All Forum Posts by: Bonnie Griffin Kaake

@Michael Bandur There are opportunities and will be opportunities in both STR and MTR (MTRs are treated like long-term rentals). There are more complexities with the STRs and many, if not most, CPAs/tax professionals are not up-to-date. Often overlooked is that a STR must be depreciated over 39 years, not 27.5. And, if you switch from a STR to a LTR or the other way around, your CPA/tax professional will need to do a 3115 Change of Accounting form. There are other challenging areas with tax filings on STRs that could cause you to pay more in taxes than you need to pay.

Quote from @Ross Alcorn:

I'm looking for some advice around cost segregation.

I purchased a townhome in 2019 that has now been an LTR for two years. I purchased a separate townhome in 2021 that I am currently house hacking in and plan to turn into a rental property in the future. I purchased both of these homes as new construction. I plan to hold these properties another 5-10 years as of right now. My question is does it make sense to do two separate cost segregations for these town homes?

When tax planning with my CPA earlier this year I asked the question around what best practices are his real estate investor clients using for cost segregation and does it make sense for me to?

I was told it doesn't make sense usually to do a cost seg if the purchase price of a home isn't $1 million or above since they are fairly expensive. 

My goal with potentially doing a cost segregation is savings on taxes in the short term to acquire more properties over the next few years. 

Hi Ross, I teach CPA's continuing education classes. Too many over the years have admitted to not recommending cost segregation studies because they thought they cost too much, hate doing 3115s on older properties, or simply don't know how to discuss the advantages of cost segregation with their clients. Admittedly, it is so much easier for a tax professional to simply do straight-line depreciation. Even the American Institute of CPAs (AICPA) and the Journal of Accountancy recommend doing cost segregation studies. Quality Engineering-Based Cost Segregation Studies can be cost effective on properties with purchase prices of about $200K, including single family rental homes and condos anywhere in the country and even the US Territories. 

As a result of this reluctance by tax professionals to recommend doing cost seg studies, many investors simply upgrade their CPAs/tax professionals to those who are more up-to-date and RE savvy and work with quality cost segregation companies and consultants in this RE niche to reduce your risk of audit.  A good RE/cost segregation consultant can maximize your tax benefits and increase your cash-flow to leverage what you have. 

@Brad Milligan  As a passive investor in a syndication, you can only use the cost segregation tax benefits against the income from that passive investment. Contact a RE knowledgeable CPA for guidance. And, consider the fact that most syndications are held for about 5 years and then sold. If they take accelerated depreciation there will be recapture...some can be mitigated but not all. 

@Pierre E.  I also recommend getting a cost segregation study done before making renovations if possible. Nevertheless, if the property has not been occupied you will not be able to do the cost segregation until it is occupied. Therefore, I recommend that you do what you have to do in the first year to get it occupied and then do the major renovation in the second year. Of course, if it cannot be occupied until it is renovated, that is a different story and you can do the cost segregation study once it has been renovated and ready for occupancy (listed for rent). I know it sounds confusing but that is why we experts in cost segregation and tax benefits for investors are here to help.  

By the way, the most experienced cost segregation companies and those who do quality studies (engineering-based) do studies anywhere in the USA and are not likely to be "local". 

@Basit Siddiqi I agree with you, there is a lot of misinformation in this post. We see a lot of depreciation schedules and the majority of STR are being done incorrectly by CPAs and other tax professionals. The majority of these STRs, whether passive or active, need to be done on schedule E. NOT on Schedule C. All of them must be depreciated over 39 years, not 27.5. 

Quote from @Anna Antipkina:

Hi all! Great info here. Thank you for sharing, first of all. For some background....I'm currently working with my CPA to setup my STR that I manage myself (I have a cleaner and landscaper aside from me). I acquired it in 2022 so this is the first time I'm filing taxes on it. We're setting it up on Sch C and from what he told me, if I set it up on Sch C, I have to stick with Sch C and can't bounce back to E. 2022 shows a loss as that is the year it was setup. His warning to me is that once it starts to turn a profit, which most STRs do, I will have to pay Uncle Sam quite a bit. I'm ok with that. Running a business comes with paying taxes and I will work with my CPA to write-off/depreciate whatever I legally can as a business owner.

I see a bunch of discussion around "substantial services". Does providing complementally k-cups/teas, popcorn, spices, toiletry essentials (toothbrushes, floss, bath wash, shampoo, conditioner, soap, paper products, makeup remover, laundry detergent, firewood with firestarters for the fireplace and firepit constitute as substantial services? We are also looking to start providing complimentary maple syrup ( VT ). Does that also equal as substantial?

Thank you in advance!

Hi Anna, Unfortunately, this is a common misunderstanding by most CPAs and tax professionals. Schedule E is what your tax professional will generally use and should be using. htps://www.irs.gov/pub/irs-wd/2021510... (see pages 3 & 4). Schedule C is needed ONLY if the owner provides significant services for the occupants' convenience, other than the space rental and to maintain the property. Examples of these significant services (regular cleaning, changing linen, maid service, transportation, tours, etc.) and are described in Treas. Reg. Sec. 1.1402(a)-4(c)(2). See PDF link above. 

If your CPA/tax professional uses Schedule C instead, you will end up owing more in taxes. The items you listed are not considered "substantial services". 

Quote from @Sergey A. Petrov:

Very much trust my CPA of many years but had to go look at our returns! Our STRs are not on Schedule C so I suppose we are out of trouble. Ours are passive, professionally managed by someone else and we are fully hands off…

 Maybe, as long as your CPA has depreciated the STRs, whether they are passive or active, over 39 years, NOT 27.5. 

STRs can be a bit tricky from the tax filing perspective. Most STR depreciation schedules are not being done correctly and can be low-hanging fruit for the IRS. Let me know if you are interested in getting a recently published Q&A document for CPAs and investors. No cost, we believe an informed investor and informed tax professionals are important in this fast growing area of RE investments. The IRS' Audit Guide for STRs is not the last word. There has been much case law that followed that document.

Quote from @Greg Cook:

We are looking to have a cost segregation on our newly purchased STR. Does anyone have any recommendations for companies they have used?

I can get you as many references as you would like. Let's talk and get you a pre-analysis. You will not be disappointed. 

@Wendy Stclair  You are wise to get more than one estimate and realize it is not always the cheapest study that should get your business. The cost of an audit is not inexpensive. Look for value and be sure you are getting an engineering-based study, not a "desktop" study or "rule of thumb" study. Of course, if you like spending time with auditors, go for low cost. ;-)