Last week, you learned why cost segregation is an investor’s secret weapon, supercharged by 100% bonus depreciation. Now, it’s time for the “how-to.” How do you actually get a study done? Who do you hire? What does it cost? And what’s this “Depreciation Recapture” trap that can cost amateurs their entire tax savings? In this tactical follow-up, the 5-Minute PRIME Podcast, host Martin Maxwell delivers the complete playbook for executing a cost segregation study like a seasoned professional.
Tune in to learn:
- Who to Hire (An Engineer, Not Your CPA): The critical difference and what a high-quality study really costs.
- The “Perfect Candidate”: Which properties are a goldmine for cost seg (Apartments, Self-Storage) and which are a “waste of time.”
- The Fatal “Depreciation Recapture” Trap: The million-dollar mistake amateurs make when they sell.
- The Pro’s “Escape Hatch”: How to use a 1031 Exchange to defer your tax bill… indefinitely.
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Show Notes: Cost Segregation
Key Takeaways
- Hire an Engineer, Not Just a CPA: A defensible cost segregation study is an engineering-based report. Your CPA’s role is to use this cost segregation report for tax filing, not to create it.
- It’s an Investment, Not a Cost: A quality study costs 5,000-5,000-15,000 but can generate massive ROI. On a $2M property, this could lead to $175,000 in first-year tax savings.
- Identify the “Perfect Candidate”: This cost segregation strategy is a “sniper rifle” for properties with a cost basis over $1M, especially those rich in personal property like apartment buildings, self-storage facilities, and data centers. It is a waste of time for smaller single-family rentals.
- Beware the Recapture Trap: When you sell, the IRS “recaptures” the accelerated depreciation and taxes it at your high, ordinary income tax rate, not the lower capital gains rate, potentially wiping out all your initial savings.
- The Pro’s Escape Hatch: Use a 1031 Exchange to sell the property. This defers both capital gains and the costly depreciation recapture tax, allowing you to roll your gains and tax liabilities into the next, bigger deal.
- The Master Play: The ultimate strategy is a cycle: Buy, Cost Segregate for a paper loss, use the tax savings to buy more, and then 1031 Exchange into a larger asset to repeat the process, indefinitely deferring the tax bill.
Action Step:
- Build your professional team before you need them by identifying and saving the contact information for two specialized, engineering-based cost segregation firms in your area.
- Prepare your “ready team” so that when you analyze your next potential deal over $1 million, you can immediately contact these experts to accurately model the massive Year One tax savings from a study.
Mentioned in This Episode
Episodes to Revisit:
- Episode 59: Self-Storage Investing
- Episode 62: Data Center Opportunities
- Episodes 101 & 102: Deep Dive on the 1031 Exchange
Key Strategies & Legislation:
- The “Paper Loss Power Play” Strategy
- “One Big Beautiful Bill Act” (and 100% Bonus Depreciation)
- The PRIME Investing Framework (‘Research’ and ‘Manage’ phases)
- The “Triple Threat” Strategy
- Depreciation Recapture
- 1031 Exchange
Challenge for Today:
- Use the precise Google search term “cost segregation engineering firm” followed by your state’s name to filter out general tax preparers and locate specialized professionals.
- Thoroughly vet two firms by reviewing their websites for key trust signals like detailed case studies, listed engineering credentials, and a clear, IRS-defensible methodology.
- Create a digital or physical folder named “My Pro Team” and save the contact information for your chosen firms, solidifying a critical part of your investment infrastructure.
