How can I apply cost segregation to my proforma?

Question

does anybody apply cost segregation depreciation in their financial model? Is there any way to do it without having an actual cost seg study done first or could I use a general assumption?

Lane Kawaoka · Answer

@Jay Ben

So, here's the deal. As some others have mentioned, it's not a good idea to factor in the tax benefits when evaluating your proforma. The reason is that we can't accurately predict the extent of the cost segregation benefits or everyone's unique tax situation.It really varies from person to person. For instance, some individuals qualify for real estate professional status or have high incomes exceeding $400,000 per year, while others have lower incomes under $200,000 annually. Consequently, the personal benefits they receive from passive activity losses can differ significantly. It's crucial to avoid making specific claims about the benefits of cost segregation for each individual.In the past, what we've done is provide the facts and acknowledge the variability involved. Let's say we have a $30 million property in an area with low land values. We might assume that around two-thirds, or $20 million, of that property's value is depreciable. As a general rule of thumb, a 100% bonus depreciation cost segregation study typically results in about a third of that amount being claimed as losses in the first year. From there, we can calculate the impact on your equity based on an LPs proratta share.Now, here's the thing: if you want to go further and get a more accurate estimate, we can ask the cost segregation vendor for their input. However, keep in mind that this approach requires individual analysis for each investor, which can become quite complicated. It's important to consider the potential risks and complexities before deciding to pursue this avenue.

Arn Cenedella · Answer

@Jay Ben

Sorry that’s not a good idea. Every investor’s tax situation is different. Some can use the passive losses generated by cost seq and bonus deprivation, some can’t.

I don’t that info in my proforma but I do include in my investment summary after I have received a rough estimation from my cost seq vendor.

It would read like, we estimate a bonus deprecation amount of about 40% of one’s investment amount. But we are very careful to emphasize “estimate” and the need to consult a tax professional to see how these passive losses might be used to reduce an investor tax liability.

The decision of these passive losses is extremely tricky.

Justin Moy · Answer

Most will not include tax benefits as the performance of the property or factor it into the returns because of all the reasons mentioned above.

I have seen people include estimates from their CPA on how much losses an investment will give but they need to have a disclaimer that every tax situation is different. If you want to do that I'd ask your CPA what is a safe estimate that can be applied for this and then flood that part of your advertising with disclaimers if you choose to use it.

Greg Scott · Answer

I don't.

A cost seg has no affect on the asset's performance. The only thing it affects is your personal taxes.  When you have investors, how it affects their taxes will vary from person to person, so putting it in a model is not practical.

If you will own 100% of the property, go for it.  On the other hand, its probably not a good deal if it only starts making senses if you have a cost seg done.

How can I apply cost segregation to my proforma?

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