Cost Segregation Study

8 Replies

Hello BiggerPockets Family,

I own a 3 unit multifamily house and I'm considering having a cost segregation study to accelerate the depreciation on the property.  I know that this makes sense as a tax strategy for commercial property but does this make sense for a residential property. Any thoughts and advice would be appreciated.

Thanks,

Kelly

My advice is that it does not make any sense unless the property was acquired for over $1m. You'd be looking at about a $5k price tag for a basic cost seg. I'd also beware if they are not having it signed by an engineer.

The only instance that I have seen where this worked for small residential properties from a cost benefit standpoint is where a individual bought a series of new homes in one transaction all with the same floor plan, so a study was done for one and leveraged across all of them. Outside of that I think it would typically be more trouble than its worth.

The company I reached out to will charge $2K for the study and gave me a accumulated tax reduction benefit estimate of $3,351 for 2017 and the tax reduction benefit accumulates to an estimated $ 15,052 in tax year 2022.  The study is tax deductible. Does that change your opinion?

Originally posted by @Kelly Arthur :

The company I reached out to will charge $2K for the study and gave me a accumulated tax reduction benefit estimate of $3,351 for 2017 and the tax reduction benefit accumulates to an estimated $ 15,052 in tax year 2022.  The study is tax deductible. Does that change your opinion?

 I am very skeptical.  This "benefit" sounds too good to be true forthe size property you have.

@Kelly Arthur

If you are in the 25% tax bracket, an additional $3351 reduction in your first-year tax liability based on the results of a cost segregation study, would have to generate $13,404 more depreciation than you would have taken otherwise.   

As I said before, I am skeptical.  I just don't believe that the company made this prediction without even seeing your property and then will deliver for just $2000.  Sounds too good to be true.

Next question to ask yourself -- If this company really can deliver on their claim, Is your tax bill high enough that you can use the full "benefit" of a $3351 reduction in first year taxes?  Next question to ask yourself,  -- Is your modified adjusted gross income (MAGI) between $100K and $150K.  If so, then you are in the phaseout zone for the net passive loss allowance.  If your MAGI is $150K or higher, then it does not matter how much extra depreciation a cost segregation study can give you, your rental property activity losses won't reduce your tax bill because the net passive loss allowance is no longer available to you.

@Dave Toelkes

Thanks so much. Great points. This  is all a little over my head so all of your insight is appreciated. Thanks again. 

I'm very skeptical. That is extremely low considering the actual work that needs to be done for a proper Cost Segregation Study. A field visit is required. 

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