Tax Smart Real Estate Investors Podcast

Episode 313: "Do I Need To Do A Cost Segregation Study?"

Date: February 12, 2025
Host: Hall CPA (Team: A & C)

Episode Overview

This dynamic Q&A episode is dedicated to answering real, pressing tax and accounting questions from the Tax Smart Real Estate Investors (REI) Facebook community. The Hall CPA team addresses crucial tax planning issues for real estate investors, focusing on topics like cost segregation studies, partial asset disposition, real estate professional status, bonus depreciation, and optimizing deductions. The episode aims to break down complex topics into actionable insights, with a practical, straight-talking tone.

Key Discussion Points & Insights

1. Capital Gains Tax Timing

[02:33]

• Question: If I sell a property with a $300,000 gain in January 2025, when do I owe the $45,000 estimated capital gains tax?
• Answer:
  • C: "It's April. It's not due then and there. It is just due when you file your tax return."
  • Recommends considering an estimated payment before filing to avoid penalties and interest, especially for a large bill.

2. Partial Asset Disposition Explained

[03:39]

• Scenario: Replacing a roof and questioning how to determine the original roof's value for a partial asset disposition.
• Explanation:
  • Depreciation schedules can overlap if not managed—partial asset disposition allows deduction of the remaining value of the old component (e.g., the roof) immediately rather than over 27.5 years.
  • Primary Method: Get a cost segregation study to determine component values at acquisition.
  • Alternative: Use the producer's price index to estimate original value (more complex).

Quote:

• A: "The primary way of doing it, the most common way, is by having a cost segregation study performed on the property... partial asset dispositions is another way [to use cost seg]."

3. Flipping Properties: Active vs. Passive Income

[05:59]

• Clarification: Income from flipping properties is always active (technically, non-passive), even if you have a W2 job and are not a real estate professional.

Quote:

• C: "Flipping isn't necessarily passive like rental properties are. So, yeah, ...it is going to be non-passive."

4. Real Estate Professional Status & Loss Limitations

[06:27]

• Question: Do real estate professionals face the $150,000 loss limitation?

• Answer:

  • A: "No. When you qualify for real estate professional status, you are not subject to the $150,000 limit... This is where real estate professional status comes in handy."

• Background: The $25,000 loss deduction for non-professionals phases out between $100K-$150K MAGI. Real estate professional status bypasses this entirely.

5. Timing & Frequency of Cost Segregation Studies

a. Do I have to do a cost seg study in year one?

[07:46]

• C: "No, you don't have to do it in the same year. You would just use Form 3115."
• Explanation: Form 3115 allows a retroactive cost seg (e.g., placed in service in 2023, cost seg done in 2024).

b. How many times can you do a cost seg?

[08:42]

• While theoretically unlimited, it has diminishing returns for the same property.
• A: "You would typically only do one [cost seg per property]."

c. Improvements After Cost Seg

[09:17]

• For significant capitalized improvements after a purchase, an "improvement study" is reasonable, not redoing the original cost seg.

6. 100% Bonus Depreciation: Will It Return?

[09:50]

• Update: Bipartisan support exists for reinstating 100% bonus depreciation.
• Current Status: Not yet law. Possible return in 2025 via upcoming tax legislation (pending specifics).

Quote:

• A: "It's not over until there's a bill signed into law and we're sitting here celebrating 100% bonus depreciation."

7. Short Term Rental Loophole vs. Real Estate Professional Status

[12:50]

• Misconception addressed: These are distinct strategies for different types of rentals.
  • Long-term rentals: Use real estate professional status (REPS).
  • Short-term rentals: Use the 'short term rental loophole' for average stays <7 days—does not require REPS.

Quote:

• C: "Real estate professional status is just for long-term rentals. Short-term rental strategy is just for short-term rentals."

8. Capitalizing Repairs & Start-Up Costs Pre-Service

[15:37]

• Question: Are paint and minor repairs before a short-term rental is placed in service deductible?
• Answer:
  • Generally, no—capitalize costs incurred before a property is placed in service (routine maintenance safe harbor rarely applies before service).
  • Consumables (one-time use items like paper towels) can be expensed.

9. Using Depreciation Against High W2 Income

[17:15]

• Scenario: Husband earned $1.25M W2; cost seg generated $688K depreciation.
• How much of W2 can depreciation offset?
  • Limited by excess business loss rules (2025: $626K deduction limit for married joint filers; surplus carries forward as NOL).
  • Assumption: Loss is non-passive (requires REPS/short-term rental rules).

Quote:

• A: "If you're at the 37% tax bracket... that $626,000 at the federal level is going to save you $231,620 bucks. That's a lot of money."

Notable Quotes & Memorable Moments

• On timing cost segregation studies:
  • C ([07:46]): "Bottom line is no, you don't have to do it in the same year. You would just use Form 3115."
• On short-term rental loophole:
  • C ([12:50]): "Is there an overlap? No... real estate professional status is just for long term rentals."
• On capitalizing repairs pre-rental:
  • C ([15:37]): "In general, if anything's before it's placed in service, we generally think it's going to be capitalized."

Timestamps for Major Segments

• Sell Property, Capital Gains Tax Timing: 02:33
• Partial Asset Disposition & Roof Example: 03:39
• Flipping as Active Income: 05:59
• Real Estate Professional Status & Loss Limits: 06:27
• Cost Seg Timing & Redoing Studies: 07:46–09:17
• Bonus Depreciation Updates: 09:50
• Short-term Rental Loophole vs. REPS: 12:50
• Repairs/Capitalization Before Service: 15:37
• Large Depreciation Offsetting W2 Income: 17:15

Final Thoughts

If you’re a real estate investor, this episode demystifies some of the most nuanced tax-saving strategies available for 2025 and beyond. It reinforces the importance of professional guidance, proactive tax planning, and joining communities where these questions get real answers. Whether you’re new or experienced, the team’s practical advice can save you significant amounts—and avoid costly mistakes with the IRS.