First Time Doing Cost Segregation, 3 Companies interviewed, 3 Very Different Answers.

[Joaquin Camarasa]

Hi everyone,

For the first time, I’m considering cost segregation on my rental properties. I recently realized I qualify since I’m a Real Estate Professional and actively participate in all of them.

I interviewed three different cost segregation companies, and the answers I got were very different. I’m sharing the details below to get your thoughts on which option makes the most sense and what you’d do in my situation.

Property Overview

All are single-family rentals:

1️⃣ Property #1

• Purchase price: $330k

• Depreciable basis: $210k

• Bought: 2017

• Placed in service: 2019

2️⃣ Property #2

• Purchase price: $575k

• Depreciable basis: $370k

• Bought & placed in service: 2022

3️⃣ Property #3

• Purchase price: $510k

• Depreciable basis: $350k

• Bought & placed in service: 2020

Proposals Received

🅰️ Company A

• “Fast study” (no engineered site visit)

• Properties 1 & 2: $1,000 each

• Property 3: $2,000 (engineered, potentially virtual)

• Form 481 prepared

• Form 3115 completed & filed: $1,800

• Audit assistance included

• Estimated 38% cost segregation

• Total cost: $5,800

🅱️ Company B

• Engineered studies on all 3 properties

• In-person site visits

• $2,100 per property

• Audit assistance included

• Estimated 33% cost segregation

• Form 481 provided

• Assistance with Form 3115

• Total: ~$6,300

🅲 Company C

• Said it’s not worth doing cost segregation on these properties.

Questions for the Community

• Is a non-engineered / “fast” study reasonable for SFRs?

• Is 38% vs 33% a meaningful difference, or mostly marketing to get to go with them, then lower %?

• Is Company C being conservative… or just honest?

• For SFRs in this price range, is a full engineered study worth the extra cost?

Would love to hear from anyone who has:

• Done cost seg on single-family rentals

• Been through an IRS audit

• Strong opinions on engineered vs. non-engineered studies

Thanks in advance!!!

[Greg Scott]

The IRS recognizes 6 methods for conducting a cost segregation analysis.  You could put these on a continuum.  On one end you have a very detailed engineering studies that are highly defensible in an audit and also very expensive.  On the other end, are ways to do a cost seg that are cheap (possibly free) but are very risky if you try to use them in defense of an audit.

I'd encourage you to read IRS publication 5653 starting at page 26

For SFR, most companies don't do a true full-blown engineering study. They will take some short-cuts to keep the cost down. Is that bad? Not necessarily. With millions of dollars on the line, we've always done detailed engineering studies on our apartments for our cost seg. Those cost is around $10,000. If Company C only does detailed engineering and the cost is similar, yes, it might not make sense to do them for a SFR.