Cost segregation for properties rented out against my will

Member since 2022 · 11 posts · 2 votes

Hello, I ran into a situation and I would like to ask for some advice.

I've purchased a property earlier this year as my primary residence, under California, SB1079. After purchasing the property, I have discovered that there is tenant living in it. They had a valid lease with previous owner and it took me seven months to get them out. In the seven months my tenants lived in my property, they paid rent. So my property was effectively rented out for the major majority of the year, even though my intention of purchasing, it was to live in it as my primary residence.

Under such circumstances, can I still cost segregation on this property and file my taxes as a rental?

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Jason MalabuteBusiness Member

Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 900 votes

11mo

Sorry to hear that. That must be very frustrating.

However, before asking whether you can do a cost segregation study, I’d first make sure it would actually benefit you if you did. A couple of things to think about:

Are you a real estate professional for tax purposes?
Do you make less than $150,000 of modified adjusted gross income?
In both situations passive losses can offset your active income.

If the answer is “no” to both, then even if you could technically do a cost segregation study, you may not see much of a tax benefit from it. That’s why it’s usually better to clarify those points first before scheduling a consultation.

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Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 900 votes
11mo
Sorry to hear that. That must be very frustrating.

However, before asking whether you can do a cost segregation study, I’d first make sure it would actually benefit you if you did. A couple of things to think about:
- Are you a real estate professional for tax purposes?
- Do you make less than $150,000 of modified adjusted gross income?
- In both situations passive losses can offset your active income.
If the answer is “no” to both, then even if you could technically do a cost segregation study, you may not see much of a tax benefit from it. That’s why it’s usually better to clarify those points first before scheduling a consultation.
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Josh L.
USA · Member since 2023 · 145 posts · 84 votes
11mo
@Sim Xing Sorry about that situation. Without knowing actual numbers it's hard to say. It might make sense but you will be limited as you will trip this threshold which will limit your loss to rental income (ie can't exceed). I'm assuming you'll be in home greater than 21 days (7 months x 30 days x 10% below for ease). You just have to see if you have enough net rental income for the 7 months to justify a cost seg cost vs cash tax savings.
If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for a number of days that’s more than the greater of:
1. 14 days, or
2. 10% of the total days you rent it to others at a fair rental price.
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Rohullah Sharifi
Dr · VA · Member since 2025 · 154 posts · 34 votes
11mo
However, because you are now planning to move into the property and use it as your primary residence, the option to apply cost segregation is no longer available. Cost segregation is a tax strategy that accelerates depreciation for investment or rental properties, but it is only applicable while the property is being used for rental or business purposes.

Once the property is converted to personal use, depreciation (and by extension, cost segregation benefits) must stop. If you wish to take advantage of cost segregation, the property would need to remain a rental for the foreseeable future.

Please let me know if you’d like to discuss the tax implications further or explore other planning options.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
11mo
@Sim Xing Wow, that’s a wild situation! You've gotten some good replies above. You should definitely check if it would actually benefit your tax situation. The tax treatment depends on how the property was actually used during the year.

A few things to keep in mind:
- Conversion to rental vs. personal residence: For cost segregation, the property needs to be classified as a rental. Since tenants were living there under a valid lease, it may be possible to treat that period as rental use.
- Depreciation and cost segregation: A cost segregation study could apply to the property for the rental portion, allowing accelerated depreciation on eligible components. Depreciation might not be able to reduce your taxable income so understand the REPS or active participation threshold.
- Prorating personal vs. rental use: If you moved in later in the year, you’d need to prorate deductions between personal and rental use.
- Other tax considerations: Beyond cost segregation, there are other strategies you could explore with a CPA, such as deducting expenses like property management, maintenance, and mortgage interest, or planning for future rental vs. personal use conversions to maximize tax benefits.
Because this can become nuanced, it’s best to sit down with a CPA experienced in real estate rentals and cost segregation to ensure everything is allocated correctly.

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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
11mo
You'll first want to see what your profit and loss would be for the year after accounting for all expenses including regular depreciation. From there, I'd look to see if you make below $150k as there may be some benefit. Otherwise, if you accelerate losses, you may not get the benefit in the current year.

Lastly, you may not want to do a cost segregation study as there would be depreciation recapture. As you mentioned that you're going to use this personally, that's why I'm mentioning it. If you were to continue renting out your place, it'd be a different story
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Fulton Abraham Sanchez
CPA| New Clients Welcome| 50 States · Member since 2016 · 430 posts · 93 votes
11mo
@Sim Xing, hi. That’s definitely a unique situation. Since the property generated rental income for most of the year, you’ll need to report it as such on your tax return. However, whether you can use cost segregation depends on how the IRS views your intent and use of the property going forward. If your long-term plan is to occupy it as a primary residence, cost seg usually isn’t available, it’s designed for investment property. If you keep it as a rental, then it could make sense, but you’ll want to weigh the benefit against the complexities of partial-year use. This is one of those cases where sitting down with a real estate-savvy CPA is critical to map out the best filing strategy.
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