Cost Seg Building

A Blog About Tax Savings for Building Owners

Month: November 2023

Industrial Outside Storage – Great Property for Cost Segregation

November 4, 2023 /

Industrial Outside Storage or IOS, is a class of property that has become increasingly popular especially in areas where there is a high concentration of warehouses, trucking and supply chain operations. Generally speaking this is a parcel of land where truck trailers are parked.

These IOS’s generally consist of fencing all around the property and then some kind of parking pad – often gravel of sorts. Nearly all of the improvements are land improvements. There will be a small part of it likely identified as utilities which are 39 year class life.

*Let’s say you buy a 5 acre parcel that already is an IOS and you paid $700,000 for it. Maybe you have a land value of $350,000. The remain $350,000 can be studied in a cost segregation study and get that identified properly. That’s not an expensive study. It might cost about $3,000. It’s likely you’ll end up with 90+% that gets identified as 15 year class life because they are land improvements. In 2023, you can take 80% of that in depreciation right away given the bonus depreciation rules.

If you have a property like this, reach out and we can run the numbers for you.

Cost Segregation Lake Keowee Rentals

November 4, 2023 /
Lake Keowee VRBO with direct lake access and spectactular views

Do you own property on beautiful Lake Keowee in the Upstate of South Carolina? Is it a short-term rental? Long-term rental? Either way, you might benefit by doing cost segregation for tax savings.

I’m based here in the Upstate of South Carolina and work with many owners not only in South Carolina, but across the U.S. to study their investment properties for tax savings that can be the result of applying cost segregation to your properties.

Cost segregation is a tax planning strategy that can be applied to various types of real estate investments, including short-term rental properties. Short-term rentals, such as vacation homes or Airbnb properties, can benefit from cost segregation studies in order to maximize tax deductions and reduce taxable income. Here’s how cost segregation can be applied to short-term rentals:

  1. What is Cost Segregation? Cost segregation is the process of identifying and classifying certain components of a real estate property into shorter depreciation periods for tax purposes. This allows property owners to accelerate their depreciation deductions, which in turn can reduce their taxable income and improve cash flow.
  2. Types of Property Components: Cost segregation typically focuses on reclassifying certain building components from a standard 27.5 or 39-year depreciation period to shorter periods, such as 5, 7, or 15 years. Short-term rental property owners can benefit by reclassifying assets like:
    • Personal property: Furniture, appliances, fixtures, and equipment.
    • Land improvements: Landscaping, outdoor lighting, parking lots, and sidewalks.
    • Tenant improvements: Renovations or improvements made to cater to guests’ needs.
  3. Benefits of Cost Segregation for Short-Term Rentals:
    • Increased depreciation deductions: By reclassifying assets to shorter depreciation periods, property owners can deduct a larger portion of the property’s cost in the early years, reducing their taxable income.
    • Improved cash flow: Higher depreciation deductions mean lower taxes, leading to increased cash flow for the property owner.
    • Enhanced ROI: The upfront tax benefits can significantly improve the return on investment for short-term rental properties.
    • Cost recovery: Cost segregation can uncover previously overlooked deductions, allowing property owners to amend past tax returns and claim retroactive deductions.
  4. Cost Segregation Study: To implement cost segregation for a short-term rental property, property owners typically hire a qualified cost segregation specialist or firm. The specialist will conduct a thorough study, which involves inspecting the property, identifying eligible components, and preparing a detailed report that outlines the reclassified assets and their respective depreciation periods.
  5. IRS Compliance: It’s important to ensure that the cost segregation study is performed in compliance with IRS regulations and guidelines. The IRS provides detailed guidance on cost segregation in its Cost Segregation Audit Techniques Guide.
  6. Documentation: Proper documentation is critical when applying cost segregation to short-term rental properties. Property owners should maintain records related to the cost segregation study, including the study report and any supporting documentation.

While cost segregation can provide significant tax benefits for short-term rental property owners, it’s important to work with tax professionals or specialists who are experienced in this area, as it can be complex and requires expertise to maximize its benefits while staying compliant with tax regulations.

Cost Segregation for Short-Term Rentals

November 4, 2023 /
Stunning mountain Airbnb in Pigeon Forge, TN

Short-term rentals are great candidates for cost segregation. Whether your on the Airbnb, VRBO or some other short-term rental platform, these properties tend to do very well for their owners when it comes to utilizing this tax strategy.

Many of the short-term rentals that I see tend to be nicely finished on the inside and often will have decent land improvements like driveways, patios, outdoor kitchens, docks and extensive landscaping.

How might this work you ask? Let’s say you paid $800,000 for your property that you’ve converted into an Airbnb in 2023. We’ll say the land is $150,000. That leaves you with $650,000 as your basis. (BTW, this math works essentially the same if your Airbnb was 2x as much or 1/2 as much). Of that $650,000, let’s say we identify 20% as 5 year property and 5% as 15 year class life property. That means you can accelerate 25% of the $650,000 or $162,500. In 2023, you can take 80% of that as Bonus Depreciation so you could take a deduction of $130,000. If you made $150,000 in 2023 as your Airbnb income, you could knock that down by $130,000. If you’re at the 32% tax rate, that’s a savings of over $40,000 in income tax savings. A study like this might cost you between $3,500 – $4,000. That’s an expense to you so it nets down to $2,720. Your ROI is about 15:1 or 1,500%.

Owners should always consult with their tax professionals to see if this makes sense for you to do. Feel free to reach out if you’d like to discuss. I’m happy to run a no cost, no obligation analysis / estimate for you. Let’s connect on LinkedIn or find my on Twitter @costsegbuilding.

© 2024 Cost Seg Building

Theme by Anders Noren — Up ↑