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If you can accelerate 25% of a million dollar property and get bonus on it, then you're getting a$250,000 a year deduction instead of a$36,000 a year deduction.
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Depreciation is essentially a 100% off discount coupon that the IRS gives you, but it's spread out over time.
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You can only get a little piece of that.
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There are two asset classes where you can't fully write off the thing and complete it, which is pretty wild.
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You have a million dollar property there, the whole thing is 15 years.
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You can write off a million dollars in your taxes in that first year.
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Pretty insane.
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His wife was a teacher.
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She was making like 40k a year.
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Instead of 40,000 a year, they would be saving hundreds of thousands a year.
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Rather than spread it out over 27 or 39 years, you can take a massive portion of that up front.
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It massively changes the cash flow so you can reinvest into more property.
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Today we're going to be talking about cost segregation and how we've got a nice little ATM for you today, where with cost segregation on average, what Chris has seen is if you put one dollar in, you typically get$10 back.
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So definitely going to be a really interesting strategy for a lot of you if you've got some of these larger assets, especially multifamily or something similar.
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So we're going to dive right in and uh let's get started.
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Yeah, awesome.
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Great to be here, Vince.
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All right, Chris, what city are you located in?
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I live in a really small town.
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It's called Salida, Colorado.
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We're about two hours west of Colorado Springs.
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Okay.
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So I'm thinking about I've been to Denver.
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I know Colorado Springs, I think, is about an hour south.
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So if you're two hours west of there, that's got to be.
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Are you in the mountains kind of in the middle of nowhere?
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Yeah, I'm surrounded by four teeners.
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I'm surrounded by three different mountain ranges, actually.
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Okay.
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Very interesting.
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That's cool.
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Uh there's a guy I chatted with, I think, who who did climb like a bunch of mountain peaks out there.
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I forget his name.
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I'll have to connect you if I think of him.
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But uh anyway, so you're doing you're doing cost segregation right now.
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I don't know how long uh you've been doing this or what you had done in real estate prior.
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So uh let's go back to kind of how your real estate journey started so we can kind of map back how you got here to doing cost segregation.
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Yeah.
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Um, so full transparency, I I started in business acquisition.
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Um, I had bought a boring service-based business and was scaling it.
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Uh, and it was really bad acquisition, did not go well.
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Uh, I lost a lot of money in that deal.
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So I know a lot more about due diligence and like what to look for in those deals.
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And it was through that business that I first came across cost segregation.
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So we had been running the business out of a facility.
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Um, and then I kind of discovered it after meeting with the owner of of our company of Maven cost segregation.
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And uh after like looking at different properties, I realized, oh, hey, if we buy this property, if we lease out some of the other units in this property, I can now uh do a cost segregation, accelerate a lot of that depreciation forward, and then reduce my taxes to be able to put more back into the business.
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So it was something we were heavily looking at before things kind of like fell apart in my hands at the time, which was which was crazy.
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So fast forward a little bit, um, Sean was looking to scale his business and I was able to step in and help and join in this role.
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So this is actually a really interesting concept and topic, and we'll talk about it at the 101 level today.
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First of all, because that's where I am.
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I don't have an extremely deep understanding of cost segregation myself.
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Uh, as of this episode, I will probably know a ton about it over the next 12 months just based on the rate that I'm learning from interviewing everyone and studying the things like this on my own.
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But this sounds like something that could really juice your ROI on a deal because a lot of times when people are looking at real estate deals, it depends, first of all, where you're kind of positioned, right?
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So I'm gonna just briefly touch on the different ways that people might be investing.
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There might be people investing on the GP side of real estate where you're the owner, you're the one actually doing it, and you would be the one potentially pursuing cost segregation on a deal for savings.
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And then the limited partner, if you're investing in a larger commercial real estate deal, you're not doing anything because you're just writing a check and getting little checks back.
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And then I guess those are really kind of the only two plays here.
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Or if you're a smaller time investor where you're just doing these deals on your own and there are no limited partners investing, it's just all you, you would actually still be pursuing potentially cost segregation on some of these deals because you want these savings, they're just for you.
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Maybe there's no other partners.
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But this could really change your returns because if you think that you're, you know, I've noticed people have a buy box, they've got an ROI that they target.
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So, you know, if you're like, hey, if I'm gonna be active on a real estate deal, I want at least 20% returns per year if I'm gonna be actively doing it, or maybe it's more than that.
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But this might be something that drastically improves your returns and can maybe turn a good deal into a great deal.
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I'm guessing that people shouldn't go buy a deal just because of this, but if this is something they could do that takes it from good to great or great to a home run, you know, this might be something to really look at.
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Yeah, totally agree.
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Um yeah, absolutely.
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I mean, like you're gonna take the depreciate depreciation anyway in a property.
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When you get that investment property, you claim the depreciation.
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It's not optional.
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A lot of people make that mistake sometimes.
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We've come across that.
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Um if you're gonna be taking this depreciation rather than spread it out over 27 or 39 years, you can take a massive portion of that up front and it massively changes the cash flow so you can reinvest into more properties come tax time, which is a huge lever.
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So if we kind of illustrate this for people, because cost segregation might sound like a fancy word if people aren't super familiar with it.
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Cost segregation, correct me if I'm wrong, my understanding of it is let's pretend that I buy an apartment building and it will help people visualize this.
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Maybe it's a hundred units and the value of the land is 25%, the van value of the building itself is maybe 75%.
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And the things that depreciate in value over time, you accelerate the depreciation of all these things, and you get some massive tax write-off in year one.
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So you get all this money back that you can use to go do another deal.
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Is that correct?
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And if not, can you please correct me?
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You're on the right track.
