Cost Segregation Study on Single Family Home

[Julio Gonzalez]

A lot of people ask me if it’s beneficial to do a cost segregation study on a single family home, the answer is yes! Determining exactly how beneficial is based on a multitude of factors, but a cost segregation study cost/benefit analysis on your home is typically free.

If a Cost Segregation Study had not been performed on this $559,200 single family home located in Phoenix, Arizona, it would have had first year depreciation of approximately $20,700. Thanks to the Cost Segregation Study, the property investors accelerated the depreciation that the first year depreciation was approximately $182,900.

The use of the accelerated depreciation strategy helps real estate investors to reduce the tax liability immediately which therefore increases their bottom line due to the offsetting of income. An additional benefit of a detailed engineering-based Cost Segregation Study is that it can increase potential insurance premium savings as well as provides support for the property tax appeals process. Additionally, it can help maximize renovations and improvements.

A Cost Segregation study is an IRS approved federal income tax tool that increases near term cash flow by utilizing shorter recovery periods for depreciation to accelerate return on investment. For newly constructed, purchased or renovated properties and also retroactive generally over the last 10 years, building components are properly classified into individual units of property and accurate recovery periods for computing depreciation deductions. The study identifies with forensic engineering detail the immediate Bonus Depreciation 5, 7 and 15-year personal property class lives qualifying portions of a building that are normally buried in 27.5 year residential or 39 year commercial categories.

Have you considered a cost segregation study on your residential property?

[Bonnie Griffin Kaake]

@Allan Smith  @Andrew Postell

Both of you are correct in some aspects and not in others. Yes, if you are going to sell in a year or two, a cost seg study will not benefit you. On the other hand, you can always roll the credits forward to the following years. It is a rare $250,000 rental owner that is not able to use the benefits of cost segregation. It is especially beneficial if it is done in the first year of ownership. That is because you don't have to pay extra for a change of accounting form 3115 in the following years. If you don't pay taxes (non-profit entity or very low income earner) it may not be to your benefit to do it now. This is a decision you make with your CPA/tax professional once you have a no-cost pre-analysis.