Cost Segregation worth it on a 530k 5 plex

[Jake Ferris]

Closing tomorrow on a 5 plex in Superior WI. 

In the past, my old CPA told me a cost seg study wouldnt be worth it on a commercial building I owned that was only 295k. His reasoning was the amount I would save would be offset by the price of having the study. 

Is there any reason it would not be worth it on something of this size (530k)?

[Chris Lopez]

@Jake Ferris

It depends!

Cost Segregation Study for Significant Tax Saving

I did a cost segregation study for my four rental properties and found it’s a good way to front-load tax depreciation benefits. Instead of having to spread depreciation evenly over the next 27.5 years for most properties, it’s possible to front-load them to get a huge tax write off on year one.

The table below gives a breakdown of how cost segregation front-loaded depreciation. Each study cost $2,500.

Cost Segregation Property Breakdown
	House w/ ADU	Aurora Condo	Fourplex*
Purchase Price	$475,000	$207,000	$850,000
Land Improvements (15yr)	$42,327	$0 (I don't own the land)	$59,669
Personal Property (5yr)	$47,251	$44,070	$110,667
TOTAL Segregated costs	$89,579	44,070	$170,166

With the current tax rules, bonus depreciation is currently 100%. Which means that the total segregated costs can be front loaded and used in one year. The amounts are raw dollar depreciation and need to be multiplied by your tax bracket to estimate the savings. For example, $89,578 * 35% = $31,352 in potential tax savings. That’s huge!

The fourplex was purchased in 2019 via a 1031 exchange. It’s important to note that I did the cost seg two years after the property was purchased. Since it was a 1031 exchange, I had a lower basis.

Front loading the depreciation means that I’ll have less depreciation in future years. The table below compares future annual depreciation write off between doing a cost segregation study and not doing one. How much future tax benefit will I lose?

Annual Depreciation Difference between 27.5 yr vs Cost Seg
	House w/ ADU	Aurora Condo	Fourplex
Annual depreciation, w/o cost seg study	$14,684	$7,527	$26,005
Annual depreciation, w/ cost seg study	$11,423	$5,924	$19,812
Difference	($3,261)	($1,602)	($6,193)

Do I care about the lower depreciation difference in year 5? Year 10? Year 24? No, I don’t. I’d rather have the depreciation today in a large chunk, rather than smaller amounts in future dollars. I want the dollar today to invest.