All Forum Posts by: Bonnie Griffin Kaake

@Gabriel Litvack Cost segregation studies are not DIY projects unless you like spending time with IRS auditors. ;-)  The IRS' preferred methodology for a cost seg study is engineering-based. This requires someone experienced in engineering, construction and accounting. It also requires an on-site property review inside and outside by a professional. The difference in cost between a rule-of-thumb approach or "desk-top" study is simply not worth the risk and rarely gets you the same amount of tax benefits. 

@Jordan S. Do you realize that once you turn your residence into a rental, you are eligible for cost segregation which can get you about 6-8% of your original purchase price in additional cash-flow, taxes that you don't have to pay? It may be worth getting a no-cost pre-analysis to see if this option will give you the cash flow you need and allow you to keep your current lower interest rate. It may be worth checking out. Let me know if I can help or answer any questions.  

@Dimitra Manou This would be a great property for leveraging the benefits of cost segregation. You may have a minimum of $120K in taxes that you won't have to pay the first year. Sure beats depreciating over the 39 years required for a STR. There may be an investor out there that needs tax benefits AND an investment in a resort area.

@Account Closed Once you determine whether or not you can have a STR, you will have more decisions to make. If you can, you will be depreciating it over 39 years. If you change to a LTR or MTR, you will need your CPA/tax professional do a 3115 change of accounting form to switch it from STR to one of the other methods or vice versa. The biggest hurdle you need to overcome immediately is what can you do? As others have said, STR or MTR give you better cash-flow but may not be permitted.

@Michael Mukadi All residential, as Greg Scott said, EXCEPT short-term rentals, are depreciated over 27.5 years. STRs are all depreciated over 39 years just like a business. With few exceptions, they also get filed on schedule E, not schedule C. Condos, single family homes, and multi-families that are STRs must be depreciated over 39 years. This is just one more reason why STRs are so good for cost segregation studies right now. 

@Brian Davis STRs can be active investments if you can devote 100 hours per year in managing each property and more than any other entity. Making them active means that you can reduce the amount of taxes you pay on other income. If they are passive, meaning you cannot manage them yourself, then the benefits of cost segregation can be applied to the income you receive from the rental and thereby reduce your taxes owed on that property. 

There are some very specific regulations that apply to STRs and most CPAs/tax professionals are doing the depreciation schedules incorrectly at this point. I have written a paper for the Colorado Society of CPAs that they have published for their members. Let me know if you would like a copy.  

@Torrian Fulton An estimate for cost segregation is what you need at this point. There is no cost to get one for you within a day or two. The IRS' preferred methodology for a study is engineering-based. You are unlikely to ever hear from an auditor if you get an engineering-based study. The documentation is great, gives you the best ROI that is not going to trigger the IRS'. It may cost a little more but what will an audit cost you?

Once you have the estimate, you can discuss it with your CPA/tax professional and decide how it fits your specific tax situation. It is a rare property and owner that cannot use the study to their benefit. Here are a couple reasons not to get a study done: you pay no taxes or you are going to sell the property in a year or two. Also, if the purchase price on the property was less than $200K it may not be viable.

I am here to answer any additional questions you might have. How can I help?

@David Esslinger  @Scott E. Scott made some very good points. Another thought is to roll it into a 1031 for a larger property when you can. Then, hold onto the larger property and do a cost segregation study on it. You can expect to get about 6-8% in cash-flow/taxes you will not have to pay on the new property. You will have to hold the new property for about 2-3 years. If you simply sell the current property you will have taxes to pay that will bite into that 45-50K and realtor commissions. 

Would the area be a good one to develop the additional land?  Can you divide the land and sell part of it? How about restricting the rent to part of the property and fence off the pond as Elliott suggested? You have a lot of options to consider. 

@Anna Antipkina Michael Plaks is 100% correct. Your property goes on Schedule E. We are finding that about 90% of STR tax filing/depreciation schedules are being done incorrectly. This is low hanging fruit for the IRS. The paragraph below should help you and your tax professional, if you read it. I just finished a document for the state CPA society. They are posting it on their website because this has become a big and getting bigger issue with STR ownership increasing by 20% this year over last.

Schedule E is what your tax professional will generally use. htps://www.irs.gov/pub/irs-wd/2021510... (see pages 3 & 4). Schedule C is needed 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.

Contact me if you or your CPA/tax professional want the full document. 

 Excellent question, Rich. Select carefully. There is a wide spectrum of qualifications. Our company only hires degreed individuals and then spends an enormous amount of time training them before they are allowed to work with clients. Ongoingly, we have twice weekly meetings to keep us up-to-date. Nevertheless, some of us are more qualified than others. You should always ask questions of whoever you are considering or choosing to work with. Some companies only see their reps as salespeople. We are consultants. I am happy to let my clients and the CPAs/tax professionals I work with know my background. We have a huge team of professionals at our home office that are always at the ready to answer any questions I cannot answer. The IRS regulations are very complex in this area and need specialists to interpret them. I teach CPAs how to leverage the tax benefits available for their clients.