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You're on the right track.
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So um first thing that we would want to start and understand is the depreciation in general.
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You know, depreciation is the non-cash expense that the IRS allows you to take on your taxes so that you continually invest back into the properties you buy.
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It's essentially the IRS saying, like, hey, you bought real estate, we don't want it to deteriorate, please put money back into it.
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Here's the annual deduction that you get.
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And that's all based off of your depreciable basis in that property.
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So for the most part, when you buy a million-dollar home, that's for the most part gonna be your basis.
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I mean, it's not taking into account land values.
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Unfortunately, the IRS doesn't let you depreciate the land value, so we have to take that out.
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So let's just say you get to a million dollar depreciable basis.
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Normally you're gonna be spreading that out uh over 27 and a half years.
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You get like a$36,000 a year deduction on your taxes from their depreciation that you take every year.
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Well, if we can do a cost segregation, the that process is us going into the property with our engineers.
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We re-categorize all the components in the property into things that depreciate on shorter life cycles.
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The the IRS has already outlined in the code that it depreciates faster, right?
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Like uh the decorative lighting, flooring, cabinets, countertops, things like that, like any kind of landscaping you do outside, all that's considered 15-year improvement.
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But when you just buy a property that already exists, it's kind of all lumped into 27 and a half years.
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So we go through, we recategorize everything, we can then put it into these different buckets and move it forward and accelerate it, which is where it's really, really powerful.
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Now, the really cool thing under the current tax law is that you're eligible for bonus depreciation on anything that can be accelerated.
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That means at 100% bonus depreciation, if you can accelerate 25% of a million dollar property and get bonus on it, then you're getting a$250,000 a year deduction instead of a$36,000 a year deduction.
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That's the that's the first year.
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And then the continuation of that over the next 26 years is still gonna be um you know somewhere in the ballpark of like$28,000 to$30,000 that you take each year, which is pretty wild.
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So you're getting more of the depreciation and tax benefit basically upfront or the in year one, whenever you do this, and then you get a smaller one in subsequent years, is that right?
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Correct, because there'd still be real property that we can't accelerate, and that's the chance for that 27-year period.
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So another way to think about it in like really simple terms would be that depreciation is essentially like a hundred percent off discount coupon that the IRS gives you, but it's spread out over time, right?
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You can only get a little piece of that.
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And then if you own the property for that full length of time, then you have discounted essentially the entire depreciable basis of that property.
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But what we do is we change up the math on how you're claiming that coupon so that you can take more of it up front.
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Okay, that's interesting.
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So, does this really make sense for someone that thinks they're going to have a very high income year to help offset some of that?
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Because, you know, if they've got a lot of income in that upper tax bracket above 33 or 35%, it helps avoid that a bit.
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Or does this just make sense no matter what?
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Or are there some cases where, you know, this this may or may not make sense depending on certain circumstances?
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Yeah, to your last point there, there are absolutely uh circumstances where it does not make sense to do it.
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And if I ever talk to a client that's in that situation, I'll absolutely tell them, like, hey, this if you're fixing and flipping and you come to us for cost segregation, that's not a good fit as an easy example.
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It to the bigger question there, it depends on the situation you're in.
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If you're a high income earner, then you want to buy properties and be actively involved in those properties so that if we did a cost segment, it actually offsets your higher income, your higher tax bracket, not passive income.
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Right?
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You don't want to be a high income earner or physician and just invest passively into deals because now if you do a cost segregation, that's only gonna offset your passive income.
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So we have to make sure we're offsetting the right bucket that we want to be offsetting.
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So yeah, uh, I was just gonna say, am I understanding this correctly then that cost segregation is basically the act of going through the study with the engineers and finding those components that you can depreciate and ultimately get the tax benefit from?
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And bonus depreciation is simply the definition of, hey, you were gonna get this much depreciation over 30 years or so, but we're gonna get you like half of that in year one.
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Is that kind of how you you would define and kind of separate those definitions and then like how they work together, or how would you describe that?
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Yeah, I'd say I'd redefine the bonus definition you give there entirely.
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Everything else is like as far as coming through the property and recategorizing it, that's accurate.
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Um, bonus is really a tool that the IRS gives to incentivize investors to continue to invest.
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That's ultimately what it is.
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It's a it's a tax break.
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Um the the bonus uh has changed over the years, but even if you bought a property in previous years, if you didn't cost segregate that, we can look at that again and we can still see if there's bonus left or anything left that we could accelerate and you could still get benefits from it.
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Um oftentimes there is, which is pretty interesting.
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And can you do this on a property that you've owned for a long time, or is this better to do when you just bought something?
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Yeah, if you've owned the property longer than, I don't know, maybe since like 2018 at this point, um, we can absolutely look at it, but it I haven't seen many of those make sense.
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Um got it.
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Unless uh like on the fringe circumstances or that they did like a maybe it was a primary residence that they bought in like 2015, we'll say.
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And now they're um flipping it into a short-term rental.
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They drop a half a million into the property in a massive renovation to prepare it for being an Airbnb.
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Now it actually makes sense because that 500,000, you might be able to get back through a cost segregation.
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In the process, we would actually be able to accelerate some of the normal property as well from 2015.
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Because of the time value of money, this potentially is something that can be extremely, extremely beneficial in the ROI.
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I think that one of the top things, I don't know where it would rank it in in my top five, but it's one of the top things that investors should be thinking about and prioritizing, but they're not, is the velocity of money.
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And it's important because if you're investing in a deal actively, how fast are you going to get your capital back so that you can recycle it into doing more deals faster?
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Because whether you are working at your job or you're doing real estate investing or anything, something that I think about constantly is what's kind of the rate of progress that you have?
