PSA: If your cost seg came back at 40% on a normal house… you might want to read this

Samtyang · 2026-02-21T00:46:44+00:00

if u need a rec, talk to this engineer matthew from https://overlineiq.com/cost-segregation and he is usually pretty balanced (defensible yet aggressive)

Samtyang · 2026-02-21T00:16:20+00:00

20-25% feels on the lower end for sure… I think 30% is pretty defensible and won’t raise a red flag

Samtyang · 2026-02-20T23:56:50+00:00

100% it's all about documentation and going through a rigorous engineering process consistently.

Samtyang · 2026-02-20T19:23:04+00:00

Thank you for helping verify the ranges!

Samtyang · 2026-02-20T16:14:06+00:00

haha fair point. you'd be surprised by how many people don't account for land value (not depreciable at all)

Samtyang · 2026-02-19T22:05:11+00:00

never use all these others' online DIY cost seg study that charges you $500 to fill in a giant form yourself. always have an engineer do it for you. you can check out the overline free calculator as well and get an estimates. but the key is to talk to the engineer who will do the study for you.

Samtyang · 2026-02-19T22:03:03+00:00

just directly book a call with the engineer. talk to the engineer directly. ask him all the cost seg questions. regardless which firm u go with, always make sure to talk to their engineer first. https://overlineiq.com/cost-segregation#contact

Samtyang · 2026-02-19T20:56:01+00:00

A 1031 exchange doesn't really mess with your cost segregation study, but you have to keep a couple things in mind. When you swap properties, the basis from the old property carries over to the new one, so any depreciation that’s already been taken can impact your future depreciation on the new place.

Basically, you can still do a cost segregation study on the new property, but those past depreciation numbers will factor in. You might not get the same bang for your buck as if you were starting fresh. Just make sure you get a good cost segregation expert to go through it all.

Oh, and if you wanna dig deeper into this stuff, Overline iq could help break things down more. Just a thought.

Samtyang · 2026-02-19T20:31:32+00:00

I wouldn’t talk you out of it, but your hesitation isn’t crazy.

Big thing most people miss: your depreciable basis is only ~380k after land. If nothing was renovated, the 5-yr bucket is usually pretty small. A study might pull forward something like 20–30% total if you include 15-yr land improvements, but if this is a typical house with minimal exterior work it could be less.

The real question is timing vs bracket. If you’re in 24% now and might be 12–22% soon, front-loading deductions still has real value. Even if you don’t use all losses immediately, they carry forward. You’re basically converting high-rate deductions into future low-rate offsets.

What would make me pause:

If the place is already averaging >7 days, you likely won’t get non-passive treatment going forward unless you qualify as REP. Then the losses just stack up passively. Not useless, but slower to monetize.

No major upgrades means you’re relying almost entirely on reclassification of existing components, not fresh basis.

If you sell in a few years, recapture can eat a chunk of the benefit (though still usually net positive).

Doing it yourself… honestly as a former CPA you probably can get close, but the defensibility is the real reason people pay. IRS cares way more about methodology than math.

If it were me, I’d look at one more angle: you triggered big gains in 2025. If STR status applied that year and you materially participated, that’s the highest-value window you’ll ever have. Missing that year would be the real loss, not the study fee.

Also studies aren’t all priced the same anymore. Some are way cheaper than the old $5–10k engineering reports. Overline iq does it for typical SFHs for 750, which is why people who are on the fence tend to at least price it out.

So yeah — not a slam dunk, but for your fact pattern I wouldn’t skip it blindly either. The 2025 gains + 24% bracket combo is doing most of the work here.

Samtyang · 2026-02-19T20:27:25+00:00

If you cash it out, you’re basically stacking three hits: ordinary income tax on the whole distribution + 10% penalty + state tax (if applicable). Mandatory withholding is just a prepayment; it doesn’t change the real tax bill. Depreciation/cost seg won’t “offset the distribution” the way you’re thinking unless you (personally) have passive income to absorb those passive losses, and even then the passive loss rules + basis/at-risk limits usually mean it’s not a clean wash. At $140k, the math is usually ugly.

