Cost Segregation on SFH

[Julio Gonzalez]

A question that I am asked frequently is whether or not a cost segregation study is beneficial for single family homes. The answer is yes! We have seen properties benefit from a study with a purchase price as low as $150,000. Determining exactly how beneficial is based on a multitude of factors, but a cost segregation study cost/benefit analysis on your property is typically free and can help you decide whether the benefits offset the cost of the study.

If a Cost Segregation Study had not been performed on this $560,000 single family home located in Phoenix, Arizona, it would have had first year depreciation of approximately $20,400. Thanks to the Cost Segregation Study, the property investors accelerated the depreciation that the first year depreciation was approximately $182,900.

The use of the accelerated depreciation strategy helps real estate investors to reduce the tax liability immediately which therefore increases their bottom line due to the offsetting of income. An additional benefit of a detailed engineering-based Cost Segregation Study is that it can increase potential insurance premium savings as well as provides support for the property tax appeals process. Additionally, it can help maximize renovations and improvements.

A Cost Segregation study is an IRS approved federal income tax tool that increases near term cash flow by utilizing shorter recovery periods for depreciation to accelerate return on investment. For newly constructed, purchased or renovated properties and also retroactive generally over the last 10 years, building components are properly classified into individual units of property and accurate recovery periods for computing depreciation deductions. The study identifies with forensic engineering detail the immediate Bonus Depreciation 5, 7 and 15-year personal property class lives qualifying portions of a building that are normally buried in 27.5 year residential or 39 year commercial categories.

As a reminder, bonus depreciation started to phase out in 2023. It’s 100% bonus depreciation for properties placed into service in 2017-2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and completely phased out in 2027. However, there are tax code changes every year. In the H.R. 3936, Built in America Act, it was proposed to extend the 100% bonus depreciation until January 1, 2027. This has the potential to be passed later this year.

For additional questions, checkout this article on Cost Segregation FAQs.

Have you had a cost segregation study performed on your single family home?