Can You Do Cost Segregation on a Primary Residence?
Cost segregation primary residence applications are not permitted under standard tax rules because primary residences used exclusively for personal purposes are not depreciable property. Primary home cost segregation requires that the property be used in a trade or business, or held for the production of income. Personal residence cost seg only becomes possible when the home is converted to rental use or has a legitimate business use portion.
Understanding whether you can cost seg your home depends on the use of the property. Home cost segregation and primary residence depreciation are limited to scenarios where the property, or a portion of it, qualifies as depreciable under IRS rules. This guide clarifies when cost segregation applies and when it does not.
TL;DR – Key Takeaway
Cost Segregation Primary Residence
Cost segregation primary residence applications are not allowed under IRS rules because primary residences used for personal purposes do not qualify for depreciation. Depreciation is a tax deduction that applies to property used in a trade or business, or held for the production of income. Personal use property does not meet this requirement.
The fundamental barrier to cost segregation primary residence studies is the lack of depreciable basis. Without depreciation, there is nothing to accelerate. This rule is consistent across all personal use assets, not unique to cost segregation.
For an overview of cost segregation and eligible property types, see the core cost segregation guide. For detailed eligibility rules, see cost segregation eligibility and rules.
Primary Home Cost Segregation
Primary home cost segregation is a common question from homeowners who have heard about the strategy and wonder if it applies to their personal residence. The answer is no for homes used exclusively for personal purposes. Primary home cost segregation requires a depreciable interest, which personal residences lack.
Why primary home cost segregation does not apply
- Primary homes are not depreciable under IRC Section 167 and related provisions.
- Cost segregation accelerates depreciation, which cannot exist without depreciable basis.
- Personal use property does not meet the business or income production requirement.
Primary home cost segregation becomes theoretically possible only if the home is converted to rental use or has a legitimate business use portion that is separately depreciated.
Personal Residence Cost Seg
Personal residence cost seg shares the same limitations as primary home cost segregation. Personal residences are not depreciable, and cost segregation cannot apply to non depreciable property. Personal residence cost seg is only relevant when the property transitions from personal use to business or investment use.
Table 1: Property Use vs Depreciation Eligibility vs Cost Segregation Applicability
| Property Use | Depreciation Eligibility | Cost Segregation Applicability |
|---|---|---|
| Exclusive personal use | Not eligible | Not applicable |
| Partial rental use (portion rented) | Eligible for rental portion only | May apply to rental portion if economically justified |
| Home office (qualified business use) | Eligible for business use portion only | Technically possible but rarely practical due to small basis |
| Converted to full rental use | Eligible after conversion | Applicable based on conversion basis and components |
Personal residence cost seg planning should focus on conversion timing and documentation if the property is transitioning to rental or business use.
Can You Cost Seg Your Home
Can you cost seg your home depends entirely on whether your home is used for business or investment purposes. If your home is your primary residence with no business or rental use, the answer is no. If you rent out a portion, convert the home to a rental, or use a portion for a qualified business, cost segregation may apply to the depreciable portion.
Scenarios where can you cost seg your home becomes yes
- You convert your primary residence to a rental property and begin depreciating it.
- You rent out a portion of your home and depreciate that portion separately.
- You use a portion of your home for a qualified business and claim home office depreciation.
Even in these scenarios, can you cost seg your home from an economic standpoint depends on whether the depreciable basis and component mix justify the study cost. Partial use allocations often result in small depreciable amounts that do not support cost segregation fees.
Home Cost Segregation
Home cost segregation is most commonly discussed in the context of converted properties. When a homeowner moves out and begins renting the property, the home becomes depreciable and home cost segregation becomes a valid consideration.
The depreciable basis for home cost segregation after conversion is typically the lesser of adjusted basis or fair market value at the time of conversion. Land value is excluded, and the remaining building basis is what can be depreciated and potentially accelerated through cost segregation.
Home cost segregation decisions should be coordinated with your tax preparer to ensure proper conversion documentation, basis calculations, and placed in service dates.
