Author Topic: Cost segregation for rental property previously used as primary residence  (Read 654 times)

Greenstache

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Anyone successfully utilize self cost segregation for rental real estate previously used as primary residence?

Background:  We have a rental property that was placed in service for rental purposes in 2018.  For most of the prior decade, this property was a fixer-upper and eventually our primary residence.  Since the purchase price plus cost of renovations was significantly below the property's market value when placed in service, we went to all the work of creating a detailed summary of the renovation costs for the prior years, to get to a solid basis total.  I believe we could use the detailed support to break the property into components (to the extent those are known) as of the placed in service date - since this is a very profitable rental, we'd otherwise be looking at taxable income for the year from it.

I can't think of any reason this wouldn't be acceptable, even more so since bonus depreciation is now permissible for used property.  However, it's worth noting that the IRS includes an example in Pub 527 of property originally used as a residence, with interim improvements before it was converted to rental use.  The example shows all of the improvements being thrown together into the 27.5 year bucket, rather than broken out.

Would appreciate any thoughts you have or experiences dealing with this!

SeattleCPA

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Sure, you can use cost segregation.

You probably won't be able to use bonus depreciation to massively front load the depreciation because you acquired property (probably) before the new tax law that allows bonus depreciation for used property.

To actually get the large deductions onto your return, you'd need to get past the passive loss limitation rules. (This blog post explains: https://evergreensmallbusiness.com/vacation-rental-tax-shelters/ )

The other thing here? You need to have the cost segregation study done. Probably, you won't be able to justify the cost of that. (Having an engineer do the study would be, for example, way more expensive that having a CPA prepare your tax return.)

My general sense is, this is one of those tactics that doesn't work economically for typical investors. The professional services cost is too expensive. But we're talking apartment buildings.

And this final comment to add context: We do tax returns for real estate investors that use cost segregation studies.