Cost segregation questions - help needed!

[Karen Higgins]

Tax season is upon us, I'm in need of some advice regarding cost segregation for next years planning.  My husband and I are real estate investors in MN with 70+ units that are long term buy and hold properties.  We are looking to buy a small apartment building next year, 20-40 units (or larger if we find the right property).

Question - Can cost segregation deprecation be used to offset active income from his insurance business?  Or is it only able to off-set rental income? We've talked to a few tax accountants, and have yet to get a clear answer.  Any input would be extremely helpful.

Thanks!  Karen

[John Woodrich]

Hi Karen,

As I understand it from your posts on here you and your husband likely qualify as real estate professionals. If you decide to accelerate depreciation via a cost seg it would first offset income from your other properties and if you have a net loss it will help offset other income on your return. if you insurance business is being reported on Schedule C (not in a S-Corp or LLC) this will not however reduce the self-employment taxes you have to pay on the insurance income.

A Cost seg is really a play on the time value of money, depending on your goals with the property it may or may not make sense.  Our firm completes cost segregation studies however a $600k apartment building doesn't typically justify the cost of completing a study.  That doesn't mean you can't break out certain items upon purchase to accelerate depreciation, it just means it doesn't make sense to complete a study.  For example, instead of calling everything 27.5 year property we break out appliances and other items that are easily identifiable.  This doesn't take much time at all and allows clients to write off the basis in their property quicker.

There was a change under the "Trump plan" that affects your ability to complete a 1031 exchange (like-kind exchange) after completing a cost seg so if that is part of  your strategy it would be something to consider as well.

There isn't a hard set line on when it makes sense to complete a study but with the information posted I don't think it would make a lot of sense on this property.  It would be easy to do a "mini" cost seg though and take the low hanging fruit.  It is always easier to do this in the year of purchase because there is a little more red tape involved by breaking out assets after the year of purchase.