Many residential property owners have thought of cost segregation as something reserved for larger property owners. It has been perceived as something reserved for large corporations with commercial properties or investment groups with multitudes of rental properties.
While cost segregation can be expensive, that isn’t always the case. Below, we’ll dive into the three main cost segregation options, how much they cost, and what works best for different types of property owners.
Most expensive option: Cost segregation service providers
When most people think of cost segregation studies, they picture an engineer measuring and photographing every inch of a property and then providing information to a CPA who crunches the numbers for the study. This is the traditional method for cost segregation, and for many years it was the only option. The problem with this option is that it is very expensive, and sometimes out of reach for smaller property owners.
Most residential properties are not complex enough to warrant this type of study, as they can easily be done with reasonable estimates and an automated program like Rental Property Refund.
If an owner chooses to do a study with a cost segregation service provider, they are also not guaranteed a positive ROI, at least not in year one. They may spend $15,000 for only $10,000 in tax savings, which puts them at a negative $5k ROI for the first year.
On the positive side, this is the most comprehensive type of study and will also be extremely accurate. While overkill for most residential properties, it could be worth it for a very large apartment complex with varying unit types.
Middle option: DIY cost segregation with your CPA
In do-it-yourself (DIY) cost segregation, you take the measurements and photos yourself, then provide that information to a CPA who crunches the numbers for you. Essentially, you cut out the engineer, since that level of expertise isn’t needed to measure and photograph your property unless it is very large and complex.
This is the method we recommend for most commercial property types since they are complex enough to need a CPA to get involved. However, most residential properties are simple enough that they don’t need a CPA. Instead, property owners can spend less by using an automated solution like Rental Property Refund.
The DIY option certainly has its place and may be your best bet if you have a large apartment complex. However, if you own a simple residential property, we encourage you to consider the next option.
Most affordable option: Automated cost segregation
Cost: $1,499 per property (with Rental Property Refund)
Automated cost segregation involves entering all of your property’s information (either actuals or reasonable estimates) into a software program. Then, instead of having a CPA crunch the numbers manually, the software does that and produces a PDF report of your study.
Most residential properties are simple enough that they don’t need a CPA’s direct involvement to complete a cost segregation study and are eligible for an automated program like this. Automated cost segregation is the fastest and cheapest option. However, it is generally only available for rental properties since more complex property types will require a CPA to complete a study.
Rental Property Refund is an automated cost segregation program that provides IRS-compliant studies within 2-3 business days. It was created by engineers and CPAs with decades of cost segregation experience. The formulas it uses to sort properties into different components and depreciation periods are reliable, and costs are accurately estimated based on the RSMeans database.
Which cost segregation service option is best for residential property owners?
We created Rental Property Refund to expand cost segregation to smaller property owners who we believe can benefit from it, but have been excluded from it because of high costs. The cost segregation service provider option is simply too much for someone who owns a property that isn’t worth tens of millions of dollars. For a larger complex, it could make sense, but for most residential real estate it’s not necessary.
For most residential owners, the automated option will work great and provide the highest ROI. Some may want to work with a CPA if it gives them extra piece of mind, which can still produce good ROI. However, it’s not required to do that as automated programs like ours can quickly and accurately crunch the numbers on most rental properties.
If you’re interested in finding out how much you could save from doing a cost segregation study for your residential property, check our free rental property refund calculator.