12d • 📸 Recorded Calls
Friday Weekly Q&A Call - 10/30/26
Key Takeaways:
Cost Segregation Basics
- Four levers drive the benefit: land value, purchase price, improvements, and your tax rate. Land can’t be depreciated, so a high land share can make a cost seg pointless.
- Math example: Building basis = purchase price × ~80% (land is ~20% nationally) + 100% of improvements. About 20–40% of that is typically bonus-eligible.
- Deductions offset income, not tax. A $72K deduction in the 22% bracket saves roughly $15K, not $72K. At 37%, $100K of bonus depreciation is worth $37K.
- Tradeoff: Bonus depreciation creates recapture on sale. Strategies to manage it: 1031 exchange (though ~30% reportedly fail) or “defer, defer, die” (step-up in basis).
- Debt doesn’t exist in tax world. Refinance proceeds aren’t income, loan paydown isn’t a deduction, and gain on sale is calculated without regard to debt.
Software vs. Engineered Studies
- Software studies: ~$800–$1,200 (the $950 quote discussed fits here). They use averages and algorithms, so they’re more conservative.
- Engineered studies: ~$2,000–$5,000. They typically find more bonus depreciation.
- Rule of thumb: At lower brackets (22%), a software study is the clear choice. At 37%, an engineered study may be worth it. Take specifics to your advisor.
- Timing: No rush. A cost seg is only needed by filing, but allow a few months (target ~January) for the preparer and cost seg company.
Offsetting Active Income
- Short-term rental loophole (three pillars): average stay of 7 days or less, material participation, and no excessive personal use.
- Real estate professional status (REPS): Allows losses from long-term or other rental real estate you materially participate in to offset active/business income. A house-flipping or wholesaling business can qualify. Short-term rentals technically aren’t “rental real estate,” which is why the loophole exists separately.
- Time-tracking: Spreadsheet template provided; paid apps (REPS Tracker, REPS Log) or free ones (Toggl, Clockify) also work.
- Other strategies mentioned: S corp, solo 401(k), HSA (with a high-deductible plan), oil and gas investments. Most strategies require capital.
- Improvements decision: Add amenities if they’ll increase revenue and give a good ROI. Taxes are “the cherry on top,” never the sole reason.
Personal Use and Proration
- Formula: Personal-use nights ÷ (personal + rental nights) = share of indirect expenses disallowed.
- Indirect expenses (prorated): depreciation, property taxes, utilities, mortgage interest.
- Direct expenses (100% deductible): Airbnb fees, furnishing assembly, rental-specific costs.
- Vacant nights count as neither personal nor rental use.
- Placed-in-service date matters. Personal-use nights only count after the property is placed in service (e.g., someone who moved out in September counts personal nights from September on).
- Personal-use case: If you lived in the home for part of the year, a cost seg that year yields reduced benefit. Better to wait for a year with no personal use, and consider adding furnishings to basis rather than separating them out.
- Workaround: Time spent working substantially full-time (4–6 hrs/day) on that specific property doesn’t count as personal use, though it’s difficult to document.
Placed in Service and Expensing
- Test: Is the property habitable and ready for its intended use? A hypothetical passerby could rent it for the night.
- Furnishing treatment: Items bought before placed-in-service are added to basis and depreciated (bonus-eligible items can be fully expensed via cost seg). Small items bought afterward can be expensed.
- De minimis safe harbor: Items under $2,500 can generally be expensed (e.g., game tables), if the property is already in service.
- Expensing vs. depreciating: Expensing avoids recapture, but it doesn’t add to basis, so you’ll have more gain on sale (taxed at lower capital gains rates).
Late and Look-Back Cost Segs
- Cost seg in a later year (property not placed in service that year) requires Form 3115 (change in accounting method). Preparers charge ~$600–$1,400; cost seg companies often do it for less (~$800 mentioned).
- Switching years: You’d amend the prior return to remove the cost seg, then apply it later with Form 3115. The speaker noted this has many factors and is worth reviewing with your advisor.
- Suspended passive losses keep their character unless you amend the original return to reclassify them as non-passive. Form 8582 only tracks the carryforward.
- Pairing with a Roth conversion: All else equal, do the cost seg and Roth conversion in the same year. Avoid doing the conversion one year and the cost seg the next.
Other Tips
- Bonus vs. straight-line: Partial-year ownership prorates straight-line depreciation, not bonus depreciation.
- Moving from Massachusetts to Florida: MA audits residency aggressively. Change your license, voter registration, doctors, and insurance, and minimize return trips to avoid “intent to return” arguments.
- Mid-term rental conversion: Open a separate bank account for the property, and keep clean records of personal vs. business expenses.
- IRS payment plan: Set up via the IRS payments line (1-800-829-1040), Mon–Fri 7am–7pm.
Logistics
- Calls are held Fridays at 1 p.m. Eastern.
- Recordings are in the Skool community under Classroom → Weekly Calls.
- Number of included advisor calls and exclusions (like tax prep) are in your signed contract.
- Questions about individual situations should go to your assigned advisor.
Thank you you all for joining!
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Friday Weekly Q&A Call - 10/30/26
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