How Much Bonus Depreciation in Year 1 from Cost Segregation

General Landlording & Rental Properties
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How Much Bonus Depreciation in Year 1 from Cost Segregation

Mark Fletcher
Flipper/Rehabber · Johnson City, TN · Member since 2019 · 29 posts · 13 votes

Has anyone done a cost segregation on a rental property since the 100% bonus depreciation became allowable in 2018? If so, what percentage of the purchase price were you able to depreciate in year 1? How much did the cost segregation study cost?

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Lee RipmaPro Member
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
5y

@Trent Chance

You need to speak with your CPA, I don’t know how it will affect YOUR tax situation. If I bought a 450k triplex in KC I would assume ~90k in losses. I don’t know the land value where your investment is and I can’t give tax or legal advice. You’ll be well-served to work with a professional to get that!

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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    5y

    @Mark Fletcher

    My rule of thumb is that 20% is on the 5 year amortization schedule and can be taken as bonus deprecation. For small props there are algorithm based studies that are less expensive that engineered studies. Depends on how large the prop is. But 20% is a decent rule of thumb, great to get more.

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  • Trent Chance
    Member since 2019 · 94 posts · 75 votes
    5y
    Originally posted by @Lee Ripma:

    @Mark Fletcher

    My rule of thumb is that 20% is on the 5 year amortization schedule and can be taken as bonus deprecation. For small props there are algorithm based studies that are less expensive that engineered studies. Depends on how large the prop is. But 20% is a decent rule of thumb, great to get more.

    Would either of you care to dumb this down for me?  I'm attempting this for the first time this year.

    I just bought a new triplex for $450k, my wife manages all of our properties and will qualify for real estate professional status and we're interested in accelerating depreciation.  How would this all affect my taxable income?

    1Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    5y

    @Trent Chance

    You need to speak with your CPA, I don’t know how it will affect YOUR tax situation. If I bought a 450k triplex in KC I would assume ~90k in losses. I don’t know the land value where your investment is and I can’t give tax or legal advice. You’ll be well-served to work with a professional to get that!

    Podcast Guest on Show #373
    4Reply
  • Trent Chance
    Member since 2019 · 94 posts · 75 votes
    5y
    Originally posted by @Lee Ripma:

    @Trent Chance

    You need to speak with your CPA, I don’t know how it will affect YOUR tax situation. If I bought a 450k triplex in KC I would assume ~90k in losses. I don’t know the land value where your investment is and I can’t give tax or legal advice. You’ll be well-served to work with a professional to get that!

    Thanks for the explanation and..

    Ha!  That's definitely the plan but I haven't gotten there yet.  Still looking for a CPA who won't cost me more than I'm going to save while specializing in real estate.  I'm just trying to wrap my head around an example.

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Trent Chance

    If you are involved in real estate and trying to claim real estate professional status - you likely want to work with a professional who can guide you.

    There is extensive record keeping requirements when claiming real estate professional status.
    People would be surprised what hours count and what hours don't count.

    Regarding your tax situation - you may be able to decrease your taxable income by 100% of whatever the real estate losses are(would be helped through a cost seg).
    The tax savings depend on what federal and state tax rates you are in now.

    [email protected]917-280-8544
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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    @Trent Chance also be aware you are accelerating something you would get in the future. In other words, you are decreasing tax liability today and increasing it in the future. You are also subject to recapture if you sell. To avoid this you can exchange the property, but you are then transferring your "used depreciation". That means there is also less available depreciation in the new property. Just be aware the taxes pile up over time. Your passive loss could quickly turn into a profit and even require you to make quarterly tax payments to the IRS. I am not saying you shouldn't do it, just plan out into the future and understand the long term strategy. There is no free ride, even in real estate.

    2Reply
  • Roberta Eastman
    Rental Property Investor · Orcutt, CA · Member since 2012 · 19 posts · 12 votes
    5y

    You can also look for Mark Kohlers you tube video on cost segregation.  The ins & outs of cost segregation was eye opening.  Then confirm with your own qualified real estate CPA. 

