Cost Seg, likely a silly question

[trw4879]

Forgive me if this comes off as dense, but is it safe to assume there is no special election or filing requirement when a cost segregation has been performed (other than correctly entering assets as stated in the study)?

[sjrcpa]

You are correct.

[LJHCPA]

Whoever performed your cost segregation should have included a Form 3115 which has to be filed with, or separately from the tax return. It is considered a Change in Accounting Methods, and requires IRS "permission". Check with your cost segregation provider.

[sjrcpa]

Who said anything is changing? Maybe this is for an initial purchase, which is when I typically see Cost Seg studies.

[LJHCPA]

The OP didn't specify whether it was an initial return, or a "mid-stream" cost seg. I've dealt with about 50 of these over the years and they were all mid-stream and included the 3115. Whether the IRS would catch it is a crap shoot. You pays your money and you takes your chances.

[trw4879]

I should have clarified - this is for an initial purchase. No 3115 required. Thanks for the input!

[Ellieb]

Hi, sorry to sound even denser...but exactly where are you entering it (cost seg studie depreciation)? It's my first time using Proseries.

[TaxGuyBill]

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@Ellieb wrote:

Hi, sorry to sound even denser...but exactly where are you entering it (cost seg studie depreciation)? It's my first time using Proseries.

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You enter each asset for depreciation on an "Asset Entry Worksheet".

[trw4879]

TaxGuyBill is right. The cost seg study simply breaks out the different assets based on their depreciable life and value. From there you simply enter as you would any other asset, according to the study.

[HOPE2]

Hi @TaxGuyBill, could you please explain more about Cost Seg, I mean for investment property to accelerate dep, client need to have a study? and can we file their tax return along with 3115?

When it works? I mean when the value of property is more than $.....

If rental income is about $25000 for a year and the amount of Dep is more than $25000, the loss is based on short-term rental can help the owner deduct as non-passive income, if he/she actively like a hotel performed!! Assume the owner has a big W-2 box1 and this loss a kind of reduce taxable income. I am right?  

Does Proseries handle this way of calculation for Dep?

[TaxGuyBill]

Rather than taking the full purchase price and reporting it as one asset being depreciated over 27.5 or 39 years, you can figure out the individual assets within the purchase and break up the purchase price into many smaller assets.  For example, driveways, sidewalks, and fences could be land improvements that are depreciated over 15 years (and could qualify for Bonus).

While the client could try to figure out and break that up on their own, a Cost Seg is a specialized report from a company that is highly experienced in breaking it up, so that is usually what most people do.  The Cost Seg breaks it up into many assets and shows the cost/value of each individual asset.  You would enter each of those assets into ProSeries.

Yes, *IF* the property is non-passive, using the Cost Seg for quicker depreciation can create a rental loss that can offset other income, such as a W-2.  If the rental is passive, a Cost Seg might not be as advantageous because the losses may be 'trapped' under the Passive Loss rules.

If it is a retroactive Cost Seg that you have already filed ONE tax return, just amend the prior tax return.  If you have already filed two or more tax returns, in my opinion you would need to file Form 3115 with the current return to add the new assets, AND you would need to amend the prior returns to correct the Basis of the building (you reported the full amount, rather than the building-only amount with the other assets removed).

[HOPE2]

perfect and great.

[HOPE2]

Thanks a lot for this great reply.

This accelerated Dep can help reduce tax liability but if they want to sell it, section 1250 recapture comes to calculate unless they use like-kind to postpone of this gain. Am I right?

I already used land improvement in Proseries' Type of asset, 

but for  some may be for 5 ,7, 10, ... what would be? In Proseries Type of Asset I did not see any related Sch E 

[TaxGuyBill]

Yes, if those assets are sold at a gain, it will be taxable (although it would usually be §1245 gain/recapture).

But most people who do Cost Segs aren't holding these properties for the short term (or will be doing §1031 Exchanges ... which gets a bit questionable when you've specifically segregated items into separate assets).

[HOPE2]

Per my knowledge Section 1245 property does not include buildings and structural components, which fall under Section 1250. May I ask you why 1245 and if you have any link to find out Dep's life for 5,7,10,...like plumbing electrical fixtures.. which items included let me know please.

In Proseries I used land improvment but for the others I did not see!

[TaxGuyBill]

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@HOPE2 wrote:

 buildings and structural components, which fall under Section 1250.

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Yes, and the building and structure components are generally depreciated over 27.5 or 39 years.

The Cost Seg separates out other items, which are usually §1245 property (land improvements might be §1250, but I would need to look that up).

The Cost Seg report should show the details for each of the items, including the Recovery Period.

[IRonMaN]

You are a patient soul Mr Bill 😁

[HOPE2]

You can try it good for memory's practice

[HOPE2]

Wonderful reply.

[eduardo]

Another question regarding the Cost Seg Report. When attaching the Cost Seg Study to the tax return in Proseries, what type of form is selected in (ProSeries Attach PDF Files)? Don't see the description for the study or depreciation.

[sjrcpa]

Why do you want to attach it?

[LJHCPA]

I wouldn't attach a copy of the cost segregation study, the IRS doesn't require it. Most of mine were over 100 pages anyway. If your client is audited they will most likely request a copy of the study. Fortunately, none of my clients with cost segs have been audited.