All Forum Posts by: Bonnie Griffin Kaake

@Jack Anderson  You could not have done a cost segregation study before you did the renovations because you did not appear to have had occupancy until mid-2022. The good news is that you will qualify for 100% Bonus Depreciation. Get a no-cost pre-analysis for a cost segregation study now. Then, you can decide how it will impact your personal tax situation. You are well within the viability for a study. I can get you a pre-analysis in a day or two or answer any of your questions. Let me know if I can be of service.  

@Nancy Bachety  A cost seg does not "only delay tax day". Cash Flow is the most valuable part of any business and getting the use of the cash that you don't have to leave with the Treasury Department is like getting a free loan from the government. It is about the time value of money. BTW, the structure of the building goes on to depreciate for the 27.5 or 39 years of ownership after the cost segregation study is completed. It is a rare investor that does not benefit with a cost segregation study.

Do you really think that carpet is worth the same in 5 years when you are going to sell as it was worth when you bought the property and did the study? It may only be worth scrap value. Cost seg is a no-brainer unless you are going to sell the property in a year or two, you don't pay taxes, or have purchased the property for less than $200K.

@Roger Pearce Be careful. The IRS will be looking at intent. If you do STR for a month in '23 and then try to change to LTR in '24, you will have to do a 3115 481a Change of Accounting form. The IRS may view this as you were simply trying to game the system to get the bonus in '23. It is also going to cost you more to get that 3115 form completed to change from 39 year depreciation to 27.5. It may be less brain damage and less costly to simply make it a long term rental for 2023.

Quote from @Mark H. Porter:

I’ve done quite a few costsegs and got me it has only made sense if the property is over $2M.

When you say "I've done quite a few costsegs" what do you mean? CSSI is the largest cost segregation company in the country and rarely does it not make sense. We do engineering-based studies at very competitive prices for properties with purchase prices as low as $200K with success. Maybe, you are trying to do these complex studies yourself or having your tax pro take a few items for you. If so, you are leaving a LOT of money on the table and likely incurring unnecessary risk of audit.

Quote from @Jonathan Billing:

That makes sense. He would be paying all cash when doing a 1031 out here. We would then be renting it from him at market value rents. Hoping to purchase it from him later down the road when he does another 1031 exchange on the property selling it to us to buy a different investment property. 

The idea would be that he uses his cash from his sale to 1031 in our area with plans to rent to us and then sell to us later doing another 1031 of his own when he goes to sell it to us. Is that possible?

Yes, Jonathan, that is how he can leverage the 1031 to his benefit. He should also consider getting an estimate on cost segregation on the purchase. Even if he paid all cash, it is a rental property and he can take advantage of the tax benefit as well.

@Jonathan Billing  You have several different challenges and opportunities depending on your answers.

1. Is the house your F-I-L currently owns a rental property? Or is it his personal residence?

2. If he is doing a 1031 exchange into the home in WA and then rents it to you, he now has a continuing or new rental property. Depending on his age, if he is planning on willing the house to you, he can do a cost segregation study on the rental property for the difference between his relinquished property basis and the new one. In this situation, when he passes, there is no recapture for him (he could use that "free loan/cash-flow from the IRS" in whatever way he wants). You would inherit the property at the current market value. If that property on transfer to you is an investment rental property for you, you could do another cost segregation study to expedite your depreciation.

3. If you buy the property from him and he had previously done a 1031 exchange on it as a rental property, he would owe taxes upon sale. Unless, he did another 1031 exchange into a new rental property.

4. If your F-I-L did a rent-to-own, it is still a rental property for him and it is not a owned property until you have paid off the property or inherited it.

I am not a tax attorney or CPA. I am an expert in cost segregation and what happens when a property is sold, 1031 exchanges or inherited. If you need additional information, I can help or put you in touch with a good tax attorney and/or CPA. You need to know your options and what is best for your family's tax situation. 

@Michael Plaks  This is one of the better posts you have put up on BP. Good job!

@Kristen Haynes What you are describing is no different and may not be as good as a true engineering based cost segregation study. The depreciation timeline on a multi-family or rental home is 27.5 years. If that same home or multi-family is a STR it has a depreciation schedule of 39 years, not 29. Your best best is to ask many questions before engaging with a company. Many companies call themselves engineering-based but only do desk-top studies. A quality engineering-based study requires an on-site inspection inside and out. Also, read the fine print. Are they willing to cover you at no additional cost if you are EVER audited? 

All cost segregation companies I am aware of, large or small, offer no-cost estimates for doing these studies. Just be sure you know what you are getting. It may be best to get an estimate BEFORE you sit down with your CPA/tax professional. Keep in mind, they are very busy and short-handed. It is too easy for them to simply do straight-line depreciation which is not usually in your best interests. 

 @Rachel Anderson   The first place you need to start is by getting a no-cost pre-analysis on your property for cost segregation. Then, talk to a real estate savvy CPA who can outline the pros and cons specific to your situation of going forward. It does not cost as much as you might think and the recapture that some use as scare tactics can also be greatly mitigated upon sale.

Then again, if you plan on selling the property within a year or two, skip doing a cost seg study or even getting an estimate. Think of cost segregation as a free loan from the IRS that you don't even have to pay it all back. It is about the time value of money! It is about leveraging the extra cash you can get today to earn more than you would have by letting the Treasury Department hang onto it for the next 39 years in the case of a STR.

Quote from @Michael Rendon:

Hello all, I was considering a cost seg but my CPA is telling me that is it not worth it given the cost of my property. This seems out of line with what I see on social media so I was hoping to get some other folks thoughts. Below are some specific details... Thanks in advance!

I have a home I purchased in North Georgia in 2/2021. I acquired the property with an FHA loan and it was my primary for a year; purchase price was $350k. I lived in it for a year and since then it has been operating as a STR. I had it appraised earlier this year and the appraisal came back at $595k. I really need extra funds for another primary in the new year, so I am hoping that my CPA may just not be as educated on this topic, although it is worth noting the firm I use does focus on real estate investors so I was a bit surprised when he said a cost seg was not worth it.

Hi Michael, There are too many variables to just flat out say a cost segregation study is not worth it. Sadly, we are finding the majority of CPAs/tax professionals are making mistakes on STRs that can come back and bite. You need a no-cost pre-analysis of your property FIRST and then, sit down with your tax pro and decide how it is going to fit your tax situation. The studies are not that expensive if you decide to go ahead with the study. We get the estimates out in about 1-3 days and the completed studies right now only take about 4 weeks if you decide to proceed.

Since you started renting the property in 2022, you are entitled to 100% Bonus Depreciation. That is significant and since STRs are usually good cash-flowing entities, you may do very well with a study. If you can't use it all, you can roll the balance forward to future years. Don't you have better places to reinvest that cash-flow than letting it sit for 39 years with the Treasury Department?