Cost segregation? When?

[Kyle Robertson]

We are under contract on our 4th small(ish) apartment building. Our total doors after closing will be 50. I’m trying to learn more advanced tax strategies and this one is something I don’t quite get.

This building will be a complete remodel/value-add. We are doing some structural repairs and a lot of cosmetic updates. That being said, at what point do we tackle cost segregation for tax benefits? What did you do? Thanks!

[Steve Morris]

Usually on fixed improvements on  property (not land), you take depreciation = value of improvement / 27.5 years as a set off against income.

With cost segregations, some property improvements can be accelerated (instead of a new roof over 10 years, you do it over 5 years).  The idea being to make your depreciation number as big as possible upfront.

Usually, this gets used on syndications where you know you're going to sell it in 5-7 years.  This way you get the most tax shelter on income you can as soon as you can.

They have experts in the business that do these studies for $5000 +/-.

If you sell and do NOT take 1031 for deferral, you'll have to recapture (ie pay taxes on) all the depreciation you took however, so it's not a give away.