is cost segregation worth it?

Question

just wondering if doing a cost segregation is worth checking into on a 300k property. also, what do they charge?

Sean O'Keefe · Answer

@Michael Doughty I think @Julio Gonzalez has made some solid points here. I'd also add, to do a cost seg. or not depends on a few factors including, but not limited to:

• What you are hoping to get out of it (e.g. offset other income in the portfolio, get a big refund to put down on another property)
• How long do you plan to hold the property (depreciation recapture of 25% might make this less worthwhile if you sell the property in 2 years)
• Did you already place the property in service and start depreciating it for 27.5 years (LTR) or 39 years (STR). In this case, it's messy to fix this and you have to file a Form 3115.
• You would consider a 1031 exchange to avoid depreciation recapture.
• Type of property (STR or LTR),
• How high is your W-2 income / other income
• Real Estate Professional Status (REPS) or no REPS
• More factors ….

As a result, the cost seg on $300k property might be worth it, but you need to evaluate several factors and whether or not a cost segregation worth it depends on the real estate investor.

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Alex Breshears · Answer

Yes! We did it for an STR the year we bought it. We were lucky in that our CPA is very knowledgeable about real estate and was able to do the study for us. What we saved in taxes that first year was three times what we paid for the study. I will say just make sure you are keeping this property for awhile - otherwise you are paying back the accelerated depreciation. This wasn’t an issue for us for this home because it will be kept in the family for years and hopefully generations to come - so we thought why not depreciate now!

Julio Gonzalez · Answer

@Michael Doughty Your property definitely has the potential to benefit from a cost segregation study. Determining whether to do a cost segregation study or not has a lot variables.

Are you in an area where land is very valuable leaving you with less to depreciate?

How long are you planning to hold this property? If less than two years, cost seg probably isn't a good route.

Are you planning to do any renovations? If so, I always recommend getting the study done prior to rehabbing.

What is your ROI and the amount paid for a cost seg study? Do you have a current need for that cash flow generated from the tax savings? Could you go reinvest it in another property to build even more income? Would you have net income or net loss without the cost seg study?

Are your real estate investments active or passive? Are your losses locked up against your passive income?

There are a lot of factors to consider when get a cost seg study to determine if the benefits outweigh the costs. If you are able to get REPS status, that would help tremendously. Have you obtained any detailed cost/benefit analysis quote? Most cost segregation study companies provide the quote for free.  If you need any help or have any questions, feel free to reach out!

Alex Mkl · Answer

Hey man @Michael Doughty, it's been 2 years now and I'm looking forward how you went from this. In my experience, I have evaluated DIY options, but for me, the potential for error and the lack of defendable documentation outweighed the cost savings. I decided the security of a professional, engineered report was a necessary part of the investment.

Nate Meeker · Answer

@Michael Doughty - A lot to factor in. One test I always consider is when I might sell the property. If it is greater than 3 years and I think I can make a better return with the money saved then I'll do it.

Costin I. · Answer

@Michael Doughty - study this diagram to find answers to your questions and questions you have yet to think about

Bo Smith · Answer

For a 300k property, cost seg usually pays for itself if you've got decent taxable income to offset. The sweet spot is typically 500k+ but depends on your tax situation. Most firms charge 3-8k depending on complexity. What's your current tax bracket and do you have other income to shelter?

Bo Smith · Answer

Honestly depends on your property type and depreciation strategy. For 300k, most firms charge 3-8k for the study. Quick rule: if you can accelerate 40k+ in depreciation to years 1-7 vs 27.5 years, it usually pays for itself in tax savings. What type of property - residential rental or commercial?

Basit Siddiqi · Answer

Talk to your accountant whether you should get it done as it will depend on several factors.In short, will the added depreciation from a cost segregation help you? If yes, get it done.Some instances where a cost segregation will help1) rental losses would not be considered passive - Real Estate Professional Status or STR being considered active2) You sold another property that generated passive gain that you want to minimize3) Your income is below $150,000 and you can utilize some of your rental losses.

is cost segregation worth it?

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