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You imagine this Y-axis chart, and is it kind of like this where it's really steep and it's straight up, or is it this slow upward thing?
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Like, would you rather have, you know, three, four, five million dollars when you're 65 or when you're 35?
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And so you can pull these levers and these strategies and learn the rules of the game to figure out how you really can go faster.
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And if you can get your money back faster, then you can do more deals faster.
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And this compounds.
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So I've seen people grow eight-figure real estate portfolios in less than 10 years from scratch.
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I've actually seen a lot of people do it because I've had talked to dozens of them.
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So um this seems like one of those things that's really important, but I want to talk about potential drawbacks because I don't know if there's any free lunch out there.
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And, you know, in what in what ways would people kind of get burned by this or it's not gonna make sense for them if they're thinking about selling it at some point?
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It are there any effects if they're gonna do a cash out refinance?
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I want to know what kind of situations where you know you have to pay this back, or there's any drawbacks here.
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Yeah, I mean, if if you're gonna be like I mentioned fix and flip earlier, um, where you're not gonna be holding on to the property very long, it doesn't make sense.
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The longer you hold a property, the better.
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Um, and the sooner you want to actually do the cost segregation.
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So if you know you're gonna be holding a property for you know at least like two years, like the net benefit makes sense.
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The on the flip side of cost segregation, there's recapture tax.
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So if you do not 1031, then you will experience recapture tax as well as capital gains, right?
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So if you the property sells for more than you initially bought it for, uh, which I think we all hope in our real estate portfolios that that happens, uh, then you're gonna get hit with recapture and that gets added back depending on the category that it's in to uh your normal tax bracket.
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If you're in the really high tax bracket, there's some sections that cap at 25% as much as that.
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So there's a neat little arbitrage that you can do uh if you're in that really high income bracket.
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So that's where it can make sense more to have for like a year or maybe even a little less, like nine months on a property.
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Um but to to when you get hit with that recapture, it's it definitely raises your taxes.
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So the longer you have that, the the more balanced the recapture is.
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Now the thing to think about too with recapture is that um whether you do a cost segregation or not, there is recapture.
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We're just speeding up the rate of that depreciation.
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So if you hold the property longer, uh let's just say 15 years, then it would be much closer to what you would have had in recapture had you not done a cost segregation.
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So it can still help free up that cash flow uh a lot, which is pretty interesting.
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So there's definitely a number of factors that will come into play of people deciding how long they should hold the real estate that they own or not.
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Um, there's a lot of factors in there optimizing the ROI, the market, your personal circumstances.
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Uh, but it sounds like one of the components that maybe should be in that equation is if someone has done a cost segregation, then what does their recapture tax look like based on how long they've owned this property, right?
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Yeah, that's oftentimes something a CPA has to calculate for you, um, like your whoever your current tax advisor is, um, which we we work with all kinds of different uh CPAs and partner with them uh a lot of times.
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So um a lot of times this isn't something like your CPA actually knows how to do.
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So they know how to do some things of that, uh like you know, a 1031 exchange and creating a new adjusted basis in a property.
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Um that can then be the standpoint for a new cost segregation, things along those lines.
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But uh, you know, to your to your point.
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Uh yeah.
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What are what do you think are the most common questions that you're answering over and over for clients that you work with that are exploring a cost segregation?
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I'm curious what things come up the most.
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Yeah, the probably the biggest one that I see um is like how do I accelerate more?
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Like how how do I how can I get to a hundred percent accelerated depreciation in year one?
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Um it's an interesting question that I get because that's that's a big red flag.
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There's very few asset classes in real estate that can be completely written off on the depreciable basis in the first year.
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There's like maybe they just don't know and they're asking that by default.
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It's like exactly it's like people asking me, like, you know, I work as a realtor and they're like, you know, will you work for me for free?
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And it's like, no, like they just don't know, they've no idea how it works sometimes.
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Yeah, exactly.
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So there's definitely some like I mean, I have to help educate people a lot in what I do because it's uh and that's what we love to do too.
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Like we could talk about this all day.
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Um the the the answer to that question though, like how do we accelerate more?
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There are actually two asset classes where you can fully write off the thing and not in a complete year, which is pretty wild.
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So, like a car wash when it's structured the right way, and a gas station when it's structured the right way.
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Um, a lot of times those can be completely categorized as 15-year site improvements, like the entire depreciable basis.
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So you have a million dollar property there, the whole thing is 15 year, you can write off a million dollars in your taxes in that first year, which is uh pretty insane.
00:18:40.799 --> 00:18:41.519
Oh, that's interesting.
00:18:41.920 --> 00:18:48.240
Normally we're gonna get between 20 and 30 percent that we can accelerate on your depreciable basis.
00:18:48.319 --> 00:18:50.720
That's very, very standard across the industry.
00:18:50.960 --> 00:18:55.359
So so there's probably a minimum property value that starts to make sense.
00:18:55.839 --> 00:18:56.960
Yeah, correct.
00:18:57.119 --> 00:19:02.640
We we think uh, like in our opinion, anything over 400,000 and above definitely makes sense to look at.
00:19:02.799 --> 00:19:09.039
Anything below uh is a little bit more of a discrepancy, and you'd want to like be a bit more discerning when looking at the numbers.
00:19:09.359 --> 00:19:09.839
That's interesting.
00:19:09.920 --> 00:19:12.160
Foreheads are 400 is actually lower than I thought.
00:19:12.240 --> 00:19:13.920
I thought you were gonna say something like a million.
00:19:14.000 --> 00:19:16.960
Uh so it looks like uh the door's kind of open to more people.
