A real-estate investor with a 311-unit portfolio breaks down the tax rule that saved her hundreds of thousands of dollars last year — and even allowed her to claim a $167,000 check from the IRS

• Anne Curry has a real-estate portfolio of 311 rental units.
• She shared with Insider a tax strategy she recently started using: cost segregation.
• The strategy has allowed her to save hundreds of thousands on taxes upfront.

When it comes to real estate investing, Anne Curry is a seasoned pro.

According to property tax documents obtained by Insider, she has amassed a portfolio of 311 units over the last 25 years, and she has employed nearly every strategy in the book while navigating various market cycles.

There isn’t much she hasn’t learned about real estate investing.

So when she heard about a specific tax strategy on a podcast two years ago, she was surprised that she’d never heard of it before.

What is the plan? Cost division. It enables real-estate investors and homeowners to defer depreciation on their property and its components, such as HVAC systems and plumbing. Investors in residential properties can claim this depreciation over a 27.5-year period. Investors can claim cost segregation in advance to offset property taxes early 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 was quoted as saying by Insider.

To take advantage of this early depreciation, investors must conduct a cost segregation study on their property. A cost segregation study takes about a month or two to complete, according to Rocket Mortgage. During the study, a property and its depreciating components are independently appraised to determine how much depreciation they will experience over a 27.5-year period (again, for residential buildings; other timelines are used for other types of properties). The property owner can then claim the total amount in five-year increments.

Curry has used the strategy to save hundreds of thousands of dollars in taxes since learning about it, according to a breakdown from Cost Segregation Authority, which she used to conduct the studies on her properties. According to the document, she saved $955,733 last year.

Curry received some of the money in cash because she had studies done on properties she purchased years ago and was able to amend her 2014-2017 tax filings and claim depreciation retroactively. This allowed her to get back tax money she had already paid — this year, the Internal Revenue Service sent her a $167,850 check, which Insider saw.

Considerations Before Using Cost Segregation

Before conducting a cost segregation study, consider the type of income you want to offset. Real-estate investors, according to Bernard Reisz, a CPA and the chief education officer at ReSure, a real-estate investing tax consultancy, can only use depreciation to offset passive income, not active income. Active income is earned from one’s regular job, whereas passive income is earned from rental income, bond and stock investments, book sales, and other sources.

If you’ve had a strong year in terms of passive income, Reisz suggests conducting a cost segregation study. Otherwise, the study’s cost may not be justified. Real-estate investors with large portfolios are typically the best candidates, according to him. Short-term rental owners, on the other hand, are subject to different rules that allow them to offset their active income in certain circumstances.

Another factor to consider is the value of the land versus the building, according to Reisz, because IRS rules state that land cannot depreciate. As a result, in New York City, for example, much of a property’s value is derived from the land it sits on, rather than the building itself, because land in the city is scarce. That means the amount of depreciation that could be carried forward would be a smaller percentage of the purchase price. According to him, in less populated areas, the building is more valuable relative to the land, so a cost segregation study may be more beneficial for investors with properties in these areas.

It’s also important to remember the rules for cost segregation from the Tax Cuts and Jobs Act of 2017. Investors could depreciate their assets up to 100% of their costs until last year. This year, the figure is 80%, and it will fall by 20% each year until 2027, according to Reisz, who believes it is better to conduct a study sooner rather than later if doing so makes sense.

Then there’s the case of selling a home after conducting an analysis and claiming depreciation early. If a person sells the property before the 27.5-year period is up, they must repay the IRS a pro-rated portion of the money, known as depreciation recapture.

Of course, property owners will be unable to claim depreciation in the future if they require it. Curry, on the other hand, prefers to have the savings up front and advises new investors to consider using the strategy because it could help them scale up their portfolios faster. She also stated that it is beneficial if an investor had a particularly prosperous year.

“The idea is you use that money to go buy other investment properties,” she went on to say. “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 conducting a cost segregation analysis. Curry’s studies ranged from $2,250 to $8,450 depending on the type of property. However, Curry stated that the upfront tax savings outweighed the costs.

She also advised investors planning to use the strategy to find lenders who understand the strategy or to explain their plans to a lender. This is due to the fact that claiming depreciation in advance will appear on tax returns as if one has no income, and a lender unfamiliar with cost segregation will deny future loans to buy properties.

Given the complexities of the issue, Curry advised investors to consult with tax professionals before deciding whether a cost segregation analysis is appropriate for them.