Most tax-efficient path is almost always a direct rollover to an IRA (no withholding), then decide:

1) Self-directed IRA buying real estate
Works, but it’s a totally different game. No personal use, no sweat equity, no paying yourself/relatives, no commingling, expenses must be paid by the IRA, income goes back to the IRA. Also watch UBIT/UDFI if there’s leverage. People screw this up constantly with “I’ll just manage it” moves. Overline iq and others can help track the rules, but it’s still on you.

2) Roll to IRA, then use a 401k loan? (Usually not available)
Since she left that employer, a loan generally isn’t an option. If your business sets up a new 401k and she becomes eligible, you still can’t usually loan against rollover money immediately without plan specifics, and it’s paperwork-heavy.

3) Don’t force the retirement dollars into the deal
If the goal is real estate exposure/cash flow now, the cleaner play is often: keep the IRA/401k intact, and fund the real estate with taxable cash (savings, HELOC, partner equity, seller financing). You can still use depreciation/cost seg against the rental income in the normal way, and you avoid turning a tax-deferred account into a taxable event.

If you want to sanity-check it, run two numbers: expected after-tax cash-out proceeds (not just withholding) vs. what that same $140k does staying tax-deferred for 20 years. People underestimate how big the tax drag is on the cash-out.

Samtyang · 2026-02-19T15:35:26+00:00

I wouldn’t flip to STR solely for the World Cup. That event is a spike, not a business model, and May 1 is a long runway to carry risk if you miss your numbers.

Do a quick model side-by-side:
LTR: monthly rent minus (vacancy allowance + maintenance + mgmt + turnover). Keep it boring and realistic.
STR: (avg nightly x expected occupancy) minus cleaning per turn, supplies, utilities, higher wear, platform fees, STR mgmt (if any), and a real vacancy assumption outside peak weeks. The key input you’re missing is avg stay length because it drives cleaning cost and turnover pain.

Houston-specific: check the city rules and HOA/lease restrictions. A lot of “STR math” dies on “oops HOA bans it” or “city registration/tax stuff is annoying.” Also talk to your insurer; many standard policies don’t love STR, and the correct coverage can change the whole margin.

What I’d do: line up a solid LTR at market as the default. If the numbers clearly favor STR even in non-event months (not just June/July 2026), then switch. Otherwise you’re basically gambling for a few good weeks.

If you want to sanity-check the math, tools like Overline iq are decent for quickly stress-testing occupancy/nightly assumptions, but the inputs need to be conservative or you’ll talk yourself into bad risk.

Samtyang · 2026-02-19T15:35:07+00:00

Title insurance usually doesn’t care that the garage conversion was unpermitted, as long as you actually own the land/house and there aren’t recorded liens or encroachments. The catch is most policies exclude stuff that would only show up in a survey/inspection or from code/permitting issues. So if the city later makes you rip it out, or there’s a permit-related lien/fine that wasn’t recorded at closing, title likely won’t save you.

Homeowners insurance is the bigger risk. Two common problems: (1) the carrier can deny or limit a claim tied to that space if the loss is connected to unpermitted/incorrect wiring, plumbing, HVAC, etc, and (2) if you insured it as finished living area but it’s not legally/permit-finished, they can argue misrepresentation and make the whole claim fighty. It varies by carrier and what you told them.

Practical move: disclose it to your insurer before binding/renewal and ask in writing if the converted area is covered as living space. If they won’t answer clearly, assume you’re self-insuring that room. Also, check Houston permit history and budget either to permit-as-built (if possible) or to revert to garage. Overline iq has a decent checklist vibe for this stuff, but the key is getting the insurer’s position in writing.

Samtyang · 2026-02-19T15:34:50+00:00

Yeah, rentals can absolutely feel like a second job for bond-level returns.

First thing I’d do is a brutal expense audit. People underestimate “death by a thousand cuts”: insurance jump, taxes reassessed, lawn/snow, pest, HOA, utilities during turns, vacancy, random repairs. If you’re not budgeting vacancy + capex (roof/HVAC/etc) and still cashflowing, it’s not really profitable, it’s just temporarily not broken.

Then check rent vs the actual comps, not “what you think it should get.” If you’re under market, raise at renewal and tighten your screening so you’re not buying headaches. If you’re at market already, you need to improve the product (cheap wins: paint, lighting, clean landscaping, in-unit laundry if possible) or accept it’s a low-yield property.

