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Subject:  Re: Segmenting Assets to Accelerate Depreciation Date:  4/8/2008  3:14 AM
Author:  ptheland Number:  100088 of 127611

Rental property is typically depreciated using a straight line over 27.5 years.

For residential property, yes. Commercial property gets 39 years.

It's better to separate property assets by class life and segment the deductions - this will accelerate depreciation deductions - and for most investors, money now is more valueable than money later.


Do investors typically do this?

Small investors? No. Big investors? Yes.

If they don't, why do you think that is?

The cost of the engineering study to appropriately segregate the costs is prohibitively expensive for a single family residence. It doesn't make sense to spend several thousand dollars on a study so that you can claim several hundred dollars a year more in depreciation.

Also, if your investing horizon is short - if you are a flipper - you don't have the necessary time for the accelerated depreciation deductions to work their magic. Remember that cost segregation is really just a timing issue. It's not going to change the overall amount of the depreciation. It just affects the timing of those depreciation deductions - by accelerating them.

So if you are only holding a property for a couple of years, the timing of depreciation isn't as important as it would be if you were holding the property for 15 or 20 years or more.

Is it a hassle?

A bit, just in the initial year. You've got to pay your accountant to set up all of those separate assets instead of just land a building. That costs a bit extra.

Does it cost too much?

Absolutely. My SWAG is that a property needs to cost at least a couple million dollars before a cost segregation study becomes worthwhile.

Do they simply not know?


Are they afraid?

Sometimes. There are a number of folks who will take less aggressive tax positions because they prefer the peace of mind over the marginal tax savings.

I'm curious to hear what people have to say....

Well, you've got my thoughts now. That, and 3 bucks will get you a latte at Starbucks. ;-)


PS - One more area you didn't mention. Having a cost-segregated property greatly increases the complexity of things if you ever want to do a like kind exchange. You've got to find a property that has all of the appropriate segregated costs so that you can exchange each kind of property in the old and new pieces of real estate. Otherwise, all of that accelerated depreciation will get recaptured and taxed in the exchange.

So once you get on the cost segregation train, it's expensive to get off. And it can be expensive - in professional fees - just to stay on it.
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