IRS finalizes Cost Segregation Rules (and timeline)

Tax, SDIRAs & Cost Segregation
6yFollow

IRS finalizes Cost Segregation Rules (and timeline)

Tyler Baldwin
Specialist · Scottsdale, AZ · Member since 2020 · 9 posts · 36 votes

The treasury dept and IRS just released the final set of regulations for the popular 100% bonus depreciation schedule.

And great news for the Real Estate pros trying to avoid taxes... the “placed in service” date was extended to January 1st 2027 (2028 for certain longer production property)

So... you can keep up this new winning strategy... and avoid paying taxes for the next several years.

The Tax Cuts and Jobs Act of 2017 increased the first year Bonus Depreciation deduction percentage from 50% to 100%.

That means... taking advantage of a Cost Seg Study... you can buy a building, front-load 20%-40% of the total depreciation to the first year. Then, you can use all that tax liability you just avoided, to go buy another building. Hit repeat. And, avoid a ton of taxes every year while building a massive real estate portfolio.

6Reply
163 views

Most Popular Reply

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

@Tyler Baldwin

Good news on the bonus extension for sure.

But I would be more careful hyping up cost segregation as universal tax avoidance. It's a great strategy in some situations, not all.

I wrote about it before if you want so see my position: https://www.biggerpockets.com/...

8Reply
See this reply in the discussion

35 Replies

Jump to latestLatest
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    6y

    Please keep comments back and forth civil.

    It looks bad on the person and they tend to lose credibility when they have to take personal attacks with word usage on someone else.

    It MINIMIZES any potential substance of what someone is trying to say. Let's stick to the topic of taxes. I think most of us can agree we like to pay as least as possible in most situations!....lol

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    5Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    6y
    Originally posted by @Michael Plaks:
    Originally posted by @Joe Splitrock:

    Is there a negative to front loading depreciation and using that money to buy another property? Let's say you do that for a few years. Then you are left with a bunch of income producing properties and you lost half of your biggest deduction - depreciation. It is fine if you budget for the taxes, but this isn't a free ride or tax avoidance. I like to maximize deductions, but I have looked into using cost segregation on my $200K houses and I couldn't see the huge advantage. Not for the cost of the study and the realistic percentage I could accelerate. I see cost segregation as a better strategy for larger multifamily.

    To your point of whether there is a negative to front-loading depreciation and using the savings to grow your portfolio. This is not much different from any other form of leveraging. After all, this is basically a leveraging strategy. Subject to multiple possible "but"s, it could be very effective. Of course, everyone's situation and business goals are different, so it may not be a good move for some investors.

    As to the cost effectiveness for inexpensive SFH - generally a full-service CSS is not, unless it's done for a portfolio, reducing the per property cost. However, there're affordable DIY alternatives that use generalized computer models in lieu of traditional on-site studies. Here're two such options to consider:
    https://www.kbkg.com/residential-costsegregator
    https://diycostseg.com/



     I have looked at the less expensive options and I am not gaining that much in the projections. I am not going to get enough of a tax break to acquire another property. Maybe here is a magical deduction I am missing out on that will give me another $50K a year. I would love for that to be true, but the math doesn't add up.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Joe Splitrock:

    I agree, CSS does not always make economic sense. The only way to figure out if it's beneficial to you is to thoroughly review your overall situation.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Daniel Dietz:

    Dan, you understood the first of the two issues I pointed out but not the second one. If your AGI is $80-90k after Roth, you will be limited to a maximum of $25k total loss from your rentals. The total loss includes everything, not just depreciation. If you already have $20k of losses, you have room to add just $5k with cost seg. The rest will carry forward.

    Unless you qualify as a Real Estate Professional.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Scott Roelofs:

    And let’s be clear, when the IRS comes knocking because a tax payer used a “diy” strategy, you will not be there to help them, free of charge of course. But I’m sure your IRS agent will allow you to just change your numbers after you receive the audit notice. “Hold on, before the audit, I’m really going to do the cost segregation now.” See how that goes over.

    Maybe you should not be so quick to dismiss your competition. The companies that offer those algorithm-based DIY cost seg services have been in your business for a long time. They provide the full-service cost seg as well. Their DIY service comes with an optional IRS audit protection, and they promise to defend their clients if necessary. They claim that they have consistently and successfully done so.

    I don't have any skin in this game. I'm neither endorsing nor dismissing the DIY service they offer. I do think it's worthwhile to consider for SFH investors for whom the traditional full service CSS is not cost-efficient.

    0Reply
  • Scott RoelofsPro Member
    Specialist · Scottsdale, AZ · Member since 2019 · 44 posts · 30 votes
    6y

    @Michael Plaks

    You seems to have a lot of “skin in the game” as you continue to provide false information. You claim to “not promote” DIY, while you post links to their site and slam engineered cost segregation.

    You obviously haven’t looked closely into “DIY” cost segregation or the audit protection they offer. If you had done that you would realize that neither are worth the paper they are written on. They simply created a product that people would buy. If they really believed in their “audit protection” why would anyone ever pay for their full price product? Why not just “audit protect” them all?

    People say “perception becomes reality”, I say “Unchallenged perception becomes reality.”

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Scott Roelofs:

    There are much more productive ways to build your business than what you're doing, IMHO.

    I never slammed CSS, I love them and recommend them to my clients when appropriate.

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    6y

    @Tony Kim

    A 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2M for it to make sense the brain damage.

    There are reverse exchanges and other more exotic exchanges but I personally not sold on the concept when the IRS comes knocking. I am not a tax professional but I feel it is a little sketchy.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Tony Kim:
    Originally posted by @Lane Kawaoka:

    Goodie. Cost segs make 1031 exchanges obsolete for syndication investors.

    Also, while I agree that cost segs provide a front-loaded benefit to syndicators, won't most of that benefit be paid back when the investment goes full cycle? I'm having trouble seeing how that will make 1031 exchanges obsolete? Thanks.

    Lane, your initial statement of "Cost segs make 1031 exchanges obsolete for syndication investors." was unclear to me as well. In your response to Tony you explained why 1031s are incompatible with conventional syndications. Agreed. Tony and I both know that. But this has nothing to do with cost seg, or does it?

    You did not answer his (and mine) question: how does cost seg "make 1031s obsolete?"

    Tony, you're correct that cost seg savings have to be returned at the end of the cycle. It is a temporary reduction in K1 income that keeps the investors happy and makes the sponsor look good. Win-win, until the year of sale. But in the year of sale, investors expect a tax hit, so they do not notice depreciation recapture. A little game if you will.

    I tell my syndicators that cost seg is only recommended if their net income would otherwise be positive.
     

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free