Cost Segregation Study for Taxes

[Tory Sheffer]

We just completed taxes for 2020 and with cost segregation study for one property we were able to write off $640k in depreciation for 2020. We paid $1.97M for this property and closed in 4th Qtr 2020. With our structure it’s distributed to our investors as well based on percentage of ownership. One investor with potential to write off $400k against their personal W2 income!

Would be curious to hear more cost segregation success stories and happy to answer any questions on who we used and how the process went.

[Michael Plaks]

This is, at a minimum, a misleading post. At a maximum, it's not telling the truth.

It is possible to write off $640k of depreciation on a $1.97M property with cost segregation. A bit on the aggressive side, but possible. So far so good. 

Combined with other losses, it is also possible to show a $400k loss for one of the partners. It would indicate a real major partner and an exceptionally high amount of deductible early expenses on a property with very low income, as in low occupancy. This also stretches credibility but is not impossible.

The problem is your statement that this particular partner will deduct a $400k loss from this syndication against his W2 income. This can happen only in a very specific situation, for example:

• you're talking about the syndicator himself, the general partner who runs the show
• this is an investor who, thru some other real estate activities, qualifies as a real estate professional and is able to aggregate this syndication investment with his other activities
• the investor has significant passive income from other investments, so the offset is not really against his W2 but against his other passive income

A couple of other situations are possible, but all of them are RARE. In most cases, regular passive investors will be unable to claim their K1 losses against their W2 income.

Also, this $640k depreciation will come back as taxable income (depreciation recapture) at the end of your cycle when you sell, so it's a temporary tax benefit, aka a loan.

Assuming your story is accurate, it hardly qualifies as a "success story" - as it would be a success only under some very specific conditions.