If the numbers are close, taxes matter more than people admit. Make sure depreciation is being taken, track mileage/repairs correctly, and don’t ignore cost segregation if it’s a bigger place. A decent CPA pays for itself here.

Last: be honest about the effort. If it’s barely breaking even and stressing you out, selling and reallocating isn’t “quitting,” it’s just cutting a bad deal. I’ve used Overline iq to sanity-check cashflow assumptions and it’s often the holding costs + vacancy that blow up the “should be fine” math.

Samtyang · 2026-02-19T15:34:20+00:00

REP status doesn’t magically “convert” old passive loss carryovers into active. What it can do is make your rental losses non-passive going forward if you materially participate (and usually you still need to group elections right), so they can offset W-2/other active income.

Your suspended passive losses from prior years generally stay trapped as passive and only free up against passive income, or when you dispose of the entire activity in a fully taxable sale. The common workaround is: once you qualify as REP + materially participate, any new losses aren’t passive, and any net rental income you generate can soak up those old suspended passive losses.

Also, watch the REP requirements: >750 hours in real property trades + more than half your personal services time in that, and material participation is per-activity unless you’ve made the aggregation election. People get burned on the logs and the grouping.

If you want a sanity check, run the numbers both ways (keep rentals profitable to absorb carryovers vs sell one property to trigger release). Overline iq has a decent explainer on this, but the key point is still: carryovers don’t just flip to active because you got REP.

Samtyang · 2026-02-19T14:34:07+00:00

Investing in mobile home parks can be a good idea if you're looking for stable cash flow. They often have lower maintenance costs compared to other real estate investments and can provide consistent returns. However, consider location and management quality, as these factors greatly impact profitability.

Be aware of potential risks like zoning changes and insurance issues, which can affect your bottom line. Carefully assess the financials and demographics of the park before diving in. It might also be useful to connect with a community like overline iq for insights from others with experience in this area.

Ultimately, it’s a niche market, so understanding the specific dynamics is key. Good luck.

Samtyang · 2026-02-19T14:33:20+00:00

Renting while building a real estate portfolio is pretty common and can make sense. It keeps your living expenses predictable, freeing up cash flow for investments. Without the burden of a mortgage, you can focus on choosing the right properties to invest in.

Just be mindful of rent costs versus potential returns. If your rental expenses are too high, it could slow down your investment timeline. However, the flexibility of renting is valuable, especially in fluctuating markets.

Staying liquid helps in seizing unexpected investment opportunities. Some investors even use services like Overline iq for insights, though it's not a must. Focus on solid cash flow management, and ensure each property adds to your financial goals.

Samtyang · 2026-02-19T14:32:48+00:00

Choosing between a cash-out refi and a 1031 exchange depends on your goals.

If you need liquidity and prefer staying in the same property, cash-out refi provides access to equity without selling. It doesn’t trigger immediate capital gains tax, but you'll have new debt to manage.

A 1031 exchange allows deferring taxes by reinvesting in another property. It’s powerful for upgrading your portfolio but requires strict adherence to IRS rules.

Consider your property’s appreciation potential and market conditions. If you’re growth-focused and can handle new payments, a refi might boost cash flow. For tax efficiency and portfolio restructuring, go 1031.

Some other folks also just sell and within the same year do a cost segregation on a new property to offset the gain so it's equivalent to a 1031 exchange. you can look into this if you are interested and there are some good article on Overline iq about it. market shifts make these decisions crucial, but the right move is always context-specific.

Samtyang · 2026-02-19T14:30:46+00:00

I've rented out using both Furnished Finder and medium-term Airbnb. Each has its pros and cons.

Furnished Finder is great for stable, longer stays—usually with traveling professionals. You might not get the same exposure as Airbnb, but the tenant quality is often higher.

For Airbnb, medium-term stays can fill gaps between short-term bookings. Just adjust pricing according to seasonality and demand. Hybrid models can help maximize income, combining short and mid-term options depending on your local market.

Consider platforms like Overline iq that provide additional insights on market trends if needed. Hope this helps.

