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Tax, SDIRAs & Cost Segregation

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Michelle Curran
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Cost Seg on a STR Reno all Self-done

Michelle Curran
  • Massachusetts
Posted Apr 3 2024, 19:54

Trying to determine if a cost seg study is worthwhile. Our purchase price was very low $225k and land value about 30% of that. We renovated property doing all the work ourselves so I'm not sure if we can factor in our labor into the money we put into the property, not just materials? I am a Realtor qualifying for REPS and my husband did all the labor material participation in the property. It seems like with the low purchase price we might have to use one of the online calculator type services.

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Greg Scott
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Greg Scott
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Replied Apr 4 2024, 06:28

If you would like to see the guidelines for IRS auditors regarding Cost Seg, you can find them starting on Page 24 of this document https://www.irs.gov/pub/irs-pdf/p5653.pdf

I would be very surprised if you could claim unpaid labor in your Cost Seg.  The only way I could see you do that is if the property paid your husband for the work, but then you would have to claim the labor income on your return.  That would effectively cancel out the benefit of adding the labor to the Cost Seg.

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Zachary Jensen
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Zachary Jensen
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  • San Diego, CA
Replied Apr 4 2024, 07:01
Quote from @Michelle Curran:

Trying to determine if a cost seg study is worthwhile. Our purchase price was very low $225k and land value about 30% of that. We renovated property doing all the work ourselves so I'm not sure if we can factor in our labor into the money we put into the property, not just materials? I am a Realtor qualifying for REPS and my husband did all the labor material participation in the property. It seems like with the low purchase price we might have to use one of the online calculator type services.


 Hey Michelle, 

Usually, a cost seg will result in a deprecation amount of 15-30% of the purchase price. If that makes it worth it for you I would suggest to go for it! 

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Kislay Shah
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  • New York
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Kislay Shah
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  • New York
Replied Apr 4 2024, 11:05

In your case, with a relatively low purchase price of $225k and substantial renovation work done, a cost segregation study could still be beneficial. Here are some points to consider:

  1. Renovation Costs: Even if you did the work yourselves, you can typically include the cost of materials and any contractors you hired in the renovation costs. However, the value of your labor generally cannot be included in the cost basis for depreciation purposes.
  2. Accelerated Depreciation: A cost segregation study would identify components of your property that can be depreciated over shorter periods, such as personal property and land improvements. This can result in higher depreciation deductions in the earlier years of ownership, providing tax savings.
  3. Tax Situation: Consider your tax bracket and the impact of increased depreciation deductions on your tax liability. If you're in a higher tax bracket and expect to benefit from the additional deductions, a cost segregation study could be more advantageous.
  4. Professional Assistance: While online calculators can provide estimates, they may not capture all the nuances of your specific property and tax situation. Working with a qualified cost segregation specialist or tax professional can ensure that you maximize the benefits and comply with IRS guidelines.
  5. ROI Analysis: Evaluate the potential cost of the cost segregation study against the expected tax savings over time. If the projected tax savings outweigh the cost of the study within a reasonable timeframe, it may be worth pursuing.

Given your qualifications and involvement in the property, you likely have a good understanding of its components and renovation costs, which can facilitate the cost segregation process. However, consulting with a tax professional or cost segregation specialist can provide personalized advice and help you determine if a cost segregation study is worthwhile in your specific circumstances.

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Julio Gonzalez
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Julio Gonzalez
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Replied Apr 4 2024, 12:58

@Michelle Curran We have seen properties with a purchase price as low as $150,000 benefit from an engineered cost segregation study. It all depends on the property and the investor's tax situation. Feel free to reach out if you have questions!

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Costin I.
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Costin I.
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Replied Apr 5 2024, 07:36

@Michelle Curran - Here is 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 in your quest.

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Basit Siddiqi
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Basit Siddiqi
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Replied May 8 2024, 12:31

its an easy calculation.

What is your tax burden without the cost segregation study?
What is your tax burden with the cost segregation study(Assuming you can take the extra depreciation expense)?
What is the cost of the study?

If your tax burden decreased by more than the cost of the study, it may be considered worthwhile.