Cost Segregation study?

Question

Looking for advice - Does it make sense to do a cost segregation study on a property (and claim accelerated bonus depreciation) I bought this year considering the following?  why/why not?

(I understand that I need to consult a CPA to get the answer specific to my situation, but just wanted to get a general idea on what experienced investors suggest)

1) Property cost ~1M. Passive investment for tax purposes

2) Property is a two-family. In the process of doing a large renovation (~$100k)

3) Expecting to generate around $35,000/yr net cash flow

Thank you!

Scott Trench · Answer

My guess is that no, this will not be beneficial for you.

Suppose that you generate $35,000 in cash flow. When you later in normal depreciation, you might depreciate, say $900,000 of the $1M in property value (talk to your cpa, this is just a guess) over 27.5 years.

That’s $32K in depreciation per year.

Now you have $3,000 in taxable income (maybe as much as $8K when we later in principle reduction on your loan payments).

Your tax liability is like $600 on $3000 in income ($1600 on $8,000).

So if your cost seg costs you $3,000 (please correct me if this is incorrect it may be much cheaper), you are spending real money to save a few hundred in taxes.

And by the way the cost seg just accelerates the depreciation. It doesn’t eliminate it. You have to recapture when you sell.

Where this might make a lot more sense is if you are a real estate professional or earn less than $150k in AGI. If so, then you can deduct losses in real estate from your personal return. In that case a big loss every year is having a real present value impact on your life today, freeing up cash.

Hope this helps!

Lien Vuong · Answer

Definitely would be more worthwhile if you're already REPS certfied where you can move the gains in the active column but in this instance it would not be.

Julio Gonzalez · Answer

@Thiag Sivalingam Scott makes a good point above. A cost segregation study can be extremely beneficial but its a case by case basis that depends on a multitude of factors. Most cost segregation study companies will provide a free cost/benefit analysis quote to tell you how much the study would cost and how much you could potentially benefit from the study. For me, it's helpful to see the actual numbers to decide if the cost is worth the benefit.

Bonnie Griffin Kaake · Answer

On the low side, you would have about $66,000 in taxes you don't have to pay. Yes, even if you are a passive investor because you can always roll what you can't use in a specific year to the next. Why pay more in taxes than you need to pay? You can always invest that extra cash in your properties or leverage it to buy more. Sure beats letting the Treasury hold it for 27.5 or 39 years.

Basit Siddiqi · Answer

Are you using the units as a LTR or a STR?I normally find it that units that cost more than $150,000 do not cash-flow / provide taxable income if operating as a LTR.There are always exceptions but this is my experience.To answer your question - based on what you provided, I wouldn't perform the cost segregation study unless you can claim REPS as regular depreciation would eat up that taxable income.

Bonnie Griffin Kaake · Answer

Get an estimate for an engineering-based cost seg before making any decision about whether or not cost segregation is a good or bad idea for you. It is usually a good idea. Even the American Institute of CPAs (AICPA) and the American Journal of Accountancy recommend doing cost seg on any investment above $750K in the purchase price. Cost seg can be done on investment properties purchased for as low as $250K. The highest benefit is for higher-priced properties and investors in higher tax brackets. Cost segregation is about the time value of money. Why let the treasury hold onto these benefits and dribble it out to you over 27.5 or 39 years. If you cannot use all the benefits in the first year, remember, that you can roll the excess depreciation forward to the following years until it is gone. You are then continuing to depreciate the structure of the building going forward. Reinvest the extra cash flow and reap the benefits!

Colton Hahn · Answer

You can get a free estimate done usually to determine if the juice is worth the squeeze :)

Cost Segregation study?

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