Accelerated Depreciation/Cost Seg studies-what order?

Question

I think I have decided I want to do cost seg studies on my portfolio to accelerate depreciation.  My current CPA does not have experience doing them.  For those of you who have done this, in what order do you recommend I do things? I am also struggling with getting the numbers on to see the big picture.  Meaning what will this cost, what my short term tax savings are, and what the long term implications are, like when/if depreciation recapture can kick in.

Ashish Acharya · Answer

Please talk to an experienced CPA on this. Cost seg might be expensive and useless if you cannot really use it.

- I might be limited at your return and cannot really benefit from it.

- If you are going to sell right away, might not be worth it.

- What would be your total tax saving if you were to do it.

These need to be answered before pulling the trigger.

Michael Plaks · Answer

@Amir Navabpour

It's troubling to read that you "decided" to do something you don't fully understand. Cost segregation does one thing only: it accelerates your depreciation from future years into the current year. Whether or not it can reduce your taxes in the current year depends on multiple factors and is case-by-case.

Example: you're single, have a full-time W2 job making $150k. You have a couple of long-term rentals with mortgages, and they already show a net loss with the "slow" depreciation. No other investment income. In this situation, cost segregation will not help you. Change any of the factors in my example or add something I did not mention, and the answer might change, as well.

And even if it does save you taxes in the current year, it may or may not be a good route to take, depending on other factors, including your intentions with this property and cost/benefit analysis. For example, usually cost seg does not make a lot of sense if you're planning to sell the property soon.

Julio Gonzalez · Answer

@Jason Renner Depending on the company, the fee could be much higher because it's a different approach. Most companies do a desktop or limited scope study - more of a cherry picking strategy. At my company for instance, we rebuild the building on paper from the ground up using construction software then apply a condition factor. It's a true engineering study and not just a square foot approach. It helps make the study as accurate as possible and gives the property owners the most tax benefits.

Jason Renner · Answer

Following up on this thread, I am in a situation where I plan to hold my property for awhile and it makes sense for me to get a cost seg study done. When comparing between providers who have given my free quotes/estimates, I am seeing fees range from several thousands of dollars in price. What I don't understand is shouldn't any cost segregation study done on the same property produce the same result? How could the results from two different providers be different for the same property? One provider is asking for close to $2k more in fees and I don't see how they would be providing any further benefit vs another company if their results should be consistent with any other cost seg study. I understand that the quality of the report could be higher or they have more experience defending successfully against IRS audits, etc. but am I missing anything else regarding total depreciation calculated? Thanks in advance!

Julio Gonzalez · Answer

@Amir Navabpour As Yonah mentioned, most cost segregation companies will provide a free cost/benefit analysis quote to help you answers your questions above. Reaching out to multiple companies to obtain this quote is a great place to start. Here's an article that lists the info you'd need to provide during a cost seg study to help you prepared:https://www.biggerpockets.com/... If you have any other questions, please feel free to reach out!

Yonah Weiss · Answer

Great comments showing a bigger picture of the pros and cons by @Ashish Acharya & @Michael Plaks (two great accountants)

Most companies will offer a free analysis/estimate, so you can see what the benefit may be in your specific situation. Feel free to DM me.

David M. · Answer

@@Amir Navabpour

Yeah,  you need some proper professional help.  You need to figure out your goals.  You need to have a better feel as to how much depreciation you can pull in upfront to determine your deduction amount, and if you have sufficient rental income to offset (otherwise the deduction is just carried over year to year).  Depreciation unrecapture "kicks ins" when you sell the property unless you do a 1031 exchange.  If anything, your CPA should be able to explain to you the tax implications since (s)he should know your numbers.  It sort of sounds like you need to understand how taxes work in your situation, first.  Then, you can create a picture of what sort of "advantage" you are trying to get from a cost seg.  From there it should be relatively easy to see if you are in the ball park for the cost seg helping.

Good luck.

Accelerated Depreciation/Cost Seg studies-what order?

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