Frequently Asked Questions

Cost Segregation itself is a process that essentially reverse-engineers a building on paper.  Once all property components have been identified, a cost value is assigned to each component.  The total of all the building pieces adds up to the purchase price. 

Once all of the components of your property are identified with their respective cost, the IRS has identified many of these components that are allowed to be depreciated in a much shorter class life. Without cost segregation, the entire property is depreciated using a 27.5 year straight-line method.  Generally, after cost segregation is applied, 20 – 40% of the building value can now be depreciated over 5, 7 or 15 years.

Once all of your building components are assigned a cost and put in their life buckets of 5-, 7-, 15- or 27.5 years, the IRS allows us to accelerate the expensing of the shorter life assets in the 5-, 7-, and 15-year buckets.  This is what is referred to as “bonus depreciation”.  The mechanics on how much is accelerated with bonus depreciation varies each tax year, just like tax rates change annually. For example, in 2024, 60% of the costs in these class lives can be immediately expensed. The remaining 40% is depreciated over the respective lives assigned.

Depreciable lives and bonus depreciation are functions of federal income tax.  The majority of your tax savings will be seen on your federal income tax return.  Many states start with federal taxable income after depreciation has been deducted and apply state tax.  However, some states add back some of the depreciation taken on the federal return and then apply their own method of depreciation.  Please consult your tax advisor to discuss the ultimate savings on your state tax return from cost segregation.

Cost segregation is a federal income tax concept and will not affect your property taxes.  Even though items assigned a 5- or 7- year federal class life are considered personal property by the IRS, state law dictates what is taxed for property taxes.  Most states do not consider the definition of federal tax depreciable property when defining what is considered real property and personal property for property tax purposes

If straight-line depreciation is causing your rentals to show a loss every year on your tax return, cost segregation may not make sense. If your income is deemed passive and you don’t have any other passive income to offset the additional losses, you should hold off on utilizing this incentive. However, if your income is active then the losses can be used to offset other sources of income, such as wages.

No, the funding method to purchase your property has no effect on depreciation and therefore no affect on the use of cost segregation techniques.

Yes, cost segregation will work for any income-producing piece of real estate.  However, if your long-term rental is showing a loss on your federal tax return each year and you do not forsee it generating income in the near future, cost segregation will not help you reduce income tax due with a long-term rental.

Yes, cost segregation will work for any income-producing piece of real estate.  Short-term rentals fall into two categories, passive or active on your tax return.  Passive activities can only offset passive income, so if your rental is passive and is consistently generating losses on your tax return cost segregation will not be helpful.  However, if your rental is considered active, the losses from your rental (including losses generated from cost segregation) can be used to offset your other active income including W-2 wages.  This is a complex topic.  Please reach out to us to discuss your unique situation.

No, only property used to generate rental income as business property can benefit from cost segregation techniques.

Accountants are not qualified to conduct cost segregation studies in most cases.  Some accountants do this for their clients by randomly assigning a certain percentage of your purchase price to the different depreciable buckets.    There are two problems with this scenario, the first is under audit you will have no backup.  The second is the percentages are generally very low since your accountant will want to “guess” conservatively. This will cause you to be miss out of valuable tax savings by their conservative efforts.  Generally, we have seen that the tax savings you missed out on are much greater than the cost of a fully-engineered cost segregation study.

Yes, this is a recommended next step.  While we can help you with a cost segregation study we do not have a full picture of your tax situation and how the study will impact your taxes due.  Your tax accountant can help you “bring it home” and help you make the ultimate decision to complete the study or hold off. 

While we cannot know how all tax preparers charge their clients, we strive to make the process seamless for your tax preparer so no additional fees are incurred by you for implementation.  We provide the results in an easy to follow format that only requires two additional entries into the tax software.  We are also available to answer any questions your preparer may have to implement.

We provide an audit guarantee, as soon as your receive a notice from the IRS with questions about the cost segregation study, contact us regarding next steps.

If you have completed renovations  soon after purchase and prior to completing your study we will incorporate the improvements with the study.  Please reach out to discuss any additional circumstances.

The best time to complete a study is in the initial year of purchase. This will maximize the tax savings from day one without the erosion of the dollar due to annual inflation.

Yes, this requires an extra form to be attached to your tax return when filed called Form 3115.  We include this form as part of your package and will work with your tax accountant to incorporate it in your return.

Please read our blog post here to walk you through this: https://residentialroibooster.com/how-much-of-my-cost-is-for-land-vs-residence/