All Forum Posts by: Bonnie Griffin Kaake

@Oscar Ledezma Vazquez  You are correct, there are 7 ways. The easiest one to meet is #3, the 100 hours. I didn't want to make the post any longer. ;-)

Bonnie

Quote from @Brad Gibson:

Howdy everyone. I'm considering the purchase of a small home in Western Washington as a STR. One of the intriguing things about adding this home to our portfolio would be the potential tax benefits of doing a cost segregation study and receiving the 80% bonus depreciation this tax year. What I'm not clear on is approximately how much an average cost segregation study will show as available for that immediate depreciation.

Here are the numbers:

Sale Price $300,000 

Value of the land per the county assessor: $9.000.

Value of the structure including fixtures and contents: $291,000

Current tax bracket: 32%

The wifey and I both have high paying W-2 jobs and it would be nice to count that depreciation against her or my salary.  I know the rules for ensuring that the "loss" counts against W-2 income in a short term rental.

Is the standard estimate about 25% of the structure and contents what would be yielded as an immediate depreciation based upon a cost segregation study.  I'm also aware that in 2023, only 80% can be bonus depreciated.

Thanks in advance for the insight.

Hi Brad,

You may not qualify for "material participation" unless you do the majority of the management and day-to-day operations along with your W2 jobs. You would have to put in 100 hours per year and more than anyone else. Don't lose hope...most STR in good areas return very nice ROIs. The cost segregation benefits can be applied to the income from that STR property.

Be careful, you have to use this property as an investment and not a frequented vacation home for you or your family. A good RE savvy CPA will help keep you on the right side of the IRS in this situation. Another red flag is if the "vacation property" is in a different state and you try to claim it as being materially participated. You had better keep some meticulous records if you try that.

Another thing you mentioned is the assessor's land value. The land value is not the number you can use unless your CPA has a good reason for using it. In most situations, you need to use the percentage difference between the total assessed value and the land value to determine what percentage of your purchase price is land.

This stuff can get very complex and you don't want to guess. There is no cost to get a good engineering-based estimate. This will give you everything you need to make a good decision about how a cost seg study can help you. 

Quote from @William C.:

Hoping to gather some opinions. For SFH's that are LTR's (home values approx. $280k with land value backed out) what are the advantages and disadvantages to conducting a cost segregation study when bonus depreciation is unavailable? If the cost seg study will cost approx. $3k, is it worth the cost to bring that depreciation forward on an accelerated timeline. Cost seg in a bonus depreciation setting appears to be a no-brainer, but when bonus depreciation is not possible the advantages seem more murky. Thanks in advance for opinions here.

Hi Nathaniel, Your best best, rather than guessing, is to get a no-cost estimate for an engineering-based cost segregation study from a reputable company. That will give you all the information you need to decide how you can or cannot take advantage of cost segregation. There are too many moving variables that can effect the specific property...no two are alike.

As for purchasing the property in 2017 and offering it for rent in 2018, you will most likely qualify for 100% bonus depreciation. Any property over about $250K purchase price is usually viable. The sooner you get the study done the better. You are losing valuable time and money by waiting.

Quote from @Oscar Ledezma Vazquez:

Hi,

My wife and I both have a W2 job and purchased a vacation home in big bear, CA in late 2022 that is being used as a short term rental. I am looking for a CPA that knows the STR Loophole and can help us with offsetting our W2 income and is taking new clients. The CPA I been using isn't versed in real estate and isn't aware of the STR loophole.

i also wanted to consult with a CPA, If it's worth doing a cost segregation for our situation and what are the tax implications.

Thanks!

Hi Oscar,

RE savvy CPAs are not the norm. Doing thousands and thousands of cost segregation studies puts me in contact with these CPAs on a regular basis. Also, keep in mind that most CPAs do their work electronically now. This means that they do not have to be in your state to do a good job for you. They do need to be up-to-date on the nuances of your state taxes.