00:19:17.119 --> 00:19:22.880
Um yeah, I'm curious, like the top five things that you think that uh people need to know about cost segregation.
00:19:22.960 --> 00:19:27.519
So, or the top five most frequently asked questions that you get uh or that you're having to explain.
00:19:27.599 --> 00:19:39.200
So, number one is you know, people wanting 100% depreciation or in year one, you know, if you had to pick maybe four more, the things you're most commonly answering or having to clarify or teach people.
00:19:39.759 --> 00:19:40.799
Number number two.
00:19:41.440 --> 00:19:45.920
Number two, um it's funny, but what is depreciation?
00:19:46.000 --> 00:19:46.640
I get that a lot.
00:19:46.960 --> 00:19:47.599
No, that's okay.
00:19:47.680 --> 00:19:52.000
It could be as elementary as it needs to be because a lot of people just don't know about this.
00:19:52.240 --> 00:19:52.720
Yes.
00:19:52.960 --> 00:19:55.519
And then uh, you know, what is depreciation?
00:19:55.759 --> 00:19:59.920
The the third um is probably what's the short term on a loophole.
00:20:00.160 --> 00:20:01.119
Wait, wait, sorry, really quick.
00:20:01.200 --> 00:20:02.640
I w I want to make sure we define these as we go.
00:20:02.720 --> 00:20:03.440
So we did the first one.
00:20:03.519 --> 00:20:03.839
Yeah, yeah, yeah.
00:20:03.839 --> 00:20:03.920
Sorry.
00:20:04.079 --> 00:20:06.240
The second the second one, what is depreciation?
00:20:06.559 --> 00:20:07.279
Depreciation.
00:20:07.359 --> 00:20:11.680
I can give you the the I'll give you the official definition, then I'll break it down in layman's terms.
00:20:11.920 --> 00:20:19.039
Official definition by the IRS is that it's a non-cash expense that can be deducted from your taxable income.
00:20:19.200 --> 00:20:21.519
Uh so it's a pre-tax deduction.
00:20:21.759 --> 00:20:27.839
Um the the layman term that I like to use is that the IRS coupon.
00:20:27.920 --> 00:20:36.960
They're they're essentially giving you something to uh you know put back into the vehicle because it does cost money to operate investments and things, and they recognize that.
00:20:37.039 --> 00:20:39.359
Um, so they give you a little bit of that cut up front.
00:20:40.000 --> 00:20:40.319
Okay.
00:20:40.640 --> 00:20:45.920
And then the third thing that you find yourself having to explain or teach or being asked about.
00:20:46.240 --> 00:20:48.400
Yeah, short-term rental loophole.
00:20:48.720 --> 00:20:49.279
Oh, for sure.
00:20:49.359 --> 00:20:49.920
That's a big one.
00:20:50.000 --> 00:20:50.160
All right.
00:20:50.240 --> 00:20:51.519
What are your what are your thoughts on that?
00:20:51.599 --> 00:20:52.240
What's your take on it?
00:20:52.480 --> 00:20:57.759
Yeah, man, this is probably one of the most powerful things for high income earners in in real estate, in my opinion.
00:20:58.079 --> 00:21:02.480
So the the loophole in uh what it what it consists of.
00:21:02.720 --> 00:21:18.720
So um if you operate a short-term rental, um, if you are materially participating in the involvement and management of that property, there's like seven questions the IRS outlines, um, but only one of them has to be true to me material participation.
00:21:19.119 --> 00:21:27.759
And then the average day has to be less than seven days uh across a calendar year, um which that that's pretty easy to do.
00:21:27.839 --> 00:21:33.119
And when it comes to the IRS, they if it's over that, then it's considered long-term rental.
00:21:33.279 --> 00:21:37.599
So all midterm rental stuff when it in the eyes of the IRS is just considered long-term.
00:21:38.000 --> 00:21:54.000
Um so if you meet it's a short term rental and you're managing materially participating in the property and you're actively managing it, now the income or losses from that property are go against your ordinary income.
00:21:54.079 --> 00:21:58.400
You're looked at like you're operating in a hotel, you're you're a hotel year, and the IRS treats you that way.
00:21:58.559 --> 00:21:59.759
So now we have this depreciation.
00:22:00.319 --> 00:22:06.799
Bucket that's spread out over 39 years because a short-term rental by the IRS is categorized as a commercial asset.
00:22:07.039 --> 00:22:08.880
So it's depreciated over 39 years.
00:22:09.359 --> 00:22:19.519
And now what we can do is things that would have taken 39 years, we can accelerate up into year one as a paper loss that offsets your ordinary income.
00:22:19.599 --> 00:22:22.480
So if you make a million dollars a year, you're a physician.
00:22:22.960 --> 00:22:24.880
I use a million just because it's easy math.
00:22:25.200 --> 00:22:25.440
Right.
00:22:25.599 --> 00:22:29.519
And then you have a million dollar depreciable basis in a property.
00:22:30.559 --> 00:22:36.079
If we cost segregate that, I'll say conservatively, we can accelerate 20% of that.
00:22:36.160 --> 00:22:37.599
It's probably going to be closer to like 30%.
00:22:38.400 --> 00:22:43.680
But at 20%, that means you get a$200,000 accelerated depreciation.
00:22:43.759 --> 00:22:46.559
That's a deduction that you would claim in this in the current tax year.
00:22:46.720 --> 00:22:56.720
So instead of being taxed at 37% on a million, I've just cut$200,000 at 37% tax rate from your income.
00:22:56.880 --> 00:23:06.079
Now that's uh do the math on it, that's like$130 something K that you've just freed up in your taxes that now you can turn around and reinvest.
