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Tax, SDIRAs & Cost Segregation

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Costin I.
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What should one use for the home basis value in a CSS?

Costin I.
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Posted Feb 28 2024, 14:53

My understanding in this matter, there are several options for selecting the home basis for a cost segregation study:

A. Property appraisal (if you have one).

B. Tax Assessment – tax assessment for the property in question shows Land @ $48,920 and Improvement @ $174,300 (or a 22%/78% distribution from the total tax assessed value of $223,220).

Wouldn’t be fair to use the $174,300 valuation as the basis for the CSS? After all, I paid county taxes based on that.

Or, if we were mandated to use the acquisition cost (195K), shouldn’t we apply the same percentage to it (as in 78% of the purchase price)? 

C. Replacement/construction cost estimation as per insurance policy, $236K - can we use this one?

Whenever I tell the insurance the tax-assessed value of a property is X, they tell me is irrelevant, as they need to consider the replacement/construction cost for the policy premium.

D. Comparable sales

E. Engineering study

    Can I use the one with the biggest value, and gives me the biggest basis?

    CSS experts and Tax experts, what do you say?

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    Michael Plaks
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    Michael Plaks
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    Replied Feb 28 2024, 18:24

    @Costin I.

    Your understanding is incorrect. The ONLY basis for CSS you can use is your actual tax basis, i.e. your acquisition cost plus some closing costs and post-acquisition capital improvements.

    The confusion comes from misunderstanding the essence of what cost segregation is. It does not create any new basis or new deductions. All it does is takes your already calculated tax basis (again - your actual acquisition) and identifies some components of that basis that have more favorable depreciation treatment. 

    Think about your SO preparing food for a SuperBowl party. And then you come home hungry and want to wolf down some of it. You ask - honey, what can I eat right now? She allows you to take a few bites from here and there. This is cost seg. Notice: the amount of food she prepared is exactly the same. She just lets you eat some of it ahead of time, because otherwise you're too disagreeable to be around.

    Now, you have different methods of allocating land for CSS purposes. There indeed you can rely on county assessment, appraisals, insurance and even on Zillow.

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    Replied Feb 28 2024, 18:28

    Personally, I'd lean towards using the tax-assessed value of $174,300 as the basis. You've been forking over taxes based on that, so it seems fair game. The insurance replacement cost of $236K might be a bit overkill unless you're planning on burning the place down (just kidding!). Comparable sales and engineering studies could get messy. Stick with what's tangible and tax-backed, man. 

    But hey, I'm no CSS or tax guru – just tossing in my two cents!

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    Costin I.
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    Costin I.
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    Replied Feb 28 2024, 19:02

    Thanks @Michael Plaks. My inquiry is primarily regarding the cost basis - can you elaborate on 
    "the different methods of allocating land for CSS purposes" (I don't know how would you use insurance, cause they don't insure the land, nor Zillow does show land/house allocation).

    Just to double-check to make sure I get this correctly:

    Let's say I get a property for 100K, well below market value.

    The county tax assessment for the property is 250K, with 50K land and 200K improvement (or a 20% / 80% ratio).

    Which one do I use as the cost basis for the CSS?
    a. do I use 50K (my 100K acquisition cost minus the 50K from the county land assessment), 

    b. the county assessed 200K for the home/improvement (after all that's what is used to calculate the property tax and I have to pay them) 

    c. or 80K, the county improvement percentage applied to acquisition cost (80% of 100K = 80K) 

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    Michael Plaks
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    Michael Plaks
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    Replied Feb 28 2024, 19:09
    Quote from @Costin I.:

    Let's say I get a property for 100K, well below market value.

    The county tax assessment for the property is 250K, with 50K land and 200K improvement (or a 20% / 80% ratio).

    Which one do I use as the cost basis for the CSS?

    For CSS you use $100k, period.

    This $100k needs to be broken out between the building and the land. In order to do this allocation you can use:
    1. county ratio of 80/20 resulting in $80k building basis and $20k land basis or
    2. county land value of $50k, leaving only $50k for the building basis or
    3. a variety of other methods.

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    Michael Plaks
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    Michael Plaks
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    Replied Feb 28 2024, 19:11
    Quote from @Malcom Turn:

    Personally, I'd lean towards using the tax-assessed value of $174,300 as the basis...
    But hey, I'm no CSS or tax guru – just tossing in my two cents!

    Uhm, sorry, these two cents do need to be tossed  :)

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    Julio Gonzalez
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    Julio Gonzalez
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    Replied Feb 28 2024, 19:25

    @Costin I.



    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

    As Michael mentioned, you need to use your cost basis in the property for a cost segregation study.

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    Costin I.
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    Costin I.
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    Replied Feb 28 2024, 19:40

    Thank you @Michael Plaks. I will use the county ratio applied to the total acquisition cost ($80k building basis and $20k land basis in my example).

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    Bonnie Griffin Kaake
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    Bonnie Griffin Kaake
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    Replied Feb 29 2024, 11:34

    @Costin I. Just to be clear so you are using the right numbers as your basis. $100K purchase price minus $20K land value = $80K basis for depreciation. This is using a 80/20 ratio for building versus land if that is what the assessor's office lists for your property.

    Of course, if you do any renovations on the property to get it ready for rent, those renovations may need to be capitalized (added to your basis) or might be expensed, depending on what is done.