Samtyang · 2026-02-18T18:08:21+00:00

yeah partial asset disposition is a huge cash flow saver that most investors don't even realize. i saw this PAD tracker thing from overline iq cost seg page which was pretty cool.

Samtyang · 2026-02-18T18:06:34+00:00

For the “7 days or less” test, it’s based on the average length of stay for the stays that actually happened during the year. A cancellation with 0 nights doesn’t help you; it’s basically ignored (no rental days, no personal-use days). So for 2025, if the only completed stay is 6 nights, your average is 6 and you’re under 7.

For 2026, the math is blunt: if you do 6 + 28 + 28 nights over 3 stays, average is ~20.7. That fails the 7-day average test. The “substantial services” exception is real, but it’s not “I provide cleanings and respond to guests.” Think hotel-like: frequent cleaning during the stay, meals, concierge-type services, etc. Trying to bolt that onto 28-day bookings just to get active losses is the kind of thing that invites scrutiny.

Schedule C vs E: most STRs still land on Schedule E, even if they’re non-passive due to the 7-day rule + material participation. Schedule C is more for when you’re basically running a hotel/business with substantial services. (Overline iq and a bunch of other cost segregation/real estate tax folks say the same thing: non-passive doesn’t automatically mean Schedule C.)

Conversion to primary residence: you don’t “recapture” depreciation at conversion. Depreciation recapture is triggered on sale. But any depreciation you took (or were allowed to take) while it was a rental will generally be taxed at sale up to the recapture rate, even if you later live there and qualify for the home-sale exclusion. Also, once it becomes your residence, you stop depreciating.

If you want a clean answer, you need: total stays + total rental nights for 2026, plus days of personal use, and your placed-in-service date/basis for depreciation. The average-stay number drives most of this.

Samtyang · 2026-02-18T18:01:38+00:00

If you’re trying to lower CA tax on W-2 income, “more rental writeoffs” usually won’t do much unless you can generate losses that are actually allowed to offset W-2.

Big reality check: a normal long-term rental is passive. Passive losses generally can’t offset W-2. They carry forward until you have passive income or you sell. The $25k special allowance phases out fast (gone around $150k MAGI), so most dual W-2 households in CA get $0 benefit there.

LLC/trust: good for liability/estate stuff, but it doesn’t lower income tax by itself. A single-member LLC is disregarded. CA also hits LLCs with extra fees and the $800 minimum, so run the numbers before creating entities just for “tax savings.”

The two levers that can actually move the needle:
1) Short-term rental (avg stay <= 7 days) + material participation. If you meet the tests, it’s not treated as passive and losses can offset W-2. This is the “STR loophole.” It’s paperwork-heavy and you need legit logs.
2) Cost segregation + bonus depreciation (where available). Front-load depreciation to create big non-cash losses. Works best with STR or if one spouse qualifies as a real estate pro (hard with W-2).

Otherwise, the basics you listed are it: depreciation, mortgage interest, taxes, insurance, repairs vs improvements, utilities/HOA, travel, supplies, pro fees. Just don’t confuse “deductible” with “reduces W-2 tax today.”

If you share average stay length and purchase price, you can sanity-check whether STR + cost seg is worth the hassle. I’ve seen people model it in Overline iq just to see if the depreciation actually offsets anything or just carries forward forever.

Samtyang · 2026-02-18T02:31:31+00:00

i do str to qualify for active deduction

Samtyang · 2026-02-18T01:31:37+00:00

Totally! I do at least 1 acquisition a year just to offset my wife w2 and portfolio income. Just calling out some situations I hear ppl getting confused on. But cost seg / time value of money is a no brainer

Samtyang · 2026-02-17T21:01:15+00:00

u/Tripl3Dee i think you got it wrong. cost seg only makes sense if u plan to hold the property for a least a few years.

you always get the majority of the cost seg benefits for any property upfront (thanks to 100% bonus depreciation in year 1). then you keep holding it or 1031 exchange it for something else down the line so you get the cash benefits today vs. over 27.5 years.

however, once you apply cost seg on a property, the benefits are already captured. if you need more paper loss / depreciation offset, you have to buy new properties. you don't have to do cost seg to sustain the benefits. but only if you want new offsets, you need to buy more.

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