Cost Segregation - Scale?

Question

At what scale does it make sense to start exploring a cost segregation study?  Does the cost of the study scale with the size of the investment?  Who does these (not looking for specific companies), is it accountants, lawyers, agents, and/or contractors?  Seems like an interesting niche...

I had always assumed these were for larger scale commercial investments, but in the recent On The Market episode, Brandon Hall used an example of a $100k property.  Not sure if that was for easy numbers or if this is something that can apply to most six-figure investments.  In my head it's always been a 7+ figure investment tool...

Thanks in advance!

Christian Block · Answer

As suggested, I think the size of the property is a bit irrelevant.

One very important point is if your real estate activity is passive or ordinary.  If you have passive income you are looking to offset with your passive real estate activity, a cost segregation might make sense.  If you do not have other passive activity other than your passive real estate activity, creating a loss with a cost segregation will only create a passive loss that you, likely, will not be able utilize in the year of the cost segregation and will carry forward.

If your real estate activity is ordinary because, for example, you qualify as a real estate professional, the loss created by the cost segregation can offset other ordinary income, creating an immediate tax benefit.

This is definitely something you want to discuss with your CPA.

Matthew Vanhorn · Answer

The beautiful thing about the cost segregation is that the cost seg company will give you a breakdown of what the cost seg study will cost and the likely benefit of the study before you have to pay for it, so it's a win, then play scenario. Like when I did my last one, the study was going to cost $1600 and the benefit of it was $28,000 in tax savings. I don't know about you, but for me personally, I will trade $1600 for $28,000 as many times as you will let me.  RE Cost Seg is a fantastic company designed for owners of smaller properties. They are able to do it all virtually, which reduces their costs drastically from what it used to cost to get a specialist out to your house to charge tens of thousands. Highly recommend them!

Lynn Wong · Answer

@Christian Block I just learned about this term today from the Podcast, try to learn about it since I just bought my 1st property in CA of 600K. I will most likely break even. The house is 2 years old and I plan to keep it for a long time. Can I offset my W2 job with the cost segregation study for my rental property so less income tax I need to pay every year? TIA!

Julio Gonzalez · Answer

Determining whether to do a cost segregation study or not has a lot variables.

What was the purchase price of your property? We've seen properties with a purchase price as low as $150k benefit from a study.

Are you in an area where land is very valuable leaving you with less to depreciate?

How long are you planning to hold this property? If less than two years, cost seg probably isn't a good route.

Are you planning to do any renovations? If so, I always recommend getting the study done prior to rehabbing.

What is your ROI and the amount paid for a cost seg study? Do you have a current need for that cash flow generated from the tax savings? Could you go reinvest it in another property to build even more income? Would you have net income or net loss without the cost seg study?

Are your real estate investments active or passive? Are your losses locked up against your passive income?

There are a lot of factors to consider when get a cost seg study to determine if the benefits outweigh the costs. If you are able to get REPS status, that would help tremendously. Have you obtained any detailed cost/benefit analysis quote? Most cost segregation study companies provide the quote for free. If you need any help or have any questions, feel free to reach out!

Basit Siddiqi · Answer

Engineering firms perform cost segregation studies.With the cost of Cost segregation studies coming down in recent years, it has made more sense to also apply them to lower cost properties.You should get a cost segregation study done if you anticipate that it will benefit you now or in the near future

Cost Segregation - Scale?

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