Small Time Investor - Not a 'High Income Earner' - Cost Segregation Study?

Question

Hi there. I purchased my first short-term rental two months ago and I put about $25k into renovations into it. I've never had a CPA before, but recently I've talked to two different CPA's about tax preparation for 2023 now that I have this short-term rental. When I mentioned having a cost segregation study done, both of them seemed to think I was crazy for wanting one and they said I wouldn't get my money's worth out of it.

Is this because I'm not a 'high income earner'? I work for the local public school system, so is it because I don't pay a ton in taxes? To be clear, it's not nothing, and I'd love to offset those taxes. Could it be because I don't have a lot of rental income that it would offset? Again, I just bought it two months ago, so I haven't had much revenue yet.

Can someone help me understand why I wouldn't want to do a cost seg study? Or how much money I should be making (or paying into taxes) before a cost seg would be worth it?

Thanks!

Rachel Anderson · Answer

@Michael Plaks

I appreciate your response. I was really discouraged after talking to the two that I met with. I'm in Kentucky and I've had a hard time finding CPAs in my area that specialize in real estate. I think I'll expand my search to outside my area.

Nate Meeker · Answer

@Rachel Anderson

Even if you don't qualify for REPS or the STR loophole, there can be other benefits based on the cash flow and exit plan on the property!

Michael Plaks · Answer

Which illustrates the danger of getting tax advice from people other than tax professionals. This rule does not apply to short term rentals.

Michael Plaks · Answer

We have 20+ tax professionals on this forum, all specializing in real estate and working with clients nationwide.

Julio Gonzalez · Answer

Your property definitely has the potential to benefit from a cost segregation study. Determining whether to do a cost segregation study or not has a lot variables. What was the purchase price of your property? Are you in an area where land is very valuable leaving you with less to depreciate? Some other factors to consider - How long are you planning to hold this property? If less than two years, cost seg probably isn't a good route. Are you planning to do any renovations? If so, I always recommend getting the study done prior to rehabbing.  What is your ROI and the amount paid for a cost seg study? Do you have a current need for that cash flow generated from the tax savings? Could you go reinvest it in another property to build even more income? Would you have net income or net loss without the cost seg study? Are your real estate investments active or passive? Are your losses locked up against your passive income? There are a lot of factors to consider when get a cost seg study to determine if the benefits outweigh the costs. If you are able to get REPS status, that would help tremendously. Have you obtained any detailed cost/benefit analysis quote? Most cost segregation study companies provide the quote for free. If you need any help or have any questions, feel free to reach out!

V.G Jason · Answer

This. Your STR will offset, and if your W2 income isn't super high it'll help definitely help.

STR is the only thing that is material for offsetting if your W2 income is high. The question of investing in a STR standalone is a different one.

Rachel Anderson · Answer

@Michael Barnes

I didn't realize this! I'll definitely mention this during my next conversation with my CPA.

Bonnie Griffin Kaake · Answer

@Rachel Anderson   The first place you need to start is by getting a no-cost pre-analysis on your property for cost segregation. Then, talk to a real estate savvy CPA who can outline the pros and cons specific to your situation of going forward. It does not cost as much as you might think and the recapture that some use as scare tactics can also be greatly mitigated upon sale.

Then again, if you plan on selling the property within a year or two, skip doing a cost seg study or even getting an estimate. Think of cost segregation as a free loan from the IRS that you don't even have to pay it all back. It is about the time value of money! It is about leveraging the extra cash you can get today to earn more than you would have by letting the Treasury Department hang onto it for the next 39 years in the case of a STR.

James Wilcox · Answer

You don’t need a CPA specific to here. However if you need one I can probably help with that depending on where you are. I would tend to agree already with the recommendation even if it is an STR. This is also coming from someone who HAS done a cost seg study on an STR property. You can also get a little to no fee cost seg estimate and take to your COA to see if it is worth doing with rough numbers. That may help make a decision as well.

Small Time Investor - Not a 'High Income Earner' - Cost Segregation Study?

Most Popular Reply