Do I Need to Do A Cost Segregation Study?

In this Q&A episode, Ryan and Thomas answer the most pressing tax questions from listeners. They tackle a variety of hot-button topics, including when flipping property income is considered “active” (and why that matters if you have a W-2), how partial asset dispositions really work, and whether or not a cost segregation study has to be performed in the first year.

Introduction (00:00.654)

Thomas Castelli, CPA:
Thanks for tuning into this week’s episode of the TaxSmart REI podcast. Today, we’re taking questions from our TaxSmart Investors community on Facebook. If you’re not already in the community, you can join by searching “Tax Smart Investors” on Facebook. Post your questions, and we might answer them live on an episode or within the community. Now, let’s dive into the questions.

Monthly Q&A Episode (01:00.000)

Thomas Castelli, CPA:
Once a month, we’re adding a fifth episode to the show, specifically focused on answering investor questions. These questions may come from our Facebook group, emails, YouTube comments, or other sources.

Capital Gains Tax Timing (01:35.209)

Question: If I sell a property in January 2025 and realize a $300,000 capital gain, estimating $45K in capital gains taxes, do I owe that tax immediately, or do I file it in April 2026?

Ryan Carriere, CPA:
Your assumption is correct; the tax is due when you file in April 2026. However, you might want to consider making an estimated payment if there has been no withholding on the sale to avoid penalties and interest.

Partial Asset Disposition (02:52.654)

Question: How do we use a partial asset disposition when replacing a roof? How do I determine the value of the original roof for tax purposes?

Thomas Castelli, CPA:
A partial asset disposition allows you to deduct the remaining cost of an old component, such as a roof, when it is replaced. The best way to determine the value of the old roof is through a cost segregation study, which breaks down the value of property components. Alternatively, you could use the Producer Price Index to estimate its value, but a cost segregation study is the preferred method.

Income from Flipping Properties (06:06.185)

Question: Is income generated from flipping a property considered active even if I’m not a real estate professional and have a full-time W-2 job?

Ryan Carriere, CPA:
Yes, flipping is considered active income. It is not passive like rental income, so it does not fall under real estate professional status rules.

Real Estate Professional Status and Loss Limitations (06:40.078)

Question: If I qualify for real estate professional status and materially participate, am I still subject to the $150K loss limitations?

Thomas Castelli, CPA:
No, real estate professional status makes your rental losses non-passive, meaning the $150,000 special loss allowance does not apply to you.

Cost Segregation Timing (08:06.754)

Question: Do I need to do a cost segregation study in the first year of ownership?

Ryan Carriere, CPA:
No, you can do a cost segregation study in later years and file Form 3115 to adjust your depreciation method retroactively.

Bonus Depreciation in 2025 (10:53.388)

Question: When is 100% bonus depreciation coming back?

Thomas Castelli, CPA:
There is bipartisan support for bringing back 100% bonus depreciation, and we expect it to return in 2025, but nothing is finalized yet. We will provide updates as more details emerge.

Short-Term Rental Loophole (13:31.017)

Question: Do I need real estate professional status to use the short-term rental loophole?

Ryan Carriere, CPA:
No, real estate professional status applies to long-term rentals. Short-term rental properties (average stay of less than seven days) have their own tax treatment and do not require real estate professional status to be considered non-passive.

Capitalizing Repairs Before Placing a Property in Service (16:56.861)

Question: If I purchase a short-term rental and do minor repairs before renting, can those costs be deducted as business expenses?

Ryan Carriere, CPA:
Generally, costs incurred before a property is placed in service must be capitalized rather than expensed. However, consumables like toilet paper and soap can be deducted as business expenses.

High-Income W-2 and Cost Segregation (19:03.689)

Question: If my husband makes $1.25M from his W-2 job and we did a cost segregation study generating $688K in depreciation, does that mean we only pay taxes on $562K of income?

Thomas Castelli, CPA:
Depreciation creates a loss that offsets taxable income, but excess business loss limitations apply. In 2025, you can only deduct up to $626,000 in business losses against non-business income. The remaining $62K carries forward as a net operating loss.

Conclusion & Call to Action (24:11.726)

Thomas Castelli, CPA:
That wraps up today’s episode. If you have questions, join the Tax Smart Investors Facebook group and post your questions there.

Want personalized tax strategy related to your portfolio? Schedule a consultation with our team.

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.