Cost Segregation Study for SFR's

[Account Closed]

Hi everyone - are there any economical solutions to cost seg studies for SFR's?

Thanks,

Jonny

[Ashish Acharya]

Originally posted by @Account Closed:

Hi everyone - are there any economical solutions to cost seg studies for SFR's?

Thanks,

Jonny

 Jonny, 

IRS has briefly mentioned this issue in Revenue Ruling 73-410, 1973-2 C.B. 53, Private Letter Ruling (PLR) 7941002 (June 25, 1979), Chief Counsel Advice Memorandum 199921045 (April 1, 1999).

All emphasize that the segregation of cost to determine the 1245 property  is factually intensive and must be supported by corroborating evidence.

In addition, an underlying assumption is that the study is performed by “qualified individuals” and “professional firms” that are competent in design, construction, auditing, and estimating procedures relating to building construction.

Having said that, that mostly applies to complex and larger properties ( hospitals or specialized warehouses). 

For smaller projects, the tax professional may be able to get enough information from you to break out some assets that are personal property or land improvements. However, when this approach is used, the IRS may challenge it unless the taxpayer can show that the remaining costs (those allocated to the building) are reasonable. 

For eg: 

You cannot buy a house for 100k and allocate 30k for the appliance and other shorter life asset. Even though the value of the segregated asset would amount to 40k, that would drive the value of the home to 60% of the purchase price. That would be no - no. So, if you are doing this economically by yourself, make sure that it is reasonable. 

Also, consult with a taxpayer to determine if cost seg beneficial for you. Might also negatively impact when you actually want to do 1031 exchange due to change in 1031 law after new tax reform