Should I Get a Cost Segregation Study Before or After Rehabbing?

[Julio Gonzalez]

A cost segregation study should only need to be performed one time for each property and the annual depreciation calculated during the study using the detailed asset listing is relevant for as long as you own the property. However, there are instances where it may be beneficial to perform additional cost segregation studies.

You could perform a second cost segregation study after you’ve made large improvements to the property. Many improvements may qualify as Qualified Improvement Property (QIP) and can be written off immediately rather than being capitalized.

A question that investors ask a lot is if they should perform a cost segregation study before or after a rehab. If you purchased a property, it is recommended to perform a cost segregation study prior to improving / rehabbing the property as it is harder to document after the fact. The cost segregation study is used as your baseline. Once you’ve made the improvements to your property, you should have the receipts to justify the cost of all newly added items. With that information, your accountant can determine the amount of bonus depreciation your property is eligible for in relation to the new improvements. This would also allow you to utilize the Partial Asset Disposition deduction. This deduction is related to the loss on disposal of certain assets in your building such as replacing or removing existing components of the building.

Cost segregation studies can be a very beneficial tool for real estate investors. On average 20-40% of the property’s components can be depreciated over a shorter useful life which can result in a much lower tax bill and increased cash flow. So if you’ve already had a cost seg study performed and made significant improvements to your property, it could be beneficial to refresh the study. And if you haven’t performed a cost seg study before and intend on improving your property, I highly recommend doing so beforehand.

What questions do you have for me?