All Forum Posts by: Bonnie Griffin Kaake

Quote from @Christian D.:

We are filing our taxes for an multifamily property we purchased in October 2022. Regarding depreciation, I wanted to confirm if bonus depreciation (100% allowable for 2022) is only determined by completing a cost segregation analysis or is there a way to claim bonus depreciation on a property without conducting a formal cost segregation?

Christian, the cost of an engineering based cost segregation study is well worth it. It will usually get you about 40-50% more than what a CPA can do for you. Most will not even offer, don't have the time, or the skill set, don't want the risk and I don't know one that likes doing the 3115 481a forms required for Changing the Method of Accounting when a depreciation schedules has been done straight-line previously. And, depending on what company you choose to do the study, you greatly reduce your risk of audit.

I highly recommend you get an engineering based study that offers you at no extra cost audit protection for as long as you own the property and as long as the IRS has the right to audit that depreciation schedule. This is not the place to cut corners. A good study pays for itself many times over in tax benefits and extra cash flow so you can leverage that to make more money.

Quote from @Alex U.:

IF a property has been purchased a couple of years ago, and a regular depreciation was taken for 1 yeaer, ( ie. 27.5 year depreciation), in year 2, can you do a cost segragation, and take the bonus depreciation in the 2nd year?

Yes, you can do a cost segregation study in years other than the first year of ownership. Because it requires a 3115 481a Change of Accounting form as others have pointed out, it will cost you more than it would to do the study in the first year. Don't let that deter you from asking for a no cost estimate. Another point that I didn't see mentioned is that the amount of Bonus Depreciation you get will be based on the first year of occupancy, not the year you get the study done.

Quote from @Jerome Skinner:

Thank you all for you responses! This answers my question and more. To answer your question Julio, it was that episode and I placed my rental into service this year. And Bonnie, I just bought it in 2021, so the benefit has only been lowered by 1 year. I'm lacking funds to continue my real estate investing journey and this seems like a perfect way to get a tax break sooner to help with that.

Hi Jerome, If you started renting the property in 2021 when you purchased it, that is correct. Depreciation starts, usually with straight-line depreciation, the first year you start using the property as a rental business. CPAs/tax professionals can depreciate some items but do not do engineering based cost segregation studies which require an engineer, an expert in construction, and a RE savvy CPA. If you are lacking funds to continue your real estate journey, what cost segregation can do for you is give you a relief from paying taxes you would have normally had to pay for a while. The IRS is not going to send you a check.

It is in your best interests to get a no cost estimate from a reputable cost segregation company. Then you can decide if the benefit fits your tax situation.

Quote from @Heather Hall:

Hi Bonnie and thanks for the info!  So for 2022, bonus depreciation is taken for the main home and ONLY taken in 2022, correct?

Meaning, material participation is only critical for 2022?  

If the property manager put in more time than I did, in 2023, and I do not meet “material participation” it does not matter for purposes of bonus depreciation . . . ?

Heather, that is correct that in 2023, if you do not meet the "material participation" requirement, it has no effect on bonus depreciation but it does make the property passive for 2023. This means that you cannot use any left over benefits against W2 income or other active active income. You can use any benefits rolled forward toward your passive income. The depreciation on the structure will continue for the 39 years of ownership regardless.

Another consideration you might want to know is that if you did the cost segregation study for 2023  instead of 2022, you would not need to amend the 2022 taxes you already filed. The cost segregation study will bring your depreciation schedule up-to-date with the 3115 481a Change of Accounting Form which we prepare for you and your CPA/tax pro. 

Quote from @Heather Hall:

Hi Bonnie and thanks for the info!  So for 2022, bonus depreciation is taken for the main home and ONLY taken in 2022, correct?

Meaning, material participation is only critical for 2022?  

If the property manager put in more time than I did, in 2023, and I do not meet “material participation” it does not matter for purposes of bonus depreciation . . . ?

@Heather Hall I forgot to mention that I have known some CPAs who have used a short period of rental, as you had with your ADU, as income rather than depreciating the property. In that situation, you would not have a depreciation schedule for that time.

Your main house on the other hand is eligible for 100% Bonus depreciation. In addition, since you are materially participating in it's management more than anyone else, it is an active rather than passive investment. Win-Win!

@Heather Hall  In order to give you the best and most accurate answers, I would need to see the Federal Depreciation Schedule created by CPA/tax professional. Your CPA/tax professional has a copy and may have given you a copy with your last tax filing. What I can tell you follows:

1. The ADU was a LTR during those 90 days (1/4 or the year). If the purchase price that is assigned to the ADU is high enough, it could have had cost segregation and Bonus benefits on its own. The fact that you stopped renting it in Oct 2021, may have negated those benefits and your Federal Tax Depreciation Schedule will be telling.

2. There is no depreciation available while your family is living rent free in the ADU and/or you are living in the main house.

3. In June '22 when you move out of the main house and begin renovating the main house, the $75K in renovations will be added to y.our basis in the home or expensed depending on what was done and the cost involved.

4. With a cost segregation study, the main house is eligible for Bonus Depreciation on November 2022 at 100%. If you have filed your 2022 taxes with straight-line depreciation, you will need a 3115 481a Change of Accounting Form done to change from straight-line depreciation to accelerated depreciation.

With the Federal Depreciation Schedule and answers to a few questions, I can get you a no cost pretty accurate pre-analysis that you and your tax pro can review and decide if the benefits fit your specific tax situation. Let me know if you have additional questions and/or you would like a pre-analysis/estimate. 

@Frank Hardy You have some terrific options for tax benefits and extra cash flow that is ONLY available to you in the first year of purchase. This is in addition to cost segregation. We should talk. 

Quote from @Alex Jacobson:

I have a client who would like to buy a multi-family and STR property in Colorado and apply tax segregation rules before the end of year.

But they are claiming that in order to  that, the property must be vacant? Is that the case?

Thank you! 

Boulder REALTOR®

No, Alex, quite the opposite. The property must have occupancy or being advertised as available for occupancy to be able to do a cost segregation study. I am in Colorado and can help you close that deal as the buyer's hero. There are special considerations for STR that you and the buyer need to know. I would like to help. Chris Lopez is a broker in CO as well and is very knowledgeable about this.

@Frank Hardy Are you talking about a mixed use building that will be part your office? If so, you may have more tax benefits than you realize. If you are occupying part of the property as your residence, that could be of less benefit. Get quotes for your purchase and a no cost estimate for cost segregation. There are too many unanswered questions to give you more advice.