Passive RE investors CAN and DO take advantage of cost segregation

Tax, SDIRAs & Cost Segregation
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Passive RE investors CAN and DO take advantage of cost segregation

Account Closed
Specialist · United States · Member since 2025 · 45 posts · 31 votes

In a passive income/loss scenario where the RE investor/taxpayer does not satisfy the material participation requirements for REPS or STR, the loss created through cost segregation is suspended until absorbed by passive income or the applicable assets are sold in a taxable event. For passive investors who own multiple properties, passive gains and losses offset each other. Passive activity grouping elections allow passive investors to treat multiple activities as a single activity. This understanding of IRC Section 469 passive activity loss (PAL) rules is why cost segregation continues to be very popular tax deferral strategy for passive RE investors. In addition to STR and REPS, there is an active participation exception to the PAL rules that allows taxpayers who meet the active participation requirement (i.e., make management decisions) to deduct up to $25,000 of passive losses against non-passive income. This deduction phases out when AGI is between $100K and $150K.

Related post:

https://www.biggerpockets.com/forums/51/topics/1295322-once-again-cost-segregation-hype#post_7247917

Disclaimer: This is not tax advice.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    1mo

    @Account Closed - your hard promotion of cost segregation is understandable, since you work for a cost seg company.

    See, every tax professional on this forum, including myself, fully SUPPORT cost segregation. There is hardly a need to defend it.

    The difference is that we caution investors that cost segregation is not always advisable. You seem to think otherwise.

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  • Account Closed
    OP
    Specialist · United States · Member since 2025 · 45 posts · 31 votes
    1mo

    @Michael Plaks Cost segregation is not "always advisable" but in many instances it is. If studies generate large losses that will not be absorbed by current or future income or the properties will be sold within the first two years of ownership, there is no point in paying for losses (tax deferrals) you will never use. This is ALWAYS a facts and circumstances decision.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1mo

    Good rundown, Stanley, and the $25k active participation exception is exactly the piece that gets overlooked in most cost seg discussions since everyone jumps straight to STR and REPS. Worth adding a couple details for anyone reading this thinking that exception applies to them, active participation is a much lower bar than material participation, things like approving tenants, setting rental terms, or approving repairs count, but it only works if you own at least 10% of the activity and the phaseout range you mentioned, $100k to $150k MAGI, fully eliminates the deduction above $150k, so for a lot of higher earning investors this exception is off the table entirely and cost seg losses default straight to suspended passive treatment.

    On the grouping election point, that's worth flagging as a one-time decision with real consequences, once elected, activities are treated as one for PAL purposes going forward, which is usually good for absorbing losses across a portfolio, but it also means selling one property in a grouped activity doesn't necessarily free up suspended losses the way a full disposition of an ungrouped single property would, that election needs to be made with the exit strategy in mind, not just current year loss offset.

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