IRA withdrawal to fund investment properties, can a cost seg help to reduce tax bill?

Question

Hi all,

As titled.. I did a IRA withdrawal of 300k to buy 2 condos in May/June 2024.

I didn’t paid the 10% penalty fee.

I’m not currently working so my income is basically the 300k + (28k gross or 15k net) from another rental property.

can I do a cost segregation to offset my tax bill incurring from the Ira withdrawal for 2024?

I heard that you need to be a realtor, but also heard that since I don’t have w2 job and only doing real estate investing then I can do the cost segregation.

Appreciate your help answering this!

Diego Curbelo · Answer

Hi James, I'm not a CPA and you've already received great advice from many great professionals but just chiming in here to say I've never seen a Cost Seg not be a worthwhile investment.

Ashish Acharya · Answer

Yes, a cost segregation study could help reduce your tax bill by accelerating depreciation on the condos, offsetting income, including the $300k IRA withdrawal. Since you're focused on real estate and not working a W2 job, you may qualify for Real Estate Professional Status (REPS), allowing you to apply these losses to all income. You don’t need to be a realtor, but you must meet material participation requirements (750+ hours in real estate). The penalties cannot be avoided even with cost seg.

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

Austin Cheatham · Answer

Absolutely! A cost seg can be a great way to maximize deductions here, especially since you had a huge IRA withdrawal creating likely a very large tax bill. There are things we can look at to help avoid that 10% penalty also. But you should consult with your tax advisor on that piece.

You do not need to be a realtor to qualify for real estate professional status (REPS).

To qualify as a real estate professional, a taxpayer must meet both of the following criteria:Taxpayers perform more than 50% of services in real property trades or businesses in which they materially participate.   Taxpayers perform more than 750 hours of service in real property trades or businesses in which they materially participate.

With you not working a W2 job and likely working on these properties full time, it sounds like you have a good chance to qualify. I can recommend some good cost seg guys to help you maximize those deductions.

Be sure to communicate this information to your accountant as well, so they can help you plan and be aware of the situation. Happy to help provide any advice. Feel free to send me a message if you want to connect!

Basit Siddiqi · Answer

If you can claim real estate professional status, you can offset the losses from the real estate against the income from the retirement distribution.You may still be subject to the 10% penalty.The good thing about a condo is that you pay potentially be eligible to depreciate more of the property compared to other types of residential properties.Best of luck!

Malik Javed · Answer

@James Sedano Costs can vary quite a bit. Typically, a cost segregation study ranges from $5,000 to $15,000. However, if your property is larger or more complex, the cost could be higher. It’s a good idea to get a few quotes to see what works best for you.Some companies also offer DIY cost segregation options, which can be much cheaper. Just be sure you fully understand the process to avoid any mistakes.

When picking a firm, make sure to go with a reputable one. A great place to start is www.ascsp.org, where you can find certified companies.

Also, check out the credentials of the person doing the study. Look for the Certified Cost Segregation Professional (CCSP) designation, which means they’re certified by the American Society of Cost Segregation Professionals. You’d want someone as trustworthy as a CPA for your taxes!

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

Feel free to reach out if you have any questions!

Account Closed · Answer

Hey James, A withdrawal like that will still have the 10% penalty, but cost seg will help offset your business / 1099 income here as an agent if you qualify as a real estate professional. (REPS)A real estate professional for tax purposes is someone who materially participates in real estate trades or businesses, spending more than 750 hours a year and over half of their working time on real estate activities. This designation allows them to treat rental real estate losses as non-passive, meaning they can deduct losses against other active income. Qualifying as a real estate professional can offer significant tax benefits by offsetting other taxable income with real estate losses.

Julio Gonzalez · Answer

@James Sedano A cost segregation study could definitely be beneficial in your situation. 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

Jonathan Bock · Answer

@James Sedano

Next time, talk with a professional before you make a move like this.

James Sedano · Answer

thank you everyone!! this is very helpful. what's the average cost for a cost seg?

Andrew Strauss · Answer

Hi James - You don’t need to be a realtor to do a cost segregation study. Cost segregation is available to everyone. Since you're not working, you may qualify for REPS, but you need to meet the750-hour requirement and materially participate in your properties.The $300k withdrawal will be taxed as ordinary income, so using cost segregation to create depreciation losses could help reduce your taxable income. However, the 10% early withdrawal penalty will still apply unless you qualify for an exemption.

IRA withdrawal to fund investment properties, can a cost seg help to reduce tax bill?

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