I wanted get some opinion from BP nation on a property I bought in Jan this year to see if it makes sense to do a cost segregation study and accelerate depreciation on it. Here are the numbers:
315k - land value around 60-80k (Property now worth approximately 400-425k bc raised rents by 1k/month, slight improvements, professionally managed, etc.)
7 units - 100% leased
15 year fixed at 4.75%
Cash flowing around 1k/month (even with 15 year note)
Hold for 3-5 years then 1031 out to bigger property
I feel like cost seg may not make sense? In which case, a cash out refi might be better?
Please let me know your thoughts!
https://www.vestmap.com/the-hu... This isn’t tax or legal advice. I personally do cost segs on all my props because I benefit from the passive losses.
On a cost benefit basis I have found it's usually not worth the cost or the bother for the typical SFR.
What are the costs of performing the study, and what are the anticipated PV tax benefits? Remember the costs are permanent, the benefit is only timing and tax rates may go up. So just because it gives you a few more dollars of current depreciation, doesn't mean it makes sense.
@Lee Ripma thank you! That article along with the w2 article was a big help.
@Christopher Smith I do agree with you. I forgot to mention I have w2 income and I can use accelerated depreciation to offset that income. In this case, the juice maybe worth the squeeze. I’ll still consult with my accountant.
The answer really depends on a few things:
Are you a real estate professional for tax purposes?
If not, is your AGI under $100k?
If not, do you have large amounts of passive income to offset?
If you do a cost seg and generate a good amount of passive losses you will want to be sure that you can actually utilize them or have a plan for them.
There are also streamlined cost segregations that are under $1,000 typically and are defintiely worth it even on SFH.
There is no formal definition of who can/can not perform a cost segregation study. I have done it myself for each of the SFR that I have bought recently. I have been audited and as long as you can reasonably justify your numbers, you should be fine. (no tax or financial advice given)
Do I get every last ounce of deductions squeezed out of the property? -Not even close. But I get plenty enough to make a significant difference when it comes time to file taxes. The 100% bonus depreciation from TCJA is insane, even factoring in just a few items into my segregation study can easily amount to tens of thousands in year 1 taxes. For larger commercial properties it's probably worth getting a professional to get you every last drop you're entitled to, but for a regular SFR I would rather get some deductions, than pay a specialist a bunch of money to save me a fraction of a percent extra.
We do not know your full financial and tax situation, and neither do we know your property, so we can't tell how much difference the extra depreciation can make on your bottom line. It can vary from zero to "a lot", and of course on your definition of "a lot."
Next comes your business plan. If you intend to 1031 later on, cost seg makes more sense than if you plan to sell. However, plans are just plans, and they can be disrupted by anything from our caring government to Covid to personal circumstances.
Lastly, it's cost v. benefit. A full-service engineered cost seg study is usually not cost-effective for SFHs. However, as other people mentioned, there're cheaper options, including DIY websites for ~$500.
The best thing is really to discuss it with your accountant, as was your plan, assuming (s)he understands real estate taxation and cost seg.
There are two types of cost segregation companies that investors can go to.
Engineered Cost Segregation studies
DIY Cost Segregation studies
Cost segregation studies normally make more sense if the property has a higher cost or a unique asset class(mobile home park, storage, etc). It also normally makes more sense on a multi-family home than a single family home.
It also makes more sense if you are eligible to claim as a real estate professional status.
Best of luck