Cost Segregation for STR properties acquired in 2018, 2021, and 2022?

[Shyam Subramanyan]

I have three STR properties that my wife and I have self-managed but from a tax perspective we've only taken the normal depreciation the last few tax years. However I am wondering if I can do cost segregation for all these properties for 2023 taxes since I owe quite a bit of taxes due to high W2 income. I also do not expect high W2 income for 2024 and beyond, so 2023 might be the best year to do this for the best tax savings. I did look at some of the material participation criteria and we should easily surpass the requirements since we pretty much spent time improving the home ourselves, managed all guest communication, etc.

Thoughts?

[Michael Plaks]

Quote from @Shyam Subramanyan:

I have three STR properties that my wife and I have self-managed but from a tax perspective we've only taken the normal depreciation the last few tax years. However I am wondering if I can do cost segregation for all these properties for 2023 taxes since I owe quite a bit of taxes due to high W2 income. I also do not expect high W2 income for 2024 and beyond, so 2023 might be the best year to do this for the best tax savings. I did look at some of the material participation criteria and we should easily surpass the requirements since we pretty much spent time improving the home ourselves, managed all guest communication, etc.

Yes you can. The project is not for DIY though.
Given that we have only 3 weeks before the IRS deadline, it's tough. You need to do cost segregation on all 3 properties and then find an accountant who knows how to do the catch-up. 

The fastest and cheapest cost segregation is through DIY software, but it has significant drawbacks:  
https://www.biggerpockets.com/forums/51/topics/1136752-expla...

Some areas (like mine) have extended deadline beyond Oct 15th.

[Sean Graham]

Quote from @Shyam Subramanyan:

I have three STR properties that my wife and I have self-managed but from a tax perspective we've only taken the normal depreciation the last few tax years. However I am wondering if I can do cost segregation for all these properties for 2023 taxes since I owe quite a bit of taxes due to high W2 income. I also do not expect high W2 income for 2024 and beyond, so 2023 might be the best year to do this for the best tax savings. I did look at some of the material participation criteria and we should easily surpass the requirements since we pretty much spent time improving the home ourselves, managed all guest communication, etc.

Thoughts?

You absolutely should cost seg. Definitely can help you if you’re in a pinch. 

[Aus Smith]

Hey, 

As already acknowledged, it is possible but a hefty project to undertake. While you will need an engineering company to complete the Studies, you will need a tax preparer to file Form 3115 to do the catch up, as suggested above. You are playing a fine line this close to the extended date though. You are subject to failure to file and failure to pay penalties. Failure to file is based on the original filing date. Although, they are based on taxes owed and can be reduced along with the strategy if your liability is sufficiently reduced. It may be a mute point depending on the tax benefits that you uncover. The DIY software may be a good option, but as stated has its limitation, especially if you have a unique unaverage property. I am a CPA operating a firm myself. I'm very intrigued with the idea of using the software myself. I wish you luck with this endeavor! I hope you and your professionals knock this one out of the park! 

Austin L. Smith, CPA 

[Shyam Subramanyan]

Quote from @Michael Plaks:

Quote from @Shyam Subramanyan:

I have three STR properties that my wife and I have self-managed but from a tax perspective we've only taken the normal depreciation the last few tax years. However I am wondering if I can do cost segregation for all these properties for 2023 taxes since I owe quite a bit of taxes due to high W2 income. I also do not expect high W2 income for 2024 and beyond, so 2023 might be the best year to do this for the best tax savings. I did look at some of the material participation criteria and we should easily surpass the requirements since we pretty much spent time improving the home ourselves, managed all guest communication, etc.

Yes you can. The project is not for DIY though.
Given that we have only 3 weeks before the IRS deadline, it's tough. You need to do cost segregation on all 3 properties and then find an accountant who knows how to do the catch-up. 

The fastest and cheapest cost segregation is through DIY software, but it has significant drawbacks:  
https://www.biggerpockets.com/forums/51/topics/1136752-expla...

Some areas (like mine) have extended deadline beyond Oct 15th.

Thanks Michael. Is there a DIY to figure out if it’s worth to do a full effort cost segregation? I still have a little more than three weeks left and curious to know why it would take any longer than two weeks for a firm to do cost segregation. Also assuming CPAs don’t do the actual cost segregation, what kind of professionals do it?

[Michael Plaks]

Quote from @Shyam Subramanyan:

Thanks Michael. Is there a DIY to figure out if it’s worth to do a full effort cost segregation? I still have a little more than three weeks left 

Yes, and the DIY sites are mentioned in the blog post I previously linked. Here it is again: 
https://www.biggerpockets.com/forums/51/topics/1136752-expla...

3 weeks is a super short time.

[Sean Graham]

Quote from @Aus Smith:

Hey, 

As already acknowledged, it is possible but a hefty project to undertake. While you will need an engineering company to complete the Studies, you will need a tax preparer to file Form 3115 to do the catch up, as suggested above. You are playing a fine line this close to the extended date though. You are subject to failure to file and failure to pay penalties. Failure to file is based on the original filing date. Although, they are based on taxes owed and can be reduced along with the strategy if your liability is sufficiently reduced. It may be a mute point depending on the tax benefits that you uncover. The DIY software may be a good option, but as stated has its limitation, especially if you have a unique unaverage property. I am a CPA operating a firm myself. I'm very intrigued with the idea of using the software myself. I wish you luck with this endeavor! I hope you and your professionals knock this one out of the park! 

