Cost Segregation for Residential Rental Properties
Detailed Cost Segregation services and studies by the experts to maximize depreciation.
What is Cost Segregation for Residential Real Estate?
Source Advisors’ Cost Segregation team enables you to accelerate tax depreciation during the early years of building ownership. For taxpayers who own multi-family apartments, duplexes, single-family housing, or tenant improvements, Cost Segregation services to provide significant opportunities to potentially reduce tax liability and increase short-term cash flow.
Cost Segregation is an IRS recognized tax strategy that enables qualified individuals to identify specific components of a residential property that can receive preferential tax treatment rather than being depreciated over 27.5 years. A well prepared study will identify 5, 7 and 15-year property that currently subject to 100% bonus depreciation.
Benefits of Cost Segregation Services with Source Advisors
When it comes to Cost Segregation services for your residential rental properties, our team can help with a full range of Cost Segregation services including:
Studies on your current year acquisitions
Look-back studies for properties acquired in previous years
Comprehensive tax-centric services related to repairs, renovation and “value add” developments
The Source Advisors Approach to Cost Segregation Residential Rental Property
Qualifications Matter
Our in-house Cost Segregation study residential rental property team is composed of architects, Professional Engineers, CCSPs, CPAs, MBAs and LEED cost segregation specialists dedicated solely to Cost Segregation. Our management team is involved in every project we’re engaged to perform and often conduct the site visits themselves. And, with rare exceptions, we always conduct a site visit. The IRS expects it, and we believe it is the best way to accurately assess a property.
We Have a National Presence
Our project managers and project engineers are located in major markets across the United States.
We Follow the IRS Cost Segregation Guidelines and ASCSP Standards
Our studies are designed to meet the expectations of the IRS as described in its Cost Segregation Audit Techniques Guide as well as the American Society of Cost Segregation’s www.ascsp.com Minimum Quality Standards.
How Residential Real Estate Cost Segregation Works
Pre-Qualification and Proposal
Every Source Advisors study begins with our detailed pre-qualification process where the scope of work is defined and an estimate of benefits is generated. A flat fee quote is also presented with the estimate of benefits.
Request and Gather Data
Once the proposal is signed, our team will gather and analyze information provided by you. These can include rental property construction drawings, change orders, invoices, depreciation schedules, plus more. Our team is available to answer any questions you have regarding qualifying documentation.
Perform Site Visit and Study
From the invoices, plans, and payment applications, we will identify any residential real estate property that might be specifically reclassified. In the likely event that the invoice detail is insufficient for the entire study, we will augment the invoices with detailed estimates derived from the construction drawings and site visit of the property. The results will be presented in a report that includes our methodology, relevant case law, definitions, property description, photos, and detailed schedules of our calculations.
Report Review
Each Cost Segregation study is reviewed at least three times in a collaborative, multifunctional setting. This ensures quality and accuracy of our report and findings.
Report Finalization
We issue a draft report first and hold discussions with the taxpayer and their CPA to verify our findings. The final report is issued after these discussions take place.
Audit Support
In the event that a study is reviewed in audit, Source Advisors’ highly experienced management team will provide audit support through appeals.
How Much Does a Cost Segregation Residential Real Estate Study Cost?
The IRS specifies the cost of Cost Segregation should be based on the time required to perform the study, rather than a percentage of the projected or realized savings. The time required to conduct a study will depend on many variables, including the following:
- Size of the property
- Number of tax years needing to be analyzed
- Type of rental property
The above are just a few examples of factors that can impact our fee.
Information Needed to Provide an Estimate
Our team is happy to provide an Estimate of Benefits for your property.
We request, at minimum, the following:
For newly acquired properties:
- Settlement Statement
- Property Appraisal
For properties owned for more than one tax year, in addition to the above:
- Capitalized costs for your project.
- Years that it was capitalized in.
- Depreciation schedule, if available.
- Brief description of your business.
- Number of floors, square footage of the building site.
- Property address.
The more detailed information you provide, the more accurate an estimate we can give to you. We might also ask for additional information to clarify our understanding of your particular project and needs.
Case Studies
GARDEN STYLE APARTMENT COMPLEX
The subject property is an eighteen building, 144 unit, garden style apartment complex that was acquired for $6,700,000 and placed-in-service in 2018. It totals 113,000 square feet and sits on a 6.75 acre site.
As with many garden style apartment complexes, the site is improved with ample parking but simple landscaping. The entire property is fenced in with motorized gate access. Somewhat unusual to garden apartments, the property does not have a swimming pool.
The buildings are two-story, wood frame structures, with brick facades and asphalt shingle roofs. Interior finishes such as carpeting, vinyl flooring and cabinetry are of average quality as are the kitchen appliances.
EXECUTION
The Source Advisors Cost Segregation engineers were engaged to analyze the acquisition cost. They then applied a cost model to allocate the purchase price to various trades and building components. They conducted a thorough inspection of the property where estimates were performed. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.
RESULTS
Source Advisors reclassified 11% or $737,000 as 15-year land improvements and 29% or $1,943,000 as 5-year tangible personal property. This leans towards the high end of the expected range and was due to the number of kitchen appliances and laundry equipment acquired with the property.
% OF RECLASSIFIED PROPERTY
BENEFITS* |
|
| Increased Depreciation in 1st year | $1,653,527 |
| Increased Depreciation in years 1-5 | $1,481,739 |
| Increased Cash Flow in 1st year | $578,734 |
| Increased Cash Flow in years 1-5 | $518,000 |
| Net Present Value over 39 years | $354,799 |
*Assuming a 35% tax rate, 6% discount rate, 100% Bonus Depreciation and the property will be held for 39 years