Cost Segregation Without Bonus Depreciation on SFH, LTR's
Member since 2021 · 87 posts · 41 votes
Cost Segregation Without Bonus Depreciation on SFH, LTR's
18 Replies
- 3ySean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
Nathaniel C. to do a cost seg. or not depends on a few factors including:
- What you are hoping to get out of it (e.g. offset other income in the portfolio, get a big refund to put down on another property)
- How long do you plan to hold the property (depreciation recapture of 25% might make this less worthwhile if you sell the property in 2 years)
- Did you already place the property in service and start depreciating it for 27.5 years (LTR) or 39 years (STR). In this case, it's messy to fix this and you have to file a Form 3115.
- You would consider a 1031 exchange to avoid depreciation recapture.
There are more factors to consider depending on the investor. Would model this out or prepare tax returns with and without the impact of cost seg to help in the decision-making process.
*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
- Member since 2021 · 87 posts · 41 votes3y
Quote from @Sean O'Keefe:
Nathaniel C. to do a cost seg. or not depends on a few factors including:
- What you are hoping to get out of it (e.g. offset other income in the portfolio, get a big refund to put down on another property)
- How long do you plan to hold the property (depreciation recapture of 25% might make this less worthwhile if you sell the property in 2 years)
- Did you already place the property in service and start depreciating it for 27.5 years (LTR) or 39 years (STR). In this case, it's messy to fix this and you have to file a Form 3115.
- You would consider a 1031 exchange to avoid depreciation recapture.
There are more factors to consider depending on the investor. Would model this out or prepare tax returns with and without the impact of cost seg to help in the decision-making process.
*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
Thank you for the reply. We are not REPS and likely never will be. So no opps to offset W2-like income. However, on some of our properties, cashflow outstrips depreciation and expenses. This will likely continue to be the case since we are buy/hold. So using cost seg to bank passive losses would help our overall tax picture, now and in the near future.
We plan to hold forever.
We did place the property in service. We did start depreciating on a 27.5yr schedule (LTR). We are aware that Form 3115 will be involved in our scenario.
With our buy-hold forever plans... 1031 is a method we have our eyes on in case we need to "move" properties.
- Member since 2021 · 87 posts · 41 votes3y
@Sean O'Keefe would like to get your opinion (nothing implied here) based on the facts below... Trying to grasp if you think our SFH would be eligible for ANY amount of bonus depreciation after a cost seg study is completed.
SFH purchased brand NEW the builder of the community. Purchased May 2017. Lived in as a primary residence. Placed in service as a long-term rental May 2018. Has been a rental property ever since.
Based on the well known 9/27/2017 cutoff date, we clearly do not qualify for 100% bonus depreciation. But do we qualify for any level of bonus depreciation? How much and through what methodology. We have read notes about 50% bonus or 40% bonus being available to us, because the home was purchased new.
- 3ySean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
Nathaniel C. good point, type of property (STR or LTR), REI income, and REPS or not are also factors to consider when evaluating whether or not to do cost seg.
- Member since 2022 · 19 posts · 2 votes3y
We're able to help. Fee is only $2,000! We usually have a minimum of 5 properties. You supply photos and floor plan for report. Our contractors can be engaged to help if you are unable to provide these items. Send me answers to the questions below and I'll tell you your estimated benefits. Takes a couple minutes.
Your Name for the Property____
Your Purchase Price of the Property (Subtract the Land Costs),____
Freestanding, Leasehold Building/Renovation SELECT Freestanding ____ Leasehold Building/Renovation ____
Date Acquired or Placed in Service____
Current Tax Year? Yes ____ No____
Return on Investment Factor _____
Federal Tax Rate____
State Tax Rate _____
ADS Depreciation Required for Real Property? No Yes
Is this improvement newly constructed or acquired property?
Newly Constructed ___ or Acquired Pproperty ___ - Member since 2022 · 19 posts · 2 votes3y
Document and Calculate IRC §481(a) adjustments required for
Change in Accounting Method IRS Form 3115.These adjustments are typically necessary when a Cost Segregation study is performed on a building acquired or improved in a prior tax year and reclassifies costs to different depreciable lives or to expense categories under the new Tangible Property Regulations.
