filing taxes for a Buy and Hold Reno | Cost Segregation?

Question

After listening to an informative BP podcast #269 podcast link, I'm inspired to find some tax savings related to a house that I purchased and renovated in 2018.  I also advertised the place to sell and rent in 2018, but I haven't yet found a tenant.

Thank you BP community for your feedback.  I appreciate it!!

Questions:

1.  How do you treat the recurring holding costs: property tax, utilities, and mortgage?  Can this be expense-d or would it be added to the building improvements and amortized?

2.  If I had to travel to manage the project, can I get any tax benefit for these costs?

3.  Is it worth it to complete a cost segregation for a project worth $350K ($250k purchase and $100k in renovations)?  Can someone do this on their own or do you need to pay a professional?

4.  Assuming a cost segregation is beneficial. . .  How does one decide what is personal property for the purposes of the bonus depreciation?  The experts in the podcast mentioned that furniture, fixtures, and carpet could receive the bonus depreciation.  Does that include kitchen appliances, water heater, mini-split air conditioning, kitchen cabinets?

Ashish Acharya · Answer

1. How do you treat the recurring holding costs: property tax, utilities, and mortgage? Can this be expense-d or would it be added to the building improvements and amortized?

Yes, they can be deducted while the property is vacant. The total mortgage payment is not an expense, only interest is an expense.  Holding cost while doing a rehab is added to the basis.

2. If I had to travel to manage the project, can I get any tax benefit for these costs?

Yes. Deductible cost also depends on if you are talking about out of state travel or just a transportation cost.  Need to keep the detail record.

3. Is it worth it to complete a cost segregation for a project worth $350K ($250k purchase and $100k in renovations)? Can someone do this on their own or do you need to pay a professional?

4. Assuming cost segregation is beneficial. . . How does one decide what is personal property for the purposes of the bonus depreciation? The experts in the podcast mentioned that furniture, fixtures, and carpet could receive the bonus depreciation. Does that include kitchen appliances, water heater, mini-split air conditioning, kitchen cabinets?

In my opinion, depending on your other income level, you already going to have a have a loss from your rental as it is vacant. The cost seg will only increase your loss that might not be deductible anyway (Passive loss).  I would rather save depreciation for later years when you actually have steady cash flow which might bump up your tax bracket. (So, analyzing your numbers would provide answers). You are just accelerating the depreciation, you are not going to lose it if you don't do a cost seg.  Cost seg also comes with a downside, if you ever wanted to do 1031 on this house, you cant completely defer your gain as you have separated your property into the real and personal property. Personal property is no longer eligible for 1031 exchange.  Also, more depreciation equals more recapture too.

If you are going to save a lot of money and it was going to be reinvested to earn more, then cost seg makes sense.

For the exact same questions that you have, you need a professional to do the job, Fora SFH, I highly doubt the cost is justified.

@JJ Ono

Eamonn McElroy · Answer

@JJ Ono

Only the $250k would be examined and I doubt that would have a positive cost-benefit.  The $100k is easily traceable and will be assigned asset lives as appropriate for tax.  e.g. If you bought a new refrigerator, that wouldn't be depreciated over 27.5 years.  It would have a 5 year asset life but might be eligible for bonus or S179 if purchased installed before the house is put in service.  If after, you can probably expense it as de minimis.  Speak with your CPA.

Costin I. · Answer

@JJ Ono @Ashish Acharya - one can do a cost segregation study report for about $500. And if you do it in the same year as the aquisition year (in the tax return for that period) the CPA cost should be minimal - you can still do it for properties acquired in past years, but it complicates things since now you/CPA have to deal with adjustments. PM if you want more details.

In my opinion at that cost is worth the trouble - just keep in mind this is an acceleration of depreciation, not a saving per se. I done this for two of my last properties.

filing taxes for a Buy and Hold Reno | Cost Segregation?

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