Cost Segregation for a Duplex or Small Rental Property

Start with the rental and personal-use portions

A duplex can include both your home and a rental unit. The allocation between those uses matters before evaluating depreciation. Land itself is not depreciable.

Cost segregation examines how eligible property costs are classified for depreciation. A study should support the classifications and amounts rather than simply promise a large first-year deduction.

Ask whether the deductions are useful to you

The result depends on the property, placed-in-service date, ownership, tax position, and applicable rules. A projected deduction does not automatically equal a reduction in the tax you owe that year.

Ask your tax adviser to compare the expected benefit with study costs, return-preparation work, and any effects when the property is sold. Have the adviser evaluate loss limitations and the treatment of prior depreciation.

Keep the tax model separate from mortgage qualification

A tax strategy does not establish a property’s lending value or guarantee that additional income can be used for a mortgage. The lender applies its own income and asset documentation rules.

If a refinance or purchase is planned, let the lender know about material tax-return changes so the financing review uses the correct documents.

Questions for your tax adviser

• Which portions of the property are eligible rental use?
• What costs and records support a study?
• When could the deductions affect my actual tax liability?
• What happens to basis and tax treatment when I sell?

Sources and program details

These references support the program details discussed above. The program selected for your loan and its current requirements control your application.

• IRS: residential rental property
• IRS: cost-segregation examination guide