What is a 481(a) Adjustment?
Under current IRS rules, the calculation of depreciation or repair deductions for prior years can be recomputed, and a one-time catch-up adjustment (i.e. IRC §481(a) adjustment) is allowed in the current tax year for missed deductions. The adjustment is the difference between depreciation or repair deductions claimed versus depreciation or repair deductions that could have been claimed by the end of the prior tax year. This adjustment is reported on IRS Form 3115 and does not require amending any prior year tax returns - Member since 2022 · 19 posts · 2 votes3y
Quote from @William C.:
@Sean O'Keefe would like to get your opinion (nothing implied here) based on the facts below... Trying to grasp if you think our SFH would be eligible for ANY amount of bonus depreciation after a cost seg study is completed.
SFH purchased brand NEW the builder of the community. Purchased May 2017. Lived in as a primary residence. Placed in service as a long-term rental May 2018. Has been a rental property ever since.
Based on the well known 9/27/2017 cutoff date, we clearly do not qualify for 100% bonus depreciation. But do we qualify for any level of bonus depreciation? How much and through what methodology. We have read notes about 50% bonus or 40% bonus being available to us, because the home was purchased new.
You can get 100%!
- Member since 2021 · 87 posts · 41 votes3y
Quote from @John Norman:
You can get 100%!
Thanks for the reply. Can you please provide the methodology for why you believe we can get 100% on that property? Thanks in advance.
- Member since 2022 · 19 posts · 2 votes3y
481a to 3115 The IRS prefers studies are done by professionals.
- Member since 2021 · 87 posts · 41 votes3y
Quote from @John Norman:
481a to 3115 The IRS prefers studies are done by professionals.
Thanks for this. The opinions we have gathered from pro's has varied greatly. Currently we are operating under the understanding that the home was purchased new in May 2017 (so missed the Sept. cutoff for 100% bonus) and then placed in service in 2018. Because we (the taxpayer) were the original user of the property, this qualifies it for 40% bonus depreciation. Had it been placed into service in 2017 (but still purchased before the Sept 2017 cutoff) then we would have qualified for 50% bonus. Hopefully this info and digging is helpful to someone else who stumble upon it. Still open for thoughts and opinions as always.
- 3yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@William C., You'll love your 1031 strategy as you move forward. And thanks to some favorable clarifications from the IRS, cost segregations are going to be much easier to include and defer recapture from in a 1031.
Non real estate "property" that have been set aside for accelerated depreciation may be included in a 1031 exchange as long as there is an equivalent amount of the same "thing" in the replacement property. This is great news for a 1031 investor who can now take much more advantage of cost segregations and still potentially defer all recapture through a sale and 1031.
The 1031 Investor5137 Reviews - Member since 2022 · 19 posts · 2 votes3y
"Placed in service" is your benchmark, not when you purchased it.Thinkj about it, makes sense. Watch the 1031. Don't touch any 1031 funds before a qualified entity advises you.
- Member since 2022 · 19 posts · 2 votes3y
A look back study can go back to 1987. You put the property "in service" in 2018. You are under the rules from the "in service" date.
Rules from the "in service" date included the 100% bonus (9/27/2017 to 12/31/2022). We provide audit protection. - Member since 2022 · 19 posts · 2 votes3y
"When you get your report it will list the building components by item and class. In most cases you will see components listed under 5-year, 15-year, and either 27.5- or 39-year property, depending if it is residential or commercial real estate. Sometimes a component will also fall under 7-year property.
It is important to add each item separately to the depreciation schedule, even the 27.5- or 39-year property. The 5- and 15-year property accelerates the current depreciation deduction. But even the long end of the depreciation schedule has value. The roof, doors, electrical, plumbing and painting eventually need upgrading. When you upgrade any component you deduct the remaining undepreciated basis left in the replaced component.
The same applies to short end of the depreciation schedule. The parking lot, sidewalk and landscaping are 15-year properties. A replacement of any of these will trigger the remaining basis for deduction of said component.