00:23:06.400 --> 00:23:16.880
So that's that's the loophole, and that's how it works because it essentially is taking something that would normally be passive, but you're actively involved in it, and therefore it can apply to your ordinary income.
00:23:17.200 --> 00:23:22.079
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00:24:11.680 --> 00:24:16.720
All right, number four, the fourth thing that you find yourself exploiting or teaching most often.
00:24:20.480 --> 00:24:24.000
Probably probably real estate professional status.
00:24:24.079 --> 00:24:25.440
A lot of people for sure.
00:24:25.519 --> 00:24:26.240
That's a big one.
00:24:26.319 --> 00:24:30.319
I bet there's a lot of people that are trying to claim that or think that they have that, and they're not.
00:24:30.559 --> 00:24:37.839
And you know, if you've got to provide proof of that, I think I think that there's a lot of people that are probably not doing that the right way because they don't understand it.
00:24:38.000 --> 00:24:43.759
And even after that's been explained to me by CPAs, I do real estate full-time, and I was even like, I don't know about this.
00:24:43.839 --> 00:24:47.599
It just seems like a not good rule that people can easily mess up.
00:24:47.680 --> 00:24:49.279
So I want to hear your perspective on that.
00:24:49.519 --> 00:25:02.319
Yeah, well, on the flip side of that, too, there's a lot of people to think and just kind of have preconceived notions they don't qualify for, but they have this real estate portfolio, they work a full-time W-2 outside of real estate, and their spouse doesn't is a stay-at-home mom.
00:25:02.400 --> 00:25:06.799
It's like you can the spouse can be the real estate professional.
00:25:06.960 --> 00:25:12.000
Now you get all these amazing tax benefits from them being able to be involved in the real estate.
00:25:12.079 --> 00:25:14.960
Uh, and you can still buy and sell and and be a part of it.
00:25:15.119 --> 00:25:25.759
So uh real estate professional status, it it's again uh showing material participation and the uh acquisition, management, development of real estate.
00:25:25.920 --> 00:25:32.160
And there's there's definitely more of like you're involved in real estate transactions on a day-to-day basis with your job, even right?
00:25:32.319 --> 00:25:36.559
If you're a real estate agent, you qualify for real estate professional status.
00:25:36.799 --> 00:25:48.240
So any of your investments that you then make personally, even though your job is with another brokerage, personally, you invest in real estate, it can be as passive as you want it to be.
00:25:48.400 --> 00:25:54.960
But because you're you already have real estate professional status, any income from those passive investments is considered ordinary income.
00:25:55.119 --> 00:26:00.319
That means we can do a cost segregation, accelerate those losses, and we're still offsetting your ordinary income.
00:26:00.480 --> 00:26:06.720
So like real estate professional status might be the golden ticket to have within within cost segregation for sure.
00:26:07.200 --> 00:26:11.440
Do you think that it's reasonable for people?
00:26:11.599 --> 00:26:12.960
Because I've heard people talk about this.
00:26:13.119 --> 00:26:22.160
Do you think it's a reasonable approach that maybe, you know, potentially you have a guy or a woman who is a really high earner in the relationship?
00:26:22.400 --> 00:26:27.039
The other one just earns a lot less or you know, is maybe kind of staying home with the kids.
00:26:27.279 --> 00:26:38.480
Does it really make sense to for that other person who earns less to maybe quit their job if it's low paying to be the real estate professional person full-time and actually fulfill the things that are associated with that?
00:26:38.640 --> 00:26:43.839
Like, is there what kind of situation makes sense where that actually comes out ahead?
00:26:44.880 --> 00:26:46.559
It's funny you asked that question.
00:26:46.720 --> 00:26:49.759
I actually helped a client come to this exact realization recently.
00:26:49.839 --> 00:26:53.759
He had a he's been investing really heavily, he has an awesome W-2.
00:26:54.400 --> 00:26:57.359
Um, he was making a million a year.
00:26:57.839 --> 00:27:02.880
And his wife was a teacher, she was making like 40k a year, and it was just like charity work for her.
00:27:02.960 --> 00:27:04.640
Like she just liked being with the kids.
00:27:04.880 --> 00:27:20.720
And what he realized is if she left her job and got to spend more time with the family, which you kind of wanted to do anyway, she could be the real estate professional, and then all of their portfolio could offset, and instead of 40,000 a year, they would be saving like hundreds of thousands a year.
00:27:21.119 --> 00:27:25.920
And it made so much more sense um on like the net benefit for them to do that.
00:27:26.000 --> 00:27:33.759
And she can still substitute teach, like she can still be in the classroom, she can still have that, and it really does become more of like a charity work for her.
00:27:33.839 --> 00:27:37.039
Uh, but it it freed up all kinds of cash flow for them.
00:27:37.759 --> 00:27:38.880
That's interesting.
00:27:39.200 --> 00:27:46.880
The number five uh item in cost segregation that you find yourself having to explain or teach or being asked about.
00:27:49.599 --> 00:27:56.960
This is probably this is gonna be like really, really like deep, I think, but it's very it's common.
00:27:57.200 --> 00:28:01.279
So we'll we'll run a cool an estimate on somebody um for like a property.
00:28:01.519 --> 00:28:08.079
And um, if you bought a property during the previous tax law, um, or really before 2025, right?
00:28:08.160 --> 00:28:20.079
The tax law that we're currently under one of the beautiful bills placed into effect January 20th, 2025, or made retroactive to that date, even though it was signed on, I think it was signed July 4th of 25.
00:28:20.960 --> 00:28:28.400
So if you bought a property before that, you fall out of the current tax bill rules, but there are still benefits from cost segregation.