Short-Term (STR) are a unique niche of the tax laws and require more knowledge. This is not what I would call a "loop-hole" since it is in the tax code as a viable and legal depreciation method. It is just different. Most depreciation schedules are not being done correctly for STR and not catching the tax benefits available or are taking too much straight-line depreciation by putting them on 27.5 year schedules instead of 39 year depreciation schedules.

There are only two ways to off-set your W2 income with STRs. First, you have to actively participate ("material participation") in the management of the property more than any other entity/person, and at least 100 hours/per year. Second, you or your spouse have to qualify as a Real Estate Professional. If you spend more than 2 weeks or 10% of the actual rented days in the property for your personal use, there are additional issues to address with your CPA. If your "rental property" is in another state and you are claiming you materially participate in the management of this property, you may have difficulty convincing the IRS.

To maximize your tax benefits and cash-flow, it is recommended that you do a cost segregation study the first year you purchase the property. Some investors get cost seg estimates on their potential purchases before actually purchasing because the benefits can be very different even if the properties look the same or are at the same price.

@Keith Mintz  Don't forget that with a 1031 exchange into a residential rental or commercial property that a cost segregation study can also help you increase your tax benefits and cash-flow. The increase in basis is a candidate for a good engineering-based cost segregation study. Let me know if you need more information. 

@Artur A.   I have traveled all over Mexico and one of the places you did not mention was San Miguel de Allende. Large expat community and popular with tourists. I have traveled there and have friends there. 

@Justin Crump  You need a good cost segregation company as part of your team to maximize your tax benefits and cash-flow. I am here in Colorado as well. Let's talk. 

@James Likis  Getting a no-cost cost segregation estimate is your best bet on every property you purchase as soon as you purchase it or even when you are considering a purchase. Then, you have the information you need to make good decisions. Be sure you are using an experienced company that provides engineering-based studies which require site surveys inside and outside the building. 

The bonus depreciation is based on the year of purchase no matter when you do the cost segregation study. The downside of waiting is that you don't have that extra cash-flow up-front. You will be depreciating 1/27th or 1/39th of the purchase price minus land value each year under standard straight-line depreciation.

Once you become a real estate professional, your properties become active investments and the paper losses can be used against other active income. All depreciation resulting from a cost segregation study can be rolled forward to future years until you have used all of it. The highest benefit from a cost seg study usually comes when your income is at its highest as well. Remember, passive losses, when created by cost seg studies can be used against other passive gains.

BTW, don't expect your CPA/tax professional to know a lot about cost segregation. It is a complex special niche that applies to commercial properties owned or leased and residential rentals. The RE savvy CPAs are few and far between...even those know better than to take the risk themselves and refer you to a trusted source or expect you to find a reputable cost seg firm yourself.That is why getting your information on BP is so valuable. Let me know if I can be of help. 

Quote from @Jon Fletcher:

Does anyone have an example Excel Sheet for a bonus depreciation schedule? Just something simple, for example, $1MM purchase, with 10% allocated to the land value. The remaining $900k split between 5-Year (15%), 7-Year (5%), and 39-Year (80%). It would be helpful to have a spreadsheet to play around with. 

Hi Jon, as a cost segregation specialist, I wish there was a simple formula. First, I will say that it is a rare property that has a 10% land value. I have seen them range from 20% to 90% of the purchase price. Why try to guess when all you have to do is get a no-cost, no obligation estimate. You will usually have your answer on a specific property you own or are considering in about 1-3 days and save yourself all the brain damage. Cost segregation is a complex process when it is done correctly and with the least risk of audit. Every property is unique.

@Travis Tinnes  I am also in the Denver Metro area but help owners of investment properties all over the country. @Ben Einspahr gave you some great information about the availability of STR properties here. I would add to that the fact that STRs here are much more accepted in the resort areas. Nevertheless, you will find the purchase prices are high. Cost segregation can be a help, especially with the bonuses available, but you want to make sure the numbers are right. Since land values tend to be higher in the resort areas, that can have a negative effect on tax benefits. A lot of my clients ask for no-cost estimates before they make a purchase to help with the decision-making process.