All Forum Posts by: Malik Javed

Quote from @Basit Siddiqi:

I guide clients who are looking to treat their STR as active.

Somethings to consider are whether you should get a cost segregation study done, creating a log of your hours and having an understanding of what hours count / don't count.

@Basit Siddiqi - good point about the cost seg. Another thing to note, certain renovation costs can be eligible for Qualified Improvement Property (QIP). QIP has a depreciable life of 15-years and is also bonus eligible.

Definitely consider speaking to a certified cost seg professional. Feel free to message me with any questions.

@Connor Castillo - feel free to reach out via DM or email with your questions.  Thank you!

The definition of qualified property under Section 179 was expanded in 2017 under TCJA to include the following real property improvements to nonresidential buildings:

• Roofing
• Fire protection and alarm systems
• Security systems
• HVAC systems

So you can expense roofing under Section 179 as long as it is an improvement to a commercial property and meets the Section 179 criteria.  You can also take a loss on the old asset.  Double gift!

@Jane Dang  is your rental property a short-term rental or long-term rental?  If it is a short-term rental like an Airbnb, you may expense those costs under Section 179.  Otherwise, you will have to depreciate it over 27.5 year.  However there are many questions to determine if the roof work is a capitalized betterment or a restoration.  Generally, if it was due to sudden damage, the cost to bring the roof back to the same condition using the same materials is not a betterment.  If only the outer roof covering (membrane, shingles, etc.) was replaced but none of the underlying roof system, it is not a restoration and you can expense these costs.  

Another option is to retire the old roofing costs from the original basis if you can't expense due to a capitalized event.  There is a software that can help determine the true value of the old roof costs that are no longer present, especially if a cost segregation study was not done previously.  Happy to assist if you're interested.  Feel free to send me a private message.  I hope this helps.

Tim,

Yes, you can do a CS study and retroactively claim 100% bonus depreciation in 2024.  You can file an automatic change in accounting method using Form 3115, which does not require amending any returns.  Happy to help if you have any additional questions here.  Meanwhile, here is my recent post on cost segregation:  

Cost Segregation - The Basics (biggerpockets.com)

@Michael Plaks   Well said.  I completely agree with your options.  Thanks for sharing.

Quote from @Victor Lavigne:

Good morning everyone,

Curious to see if someone could help with the following question:

If I perform a cost segregation study for a short-term rental property purchased the previous year, would I amend the return for the previous year or adjust in the year of the cost segregation study?

Also, do the aggregate losses above any W2 income get carried over to the following year?

No need to amend. If taxes has been filed, just file form 3115 with your current year's return and calculate the appropriate 481(a) adjustment. Not all W-2 (active income) is eligible to offset passive losses. It depends on the rental period.

Quote from @Jonathan Cooper:

Purchased a STR in February. Worked on the remodel until the end of August. Once the cost segregation study is complete, will I be able to take a full year of depreciation or only a prorated 4 months? I have seen a tax attorney on YouTube specifically saying you can take a full year of depreciation even if you buy in December but all I see in the IRS publications indicates that you have to prorate based upon the time it was available to rent.

is there a rule I am missing?  

Thanks for your time.

@Jonathan Cooper - 
Sounds like a short-tax year is involved. Depending on when the STR was placed-into-service, depreciation will be prorated based on the amount of months remaining the tax year. Definitely talk to your CPA and feel free to reach out for more insights.

If you're a real estate investor looking to maximize your tax savings and boost cash flow, cost segregation might be your secret weapon. Here's a case study on a 6-unit apartment building that shows just how much you can save by breaking down your property into its components for faster depreciation.

Case Study: Cost Segregation Study on a 6-Unit Apartment Building

Overview: A 6-unit apartment building placed in service in July 2021 underwent a cost segregation study, significantly enhancing the property owner’s tax benefits. Through strategic reclassification of assets, the property owner was able to claim additional deductions of $215,000 in the first year alone. This case highlights the power of cost segregation in maximizing tax savings and boosting cash flow for real estate investors.

Property Details:

• Property Type: 6-Unit Apartment Building

• Building Area: 4,500 square feet

• Lot Size: 3,050 square feet

• Depreciable Basis: $1,000,000

• Placed in Service: July 2021

Results from Cost Segregation Study: The study identified various components within the property that qualified for accelerated depreciation, leading to substantial deductions in the first year. These deductions were crucial in offsetting the property owner's taxable income, effectively reducing their tax liability.

