• Passive - By default, Real Estate Income is considered “Passive Income” under the Tax Code. It is the taxpayer’s burden of proof to prove that it is NOT passive. Most business owners and W2 investors fall into this category. 
  • If you DO fall into the passive section check out our Passive Maximization techniques!
  • If you are a PASSIVE investor your Cost Segregation will produce a PASSIVE LOSS!  This loss can only offset other passive items.  Passive items include limited partner business interests, other real estate income, ATM investing income, royalty income. 
    
    
• Non Passive- if you are a qualified short term rental investor OR a "real estate professional" the income OR loss from you activity would be considered nonpassive.  Nonpassive losses from cost segregation studies can offset business income and W2 income.
  • Real Estate Professional = High bar!  750 hours in real estate AND >50% of your time in real estate.  However, if your spouse does not work, they may qualify.
    • NOTE - please speak with us first if you think you qualify as this is highly audited. 
  • STR - please check out our STR guides for more BUT if you have an STR with an average stay of 7 days or less AND you materially participate by spending >100 hours AND more than anyone else, you are nonpassive!  This is a major loophole in the tax code. 
  • Business Owners that OWN the Building you are in - we CAN make the loss from a cost seg nonpassive using a special grouping election!  NOTE this is highly technical but we can work with you to maximize this if you buy your own building.  
    
    

We get it...this stuff is confusing!  If you are unsure of your tax status as a real estate investor, please just ask us!  

 A common misconception is the purchase price = the amount eligible to be analyzed in a cost seg study. 
 

• You must determine the LAND value.  At Anomaly, we typically use 1 of 3 techniques to maximize the ROI here by using the lowest land value possible.
• However, to approximate your building vs land value, allocating 20% to land is a decent estimate.
• Purchase Price LESS Land Value = Cost Basis eligible for a cost segregation study

what is it and are some of the strategies around it? It is more nuanced than anyone on social media claiming it is automatic! more nuanced than anyone on social media claiming it is automatic! 

• Accelerated Depreciation is available for tax years starting September 2017 through 2026
• From 17 to 22 the rate was 100% of eligible items then phasing down 20% per year
  • Eligible items include any assets in the 3-15 year asset classes:
    • Furniture, fixtures, certain land improvements, nonstructural components of the building and more
    • You CANNOT use bonus depreciation on structural items that are immovable (think foundation and guts of the property)
    • You CANNOT use bonus depreciation on structural items that are immovable (think foundation and guts of the property)
      
      
• In a cost segregation setting, we generally look at the following formula to determine the bonus depreciation as a ROUGH estimate to see if it is a good investment for you to see if it is a good investment for you:
  • Purchase price
  • LESS: Land Value
  • = Depreciable base 
  • Multiply by 25%
  • Multiply by BONUS % for the YEAR IN WHICH YOU PLACED THE ASSET INTO RENTAL SERVICE
  • Multiply by your Tax Rate (say 30%) = CASH TAX SAVINGS

​​​​​​​​It is very important to understand that the Bonus Depreciation percentage is based on the year in which you placed the property into service and NOT the current tax year!  As an example, if you are performing a cost segregation study in 2024 but you put the property into service in 2021, you would be eligible for bonus depreciation on the eligible items in the 3-15 year asset classes.

Now that we have progressed further into our cost seg journey, please let us know if there are any questions at this time!  Cost segregations are a foundational and important tax strategy for all real estate investors.  In the next installment we will discuss some additional advanced techniques!

Now that we have progressed further into our cost seg journey, please let us know if there are any questions at this time!  Cost segregations are a foundational and important tax strategy for all real estate investors.  In the next installment we will discuss some additional advanced techniques!