Cost Segregation Study Worth It?

Question

I own a 3-unit multifamily property in Elizabeth Port, NJ. I got a study appraised (I haven't committed to the appraisal yet) that claims they can write off anywhere from $76,000 - $117,000. A couple of questions:

Does this pass on to my income?

Does this affect anything with my property taxes? Elizabeth, NJ, has exceptionally high property taxes.

Is it detrimental that I do it in my first year of owning the property, or can I wait a little? Possibly going through an eviction soon.

Any information is appreciated!

Michael Plaks · Answer

@Matthew Brown

The only two certainties are:1. cost segregation has nothing to do with your local property taxes2. cost segregation will not help you with your NJ state taxes, because NJ does not recognize bonus depreciation

Whether or not it will help you with your Federal (IRS) taxes depends on a lot of factors that have to be evaluated by your own tax accountant and not by cost segregation companies. Cost seg companies give you a hypothetical best case scenario. They are not equipped to assess your specific tax situation.

Read this for some additional info: https://www.biggerpockets.com/forums/51/topics/1075919-five-...

Basit Siddiqi · Answer

Run this question by your accountant.if the cost segregation study will help / benefit you, get it done.If the cost segregation study will not help / benefit you, don't get it done.Don't fall for the trap based on the 'estimate' provided by the cost segregation study.They will 'woo' you by saying your potential tax savings by getting this study is $XX,XXX.While it may be potentially true, it assumes certain status on your tax return which may not be true. They are not your accountants and do not know about your tax situation.

Becca F. · Answer

Great question! I had a major renovation done to a California property in 2022. I didn't do a cost segregation study. I don't plan to sell this home and it will be passed down to my kids - they can continue renting it out or move in the house themselves when I pass away. It was rented out later in 2022 so already placed into service.

I feel like so many people are having a cost set done and sometimes it's not worth doing depending the individual situation. I'll ask a tax strategist/CPA - I've been doing my own taxes so I just do the 27.5 years depreciation on all my properties (I know I shouldn't do my own taxes).

Sean O'Keefe · Answer

@Matthew Brown To do a cost seg. or not depends on a few factors (that don't include impact on property taxes) including, but not limited to:

• What you are hoping to get out of it (e.g. offset other income in the portfolio, get a big refund to put down on another property)
• How long do you plan to hold the property (depreciation recapture of 25% might make this less worthwhile if you sell the property in 2 years)
• Did you already place the property in service and start depreciating it for 27.5 years (LTR) or 39 years (STR). In this case, it's messy to fix this and you have to file a Form 3115.
• You would consider a 1031 exchange to avoid depreciation recapture.
• Type of property (STR or LTR),
• How high is your W-2 income / other income
• Real Estate Professional Status (REPS) or no REPS
• More factors ….

...

*This post does not create a CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Matthew Brown · Answer

Awesome thank you!

Nate Meeker · Answer

@Matthew Brown - Timing is everything, it might be beneficial to pull the trigger in another year when you have more income to offset.

Julio Gonzalez · Answer

@Matthew Brown 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? Is it a reputable company and will the documentation provided from the study hold up in an audit? Most cost segregation study companies provide the quote for free. If you need any help or have any questions, feel free to reach out!

Cost Segregation Study Worth It?

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