Austin L. Smith, CPA 

 The 3115 isn’t a problem with the right information readily available 

[Basit Siddiqi]

The cost segregation will analyze the property to find assets that can be depreciated faster than 27.5 years.

The accountant you work with will be able to help connect you with a cost segregation specialist.

The most difficult part is completing form 3115 which will also calculate the 481(A) adjustment.
The 481(A) adjustment is the difference between the correct depreciation calculation less the actual depreciation taken.

[Account Closed]

Quote from @Shyam Subramanyan:

I have three STR properties that my wife and I have self-managed but from a tax perspective we've only taken the normal depreciation the last few tax years. However I am wondering if I can do cost segregation for all these properties for 2023 taxes since I owe quite a bit of taxes due to high W2 income. I also do not expect high W2 income for 2024 and beyond, so 2023 might be the best year to do this for the best tax savings. I did look at some of the material participation criteria and we should easily surpass the requirements since we pretty much spent time improving the home ourselves, managed all guest communication, etc.

Thoughts?

 hello Shyam, 

You certainly can do a retroactive cost segregation study and either go back and amend your old return or you can take it on this years return. The bonus deprecation rules apply here and it would be a conversation you would need to have with your accountant as to what the best course of action is. I can refer you to someone who does great cost segs, just send me a DM

[Aus Smith]

 The 3115 isn’t a problem with the right information readily available 

Yes, Agreed. It is fairly basic compared to other changes in accounting method. However, not every tax prepaer is familiar and willing to do the form. While the ones who are I hear a minimum of $2,500 for filing the form. The 2,500 would obviously not compare to tax deductions generated in the thousands. I am still waiting on my EFIN myself, but I am not to sure how much I would charge for this form, even though I'm familiar with the calculations. Have you seen anybody charge less? 

[Shyam Subramanyan]

If I don’t want to rush, can I still file/pay my 2023 taxes as is and then amend the return over the next few weeks to get money back?

[Michael Plaks]

Quote from @Shyam Subramanyan:

If I don’t want to rush, can I still file/pay my 2023 taxes as is and then amend the return over the next few weeks to get money back?

You cannot do that. Form 3115 - which is required for retroactive depreciation adjustment - can only be filed with a "timely filed" 2023 return, not an amended return. For most people it means October 15th.

For my clients the deadline is February 3rd, because my firm is in Houston and has a special hurricane-related extension. In some other areas, there could also be special extensions.

[Sean Graham]

Quote from @Aus Smith:

 The 3115 isn’t a problem with the right information readily available 

Yes, Agreed. It is fairly basic compared to other changes in accounting method. However, not every tax prepaer is familiar and willing to do the form. While the ones who are I hear a minimum of $2,500 for filing the form. The 2,500 would obviously not compare to tax deductions generated in the thousands. I am still waiting on my EFIN myself, but I am not to sure how much I would charge for this form, even though I'm familiar with the calculations. Have you seen anybody charge less? 

 $500 for 3115

[Aus Smith]

Quote from @Sean Graham:

Quote from @Aus Smith:

 The 3115 isn’t a problem with the right information readily available 

Yes, Agreed. It is fairly basic compared to other changes in accounting method. However, not every tax prepaer is familiar and willing to do the form. While the ones who are I hear a minimum of $2,500 for filing the form. The 2,500 would obviously not compare to tax deductions generated in the thousands. I am still waiting on my EFIN myself, but I am not to sure how much I would charge for this form, even though I'm familiar with the calculations. Have you seen anybody charge less? 

 $500 for 3115

Thanks for the information! 

[Julio Gonzalez]

@Shyam Subramanyan Cost segregation is definitely a tax strategy to consider in your situation with STRs. Here's an article with additional FAQs on cost segregation studies that you may find helpful. Feel free to reach out if you have any questions!

https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq

[Ryan Kelly]

@Shyam Subramanyan if you are not a “real estate professional” in the eyes of the IRS, you cannot use added depreciation to offset your W-2 income. It would simply sit in your passive bucket and rollover to future years, negating the benefit. Don’t spend the time and money on cost seg unless it can benefit you in the same calendar year.

[Shyam Subramanyan]

Quote from @Ryan Kelly:

@Shyam Subramanyan if you are not a “real estate professional” in the eyes of the IRS, you cannot use added depreciation to offset your W-2 income. It would simply sit in your passive bucket and rollover to future years, negating the benefit. Don’t spend the time and money on cost seg unless it can benefit you in the same calendar year.

@Ryan Kelly good question. If my wife and I manage all aspects of our STR business (no property manager, self-managing all of our bookings and guests, accounting, rehabs, working on repairs and maintenance ourselves) as we've been doing the last six years, would we be considered real estate professionals?

[Michael Plaks]

Quote from @Shyam Subramanyan:

No, but STRs have nothing to do with Real Estate Professional. Completely different tax situation, and you may be able to use the STR tax benefits. Read this:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

[Ashish Acharya]

@Shyam Subramanyan Yes, you can perform a cost segregation study on your STR properties for the 2023 tax year, even for properties acquired in 2018, 2021, and 2022. By filing Form 3115, you can retroactively apply cost segregation without amending prior returns (also you cannot amended more than 1 year old deprecation anyway), allowing you to "catch up" on missed depreciation. 

Since you meet the material participation requirements, you can use this to offset your W2 income in 2023, which is ideal given your high income this year.