00:28:28.960 --> 00:28:36.240
So the question I'll get is why don't I get 100% bonus depreciation, even though it's under the current tax law?
00:28:36.960 --> 00:28:43.839
And that would be like if you bought a property, Vince, in 2022 and you place it in service, right?
00:28:44.000 --> 00:29:00.319
Maybe it's like you you had it for a while or you uh uh it was a primary residence, and you place it in service in 2024, but you're only eligible for 60% bonus depreciation because under that previous tax law, they were grandfathering out bonus depreciation.
00:29:00.880 --> 00:29:07.839
But between like the end of 2017 and through 2022, there was still 100% bonus depreciation.
00:29:08.400 --> 00:29:17.759
And the short answer of like, why don't I get 100% bonus is it depends on your acquisition date when you bought the property.
00:29:18.000 --> 00:29:23.279
That puts you uh that determines which tax law we have to look at.
00:29:23.440 --> 00:29:28.799
And then your in-service date determines how much bonus within that tax law you're eligible for.
00:29:29.039 --> 00:29:34.640
So we have to look at a handful of different things, and that often determines the the 100% bonus or not.
00:29:35.599 --> 00:29:44.319
And if you're if you're investing as a limited partner passively in real estate deals and they do cost segregation, do you benefit from that?
00:29:44.480 --> 00:29:55.359
Does that does that pass through to the limited partners that are investing passively in these deals, or is it just on the GP side, or does it depend of actually I haven't asked anyone that before, so I'm kind of curious, really.
00:29:55.680 --> 00:29:56.880
Yeah, it can benefit you.
00:29:56.960 --> 00:30:00.400
It's it's just based off of whatever the operating agreement is.
00:30:00.720 --> 00:30:04.319
The it's gonna affect however those incomes are taxed.
00:30:04.480 --> 00:30:09.119
So as an LP, that's passive income, that's passive real estate income.
00:30:09.279 --> 00:30:22.720
So if you are still making a lot of money uh in like a W-2, that's what you do, then uh you get a cost segregation, like the GP does a cost segregation for them, the GP, they're probably rep status.
00:30:22.799 --> 00:30:25.759
So that's gonna affect their ordinary income, their active income.
00:30:25.920 --> 00:30:31.920
They're gonna get a little bit more benefit from it because they probably have a higher tax rate on their ordinary income than their passive income.
00:30:32.160 --> 00:30:40.640
As an LP, when that passes through to you in the K1, you're still gonna get benefits from it, but it's gonna affect your passive income, not your ordinary income.
00:30:40.799 --> 00:30:50.799
So you might be taxed uh arbitrarily, picking examples here, like 20% on your passive income and uh 35% on your active income.
00:30:51.119 --> 00:30:58.160
Well, you're you're not doing a pre-tax deduction on that active income, you're only doing a pre-tax deduction on that passive income.
00:30:58.240 --> 00:31:00.640
So you're it still benefits you, it's just not nearly as much.
00:31:00.799 --> 00:31:05.839
And the good thing too uh with a lot of the passive losses is there's passive loss carry forward.
00:31:05.920 --> 00:31:16.000
So, like let's say uh you know GP does a cost segregation, it passes down to me as an LP, and it's like$100,000 of uh depreciation that I get to claim.
00:31:16.079 --> 00:31:19.279
But I only get$20,000 a year from that investment.
00:31:19.680 --> 00:31:21.920
Well, now it's just gonna slowly chip away at that.
00:31:22.000 --> 00:31:30.160
I'm not gonna owe any taxes on that passive$20k that I collect that year, and then the next year I'll have$80K in that bucket too for whatever income comes in there.
00:31:30.240 --> 00:31:31.279
It'll just kind of chip away.
00:31:31.359 --> 00:31:32.559
So it does carry forward.
00:31:32.880 --> 00:31:33.200
Okay.
00:31:33.680 --> 00:31:36.480
It is really incredible how much you know about all this.
00:31:36.559 --> 00:31:53.359
I know that you're doing it full time, so you know it's it's probably similar for me as a realtor or where I'm getting to with my knowledge base as a as an investor, but you really know a lot about this, which is very helpful because I think that it's a topic that many people will ask about, but they just don't understand.
00:31:53.599 --> 00:31:55.119
There's very few people.
00:31:55.359 --> 00:32:03.839
There's there's no way that it's more than 0.1% of people understand cost segregation at a deep and correct level.
00:32:04.000 --> 00:32:09.359
So it's really useful and helpful to kind of get a baseline level of education here.
00:32:09.519 --> 00:32:12.319
And I'd like to dive into a couple case studies.
00:32:12.480 --> 00:32:16.480
Uh did Jay-Z do a cost segregation?
00:32:17.119 --> 00:32:19.359
Uh it's it's very possible.
00:32:19.519 --> 00:32:23.359
Uh if you have examples of it, I we can definitely take a look at it and see.
00:32:23.599 --> 00:32:24.640
Did I did I read it wrong?
00:32:24.960 --> 00:32:28.559
Because I actually had like I wrote out my notes for the episode based on like what was on there.
00:32:28.720 --> 00:32:34.640
And or was there some I don't know how I got this, but it said like the Jay-Z comparison to property side by side.
00:32:34.720 --> 00:32:36.640
What did Jay-Z actually save in dollars?
00:32:36.960 --> 00:32:38.240
Or was this like a person?
00:32:38.720 --> 00:32:44.559
Or or was this like I'll have to go back and look how I how I got that, but maybe Yeah, I don't know.
00:32:44.640 --> 00:32:45.839
I don't know if that was me.
00:32:46.160 --> 00:32:46.480
Okay.
00:32:46.720 --> 00:32:50.559
I I don't know how I got this, but maybe that's just straight up not true.
