All Forum Posts by: Bill S.

@Elle Bindra 

Questions:

1. I am told that we could use Section 179 to deduct some of the expenses from the Airbnb property so long as we don't create a loss
2. I have a peripheral understanding of Bonus Depreciation - but looking for guidance on how this would work and what would both of these properties qualify for the deduction and at what amortization schedule [year 1 or longer]?

Yes, 179 deductions are very beneficial @Brian Poppleton and short term rentals are like hotels with a 39 year depreciation schedule, so they should fall into the commercial category for 179 expenses.

If you complete a cost seg study on both properties (one residential and 1 commercial), any short life items (less than 20 years) qualify for 100% bonus depreciation - if they were acquired after 9/28/2017. And with a fully engineered study, your CPA can then identify the items that can qualify for 179 expenses. With a properly prepared cost seg study with component level costs, you can also identify the rehab components for disposition/abandonment expenses. The expenses can be better than depreciation. You do not lose your depreciation either, even with 100% bonus (all short life items available in year 1), it still carries forward for the term of the depreciation (27.5 years residential, 39 years commercial/short term rental).

@Beville Nicholas Cashing out the IRA is not wise, I agree with the others. However, if you want truly want to use IRA money, talk to a CPA about doing a self directed IRA to move investments from stocks/mutual funds into your own real estate portfolio. You'll need someone to manage the reporting for you, there are a number of folks on BP who discuss or promote this option. Don't cash out your retirement and take the hit.

@Ben Waide you may want to speak to @Brandon Hall who is a real estate CPA. He gets all the nuances associated with passive investing, syndication's, cost segregation, TPRs, etc.

@Lucas Rowell Agee with the comments above. The capex and expenses are good to use before year-end if you need the tax benefits. It is also important to have had a cost seg report so you know the specific value of the components your are replacing, so that you can do accurate disposition and abandonment of assets (which is an expense item). The repairs may not have much to dispose of, just depends on what you do - if its just a fix or partial replacement.

An,

If you are about to sell, doing a cost segregation study is only needed for specific tax strategy. That should be discussed with your CPA and what you are trying to accomplish. If you are rolling the proceeds into a 1031, that will only allow you to segregate the "step-up" value above the 1031 funds.

Regarding on-line models, they have benefit if no asset detail is needed. They also tend to be conservative in benefit. It's important to understand how the model works, and what your goals for a cost seg study are. Scott is right, with no asset detail they will not stand up against an IRS audit - though there are plenty of 'so called' engineering studies that will not stand up very well either. Though for lower cost properties (under $1M), where a lot of improvements aren't needed, they are quick and easy and can give the CPA 5, 7, 15 and 27.5 numbers needed to file your taxes

www.DIYcostseg.com offers a fully modeled solution for under $500 on residential (1-4) properties that is completed in minutes. It also has a $195 "Audit Protection" option, which means if you go under audit, the firm will conduct a "fully engineered study" and defend you against an audit. Its essentially an insurance policy. So you are protected. Besides residential, DIY also covers all types of commercial properties for $1,295 with an improvement basis of under $1M. Though again, it will err to the conservative. That said, plenty of properties under $1M can be fully justified to order traditionally engineered cost segregation study. It all boils down to your needs and objectives. 

@Jake Baron, good question. Lance and Basit are both correct in the expenses you can take associated with the acquisition. To benefit from accelerated depreciation (beyond the 27.5 straight-line) you need to perform a cost segregation study on the property to identify assets with a appreciable life of 20 years or less. 

Here there are several cost seg study options, and the level of study (which impacts the fee) you request depends on numerous factors; your basis value of property, what are your improvement plans, what is your hold period, etc. This is where a professional cost seg firm can provide information and guidance. There is a wide perspective on the value of cost seg studies on this site, and when it makes sense to spend the money one one. Though many SF rentals or 2-4 multi-family properties are excellent candidates - again it depends on your objectives and specific tax needs.

Our firm like most others provide a Feasibility Analysis to help you and your CPA make an informed decision on what works best in your scenario. 

@Jason Graves. Both Scott and Yonah are correct. Most professional cost segregation firms (like ours and theirs) operate nationwide and send engineers on-site to identify, count, measure and document for property acquisitions. Providing complete asset detail allows you to easily dispose or abandon assets upon future renovations, repairs or maintenance. Be sure the firm you select provides the asset detail on straight-line property. Many don't, or just bundle the straight-line components together without details. Get a couple of quotes, and review the firms actual report.

@Andy C. A cost seg study today will not have a big impact on a 1031 Exchange in 5-10 years, its worth doing. The key is your initial cost basis/purchase and if you have planned improvements. Or unplanned repairs, that is where the asset management detail of a properly done engineered cost seg study will benefit you. Plus it will protect you in the event of an IRS audit. The Feasibility Analysis is where a cost seg firm evaluates your property to present tax and cash flow benefits - its really a proposal, though it does provide a NPV and the cash flow benefits. 

@Andy C. You should consider a cost segregation study if you have a 5-10 year hold. Though you also mentioned a 1031, does this transaction involve a 1031 Exchange? If so, cost seg is only good on the step up value - and there are other factors to consider. You should speak with a firm that provides an engineered study to provide a feasibility analysis on your property. There still seem to be some unanswered questions someone will need to know. We can help if you are interested.

@Chris Dengel Agree with the others, whoever is charging $15K for this is not working in your best interest. A fully engineered cost segregation report with complete asset detail should be half that cost. There are a number of charlatans out there claiming to be cost seg experts. We did a similar $600K+ multi-family project in KY recently with great results. Automated models work well on some properties, but do not provide the asset detail for future abandonment, disposition or retirement of assets.  Should an audit occur, you need the firm to stand behind and defend you by then delivering the asset detail to support the conclusions. Shop around.