Cost segregation for SFH?

Question

So I keep hearing on different podcasts about the benefits of cost segregation and bonus depreciation for real estate investors.  I just listened to a podcast that had an owner of a Cost Segregation company, and he said any property worth over $200k should at least be looked at to see if it's beneficial.  Are any of you doing this with your SFH's?  If so, was it beneficial, and is there a minimum home value that makes it worth while?

Michael Plaks · Answer

@Doug Diamond

1. You have short-term rentals, and your CPA indicated they are subject to passive loss rules. They may or may not be. I would recommend a second opinion from an accountant who specializes in real estate. If you're indeed subject to those rules and already maxed out on allowable losses, then there is no point to do cost seg.

2. You also indicated you're not a real estate professional. Again, a second opinion is something I would suggest. Maybe you can qualify. We cannot tell without a one-on-one detailed discussion. Hint: if you have a full-time W2 job and not married, then you cannot qualify.

3. If you do have room for more deductions, either by your short-term rentals being non-passive or by not maxing out on allowable deductions or by qualifying as a RE pro, then cost seg might generate some tax savings for you. Your CPA is correct that true cost seg is probably not cost-efficient, being in $2k-$5k range. However, there're online DIY options of pseudo cost seg in the $400 range. Not as good as the real thing, but may still be workable in your situation.

4. Cost seg is not magic. You accelerate depreciation that you would otherwise take anyway, just later. And when you sell, you have to pay it back. This works in your favor if you do not plan to sell soon or if you plan to exchange rather than sell. Basically, cost seg should be a part of your long-term strategy.

Basit Siddiqi · Answer

@Doug DiamondThere are self calculated cost segregation studies that can be done for as little as $400

Basit Siddiqi · Answer

@Doug DiamondEveryone's tax situation is different - as a result, whether you should do one or not will depend for everyone.Are you a real estate professionalAre you currently showing a net taxable income on the rentalsAre you above or below $150,000 of modified adjusted gross incomeetc

Christopher Smith · Answer

If the losses are suspended then you don't even get a modest timing benefit. So again where is the benefit that offsets the cost of the study. Even if you do it yourself there is still no benefit if you can't use the modest acceleration of losses.

Since the tax calculation is prosically simple proscribed by law and can't be changed, not sure what the relevance an "algorithm" is other than sounding like a slick salesman term.

Lee Ripma · Answer

@Doug Diamond

The algorithm based ones at 400-600 and you could claim up to 25k of losses against W2 income. Get your own tax and legal advice but I personally did that as a W2 employee and help my friends and family do it. A lot of people don’t know about the algorithm based studies which is why I try to raise awareness that this exists.

Lee Ripma · Answer

@Doug Diamond

I’m a huge fan. If you go to my website, which is in my signature, I have an article I wrote about the value of algorithm based cost-seg studies on props under 1M. I’m a huge fan of doing this for myself. Always seek your own tax and legal advice for your situation!

Kip Werking · Answer

The link seems out of date. Where do I read the study?

Doug Diamond · Answer

This is what my CPA told me when I asked her if I should do a cost seg on my properties:

"I would not recommend it.  It is expensive, and in most cases the loss it can produce via depreciation will be limited or disallowed all together under the  passive loss rules (which you are subject to).

It is a very specific type of rental that will benefit a cost segregation study, and for most, there is very little to no cost savings in taxes, just a sizable ($3,00 to $5,000) cost for the study."

I'm not a CPA, and I want to be able to trust what she is saying, but I'm also hearing people say that if this is what your CPA says, get a new one!

Doug Diamond · Answer

@Basit Siddiqi

I am not a real estate professional, and my AGI is below $150k, but not by much. Extra deductions could drive me above that level.

My CPA says not to do the cost segregation, as the cost of $3-5k would not be worth it, which may well be true. Also, I am about to either sell one or convert it to my primary residence, which probably changes the conversation on that property.

Christopher Smith · Answer

It's just a timing benefit and while that can be meaningful at scale I find it really hard to believe it would be worthwhile for one modest SFH. Add to that the suspension of early losses, utilization of which would presumably be the reason for cost seg study in the first place, what would be the benefit even if the study were done for nothing?

Cost segregation for SFH?

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