I think cost segs are a little overrated

[Eric Williams]

So I have a Masters in Accountancy a Master in Taxation and CPA. My last firm had a real estate agent who brought in clients with up to 40 properties. None of these people cost seg for residential. When I see costs segs they're for commercial.

• 1)They are overstating the savings. They are going to use the maximum marginal rate and full cost recovery period. The problem is you probably aren’t even making any money the first year unless you have a tenant lined up and paying.
• 2)Even if you have a paying tenant in the year of bonus, it’s a per se passive activity. That means you have to actually have enough passive income to absorb that depreciation amounts. If not, they are suspended.
• 3)If you have other passive income from other passive activities, you then would watch the depreciation deductions be used against passive income. That still means it hasn’t actually has an impact. It’s just netting to zero.
• 4)If you are eligible for active participation, then you might be able to use it against ordinary income. But even then there is a phase out after 100k.
• 5) If you have a W-2 job, to offset that with depreciation, you have to spend more hours on real estate than you do your full-time job, and prove it. That's like 80 hours a week. You still have another test under to establish that you are a real estate professional, and then you have to establish material participation, on a separate basis. As in each rental activity is treated separately unless you group them under an election.
• 6)Most people do not hold on to the residential rental property for 27.5 years. This means if you bonus, then dispose, you have depreciation recapture during the same year you have a massive gain for the sale. This means deductions earlier when you had no income are worth less than the income you recapture at higher marginal rates in the year of disposal.
  

You want to hear something really crazy? I know people who intentionally do not depreciate. It’s an actual strategy.

Why? Because if there is no depreciation, there is no recapture, meaning the entire gain is capital in the year of disposal.

But under the regs you HAVE TO account for depreciation allowed or allowable in the year of disposition, regardless if you took it earlier.

But still, why?

Because the gain from disposal leads to bracket creep and pushes me into higher income tax brackets. But that depreciation now comes into play. I’m taking it all now, which means less capital gain. The depreciation is being taken all at once in the same year as the recapture basically netting out. Basically the total gain minus recapture is my 1250 unrecaptured amount.

What is the IRS going to do they say? Go back and give me depreciation deductions and give me a refund?

You need a 3115 since a depreciation correction is an automatic adjustment.

My point is, clever CPAs know they might be better off not taking it at all.

One guy won a case by buying an old disposal pit with trenches. He allocated the purchase price to the trenches. As he filled them up (people paid him to store there trash in the ditches), he depreciated the pits. IRS challenges and loses. The allocation was reasonable.

He basically got to depreciate air. 

https://casetext.com/case/sexton-v-commr-of-internal-revenue

I'm not trying to be rude, but if you go to taxprotalk, which is for serious tax CPAs, see if they are fans of cost segs.

I mean you guys are taking bonus, but if I sat down with you, and took your tax return, could you actually prove to me the bonus depreciation deductions you paid to cost seg actually had an impact on your tax liability? I want you to go look and see if there is a form 8285. Those suspended loss amounts you might see? Guess what they are.