Cost segregation self survey instead of full study?

[Laura Van Lenten]

My accountant told me there are two ways to get a cost segregation study, one being the expensive route where an engineer comes onsite and does it. He said there is another, cheaper option where I basically fill in a survey. Anyone have any experience with this second method ?

I’m also having a hard time getting a hold of my accountant so if anyone has any details on how to do this survey option, I’d greatly appreciate it! 

[Costin I.]

@Laura Van Lenten,

There are two main avenues for conducting a cost segregation study (CSS). The first involves hiring an engineer or specialist, who meticulously categorizes components to maximize segregation and depreciation acceleration. However, this option is considerably more expensive, typically costing 5 to 15 times more than the alternative. For smaller properties such as single-family residences (SFRs) or duplexes-4plxes valued under $1 million, this option may not be financially viable. The potential tax savings, ideally four times the cost, rarely materialize at this scale (why? Because if it costs you $2K to $3K, it should give you ~4x in that in tax savings, or $8-$12K which is not happening).

It's important to understand that a CSS doesn't create additional depreciation but rather accelerates existing depreciation. This front-loading of deductions can be advantageous for reallocating funds, but it may affect long-term tax strategies. For instance, while it can bolster initial cash flow by reducing tax liability, it could diminish deductions in subsequent years (when the property might produce better cashflow), impacting overall tax footprint, so you need to take into account all that in the context of your short term and long term tax strategy (e.g. if you plan on selling soon, at which time the depreciation gets recovered, or not and planning to hold for a long term/forever/1031, buying more later and creating more depreciation to offset cashflow or not, etc.).

The alternative is a do-it-yourself (DIY) or survey option, which costs around $400 to $500 per property (I can do my CSS report in 10min, once I have all the data needed). This method, though not as exhaustive as a professional CSS, is suitable for smaller properties and still yields meaningful tax benefits. Even if not maximizing depreciation, the conservative estimates provided by DIY tools justify the cost for properties under $1.2 million.

Addressing common concerns regarding the DIY option:

1. Ease of Use: Most software for DIY cost segregation studies is user-friendly, requiring minimal input beyond property details. Calculating the depreciation base, typically guided by a CPA, is the primary complexity.

Except figuring out the depreciation base to use (what amount from the total acquisition cost goes for land and can’t be depreciated, and how much goes for the building/improvements to be used in the segregation and depreciation calculations, and even that should be an easy answer to figure out or get from your CPA), the rest is simple stuff your CPA will not know anyway (thus him sending you the “survey”) like, the sqft of the house, the length of the fence and if wood/iron/brick, how many ceiling fans in the house, how many cars garage, if carpet or tile in what room, etc.

1. Audit Protection: Reputable DIY software adheres to IRS guidelines, providing assurance against audits.
2. Time Commitment: Conducting a DIY study does not demand an extensive understanding of tax code or methodology; basic property information suffices.
3. Property Value: The DIY option is viable for properties with improvements under $1.2 million improvement value (acquisition cost minus land allocation), covering most 1-4 unit dwellings.
4. Skillset Development: Given the potential savings, investing an hour to learn the process is justified. Does saving $1-3K is worth 1hr of your time?

There are other questions you should ponder – e.g. can you take advantage of the accelerate depreciation? Do you have the passive income to use for offset? Just because you create the acceleration, it doesn’t mean you can use it – you’ll not lose it, it accumulates for later, but no point in doing it if not able to use it right away. And that’s another discussion.

Allow me to requalify the answer into a set of questions:

• Are you a person who likes to have insight into their tax situation, optimize their tax footprint, and do not shy from tax concepts? If yes, the DIY CSS may be for you.
• Do you get involved in property remodeling and maintenance, track your expenses, and maximize your deductions? If yes, the DIY CSS may be for you.

If you just like to delegate to others and pay “specialists” for your convenience and time, and just drop your papers at your CPA and let him figure out things, you might be better served either by having the CPA do the DIY CSS, or just go without a CSS and the regular linear depreciation.

Lastly: Don’t ask an insurance salesman if you need to buy insurance.