The original estimate of tax savings from a cost segregation study underestimates the benefits as it assumes only the increased depreciation expense related to the 5- and 15-year property. There are only a few components that are not replaced prior to the component being depreciated. The foundation is one such item. But even things like plumbing and electrical are likely to need an upgrade before 39 years!
The advantage of the cost segregation study is the separate listing of components. The additional deduction from the old component (when replaced) helps offset the cost of the upgrade. Coupled with the repair regs, investment property owners and businesses with commercial real estate are better able to match deductions with the outlay of capital. A difficult issue in business and with landlords is the outlay of cash to improve a property only to wait up to 39 to get a tax benefit. Without a cost segregation study the cash is spent on the improvement and also taxed currently, increasing the cash needs to undertake a project. Cost segregation and the repair regs help eliminate some of the problem, allowing more projects to move forward..."
- 3yBonnie Griffin KaakePro MemberReal Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votesHi Nathaniel, Your best best, rather than guessing, is to get a no-cost estimate for an engineering-based cost segregation study from a reputable company. That will give you all the information you need to decide how you can or cannot take advantage of cost segregation. There are too many moving variables that can effect the specific property...no two are alike.
Quote from @William C.:
Hoping to gather some opinions. For SFH's that are LTR's (home values approx. $280k with land value backed out) what are the advantages and disadvantages to conducting a cost segregation study when bonus depreciation is unavailable? If the cost seg study will cost approx. $3k, is it worth the cost to bring that depreciation forward on an accelerated timeline. Cost seg in a bonus depreciation setting appears to be a no-brainer, but when bonus depreciation is not possible the advantages seem more murky. Thanks in advance for opinions here.
As for purchasing the property in 2017 and offering it for rent in 2018, you will most likely qualify for 100% bonus depreciation. Any property over about $250K purchase price is usually viable. The sooner you get the study done the better. You are losing valuable time and money by waiting. - 2yBonnie Griffin KaakePro MemberReal Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
@Nathaniel C. Be sure the company you choose does an engineering-based study which is the IRS’s preferred methodology and requires an on-site review of your property inside and out by a qualified professional. Check the fine print regarding audit protection. IRS audits are expensive and time consuming.
- Accountant · Houston, TX · Member since 2023 · 147 posts · 41 votes2y
Quote from @William C.:
@Sean O'Keefe would like to get your opinion (nothing implied here) based on the facts below... Trying to grasp if you think our SFH would be eligible for ANY amount of bonus depreciation after a cost seg study is completed.
SFH purchased brand NEW the builder of the community. Purchased May 2017. Lived in as a primary residence. Placed in service as a long-term rental May 2018. Has been a rental property ever since.
Based on the well known 9/27/2017 cutoff date, we clearly do not qualify for 100% bonus depreciation. But do we qualify for any level of bonus depreciation? How much and through what methodology. We have read notes about 50% bonus or 40% bonus being available to us, because the home was purchased new.
Okay I'm going to say I've never heard that date at all.
Here's 168(k) says(2)Qualified property For purposes of this subsection—(A)In general The term “qualified property” means property—(i)(I)to which this section applies which has a recovery period of 20 years or less,(II)which is computer software (as defined in section 167(f)(1)(B)) for which a deduction is allowable under section 167(a)
(ii)the original use of which begins with the taxpayer or the acquisition of which by the taxpayer meets the requirements of clause (ii) of subparagraph (E), and(iii)which is placed in service by the taxpayer before January 1, 2027.
This is from the IRS website:
IRS finalizes regulations for 100 percent bonus depreciation | Internal Revenue Service
The deduction applies to qualifying property (including used property) acquired and placed in service after September 27, 2017.
So in summary if you only have a rental property at 27.5 on the PPE assets, no bonus. Cost seg, then maybe. Should you on a SFH? I dunno maybe but keep in mind bonus could get suspended. I mean you know when you bonus you have ordinary recapture and the potential for a lower basis quicker leading to bigger gains on disposal. Straight line is slower but it also doesn't reduce my basis as much if I plan on getting out within a certain time.
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