00:32:50.720 --> 00:32:52.319
So completely disregard that.
00:32:52.480 --> 00:32:55.039
But I want to I want to dive into some case studies that you had done.
00:32:55.279 --> 00:33:04.640
So if there's maybe uh maybe two or three that really stick out to you, some cost segregation studies that you had done uh for some clients, you know, what what was the situation?
00:33:04.799 --> 00:33:10.319
What asset class was this in, and what kind of results came out of it for them on the back end?
00:33:10.640 --> 00:33:11.200
Yeah.
00:33:11.440 --> 00:33:19.440
Um, there's one that like really stands out to me, and it's probably one of the coolest implementations of the strategy that I think I've seen.
00:33:19.519 --> 00:33:20.480
So I want to share that.
00:33:20.559 --> 00:33:22.880
That's uh we'll call that the Hawaii property.
00:33:23.119 --> 00:33:32.559
And then the other one, um the other one is like storage unit, storage facility.
00:33:32.640 --> 00:33:33.839
We'll talk about that.
00:33:34.240 --> 00:33:38.880
Um so the well, and we'll talk about the storage facility first because that's a little bit more in line, right?
00:33:38.960 --> 00:33:55.519
So um the I I have a um referral partner that I I work with a lot, and he coaches people how to invest into storage facilities and like how to get into um storage facilities as passive investment so that they can still rent, right?
00:33:55.599 --> 00:33:59.359
Like it's still real estate, you're still leasing it, you're just leasing like miniature units.
00:33:59.599 --> 00:34:01.599
It's very similar to multifamily in that sense.
00:34:04.079 --> 00:34:14.480
You can this guy bought a property, one of his clients bought a property for$500,000, and the location that he bought the property in um had really low land value.
00:34:14.559 --> 00:34:16.719
I think it was in Tennessee or Alabama.
00:34:16.960 --> 00:34:21.519
Like, as if you you know, opposed to California, California has incredibly high land values.
00:34:21.599 --> 00:34:26.320
I've seen land values as high as 90% in California, which is kind of crazy.
00:34:26.719 --> 00:34:27.760
Oh, that is interesting.
00:34:27.840 --> 00:34:29.280
I've never heard of something like that.
00:34:29.599 --> 00:34:33.119
So you're saying the building would have 10% of the total value and the land would have 90%.
00:34:33.760 --> 00:34:35.280
Yeah, so so think about it this way.
00:34:35.679 --> 00:34:36.320
Oh, that's so interesting.
00:34:36.559 --> 00:34:38.239
That's like a side quest, right?
00:34:38.559 --> 00:34:40.800
Same, we'll give it the exact same property.
00:34:40.880 --> 00:34:43.920
We'll use the Swords Facility, million dollar purchase on it.
00:34:44.079 --> 00:34:52.480
It's got 20% land value in Tennessee, and it's got 90% land value in San Diego, California.
00:34:52.880 --> 00:34:57.840
In California, that depreciable basis would be$100,000.
00:34:58.239 --> 00:35:00.880
That does not make sense to really do that property.
00:35:01.039 --> 00:35:06.400
So it's not even really based off the purchase price, it's your purchase price minus your your land value that we have to determine.
00:35:06.639 --> 00:35:11.599
And then in Tennessee, that property still has a depreciable basis of$800,000 because the land was only 20%.
00:35:11.920 --> 00:35:14.320
That's like significantly more advantageous.
00:35:14.880 --> 00:35:18.000
So yeah, that's that's something to kind of be aware of, too.
00:35:18.079 --> 00:35:26.880
That like sometimes you don't know the the value of the land and how much that's gonna eat into your depreciable basis and what you can claim from these tax benefits.
00:35:27.039 --> 00:35:29.440
And that's something to look at ahead of time before an acquisition.
00:35:29.760 --> 00:35:32.960
So this guy buys a uh storage facility for 500k.
00:35:33.280 --> 00:35:34.719
Uh land value is really low.
00:35:34.800 --> 00:35:36.400
I want to say it was like 10% on this.
00:35:36.480 --> 00:35:40.960
So he so the depreciable basis is 450,000 in this property.
00:35:41.440 --> 00:35:45.280
He's able to uh cost segregate it.
00:35:45.440 --> 00:35:57.920
We do the cost segregation for him, and we found uh I'm looking at my calculator here, we found uh 29.5% that we could accelerate.
00:35:58.239 --> 00:36:05.039
So 450,000 times the uh 0.295.
00:36:05.760 --> 00:36:06.800
I'll do the math for you.
00:36:06.960 --> 00:36:10.800
425, 425 times 0.29.
00:36:11.519 --> 00:36:12.480
So about 30%.
00:36:13.119 --> 00:36:13.760
450.
00:36:13.840 --> 00:36:14.639
So like we're getting.
00:36:16.480 --> 00:36:17.840
So that's over 120k.
00:36:18.239 --> 00:36:19.920
Uh 132, 132,000.
00:36:20.320 --> 00:36:21.840
As a dep as a deduction, right?
00:36:22.000 --> 00:36:24.639
As a depre that's the depreciation that hits in year one.
00:36:24.960 --> 00:36:33.519
And so if your tax rate is around 30, 32 percent, something like that, then you might be saving around 40 40,000 or something like that.
00:36:33.840 --> 00:36:44.079
And and part of what I like about this example is the the the guy who bought this property is uh he's pretty like average middle class guy.
00:36:44.159 --> 00:36:48.559
Like he was making like one like I think 100 to like 150 a year.
00:36:48.800 --> 00:36:52.400
I all I know is like his tax bracket was between 20 and 22 percent.