Key Benefits:

1. First-Year Additional Deductions: The cost segregation study enabled the property owner to claim an extra $215,000 in deductions during the first year. These deductions significantly reduced the property’s taxable income, translating to immediate tax savings.

1. Depreciation Acceleration: The standard depreciation for residential rental property is spread over 27.5 years. However, by reclassifying certain components of the building (e.g., flooring, cabinetry, electrical systems) into 5-, 7-, and 15-year depreciation schedules, the property owner could accelerate depreciation and front-load these benefits.

1. Increased Cash Flow: By reducing tax liability through accelerated depreciation, the property owner was able to increase cash flow. This extra cash flow can be reinvested into the property, used to pay down debt, or allocated towards other investments.

How Cost Segregation Works:

Cost segregation studies break down a building's components into categories that can be depreciated over shorter periods. For example, parts of the building that are considered personal property or land improvements (e.g., landscaping, parking areas, lighting) can often be depreciated faster than the building structure itself. In this case, the reclassification resulted in a significant first-year deduction under applicable bonus depreciation rates.

Why This Matters:

For investors in multi-family properties, especially in today's real estate market, maximizing tax savings is crucial for maintaining profitability. Cost segregation allows property owners to capture these savings early, rather than waiting for them to accumulate over decades. The result is a stronger financial position and more flexibility in managing the property.

Conclusion: This case study of a 6-unit apartment building demonstrates the profound impact that a cost segregation study can have on an investor's bottom line. With $215,000 in additional deductions in the first year alone, the owner was able to significantly reduce tax liability and boost cash flow. For any real estate investor, cost segregation is a strategy worth exploring to unlock the hidden value within your property.

Feel free to comment or message with any questions.

Quote from @David N.:

Thanks to everyone for the replies. I really love this community and I will pay it forward the next chance I get. @Malik Javed have you heard anything promising about the bill languishing in the Senate that would reestablish the 100% oin bonus depreciation? IIt passed the House overwhelmingly, but is being held up in the Senate. I assume that AirBnB and others have their lobbyists working on it I hope they do.

@David N. Regarding the bill to bring back 100% bonus depreciation, it passed the House but got stuck in the Senate. The Senate didn't have enough votes to push it forward, so it's kind of in limbo right now. With the election coming up, things are even more uncertain, so it might not get revisited until after the new Congress takes office. Hopefully, there will be a renewed push then, but for now, it's all a waiting game. I'm trying to stay hopeful!

Quote from @Basit Siddiqi:

First, have a conversation with an accounting firm to see if a cost segregation study will be beneficial to you.

You don't want to spend money on something where you won't get a benefit from.

Yes this should be the first thing you do.  You want the services of a reputable cost seg firm. Visit www.ascsp.org to locate a firm near you. Hiring a certified cost segregation specialist can provide additional insight to your situation.

Quote from @Ashish Acharya:

Bonus depreciation could be a viable strategy to offset your $300K capital gains, but it typically applies to specific property components identified through a cost segregation study rather than the entire residential property itself. If you rent out the home before December 31, 2024, you may be able to claim bonus depreciation on eligible parts of the property. However, there’s no set rule on how long you must hold the home as an investment before converting it to your primary residence, but it’s generally advisable to rent it out for at least a year to avoid raising any IRS concerns. The exact amount of capital gains you can offset will depend on the cost segregation study results, so it’s crucial to discuss this with your tax advisor to ensure you’re maximizing your benefits while staying compliant.

Agreed with @Ashish Acharya point above.

One thing to add, bonus depreciation is available for used property placed in service after 9/27/17, however it is does not apply to the portion where the taxpayer previously had a depreciable interest. There are certain rules regarding changes in use from investment to personal residence and vice-versa.

Another thing to keep in mind: The 100% bonus depreciation expired at the end of 2022 and is now phasing out at 20% per year, with the benefit fully sunsets after the end of 2026 calendar year.

I recommend you contact a certified cost segregation specialist and/or CPA to discuss your short-term goal. Feel free to reach out for more insights!