passive activity loss, it might not be the best move.

If you're not saving at least 2X the cost of the study (I'm talking about cash savings, not just depreciation), then it might not be worth it.

Be cautious with 1031 exchanges. There are a couple of ways to calculate the depreciation to carryover. And speaking of 1031 exchanges, make sure the federal 1031 doesn't land you with hefty state taxes on the state 1031. Just a heads up, many states have their own rules for depreciation and personal property eligibility.

Ever thought about if the 179 expensing method might be a better fit? Especially with its limitations.

Basit Siddiqi · Answer

Consult your tax advisor if you should get a cost segregation study done.

It will depend on
A) Will you be able to utilize the added depreciation expense
B) The cost of the property purchased
C) The estimated added depreciation expense from the study
D) The cost of the study.

Best of luck

John Malone · Answer

@Jim Macris not a one sized fits all answer.

Technically speaking, a cost seg is moving from an “impermissible to permissible method of accounting”, so you could argue everyone must (but the IRS wouldnt fight you on this haha)

You should get a free ROI analysis then run it by your tax advisor

David M. · Answer

@Jim Macris

The cost seg people here will say that its always worthwhile to do or at least look into a cost seg. I think that for smaller properties the cost / benefit isn't there. Furthermore, I don't see the point in bringing in your depreciation sooner since you won't be there for use in the future. Furthermore, unless you 1031 'till you drop (basically), you'll have to pay back the depreciation anyway.

From the other posts, cost seg companies should give you a free estimate, est of how much the cost seg will cost. That should help give you a ball park.

Good luck.

Joseph Palmiero · Answer

It depends on how much you paid for the property and if you will be able to use the loss generated from it.

Cost Segregation ?

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