All Forum Posts by: Mohamed Youssef

@John Underwood 

My post is not an explanation of the cost segregation, it's about the timing of performing the study.

But yes, cost segregation is a way to accelerate depreciation and use the money saved to invest in the next property and so on. The taxes will be paid regardless when you sell the property, but some investors defer it further by doing 1031 exchange or to create generational wealth.

Cost segregation can dramatically accelerate depreciation and tax benefits, but I've seen investors waste money on studies that delivered minimal value. Let me share what I've learned about when they truly make sense.

The clearest wins come with:
- Properties purchased (not inherited) within the last 5 years
- Commercial or larger multifamily with substantial improvements
- Assets you plan to hold for at least 3-5 years
- Purchase prices exceeding $1 million
- Properties with significant non-structural components

I recently reviewed a case where an investor spent $4,000 on a cost segregation study for a $950,000 duplex constructed in 1978. The resulting first-year tax benefit was approximately $8,200 due to passive loss suspension rules. Not worth the cost of the study since it did not accelerate the regular 27.5-year depreciation.

By contrast, another investor's $12,000 study on a recently renovated $3.8M office building yielded first-year additional deductions worth over $120,000 in tax benefits - a clear home run.

The quality of the engineering team matters tremendously. The best studies involve on-site inspection and photographic documentation rather than just plan reviews and assumptions.

Cost segregation can dramatically accelerate depreciation and tax benefits, but I've seen investors waste money on studies that delivered minimal value. Let me share what I've learned about when they truly make sense.

The clearest wins come with:
- Properties purchased (not inherited) within the last 5 years
- Commercial or larger multifamily with substantial improvements
- Assets you plan to hold for at least 3-5 years
- Purchase prices exceeding $1 million
- Properties with significant non-structural components

I recently reviewed a case where an investor spent $4,000 on a cost segregation study for a $950,000 duplex constructed in 1978. The resulting first-year tax benefit was approximately $8,200 due to passive loss suspension rules. Not worth the cost of the study since it did not accelerate the regular 27.5-year depreciation.

By contrast, another investor's $12,000 study on a recently renovated $3.8M office building yielded first-year additional deductions worth over $120,000 in tax benefits - a clear home run.

The quality of the engineering team matters tremendously. The best studies involve on-site inspection and photographic documentation rather than just plan reviews and assumptions.

Cost segregation can dramatically accelerate depreciation and tax benefits, but I've seen investors waste money on studies that delivered minimal value. Let me share what I've learned about when they truly make sense.

The clearest wins come with:
- Properties purchased (not inherited) within the last 5 years
- Commercial or larger multifamily with substantial improvements
- Assets you plan to hold for at least 3-5 years
- Purchase prices exceeding $1 million
- Properties with significant non-structural components

I recently reviewed a case where an investor spent $4,000 on a cost segregation study for a $950,000 duplex constructed in 1978. The resulting first-year tax benefit was approximately $8,200 due to passive loss suspension rules. Not worth the cost of the study since it did not accelerate the regular 27.5-year depreciation.

By contrast, another investor's $12,000 study on a recently renovated $3.8M office building yielded first-year additional deductions worth over $120,000 in tax benefits - a clear home run.

The quality of the engineering team matters tremendously. The best studies involve on-site inspection and photographic documentation rather than just plan reviews and assumptions.

@Roland VanLoan

I agree with @Katie Balatbat answer above. CA's definition of "doing business" for foreign entities includes maintaining a physical office, employing staff, or meeting the economic nexus, also, broadly asserted that any LLC with members, managers or agents conducting activities in CA on behalf of the LLC, would trigger registration requirements.

@Jack Pasmore

I'm glad to hear you found some useful info in the post. Local RE networking events could be a great place to meet other investors or operators. I always hear people discussing how they met their deal partners at networking events.

Many investors ask me when and how to make the jump from single-family to multi-family properties.

The transition isn't just about property size; it's about shifting your entire approach.

I've observed that successful transitions typically happen when investors have:
- Stabilized 5-7 single-family rentals with systems in place
- Built relationships with at least 2-3 reliable lenders
- Established a maintenance crew that can handle larger projects
- Accumulated at least 6 months of operating expenses as reserves

I asked a client of mine who owns a 420-unit multi-family in Nevada how he started his RE investment journey, and he told me that he started with a duplex in Buena Park, CA, 40 years ago and used the 1031 exchange to grow his portfolio to 420 units, never paid taxes on sale of any of his properties.

The most seamless path I've seen starts with small multi-family (5-10 units) rather than jumping straight to 50+ units. This intermediate step allows you to develop the required systems while the consequences of mistakes remain manageable.

One strategy that worked well for several investors I know: partner on your first larger deal with someone who already manages multi-family. You bring the capital connection, they bring the operational expertise, and then you learn while doing.

A warning from experience: don't underestimate the difference in tenant management. Single-family tenants often treat properties as their own, while multi-family requires more active management and community building.

Are you planning to scale up? What's your biggest concern about making the transition to larger properties?

@Andy Sabisch Agree. I've been seeing less and less investors going into flipping.

@Michael Baum you are right, I'm just used to that term since I use it a lot with my tax clients who do not qualify for the real estate professional status. But it's the law.

One of my clients recently asked about using the Short-Term Rental loophole for a property in a foreign country (Mexico). While short-term rentals (Airbnb, Vrbo, etc.) in the U.S. can offer tax advantages, the rules change when the property is outside the country. Here are the key tax implications we discussed:- 

- Depreciation takes longer: Foreign rental properties must use the Alternative Depreciation System (ADS), which means a 30-year depreciation schedule instead of 27.5 years for U.S. properties. If the IRS classifies the property as nonresidential, it could be 40 years. This results in smaller annual deductions.

- No bonus depreciation: Unlike U.S. rentals, foreign properties do not qualify for bonus depreciation. Any furniture, appliances, or renovations must be depreciated over longer ADS schedules rather than being deducted upfront.

- Cost segregation has limited benefits: While cost segregation can still be used to separate personal property items like furniture and fixtures, ADS rules apply. This means depreciation schedules are longer than they would be for a U.S. property, so the tax benefits aren’t as immediate.

- Material participation rules still apply: If you meet the IRS material participation tests, losses from a short-term rental can be treated as nonpassive, allowing them to offset W-2 or business income. The challenge with a foreign rental is proving active involvement remotely, especially if a property manager is handling day-to-day operations. Keeping detailed records is key but convincing the IRS will be a challenge.

- Foreign tax credit can help: If rental income is taxed in the country where the property is located, the U.S. offers a foreign tax credit to avoid double taxation. However, the credit is limited to the amount of U.S. tax owed on that same income, so it doesn’t always provide full relief.

While short-term rental in a foreign country could be a great investment and cash flow strategy, investors need to be aware of the limitations when it comes to tax planning.