Cost segregation - SFR acquired in 2021 followed by full reno

[Charles Baker]

Scenario: We acquired an SFR in the Southern California mountains in 2021. Over the past 15 months we've been doing major renovations. Work is basically complete. First STR guest has booked for the last week of 2022, so we'll be able to place the asset into service for 2022. Acquisition cost was $700k; reno costs about $165k; furnishings about $35k. How does our renovation and furniture expense factor into a cost segregation study? Do we use the current basis (acquisition plus reno cost) as the starting point? Thanks in advance.

[Bryan Martin]

Quote from @Charles Baker:

Scenario: We acquired an SFR in the Southern California mountains in 2021. Over the past 15 months we've been doing major renovations. Work is basically complete. First STR guest has booked for the last week of 2022, so we'll be able to place the asset into service for 2022. Acquisition cost was $700k; reno costs about $165k; furnishings about $35k. How does our renovation and furniture expense factor into a cost segregation study? Do we use the current basis (acquisition plus reno cost) as the starting point? Thanks in advance.

In a cost segregation study, the starting point for determining the value of the property is typically the acquisition cost, which in your case would be $700,000. Renovation costs, such as the $165,000 you spent on major renovations, would typically be included in the cost of the property and would be used to determine the overall value of the property. Furnishings, such as the $35,000 you spent on furnishings, would generally be considered personal property rather than real property and would not be included in the cost of the property.

In a cost segregation study, the goal is to identify and classify the various components of a property as either real property (land and buildings) or personal property (furnishings, equipment, etc.). Real property is typically depreciated over a longer period of time, while personal property can often be depreciated more quickly. By identifying and classifying the various components of a property, it may be possible to accelerate the depreciation of certain items and potentially reduce your tax liability.

It is important to note that the rules around cost segregation and depreciation can be complex, and it may be beneficial to work with a qualified tax professional to determine the best approach for your specific situation. They can help you identify the various components of your property and determine the appropriate depreciation periods for each item.