Cost segregation, best type of property.

[Konkova Irina]

Hi Everyone,

Want to try cost segregation for airbnb this year. Have couple of questions in terms of what type of property is best suited for cost segregation. Obviously, not to the point where it makes no sense as airbnb anymore. 

1. Condition: Does it matter if its new or old? Do you get more if the house is newer?
2. Appliances. From the description of cost segregation I would assume the more appliances the bigger the depreciation? Does it make any difference if its a high end appliances? 
3. I see that people online or podcast throw around numbers like ~20% eligibile to be bonus depreciated with cost segregation study. What if I want to buy a huge 2MM house with large land. Is it still possible to hit 20% mark? I am just thinking in terms of applicances, electric, pipes? Can that possibly add up to 400k?

Apologies if I completely misunderstand cost segregation study.

Thanks a lot!

[Yonah Weiss]

@Konkova Irina I agree with @Michael Plaks that the tax benefits should not be the driver of any real estate investment. STRs are getting a lot of attention when it comes to cost seg, because if done properly by self-managing and having enough material participation hours, you may not be subject to the passive loss limitation. In short, STRs are the one type of property that even without having real estate professional status (REPS), you cold potentially use those losses against your W2 or active income. Make sure to discuss this with your tax advisor to see if it works for your specific situation.

Now to answer your questions:

1. Condition: Does it matter if its new or old? Do you get more if the house is newer? It does matter, but not that much. Typically new construction properties will have more value placed in the structural components (27.5 or 39 year), which will leave less to be eligible for bonus depreciation in the faster depreciation categories (5 & 15 year)

2. Appliances. From the description of cost segregation I would assume the more appliances the bigger the depreciation? Does it make any difference if its a high end appliances? It does make a difference, as the more appliances, the more can be eligible for cost seg. However, as Michael Plaks mentioned above, if those appliances are purchased and placed in service separately than the acquisition of the property, they can likely be deducted, or depreciated separately from the house, and not included in the cost seg. Only that which was part of the property at the time of purchase can be broken out with cost segregation.

3. I see that people online or podcast throw around numbers like ~20% eligibile to be bonus depreciated with cost segregation study. What if I want to buy a huge 2MM house with large land. Is it still possible to hit 20% mark? I am just thinking in terms of applicances, electric, pipes? Can that possibly add up to 400k? Remember, the amount you can depreciate is the purchase price minus the land value. Some places may have a 10% land value, whereas other high end locations (like beachfront, or CA) can sometimes have upwards of 50% land value, which leaves less to depreciate. Let's say you have an average land value 15-20%, and you could get 20% of your $2M purchase after land ($2M-$400k= $1.6M) $1.6M x 20% = $320k of bonus depreciation. Sometimes it's higher, but always make sure you reach out to a cost seg company to get a free upfront analysis.