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Subject:  Re: Segmenting Assets to Accelerate Depreciation Date:  4/22/2008  2:14 PM
Author:  ptheland Number:  100520 of 121482

Thank you very much, you certainly know what you are talking about.

Being a tax professional, I try to keep up with things. It helps keep the malpractice lawsuits at bay. ;-)

And now that tax season is finally over, I can wax philosophical again as necessary.

I guess I should have been clearer in asking my question.

OK.

I understand that for a residential rental worth less than $1M, it is not worth the cost and hassle of a cost segregation study.

I agree.

Say you have a SFH worth $500,000, and it's brand new, and you happen to know the costs of some of the assets within the home (carpet, stove, washer, dryer, refrigerator, fence, other 5 & 15 year assets etc...)

OK.

And assume you do your own taxes.

No need to assume that. I really DO do my own taxes. The only problem I have is getting that lousy client to give me some data to work with. ;-)

Would you go through the trouble of separating them out and depreciating them separately?

Me? Probably. Joe six-pack who rents out the house he inherited? Probably not.

There are websites that are free and make it easy to do, I'm wondering why not everyone is using them.

1. Contrary to popular belief on the internet, not everyone is internet savvy. I'd put it at well under half the population that is internet savvy. So those web sites don't help a whole lot of people. BTW, would you have a link to a couple of them? I'm sure folks here would be interested.

2. Simplicity. I mentioned that before. By segregating out assets, you are adding a significant degree of complexity. Many people fear complexity. And many people fear the IRS. Combine those two populations (and eliminate the overlap) and you've got a whole lot of people who prefer to just separate land and building and go from there.

3. Value. Back onto the SFR scenario, the total dollars involved by segregating out certain assets just aren't that big. Sometimes its just not worth the effort.

You are completely right in your PS comment. Do you think the IRS comes down on those heavily for property worth less than $1M.

No. If anything, I'd guess they come down more heavily on more expensive properties. Presumably, those are owned by more sophisticated owners, who are paying for more cutting edge advice and will take more aggressive positions. The smaller properties are more likely to just have mistakes made out of ignorance.

From my understanding of what you are saying, say property A has a $2k washer, and property B has a $1K washer. This is an issue since you are trading down -

Correct.

but what if property A had a $1k dryer and property B had a $3k dryer? Wouldn't the common assets just offset each other since they are like-kind.

Sure. But realize what that means. In a 1031 exchange, you'd have to buy a replacement property that has a more expensive washer AND dryer AND fridge AND stove AND range AND carpet AND window coverings AND fence AND landscaping improvements, AND building. If you don't you're going to have to recapture some of that accelerated depreciation.

This is a weird example, I was just trying to illustrate. I guess I am generally assuming that you will always be trading up in a 1031...

Sure you're going to trade up. But with a cost segregated property, you have to trade up on each and every segregated asset. Any asset that you can't trade up will result in some recognized gain.

Granted, with a big enough gain on the basic real estate, a little bit of tax on the segregated assets isn't going to be a deal breaker. But it does result in you repaying a bit of that tax savings you've enjoyed up to that point.

I'd love to hear your thoughts.

There they are. Another two cents' worth of thoughts.

--Peter
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