Cost Segregation for Rental Homes
Cost Depreciation Approach Engineering Based Approach to Cost Segregation
Yes, cost segregation can be used for investment property, often including rental homes and income producing houses. Your primary residence does not qualify for cost segregation. Your second home qualifies if it is in a rental pool when you are not using it and you personally use it less than two weeks annually.
Why Rental Homes Qualify for Cost Segregation?
Houses held for investment are treated as the same asset class as office, retail, apartments, or warehouses from the IRS position. They are real estate owned for the purpose of generating income from cash flow and depreciation
DIY Cost Segregation Reports
Help us get started on a Cost Segregation report for your single-family rental property!
How much does it cost?
Starting at $500 without a site visit and starting at $1,500 with a site visit, cost segregation has become affordable for single family rental home owners. Discounts are available for bulk assignments. There are reasonable exclusions; a 10,000 SF mansion owned as a rental would not qualify for a $500 fee. The use of a cost Read more segregation calculator alone is not advisable as it allows too great a margin for substantial error and would not meet the IRS definition of a “quality cost segregation study” as defined in the IRS Audit Techniques Guide for Cost Segregation. On average, a calculator should provide a close estimate of potential savings, but it will be much too high or too low in some cases. Read less
Our method includes engaging with you to obtain as much data as is readily available to you. In addition, we have a national database of real estate and related data on prior single family cost segregation reports and access to high resolution aerial photography to study the property. For those who Read more choose to omit the site visit, if we don’t feel we can do a credible job without a site visit, we will recommend a site visit study. Read less
We are more concerned with providing you a credible report, conducted with a reasonable methodology and resulting in a quality and highly reliable report than with simply utilizing a “cost seg calculator” to make the report quick and easy. It is important to us that you can depend upon the results, and our Read more reputation is on the line as well. Read less
Why Most Tax Preparers Don’t Recommend Cost Segregation?
The concept of using cost segregation for houses is relatively new. Two years ago, our minimum fee for a single-family rental unit was $3,500 per house. Breakthrough thinking was required to develop a methodology benefitting the client at a cost-efficient price. We have solved that problem and can usually allocate 20 to 50% of the cost of a house to short life property (5-, 7- and 15-year). The above, especially when combined with bonus depreciation provided in the 2017 Tax Cuts and Jobs Act, often produce incredible results.
Example: Consider a house with a total improvement basis of $150,000 (total purchase price less value of the land since land is not depreciable) and 35% short-life property. The total short life property would be $52,500 ($150,000 x 35%). Assuming a 30% tax rate, and folding in the 80% bonus depreciation currently in effect for 2023, year-one tax savings would be roughly $12,600. The fee without a site visit would be $500. The year-one payback ratio for a house is more than 25:1. In other words, the year one tax savings are more than 25 times larger than the cost of the cost segregation study.
Cost Segregation
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Sari Quinlan
Director of Federal Tax ReductionWhat is Cost Segregation?
Watch this 1:09 video from Roger Hibbs, National Director of Cost Segregation for O’Connor and Associates.