Accellerated Cost Segregation against w2 gains or stock income

Tax, SDIRAs & Cost Segregation
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Accellerated Cost Segregation against w2 gains or stock income

Ross Y.
Investor · Escondido, CA · Member since 2016 · 36 posts · 13 votes

Team,

I’m entering into a new realm with investing and looking to offset other sources of income with cost segregation combined with accelerated depreciation from real estate professional filing status.

If the losses exceed my real estate income, can they be applied to other income sources. IE consulting, stock grants (RSU’s), straight W2 income?

I’m closing on a multi this week with DP from a 1031 and we think the accelerated cost seg will help with tax liability on those other sources.

This is my first time considering these strategies I’m being led to by my CPA. Can someone provide some insight?

IE… 200K stock income (treated as normal income), 200k w2, 50K consulting. 450K loss from cost seg

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Kelly Iannone
Rental Property Investor · Orlando, FL · Member since 2018 · 301 posts · 354 votes
5y

@Ross Y.

Very important detail that was initially left out that your wife would qualify as a RE Professional as she manages the properties and shows no other income. I’m not a CPA but it’s my understanding that this would allow for the accelerated depreciation resulting in losses to be taken against your W2 and other income.

My husband and I have looked into either of us qualifying as RE Pro in detail but we just don’t because we both have W2 jobs. We were looking at doing a cost segregation on a 6-unit but I don’t think it’ll help much until we can actually realize the accelerated depreciation.

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  • Christian Stoecklein
    Accountant · Pittsburgh, PA · Member since 2021 · 66 posts · 30 votes
    5y

    @Ross Y. You probably can't deduct those losses. There are some exceptions but they probably don't apply. Seems odd your CPA recommended a cost seg if that's the case though. You should definitely consult your CPA. If this is a 2021 event you have plenty of time to decide to use the cost seg or not. You could use the cost seg but elect out of bonus depreciation as an alternative.

    Christian

    0Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    5y

    Have you filed as a Real Estate Professional in the past and do you genuinely qualify? The IRS does not mess around with that. I've spoken with a few investors who tried to finagle RE Pro status and got that denied by the IRS

    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Ross Y.:

    Team,

    I’m entering into a new realm with investing and looking to offset other sources of income with cost segregation combined with accelerated depreciation from real estate professional filing status.

    If the losses exceed my real estate income, can they be applied to other income sources. IE consulting, stock grants (RSU’s), straight W2 income?

    I’m closing on a multi this week with DP from a 1031 and we think the accelerated cost seg will help with tax liability on those other sources.

    This is my first time considering these strategies I’m being led to by my CPA. Can someone provide some insight?

    IE… 200K stock income (treated as normal income), 200k w2, 50K consulting. 450K loss from cost seg

    You might if your spouse qualifies as a RE pro. If not, then your losses will be limited under passive activity rule because with everything going on with you, you will not qualify as the RE pro. 

    There are others ways to benefit from your RE losses, but you have to work with the tax pad professionals who can guide you.

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  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    5y

    @Ross Y.

    You either need to clarify what your CPA told you or you need to switch CPAs.   This is a pretty straight forward discussion with the info you noted.  

    0Reply
  • Ross Y.
    OP
    Investor · Escondido, CA · Member since 2016 · 36 posts · 13 votes
    5y

    @Taylor L. And all…

    Thanks for the input…. Here are a few more details.

    Writing from my phone so it might be a bit fragmented! Thx!

    I have not filed as real estate pro in past but my wife would qualify as she does all of our management and assists with our transactions. She does not show any other income against her social. We have rentals and we're focused on growing. My CPA is also having us set up an s-Corp for additional write offs such as paying our kids to help with things in the RE and consulting business, putting our vehicles in the Corp name, etc. we're putting our multi families in an LLC which will be managed by the s Corp and our primary in a trust. Topped off with an umbrella. We're trying to get our sh*t together financially for the future and crazy tax laws that are going to hit soon.

    My primary career for a publicly traded company has done well and my CPA believes that our real estate portfolio with RE pro status and acceleration of cost seg could help offset the stock income so I don’t have to sell a bunch of it for the tax ramifications. We specifically found an older building with a high tax value over the land for this purpose.

    Lots of moving pieces here. :)

    These strategies are all new to me and I wanted to get some collective thoughts from the team!

    0Reply
  • Ross Y.
    OP
    Investor · Escondido, CA · Member since 2016 · 36 posts · 13 votes
    5y

    @Ross Y. We have 9 rentals… left that part out! :)

    0Reply
  • Sarah Waterman
    Specialist · Dallas, TX · Member since 2020 · 78 posts · 28 votes
    5y
    0Reply
  • Kelly Iannone
    Rental Property Investor · Orlando, FL · Member since 2018 · 301 posts · 354 votes
    5y

    @Ross Y.

    Very important detail that was initially left out that your wife would qualify as a RE Professional as she manages the properties and shows no other income. I’m not a CPA but it’s my understanding that this would allow for the accelerated depreciation resulting in losses to be taken against your W2 and other income.