Primary Residence Depreciation
Primary residence depreciation is generally not allowed under tax law. Depreciation requires that property be used in a trade or business, or held for the production of income. Primary residences held for personal use do not meet this requirement.
Exceptions to the primary residence depreciation prohibition
- Portion of home used for qualified home office and depreciated as business property.
- Portion of home rented to tenants and depreciated as rental property.
- Entire home converted to rental use after moving out, triggering primary residence depreciation eligibility.
Primary residence depreciation is the foundation for cost segregation. Without depreciation, cost segregation cannot apply.
Partial Rental or Business Use
When a primary residence has partial rental or business use, depreciation and cost segregation may apply to the allocable portion. The calculation requires determining the percentage of the home used for business or rental purposes, then applying that percentage to the depreciable basis.
Considerations for partial rental or business use
- Home office depreciation is typically a small percentage of total basis, making cost segregation impractical.
- Rental of a room or accessory unit can support depreciation, but the allocable basis may be too small for cost segregation.
- Coordination with your CPA is essential to ensure proper allocation and compliance with IRS rules.
Partial use scenarios rarely justify cost segregation due to small depreciable amounts, but they are legally permissible if the economics support the study.
Conversion to Rental Property
Conversion to rental property is the most common scenario where a former primary residence becomes eligible for cost segregation. When you move out and begin renting the property, it transitions from personal use to income producing use, triggering depreciation eligibility.
Table 2: Conversion Step vs Tax Implication vs Cost Segregation Impact
| Conversion Step | Tax Implication | Cost Segregation Impact |
|---|---|---|
| Property converted to rental use | Depreciation begins at placed in service date | Cost segregation becomes applicable |
| Depreciable basis determined | Lesser of adjusted basis or FMV at conversion | Basis amount drives cost segregation feasibility |
| Land value excluded | Only building basis is depreciable | Reduces total basis available for acceleration |
| Study implemented post conversion | Form 3115 may be required for catch up | Timing affects implementation approach and filing requirements |
For questions about other property types, see whether cost segregation applies to foreign property and how often cost segregation can be performed.
Frequently Asked Questions
Can you do cost segregation primary residence studies?
You cannot do cost segregation primary residence studies on homes used exclusively for personal purposes. Cost segregation requires depreciable property, and primary residences do not qualify for depreciation deductions under standard tax rules.
Does primary home cost segregation apply if I rent part of my house?
Primary home cost segregation may apply to the portion of the property used for rental or business purposes. The depreciable basis is limited to the allocable portion of the home, and cost segregation can only apply to that business or rental portion.
What about personal residence cost seg if I convert to rental later?
Personal residence cost seg becomes possible after conversion to rental or business use. The property must be placed in service as a rental or business asset, and cost segregation can be applied based on the depreciable basis at conversion.
Can you cost seg your home if you have a home office?
Can you cost seg your home with a home office depends on whether you claim home office depreciation. If you depreciate the allocable portion of your home for business use, cost segregation could theoretically apply to that portion, but the small basis and complexity often make it impractical.
Is there any scenario where home cost segregation makes sense?
Home cost segregation can make sense if the home was converted from personal use to rental use and has substantial depreciable basis and eligible components. Pure primary residences with no business or rental use do not qualify.
Does primary residence depreciation exist for any tax purpose?
Primary residence depreciation is generally not allowed for personal use homes. Depreciation requires property used in a trade or business, or held for the production of income. Primary residences held exclusively for personal use do not meet this requirement.
What happens if I try cost segregation on a primary residence?
If you attempt cost segregation on a primary residence without a valid business or rental use, the IRS would disallow the depreciation deductions. Cost segregation requires depreciable property, which excludes pure personal use assets.
Can I do cost segregation when I sell my primary residence and buy a rental?
You can do cost segregation on the rental property you purchase, but not on the primary residence you sold. The rental property becomes depreciable when placed in service, and cost segregation can apply based on its acquisition basis and eligible components.