    Hope that helps, 

    Roberta 

    2Reply
  • Trent Chance
    Member since 2019 · 94 posts · 75 votes
    5y
    Originally posted by @Basit Siddiqi:

    @Trent Chance

    If you are involved in real estate and trying to claim real estate professional status - you likely want to work with a professional who can guide you.

    There is extensive record keeping requirements when claiming real estate professional status.
    People would be surprised what hours count and what hours don't count.

    Regarding your tax situation - you may be able to decrease your taxable income by 100% of whatever the real estate losses are(would be helped through a cost seg).
    The tax savings depend on what federal and state tax rates you are in now.

    Thank you Basit, I definitely will. 

    0Reply
  • Trent Chance
    Member since 2019 · 94 posts · 75 votes
    5y
    Originally posted by @Joe Splitrock:

    @Trent Chance also be aware you are accelerating something you would get in the future. In other words, you are decreasing tax liability today and increasing it in the future. You are also subject to recapture if you sell. To avoid this you can exchange the property, but you are then transferring your "used depreciation". That means there is also less available depreciation in the new property. Just be aware the taxes pile up over time. Your passive loss could quickly turn into a profit and even require you to make quarterly tax payments to the IRS. I am not saying you shouldn't do it, just plan out into the future and understand the long term strategy. There is no free ride, even in real estate.

    Great information Joe.  In the past we just had 1 or 2 doors and continued visiting HR Block.  Suddenly we have 30 doors and soon more.. figured I better get serious about tax law.  Appreciate the response. 

    0Reply
  • Trent Chance
    Member since 2019 · 94 posts · 75 votes
    5y
    Originally posted by @Roberta Eastman:

    You can also look for Mark Kohlers you tube video on cost segregation.  The ins & outs of cost segregation was eye opening.  Then confirm with your own qualified real estate CPA. 

    Hope that helps, 

    Roberta 

    I will check that out Roberta - really appreciate the response!

    0Reply
  • Trent Chance
    Member since 2019 · 94 posts · 75 votes
    5y
    Originally posted by @Mark Fletcher:

    Has anyone done a cost segregation on a rental property since the 100% bonus depreciation became allowable in 2018? If so, what percentage of the purchase price were you able to depreciate in year 1? How much did the cost segregation study cost?

     Didn't mean to highjack your thread Mark - sorry!

    1Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    5y

    I see 50-90% of what I loaded in a deal come back as year one bonus depreciation. This is with 70-80% leverage.

    2Reply
  • Paul Shannon
    Rental Property Investor · Fishers, IN · Member since 2016 · 335 posts · 470 votes
    5y

    I did a cost segregation last year on a bundle of SFRs. Bonus depreciation is 100% in year one on the 5-7 year depreciable items within the study.  My recollection is that amounts to about 20% (roughly) on the value of the asset(s).  Consider alternatively, 27.5 and 39 year depreciation right-off per year for residential or commercial, respectively.  

    Bonus depreciation on cost segregation can be your friend, as specially if you qualify for "real estate professional" status and can write-off family active income, instead of just passive losses.  

    1Reply
  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Trent Chance:
    Originally posted by @Mark Fletcher:

    Has anyone done a cost segregation on a rental property since the 100% bonus depreciation became allowable in 2018? If so, what percentage of the purchase price were you able to depreciate in year 1? How much did the cost segregation study cost?

     Didn't mean to highjack your thread Mark - sorry!

    It's an open forum, and you asked great questions. No need to apologize.

    1Reply
  • Roberta Eastman
    Rental Property Investor · Orcutt, CA · Member since 2012 · 19 posts · 12 votes
    5y

    @Joe Splitrock,

    Thanks for the info Joe.  Cost segregation is something new for our company and just started looking at it this year.

    I thought I heard when doing a 1031, a familiar process for us, when you have used cost segregation, that you don't avoid the recapture of the cost segregation depreciation.  It is taken back and out of the 1031 exchange. 