    My husband and I have looked into either of us qualifying as RE Pro in detail but we just don’t because we both have W2 jobs. We were looking at doing a cost segregation on a 6-unit but I don’t think it’ll help much until we can actually realize the accelerated depreciation.

    3Reply
  • Jai Reddy
    Edmond, OK · Member since 2012 · 456 posts · 270 votes
    5y

    @Ross Y.

    With everything you described in detail regarding your spouse already actively managing your rentals and being able to properly qualify as a RE Professional (included spending more than 750 hrs/yr$ in that role, yes, your Cost Segregation (including any first year bonus depreciation) can offset your other W2 taxable income. You seem to be working with the right CPA.

    2Reply
  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Ross Y. as @Jai Reddy said, with the extra info you provided in the second comment, that your wife qualifies for REPS, you can certainly use the extra losses from cost seg, beyond your rental income, to offset your W2 as well as the other active gains. 

    1Reply
  • Christian Stoecklein
    Accountant · Pittsburgh, PA · Member since 2021 · 66 posts · 30 votes
    5y

    @Ross Y. Glad you provided the additional information on your wife being a real estate professional. Good luck!

    1Reply
  • Luciana W.
    Rental Property Investor · Savannah, GA · Member since 2019 · 66 posts · 30 votes
    5y

    @Ross Y.

    I am not a CPA but I had 2 different CPAs tell me that if one member of the family is considered a RE professional and that spouse owns, for example,50% of the business, the couple can use only 50% of the depreciation to offset other ordinary income.

    However, I have read in a accounting book that the family could use 100% of the depreciation if one of the spouse qualifies.

    If someone in in this discussion nows best about this, I would love to hear another option.

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    5y

    @Ross Y.

    Going to paste my answer from here - https://www.biggerpockets.com/...

    Most investors are not Real Estate professionals and therefore cost segs and bonus depreciation is overkill beyond (normal bonus depreciation) as it will knock out the passive gains in the first few years of the project in most cases. In other words, even with normal depreciation you are offsetting most of your capital gains. If you are a REP and therefore interested in this subject, there is a high likelihood we will be doing a cost segregation but always reserve the rights as managers to make the call in the end in the best interests of all investors.

    Assuming an LP is not a "real estate professional" what is the advantage to the cost segregation to that investor? I understand it's certainly not a bad thing, but what's the advantage?

    In most cases normal depreciation will more than offset gains in the first few years of a value add project. The "excess" suspended losses will pile up on your books and can be used to offset passive gains. Passive gains could be coming from other passive investments especially coming from sale of other assets (which are overripe - you should have sold earlier so you don't have such a large capital gain and depreciation recapture in the first place).

    In summary Passive Losses cannot offset Ordinary Income (401k withdrawals) unless you are implementing REP status

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y

    @Ross Y.

    If your wife can claim real estate professional status, there may be some benefit in the cost segregation that was done.

    best of luck

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    4y
    Originally posted by @Ross Y.:

    @Taylor L. And all…

    Thanks for the input…. Here are a few more details.

    Writing from my phone so it might be a bit fragmented! Thx!

    I have not filed as real estate pro in past but my wife would qualify as she does all of our management and assists with our transactions. She does not show any other income against her social. We have rentals and we're focused on growing. My CPA is also having us set up an s-Corp for additional write offs such as paying our kids to help with things in the RE and consulting business, putting our vehicles in the Corp name, etc. we're putting our multi families in an LLC which will be managed by the s Corp and our primary in a trust. Topped off with an umbrella. We're trying to get our sh*t together financially for the future and crazy tax laws that are going to hit soon.

    My primary career for a publicly traded company has done well and my CPA believes that our real estate portfolio with RE pro status and acceleration of cost seg could help offset the stock income so I don’t have to sell a bunch of it for the tax ramifications. We specifically found an older building with a high tax value over the land for this purpose.

    Lots of moving pieces here. :)

    These strategies are all new to me and I wanted to get some collective thoughts from the team!

    That S corp is not a great idea for paying your children. 

    One of the biggest benefits to employing your kids if under 17 is that  there are no payroll taxes due as long as they're being paid by the parents, a parent owned 1065, or a parent's SMLLC. By paying them from an S corp he's having you pay payroll taxes when it isn't necessary. 

    Also having a vehicle under the S corp doesn't automatically make it more deductible- it depends on personal use. 

    I'd recommend consulting with a REI specailized tax pro before taking any of these big steps.

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    4y
    Originally posted by @Luciana W.:

    @Ross Y.

    I am not a CPA but I had 2 different CPAs tell me that if one member of the family is considered a RE professional and that spouse owns, for example,50% of the business, the couple can use only 50% of the depreciation to offset other ordinary income.

    However, I have read in a accounting book that the family could use 100% of the depreciation if one of the spouse qualifies.

    If someone in in this discussion nows best about this, I would love to hear another option.

    Those 2 CPA's are idiots. 

    If they marry MFJ then if 1 spouse qualifies all qualifying losses can be deducted against all income sources from either spouse. 

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