Bonus depreciation -cost segregation study

11 Replies

Do you all recommend using the bonus depreciation status and cost segregation study for multi families or single families if yes why and if not then why?

@Jacob Michal

Yes for both of you want to max out your passive losses. You’d want to do so if you have active or passive income that can be offset with the losses. It’s sort of a specific to you question though-when did you buy, when are you selling, what’s your income you can offset, etc. That’s why most people work out what to do with a real estate CPA.

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Originally posted by @Jacob Michal:

Do you all recommend using the bonus depreciation status and cost segregation study for multi families or single families if yes why and if not then why?

 I dug into this a year or two ago, with reasonable assumptions about East Bay / Oakland costs for the folks doing the study, property values, etc, and concluded that for residential 1-4 unit real estate it only makes sense for investment properties worth ballpark $1.5m or more.

I can't really speak to commercial real estate from experience, but at the time my conclusion was that for things like restaurants and corner stores, the "does it make sense?" threshold would be far lower. Does that mean $1.2m CRE, or does it mean $300k CRE? I can't really comment on that.

If it's a $20m hotel or apartment building, go for it.

If it's a $200k SFR investment, don't waste your time, same with the "should I form an LLC?" question that's been asked a million times on these forums.

Hey  @Jacob Michal!

Great question. However, as mentioned in the previous comments, the answer is "it depends". Cost segregation studies afford investors the opportunity to accelerate the depreciation of their real estate assets by separating the various components of the building and deprecating them on shorter schedules. Generally, a commercial building can be depreciated over 39 years. However, if a cost segregation study is conducted, you may be able to break out the various components of the building including flooring, HVAC system, plumbing, electrical etc. and depreciate them on a shorter timeline (5, 7, 10, 15 years). If the value of these components is significant enough, shortening the depreciation timeline can save you a TON of money in taxes on the front-end of your ownership.

Although cost segregation studies can offer significant tax savings, they're also extremely expensive. A typical cost segregation study and written report can cost anywhere between $10,000 and $25,000 or more. Therefore, you need to determine if eating that upfront cost will save you at least that amount in taxes over the course of your ownership of the property. As a rule of thumb, you'll only want to conduct a cost segregation study if the value of your property is high enough to warrant it. Hope this helps.

All the best,

@Chris Mason

With all due respect, this is a common misconception. It’s one of those “claiming a home office will get you audited” type myths. There are algorithm based studies that are way less expensive than an engineered cost segregation study (~$600 for res and $1300 for Commerical). I do these on my smaller properties and generate a ton of losses. The losses can be used to offset passive income or regular income depending on your tax situation. The new tax plan is a huge boon for all RE investors, even ones with inexpensive houses. This myth is so persistent and the value of cost segs so large that I write a blog post explaining why even someone with a very inexpensive property can benefit from these studies.

Originally posted by @Raphael Collazo:

Hey  @Jacob Michal!

Although cost segregation studies can offer significant tax savings, they're also extremely expensive. A typical cost segregation study and written report can cost anywhere between $10,000 and $25,000 or more. 

Great points Raphael. Just so you are aware, the numbers that you quoted are pretty outdated. Most national firms are charging much much less, and therefore a full engineered based quality cost segregation study can actually be quite affordable for most properties purchased for over $500,000. As @Lee Rimpa pointed out there are algorithm based studies nowadays that are even less (although hold more risk).

Jacob, feel free to reach out if you'd like to discuss your specific situation. 

Hi @Yonah Weiss and any other cost seg experts on the forum, can you pls provide a ballpark estimate for how much a cost segregation study in LA should cost? This is for a 4-unit investment property with 4 separate one-story bungalows and a 4-car garage.