Cost segregation and how to keep rental losses in future years

[Mikey Liu]

Hi all - 

I understand the benefits of cost segregation in year 1 and how you can front load the depreciation of the unit. However, in future years, isn't the depreciation much less? If so, then how can one still maintain rental losses on a unit? Any thoughts or insights into this would be much appreciated. Maybe the strategy is to buy another new rental every year and do a cost segregation study on that one so that net net you have rental losses across the portfolio? But what if you only have this one rental property and don't intend to add? Are you essentially going to be showing net rental income in future years? 

[JD Martin]

There's no good answer to what strategy is best. If you were going to only buy one property, and you weren't a real estate professional such that you could use the acceleration to offset W2 income, then there may not be any good reason to do it because yes, your depreciation write-off is going to be reduced in the future since you transferred some of what would have been on a 27.5 schedule to year 1. Accelerated depreciation is most useful (if you're not a RE professional) in writing off large amounts of rental income in a particular year, but yes you have to keep it going in order for it to make sense as a passive loss. Accelerated depreciation also works very well if you are married and one of you has a high W2 while the other is a RE professional, assuming you file jointly. 

In other words, you really need to think through your strategy on the front end. If you don't know, or don't have one, or don't have any properties, you are better off just sticking with the normal depreciation schedule because you don't want to waste excess depreciation if there's no income to offset (although you may be able to carry the loss forward).