    I could have heard or understood it completely wrong.  I picked this info up from Mark Kohler, and his you tube video on cost segregation.  

    When I saw him write his point out it made me double take thinking that takes away the benefits of cost seg, so what would be the point, if your overall strategy is to do 1031 exchanges.  Leaving me with its either one (1031 exchanges) or the other (cost segregation).

    Will confirm the point with my CPA.  But appreciate anyone's experience with this practice. 

    Like most businesses, we want benefits of both... :)

    0Reply
  • Selina Banda
    La Vergne, TN · Member since 2016 · 93 posts · 28 votes
    5y

    @Roberta Eastman yes, he is good at explaining tax legal issues

    0Reply
  • Mark Fletcher
    OP
    Flipper/Rehabber · Johnson City, TN · Member since 2019 · 29 posts · 13 votes
    5y

    @Paul Shannon thanks for the info. Spoke with a local investor that paid 8.5k for a cost seg on a 20 unit complex. Was able to depreciate 192k of his 700k cost basis in year 1. Curious as to how the cost of the cost segregation compares for multiple properties if you don’t mind to share.

    1Reply
  • Paul Shannon
    Rental Property Investor · Fishers, IN · Member since 2016 · 335 posts · 470 votes
    5y
    Originally posted by @Mark Fletcher:

    @Paul Shannon thanks for the info. Spoke with a local investor that paid 8.5k for a cost seg on a 20 unit complex. Was able to depreciate 192k of his 700k cost basis in year 1. Curious as to how the cost of the cost segregation compares for multiple properties if you don’t mind to share.

     I ended up paying about $100 a property, but it was very straightforward with 1-4 unit properties, so my accountant (who has a real estate background) did it in house.  For multifamily he said it would have to be outsourced and be more expensive.  

    1Reply
  • Mark Fletcher
    OP
    Flipper/Rehabber · Johnson City, TN · Member since 2019 · 29 posts · 13 votes
    5y

    @Paul Shannon that is great to know. Thanks

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Roberta Eastman:

    @Joe Splitrock,

    Thanks for the info Joe.  Cost segregation is something new for our company and just started looking at it this year.

    I thought I heard when doing a 1031, a familiar process for us, when you have used cost segregation, that you don't avoid the recapture of the cost segregation depreciation.  It is taken back and out of the 1031 exchange. 

    I could have heard or understood it completely wrong.  I picked this info up from Mark Kohler, and his you tube video on cost segregation.  

    When I saw him write his point out it made me double take thinking that takes away the benefits of cost seg, so what would be the point, if your overall strategy is to do 1031 exchanges.  Leaving me with its either one (1031 exchanges) or the other (cost segregation).

    Will confirm the point with my CPA.  But appreciate anyone's experience with this practice. 

    Like most businesses, we want benefits of both... :)

    Maybe I didn't explain it well and we may be saying the same thing. Lets say you had a property with $100,000 basis and you had $20,000 left to depreciate. You do an exchange and the new property cost $100,000. Your remaining depreciation on the new property would be $20,000 and the depreciation schedule is identical. It would not reset to $100,000. Let's say you trade up to a property that has $150K value. The $100K portion would have $20K depreciation at the old schedule and the $50K portion would have $50K on a new schedule. 

    The point I was trying to make is when you accelerate depreciation, it takes away depreciation later. Since depreciation is one of your biggest expenses to offset income, this will create a larger tax burden down the road. Some people don't expect or plan for it and it can be a big problem if you don't set aside money for taxes or pay in to the IRS on a schedule.

    0Reply
  • Roberta Eastman
    Rental Property Investor · Orcutt, CA · Member since 2012 · 19 posts · 12 votes
    5y

    @Joe Splitrock 

    Thank you for the clarification.  

    I appreciate you sharing the point, as it was one aspect of the cost segregation when I first heard about it that wasn't mentioned. And its a big point to consider. 

    Take care 

    1Reply
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