Cost segregation, componentizing.. anyone do it?

Question

Doing some light research on accelerated depreciation of rental R.E. 
Does anyone use these techniques? Are they sound from an IRS standpoint. Also, can someone describe the person this technique would work the best for? I'm guessing someone in the higher tax brackets would get the best results from this. Is this true? Thanks in advance, and yes, I realize 99% of us are NOT CPAs.

Ebere Okoye · Answer

I am a CPA and a real estate investor. I typically use this strategy for my clients who are able to deduct rental activities as passive investments and the accelerated deprecation does not put them over the threshold for the passive loss limitations.  For rentals, it is not just about getting the deduction but being able to deduct it because you are not subject to the passive loss rules. If you are subject to the passive loss rules because you make over $100k and you do not spend more time in real estate than in any other active profession, then there is no need to accelerate.

Bryan Hancock · Answer

Cost segregation or chattel appraisals for smaller properties aren't worth the effort and money spent IMO.  I have done this analysis several times and it never pencils out to be worth the effort to me.

If you are buying something worth a few million bucks the numbers get much better.

Lee G. · Answer

CostSeg is best with larger properties. Ultimately, it comes down to math and your objectives with the deal. If you are looking to hold onto the property long term, you won't benefit much from the accelerated depreciation as you'll blow through the best way to shelter your cashflows. If you are holding your property shorter term, then going through the cost seg exercise could be a way to make a marginal property work.

Yonah Weiss · Answer

Agree here with what Jeff says, especially the last bit from Proverbs. :)

Jeff Hobbs · Answer

Jason, and anyone else with similar questions or situations...

Cost seg works 100% of the time if you meet these criteria:

• * you are profitable, meaning you make enough money to actually pay taxes
• * you actually pay federal or state income taxes
• * you have done so on an ongoing basis and not just once a decade

One should never take a blanket statement from anybody who says, "...it doesn't make sense" or "...it won't add much value" or "...it's too expensive" or "...it's not going to save you that much so it's not worth it" and on and on. In the realm of tax savings strategies and methodologies that are approved by the IRS, why would anyone who owes AND pays income taxes NOT do whatever they can to LEGALLY mitigate them?

So, I ALWAYS seek additional counsel when it comes to investigating any strategy that will make me money or will allow me to KEEP more of my hard-earned money. To do otherwise is foolhardy. Why let anyone deny YOU the right to actually KNOW the truth. Without counsel, plans fail, but with many advisers they succeed. Proverbs 15:22.

Feel free to reach out to me with any additional questions.

Thanks,

Jeff

Dave Foster · Answer

@Jason Mak, Cost segregated property does indeed qualify for 1031 treatment.  The trick is in aligning and allocating the assets of the replacement property so that the segregated classes can be attributed from the old to the new property.  Real Estate to Real Estate and types of FFE to FFE.

Jason Mak · Answer

@Jeff Hobbs  - Hi Jeff - thanks for re-igniting this forum.   And hoping you can take a look at my situation.

I'm considering cost segregation on my portfolio.  There are two scenarios that I'm considering using cost segregation and looking to get an honest answer.  Both assets are large apartment buildings worth +$8M in value so there is sufficient capital).  Also, in both assets are long term holds (10-20 year time horizon)

Scenario 1 - For a newly purchased apartment building.  This seems to be a prime candidate for cost segregation as I can get the most deductions over the next 5-7 years.  However, since I'm a long term hold, I won't see the depreciation benefits in year 10-20 when income will hypothetically be much improved.  So I enjoy the deductions now but it becomes a headache later

Scenario 2 - I've owned a large apartment building for 12 years already and have depreciating it steadily since purchase.  My CPA commented that cost segregation won't add much value since the building is already 50% depreciated away.  Is that an accurate statement?

Finally, in the event of a sale and 1031 exchange, does the cost segregated property qualify for 1031 exchange?

Thanks in advance

Jason Mak · Answer

@Jeff Hobbs  - Hi Jeff - thanks for re-igniting this forum.   And hoping you can take a look at my situation.

I'm considering cost segregation on my portfolio.  There are two scenarios that I'm considering using cost segregation and looking to get an honest answer.  Both assets are large apartment buildings worth +$8M in value so there is sufficient capital).  Also, in both assets are long term holds (10-20 year time horizon)

Scenario 1 - For a newly purchased apartment building.  This seems to be a prime candidate for cost segregation as I can get the most deductions over the next 5-7 years.  However, since I'm a long term hold, I won't see the depreciation benefits in year 10-20 when income will hypothetically be much improved.  So I enjoy the deductions now but it becomes a headache later

Scenario 2 - I've owned a large apartment building for 12 years already and have depreciating it steadily since purchase.  My CPA commented that cost segregation won't add much value since the building is already 50% depreciated away.  Is that an accurate statement?

Finally, in the event of a sale and 1031 exchange, does the cost segregated property qualify for 1031 exchange?

Thanks in advance

Jeff Hobbs · Answer

I realize this is a 5-year old chat, but the answers here need to be addressed. Cost segregation works at virtually any level when there are sufficient assets in play to work with. On a one-off basis, a rental property qualifies at about $100k, will see about $5k in federal tax savings, and the fee will be $1500.

Bryan Hancock, you obviously haven't dealt with a reputable firm, or 300% ROIs simply don't whet your appetite...either way, your pencils need sharpening.

Kyle K. · Answer

My understanding is that any depreciation one cannot take against his ordinary income (for reasons such as making >$150k) can be later used to offset any capital gains down the road. That seems like a pretty good reason to take advantage of accelerated depreciation, especially if you don't hold on to the property for 30 years.
This unused depreciation sounds extrememly useful in that case.

Of course, it all depends on your end game. If you just purchased a property and you just retired, you probably don't want to use accelerated depreciation.

Cost segregation, componentizing.. anyone do it?

Most Popular Reply