Have $708k cost segregation loss from $2018

[Jason Graves]

If I sell a property with a $200k gain does my $708k cost segregation loss offset that gain?

For example

-$708k loss

+$200 gain no tax

$508 k carry forward loss

[Michael Plaks]

@Jason Graves

It's more complicated actually. You cannot have a $200k gain on a property with $700k cost segregation loss, so I assume you have multiple rental properties. Also, you do not have a "cost segregation loss." You have an overall loss after subtracting all deductions from income, and those deductions include depreciation amplified by cost segregation.

Let's assume that you have 3 properties. Prop A has a $150k loss, Prop B has a $250k loss, and Prop C has the rest of it, $308k loss. If you sell Prop B with a $200k gain, its entire $250k loss will normally be released. You will have an overflow $50k to offset your other income, such as your W2. Losses on Prop A and Prop C will stay suspended and roll forward. 

If you sell Prop A, its $150k loss will offset $150k of the gain. The remaining $50k of the gain will be offset with losses from Prop B and Prop C (using a complicated allocation formula) down to zero, but not below zero.

If these properties are all inside a separate pass-through entity that files its own tax return, like a partnership, things get more complicated still.

Here's a statement that will not sit well with @Yonah Weiss: if your cost segregation creates suspended losses, it may not make sense to do it at all. Need a holistic analysis of what benefits, if any, cost seg will create under these circumstances.

But wait - there is more! One thing that is likely not calculated correctly is the $200k gain. Most investors calculate it wrong. You have to understand the concepts of adjusted basis and depreciation recapture for the correct calculation. Your gain has nothing to do with the mortgage payoff, either. So your actual gain can be quite different from your $200k estimate.

Happy New Year!