Cost Segregation study?

[Thiag Sivalingam]

Looking for advice - Does it make sense to do a cost segregation study on a property (and claim accelerated bonus depreciation) I bought this year considering the following?  why/why not?

(I understand that I need to consult a CPA to get the answer specific to my situation, but just wanted to get a general idea on what experienced investors suggest)

1) Property cost ~1M. Passive investment for tax purposes

2) Property is a two-family. In the process of doing a large renovation (~$100k)

3) Expecting to generate around $35,000/yr net cash flow

Thank you!

[Scott Trench]

Quote from @Thiag Sivalingam:

Looking for advice - Does it make sense to do a cost segregation study on a property (and claim accelerated bonus depreciation) I bought this year considering the following?  why/why not?

(I understand that I need to consult a CPA to get the answer specific to my situation, but just wanted to get a general idea on what experienced investors suggest)

1) Property cost ~1M. Passive investment for tax purposes

2) Property is a two-family. In the process of doing a large renovation (~$100k)

3) Expecting to generate around $35,000/yr net cash flow

My guess is that no, this will not be beneficial for you.

Suppose that you generate $35,000 in cash flow. When you later in normal depreciation, you might depreciate, say $900,000 of the $1M in property value (talk to your cpa, this is just a guess) over 27.5 years.

That’s $32K in depreciation per year.

Now you have $3,000 in taxable income (maybe as much as $8K when we later in principle reduction on your loan payments).

Your tax liability is like $600 on $3000 in income ($1600 on $8,000).

So if your cost seg costs you $3,000 (please correct me if this is incorrect it may be much cheaper), you are spending real money to save a few hundred in taxes. 

And by the way the cost seg just accelerates the depreciation. It doesn’t eliminate it. You have to recapture when you sell. 

Where this might make a lot more sense is if you are a real estate professional or earn less than $150k in AGI. If so, then you can deduct losses in real estate from your personal return. In that case  a big loss every year is having a real present value impact on your life today, freeing up cash.

Hope this helps!