How Tax Benefit Cut 100% of Bill, Saved $167,000 Through Real Estate

So when she heard about a particular tax strategy on a podcast about two years ago, it surprised her that she’d never come across it.

The strategy? Cost segregation. It allows real-estate investors and homeowners to pull forward depreciation that would hit their property and things in it like HVAC systems, plumbing, and more. For residential properties, investors can claim this depreciation over a 27.5-year period. Cost segregation allows investors to claim that in advance so they can offset property taxes early on in their ownership of a building.

“Probably one of the best advantages out there in the world is to own rental properties, because you have something called depreciation,” Curry told Insider. 

To claim this depreciation early, investors must have a cost segregation study conducted on their property. According to Rocket Mortgage, a cost segregation study takes about a month or two to complete. During the study, a property and its depreciating components are independently appraised for how much depreciation they’ll endure over a 27.5-year period (again, for residential buildings, that is — other timelines are used for other types of properties). The property owner can then claim the total amount in chunks over a period of five years. 

Since hearing about the strategy, Curry has used it to save hundreds of thousands of dollars on taxes, according to a breakdown from Cost Segregation Authority, which she used to conduct the studies on her properties. In 2022, she saved $955,733, the document said. 

Part of that money came in the form of cash, as Curry also had studies done on properties she purchased years ago, and was able to amend her 2014-2017 tax filings and retroactively claim depreciation. That allowed her to get tax money back that she had already paid — in 2023, the Internal Revenue Service sent her a $167,850 check, which was viewed by Business Insider.

Things to consider before using cost segregation

One thing to consider before doing a cost segregation study is what type of income you’re looking to offset. According to Bernard Reisz, a CPA and the chief education officer at ReSure, a real-estate investing tax consultancy, real-estate investors can only use depreciation to offset passive income and not active income. Active income would be one’s salary from their standard job, while passive income would be money earned from rental income, bond and stock investments, book sales, and other things.

If you’ve had a big earnings year from passive income sources, then it could be worth it to do a cost segregation study, Reisz said. Otherwise, the cost of the study may not be worth it. People it typically makes most sense for are real-estate investors with big portfolios, he said. Different rules exist for short-term rental owners, however, allowing them to offset their active income in certain circumstances.

Another consideration is the value of the land itself versus the building, Reisz said, as IRS rules stipulate that land cannot depreciate. So in New York City, for example, much of a property’s value is derived from the land it sits on and not the building itself, as land in the city is hard to come by. That means the amount of depreciation that one could pull forward would be a smaller percentage of what they paid for the property. In less populated areas, the building itself is more valuable relative to the land, he said, so a cost segregation study could be more beneficial for investors with properties in these places.

It’s also worth keeping in mind the rules around cost segregation from the Tax Cuts and Jobs Act of 2017. Up until 2022, investors could depreciate their assets up to 100% of their costs. In 2023, that number was 80%, and every year until 2027 it will fall by 20%, so Reisz said it’s better to conduct a study sooner than later if doing one makes sense.

And then there’s selling a property after conducting an analysis and claiming the depreciation early. If one ends up selling the property before the 27.5-year period is up, they then owe the pro-rated portion of that money — called depreciation recapture — back to the IRS.

Of course, there’s also the fact that property owners can’t claim depreciation further down the line if they need it. But Curry said she prefers to have the savings upfront and recommends that new investors think about using the strategy, as it could help them scale up their portfolios faster. She also said it’s helpful if an investor had a particularly high-income year.

“The idea is you use that money to go buy other investment properties,” she said. “It’s almost like a tax-free loan to myself because I’m taking it all, I’m not going to get it later, but if I’m really smart and I take that $250,000 that I would pay to the IRS and I go buy other property, then I can go do that again with that other property.”

Then there’s the cost of a cost segregation study. The studies Curry had done ranged anywhere from $2,250-$8,450 depending on type of property. But curry said the upfront savings in taxes were worth the costs. 

For investors planning to use the strategy, she also urged them to find lenders who understand the strategy, or to explain to a lender what they plan to do. This is because claiming depreciation in advance will make it appear on tax returns that one has no income, and a lender who’s not familiar with cost segregation would deny future loans to buy properties. 

Given the complexity of the matter, Curry urged investors to speak with tax experts before deciding whether a cost segregation analysis is right for them.

This story was originally published in November 2023.