Cost Segregation for Self Storage

[Christopher Brown]

I bought a self storage facility in 2017 as the second leg of a 1031 exchange.  It won't have positive rental income for tax purposes for a couple of years (expenses will eat up most of it while we get the occupancy and rates up).  As I understand it, there's no immediate tax benefit for me in the short term of paying for a cost segregation study as there is no positive net rental income against which it can be deducted (and I'm over the AGI cap for deducting against ordinary income).  And I'd like not to pay the cost to do it until such time as I've got positive income on the property.  

But in the meantime, how do I (really my cpa) do the cost segregating for this year's tax depreciation schedule?  Is it literally just guesstimating how much each depreciation category of the facility is worth (by replacement cost or market value)?  Or should I just start with the straight 39 year schedule for everything (since it won't matter for this year) and then amend when I finally do the study?

Facility was built in 2004; I paid $1.95m for it. Taking into account my exchanged property, my basis in the new property is about $1.1m (which I gather has to be the basis for any new depreciation schedules).  I intend to hold it long term.  The study will pay for itself eventually, best I can tell.

[Yonah Weiss]

@Christopher Brown Congrats on the new property!

First of all, you must claim depreciation your property, whether you are making money from it or not. Let me put out a couple of scenarios of what you could do in this situation.

1. Just claim straight-line depreciation, 1/39th of the basis each year starting in 2017 (you also have to deduct land allocation let's say 15% for illustrative purposes).

$1,100,000-$135,000 (0.15%) 

=$935,000 This is your depreciable basis.

Straight-line depreciation would be $23,974.35 each year

If you do not need the extra loss this year, do the cost seg at a later date, when your property is producing income. This would be a "look-back" study, which allows you to claim the accelerated depreciation retroactively, as if you did it from 2017. The added benefit of this is that you get a big lump sum in the first year. BTW there is no need to do an amendment to previous years tax returns. You only need to fill out a 3115 form, change of depreciation. 

2. If you are a real estate professional (750 hours per year, and 50% of your time), you can take the loss of depreciation to offset all of your other income. Then it could very well make sense to do do the cost seg now.

About your question regarding doing the cost segregation. The IRS recommends this be done by a qualified engineer, not a CPAs job. You could 'guestimate' (some CPAs do this), However, this is a surefire way to fail in an eventual audit :(, and an engineer will be able to find up to 30% more benefit. 

Best to use a qualified firm.