Cost Seg Building

A Blog About Tax Savings for Building Owners

Tag: Lake Keowee

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 – VRBO and Airbnb

September 1, 2023 /

Short-term rental ownership exploded during Covid. The business model has been a good one for many investors throughout the country. These property owners can take advantage of cost segregation just like they would if they owned a commercial building or an apartment complex.

Short-term rentals, VRBOs, Airbnbs are considered 39 year property. It’s commercial property like a hotel is commercial property. It’s not 27.5 year property which is what a long-term rental would be such as a single family rental or an apartment building.

Is it worth is to doing cost segregation on an STR? Yes, of course. Where it might not be beneficial is if you just aren’t netting much profit or if you expect to sell your property within the next year or two. But generally, from what I hear, owners will net $25,000 – $50,000 per year.

In a cost segregation study, the property will be reclassified from all of it being 39 year depreciation to 5, 7, 15 and 39 year property giving you a much bigger deduction earlier on in the life of your ownership. Let’s use simple math to make some calculations. Let’s say you own an Airbnb and you have $600,000 all in. The land is about $100,000. That leaves you with $500,000 cost basis. Normally the FF&E is a separate expense from the real estate. In this case we figure you have this as a separate line item of $35,000 and it is not included in the real estate.

When we do a study on a building like this, we will generally see about 15-20% will be reclassified as 5 year class life property. The land improvements which are 15 year class life property will often come in somewhere in the 3-10% range depending upon the property. So for simple math, let’s say we identify 20% between the 5 and 15 year property. 20% of $500,000 is $100,000. You would get a $100,000 deduction against your income in year one or whenever you decide to do the study and apply it. Now in 2023, bonus depreciation has dropped to 80%. (If you own an STR that you placed into service between Sept. 27, 2017 and Dec. 31, 2022, you would qualify for 100% bonus depreciation). So that $100,000 in depreciation generated by our study would have 80% of that applied to reduce your taxes in 2023. Let’s say you net $50,000 in 2023. That’s after all your expenses, debt service and regular straight line depreciation. If you’re at the 32% tax rate, you’d owe the IRS $16,000. If you did cost segregation, you would owe ZERO and would have a loss carry forward that would eliminate most, if not all, of next year’s tax liability. The cost for such a study might be $3-4k. If you have owned the property for at least one tax year, you would need to file a 3115. That will end up costing you about another $1-2k to complete.

So if you own a short-term rental property and are making money, be sure to reach out to get a quote and see how it might work for you.

#lakekeowee #lakehartwell #lakenorman #lakemurray #STR #Airbnb #VRBO #costsegbuilding #johnmurphycostseg #taxsavings #costsegregation

John Murphy Cost Segregation Services, Inc. "Unlocking enefits: Why Property and Casualty Insurance Agents Should Offer Cost Segregation to Clients"

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