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Tax, SDIRAs & Cost Segregation

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Chris Dawson
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Cost Segregation - First Investment Property

Chris Dawson
Posted Feb 26 2024, 09:08

Hi, I am in the process of purchasing my first investment property. I am looking at a house close to my primary residence for around 1.8M; I plan to rent it out for the first year while I obtain permits and plans to build a larger house. The property sits on 0.37 acres and has lots of potential. 

I am a business owner and have an S-corporation. My wife is currently studying for her real estate license, so we can perform a cost segregation study on the property when we buy one to reduce our tax burden for 2024. I see the House passed the Tax Relief for American Families and Workers Act of 2024, meaning that bonus deprecation may get extended. 

From my understanding, you can only claim 60% for 2024; I do not understand how much bonus/accelerated depreciation we could take on a 1.8M property without a remodel. Can we still perform a cost segregation study on this? and if so, what percentage could we claim as a loss? 

Thanks in advance. 


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Zachary Jensen
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Zachary Jensen
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Replied Feb 26 2024, 11:35

Hey @Chris Dawson

There is alot to unpack here, but please note your wife getting her real estate license in of it self does not qualify you to use those losses (created by a cost segregation) against your active income. You or your spouse would need to qualify as a real estate professional for that. Or if you are using the home as a short-term rental, you could try to qualify as "materially participating" and use the short-term rental loophole. 
I would strongly recommend having a real estate-focused accountant look at your situation and prepare your taxes for you, as you are now treading into complicated waters where you can get yourself into trouble if your not careful!  

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Chris Dawson
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Chris Dawson
Replied Feb 26 2024, 13:12

Hi Zachary, 

Thanks for the reply. From my understanding, you have to spend 750 hours of annual involvement and 51% of your work relating to real estate to utilize cost segregation to offset income tax.

Anything else I'm missing? I do not want to go down the STR route.

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Julio Gonzalez
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Julio Gonzalez
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Replied Feb 26 2024, 16:52

@Chris Dawson

Here's an article with additional FAQs on cost segregation studies that you may find helpful:https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq


You can definitely perform a cost segregation study. The question is just how beneficial it'll be based on the property and your specific circumstances. Cost segregation companies offer free cost/benefit analysis quotes to help you decide how beneficial the study will be for you. Feel free to reach out if you have any questions!

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Zachary Jensen
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Zachary Jensen
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Replied Feb 27 2024, 07:07
Quote from @Chris Dawson:

Hi Zachary, 

Thanks for the reply. From my understanding, you have to spend 750 hours of annual involvement and 51% of your work relating to real estate to utilize cost segregation to offset income tax.

Anything else I'm missing? I do not want to go down the STR route.

Of course! Happy to help

There are quite a few things here you need to know: 

1. 750 hours working in a real property trade or business and more then any other work activity. Please note this area of the tax code is HEAVILY litgated. If you have a w2 and claim real estate pro, its going to be extremely hard to convenience the tax court your working on this more then your real estate. You will need to keep a time log. 

2. Material participation test, which is (for the sake of this post) likely going to be 500 hour test (500 hours materially participating in the rental activities) Please note this "managing the property manager" or traveling out to the property to look at it or just looking at investments to buy or reviewing financials in themselves do NOT count towards those hours. They need to be in conjunction with activities that materially effect the P and L of the property directly, such as screening tenants. 

Only then can you write off the passive losses generated from your active income. I highly recommend working with a real estate focused tax pro to explain your specific strategy, so you can be made aware of any pitfalls that could get you into trouble. 

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Basit Siddiqi
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Basit Siddiqi
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Replied Feb 28 2024, 14:13

If the property is a single family home...you may be limited overall in your ability to take losses.

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Vikranth Biradar
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Vikranth Biradar
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Replied Mar 17 2024, 12:22
Quote from @Basit Siddiqi:

If the property is a single family home...you may be limited overall in your ability to take losses.


 What's the issue with taking losses on a Single Family Home? 

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Costin I.
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Costin I.
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Replied Mar 18 2024, 22:10

@Chris Dawson - I just finished a CSS Decision Diagram flowchart intended to bring together all the various questions when assessing the benefits of a CSS (via a professional or DIY). Hope it will give you some guidance.

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Michael Plaks
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Michael Plaks
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Replied Mar 18 2024, 22:37
Quote from @Costin I.:

@Chris Dawson - I just finished a CSS Decision Diagram flowchart intended to bring together all the various questions when assessing the benefits of a CSS (via a professional or DIY). Hope it will give you some guidance.

Impressive work, Costin.
Almost as thorough as this one  from the IRS :)

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Costin I.
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Costin I.
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Replied Mar 18 2024, 22:55

Thanks @Michael Plaks. The IRS one is mind-bending, I hope mine is still digestible. 

I made a few tweaks - here is version 1.1 - please PM and let me know if you see any major mistakes, or misplacements or have any improvement feedback.

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Bernard Reisz
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Bernard Reisz
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Replied Mar 20 2024, 09:45

@Chris Dawson What I'd guess @Basit Siddiqi is saying is that a single SFR does not require a level of involvement that, in and of itself, can possibly satisfy real estate professional requirements. Of course, adding real estate sales activity as a broker may make all the difference here. Unless Basit meant that material participation in a single SFR is a hurdle.

Basit - Am I on or off target?

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Chris Dawson
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Chris Dawson
Replied Mar 21 2024, 06:06

Thanks, everyone lots of useless information here to digest. We will be tearing down the property and then re-building so all the hours spent on that can contribute to the hours needed to qualify as a REP?

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Chris Dawson
Replied Mar 23 2024, 06:32
Quote from @Chris Dawson:

Thanks, everyone lots of usefull information here to digest. We will be tearing down the property and then re-building so all the hours spent on that can contribute to the hours needed to qualify as a REP?