All Forum Posts by: Bonnie Griffin Kaake

@Franky Davis  I am curious, you mentioned leveraging cost segregation and doing 1031 exchanges. Have you considered doing cost segregation after you did the exchanges? Have you looked back at your relinquished properties or those you have owned for a while to get the benefits of expensing some items that were previously capitalized? This can be a huge benefit you are overlooking. 

Quote from @James Palassis:

My wife and I are about 3 years out from retirement. Both kids will be out of the house and we are looking to downsize. We have identified one of our rental properties to be our primary residence when we do this. We have several renovations planned (build 2-car garage, install solar, new kitchen and bathrooms). I'm looking to optimize our tax exposure. Would it be advantageous to perform these renovations while the unit is still a rental? Or does it even make a difference on whether renovations occur when it's a rental or when it is our primary residence?

We are anticipating the expense of these renovations to be in the neighborhood of $100-$125K. 

Hi James, What you are planning on doing will make the property more rentable and allow you to raise the rent. Therefore, if you have not done a cost segregation study yet, you should do one prior to the renovations and prior to your occupancy. Actually, the sooner the better. There are many questions to be considered in the process of making a good decision in your situation. Waiting will NOT be in your best interest.   

@Richard Unsworth  If you anticipate that your income will significantly increase as well as your tax rate next year, it would be in your best interest to wait to do the studies. On the other hand, you could do one or both properties this year and roll forward any unused tax benefits each year until exhausted. Another consideration for you is that if the cost seg study is not done in the year of purchase, it will cost you more in following years because you will need a 3115 Change in Accounting Form done to change from straight-line depreciation to accelerated depreciation. 

BTW, be aware that a cost seg study and bonuses are based on the year of purchase and occupancy as a rental, not the date of doing the study. Therefore, if you purchased with occupancy a rental property anytime from Sept. 2017 to Dec. 31, 2022 and did the study later, you would still qualify for 100% depreciation when filing your taxes. There were bonuses available prior to the 100% bonus and there are bonuses available on properties purchased after 2022 as well...just not 100%.

Quote from @Jerome Skinner:

Hey all! After listening to the last episode about bonus depreciation, it left me thinking about my home I recently converted form primary to rental. In the episode it was said that bonus depreciation had to be taken in the 1st year, but am I able to take it in the 1st year of conversion from primary to longterm rental property? Or does it have to be the 1st year of purchase?

Jerome, your situation is different than the "normal" advice. Your depreciation will be based on your original purchase price and the date you began listing it for rent/its "occupancy date". Bonus depreciation does not have to be taken in the first year of ownership or occupancy. Each year you wait to do the cost segregation lowers the benefit based on how many years you have already depreciated it using a straight-line method. AND, you will incur a cost for a Change of Accounting form 3115 to change from straight-line to accelerated depreciation. On the other hand, if your income is going to go up significantly in the next year, wait. Bonus depreciation is based on the year of occupancy, not the purchase date unless they are the same. 

@Jon Abbott  With the holidays upon us, it is not likely you will close on a property before the end of the year and have it ready for a renter and begin advertising. Have you considered looking for a property that has a renter in it now so that you could have an occupied property at closing? If so, you could get that cost segregation study done for 2022's taxes even if you had to extend your tax filing. It is best to make a good decision rather than a hasty one and regret it later. 

@Rafael Ramon  Single family homes and duplexes can have great tax and cash-flow benefits. What you need is a good no-cost estimate to determine if a study is worth doing based on your specific tax situation. The best Return On Investments/ROIs come to those at a higher tax rate and higher building value versus land value. Get the estimate from a well experienced company doing "quality" studies. Then,you and your CPA/tax professional make the best decision from that point. 

Quote from @Kevin Kittilsen:

I recently listed to the podcast on cost segregation study/ bonus depreciation. I had a significant gain on an investment in 2022 that I recently took a payout on. With that said, I will owe a significant amount of taxes on this gain. Wondering what the feasibility to purchase a property (still in 2022) and complete a cost segregation study to come up with bonus depreciation to offset my gains on another deal. Is the depreciation typically based around the purchase year of the home? Thanks in advance!

Hi Kevin, Yes, among other things, the purchase date of the property and the occupancy date are key to when that bonus applies. It is not likely that you could purchase the property and close on it yet in 2022 AND get an occupant or list it for rent. Bonus depreciation is great at 100% but next year when it drops to 80% is not so bad either. In 2023 you will get more than 80% because the other 20% will be distributed to you in 5 or 15 years. I realize this is not likely to help your big gain for 2022. Keep asking these great questions. If you have a question it is likely others have the same or a similar question as well and just not spoken up yet. 

Quote from @Greg Heden:

I am looking at a pretty big tax bill FYE 2022 and really could use some extra depreciation.  Open to acquiring some more investment property,  but unlikely before end of year.   Can I or does it make financial sense to do a cost segregation study on the commercial office buildings that I have owned for 15-17 years? Appreciate any direction on this.  

It may. It depends a lot on how much remodeling and repair you have done over the years. The best way to find out is to send your latest depreciation schedule to a good cost segregation company for a no-cost estimate. And, do you plan to keep those office buildings for at least 2-3 years or do you have plans to sell or 1031 them into new properties? There are too many unanswered questions to give you definite answer. If you have done a lot of repairs and remodeling over the years, you may be surprised at how much was capitalized in the past that could actually be expensed off that depreciation schedule as well. 

@Jeff Costa   I am curious...why does your tax professional need fair market value? The value of each item is based on the condition of the item/component and what you paid for the property minus land. As @Julio Gonzalez mentioned above, this is a very complex process and mathematically intense to be done right. And, it does require a lot of documentation. Audits are not cheap. The cost of a good "quality" cost seg study has come down considerably in the last few years. 

@Prashant Bagri  Cheap is never the best. What do you think the cost of an audit will be? The best study is an engineering-based study. It requires an engineer, an expert in construction and an on-site visit (inside and out). This is a complex process, even CPAs very rarely even try it and don't have the time to do it or knowledge base of an engineer or construction expert. They also don't like the added liability or doing the 3115 forms for properties that have had one tax filing already. If it is a very small property and you don't mind the risk, go for it.