Cost Segregation Study on Single Family BRRRR

[Marcus Auerbach]

I've been playing around with KBKG's online calculator for cost segregation and realized that the issue with BRRRR is that the cost basis compared to the value is relativley low. At least per property, it adds up over the portfolio.

A typical property for us would be 150k purchase price minus 50k land value plus 50k for rehab. That leaves me with a relatively small accelerated depriciation for the acquisition, seems like there is more meat on the bone digging through the actual improvements. It seems like a downside of BRRRR is that it greatly reduces the impact of a CS compared to buying a move in ready asset for 250k.

Do I have to go through a partial disposition calculation? Or just find the receipts for every ceiling fan and mirror?

Can anyone walk me through an example and best practice for a CS one BRRRR?

[Bonnie Griffin Kaake]

@Marcus Auerbach You may have two things against you with the property you are describing. 

First, Partial Asset Disposition can only be done in the second year of ownership or later. All improvements done in the first calendar year of ownership are added to your basis. The theory is that if the improvements needed to be made in the first year, they were in bad shape when you bought the property and did not deteriorate during your ownership. 

Second, if you are planning to sell the property in the first year or two of ownership, it is rarely beneficial to do a cost segregation study that quickly because at best, you would break even. The worst case would be having to pay back everything you gained by doing the study with due to the recapture being at your ordinary income rates. 

Third, A property under $200k purchase price rarely benefits with a cost segregation study. And, if you use a method other than an engineering-based study, the IRS's preferred methodology, you open yourself up to the risk of an audit. And, the IRS is hiring extra auditors to better scrutinize depreciation schedules going forward. 

Food for thought...