00:36:52.559 --> 00:36:58.000
So he's he's not like a physician making a million dollars a year, right?
00:36:59.440 --> 00:37:11.280
So his income from that property, the way it was cash flowing, he was making um like 50k a year uh on that property, and he didn't owe any taxes on that.
00:37:11.360 --> 00:37:12.400
So now he can turn that around.
00:37:12.559 --> 00:37:15.199
He was able to reinvest into other storage facilities after that.
00:37:15.599 --> 00:37:17.519
So that's what's that was really cool.
00:37:18.000 --> 00:37:20.639
Um the Hawaii property I think is really interesting.
00:37:20.880 --> 00:37:27.679
So this is significantly more sophisticated, but it's one of the coolest things I've heard of.
00:37:28.239 --> 00:37:36.400
And it it kind of combines real estate investing with uh traditional like 401 or Roth investing too.
00:37:36.559 --> 00:37:43.280
So uh this guy in Hawaii, uh, or he whether he I don't I don't think he actually lived in Hawaii, but he had a condo in Hawaii.
00:37:43.519 --> 00:37:50.239
So he's he's actively involved in the management of that property in this uh in this uh Hawaii condo.
00:37:50.320 --> 00:37:51.920
The purchase price of that was like 2 million.
00:37:52.079 --> 00:37:58.559
That's his like basis after we depreciate land, which is really nice about condos um is you there is no land value.
00:37:58.639 --> 00:38:05.440
So Hawaii has really high land value, but if you buy a condo there, or like you bought a condo in San Diego, a million dollars, right?
00:38:05.760 --> 00:38:08.559
Now there's no land value associated with that.
00:38:08.639 --> 00:38:13.920
So we might be able to accelerate a little bit less percentage-wise, but you have a significantly higher depreciable basis.
00:38:14.079 --> 00:38:16.480
So he buys this condo, 2.2 million.
00:38:16.639 --> 00:38:18.000
Uh there's no land value.
00:38:18.079 --> 00:38:20.480
So 2.2 million is the depreciable basis.
00:38:20.719 --> 00:38:26.719
We are able to find uh it was like 20 uh that was like 31%.
00:38:27.760 --> 00:38:29.519
So I'll pull up the calculator.
00:38:29.599 --> 00:38:39.199
We got two 2.2 million times 0.31,$682,000 that we can accelerate for him.
00:38:39.280 --> 00:38:39.440
Okay.
00:38:39.679 --> 00:38:41.360
Oh my gosh, that is insane.
00:38:41.440 --> 00:38:42.880
That is a game changer.
00:38:43.440 --> 00:38:44.639
Huge, huge.
00:38:44.880 --> 00:38:47.760
That's a so here's what's really cool.
00:38:48.079 --> 00:38:53.920
He had uh a large amount in a traditional like a 401k, right?
00:38:54.079 --> 00:39:01.519
Like a pre um like a tax benefited when you put it in, but you have to pay taxes when you get it out.
00:39:01.760 --> 00:39:03.519
Yeah, so just like a traditional 401k.
00:39:03.760 --> 00:39:04.079
Exactly.
00:39:04.159 --> 00:39:19.519
So he had he had he had a job, he had a bunch of money in there, and he realized that um like if you if you were to take a big portion of that and roll it into a a Roth that now grows tax-free, he had that huge tax bill because of the conversion.
00:39:20.480 --> 00:39:39.039
He has a COSEG, he gets his 682,000, but he's able to calculate uh like whatever the tax difference is from his traditional, from his 401k, convert that, have a net neutral benefit on his taxes in that year.
00:39:39.199 --> 00:39:45.760
And now 682,000 is now growing tax free in his own.
00:39:45.920 --> 00:39:54.559
So now it's not just 682 off your taxes, it's 682 growing tax-free for a really long period of time.
00:39:54.719 --> 00:39:57.039
That's probably like one of the coolest, most sophisticated ways.
00:39:57.119 --> 00:39:58.320
I've had two clients do that.
00:39:58.559 --> 00:40:02.159
Um, and it's it just is absolutely incredible.
00:40:02.239 --> 00:40:16.639
But you do have to have like a 401 or a traditional uh account with a significant portfolio there, and you have to structure the ownership of the real estate the right way when you do the cost segregations so that it's offsetting the the correct bucket of of income.
00:40:16.960 --> 00:40:25.360
It's really cool because there's so much strategy involved with real estate investing between the different asset classes and the different tax strategies that are available.
00:40:25.519 --> 00:40:36.239
And you can just get so creative, and if you do it right, you can absolutely hit a home run that can build you hundreds of thousands or even millions of dollars in long-term wealth.
00:40:36.400 --> 00:40:49.599
And the more educated that all of us become and the more that we're learning, you know, the odds get higher and higher that you're able to achieve that through the community that we're building uh with the mastermind, you know, where you've got all sorts of people like this in one place.
00:40:49.760 --> 00:40:54.559
Uh, it just really accelerates your progress and you have access to so many resources there.
00:40:54.719 --> 00:40:59.760
And I think that we've got uh something to share with you guys today that we're gonna link in the show notes.
00:40:59.920 --> 00:41:04.000
Do you want to mention um what we're gonna share with the people who uh listen to this episode today?
00:41:04.400 --> 00:41:05.199
Yeah, absolutely.
00:41:05.360 --> 00:41:13.440
So um we'll have a link in this episode and you guys can do uh free estimates on any property that you either have or are even looking to buy.
00:41:13.519 --> 00:41:16.400
We do a lot of estimates for people that are looking at an acquisition.
00:41:16.559 --> 00:41:20.320
And that way you can kind of see what pulling this lever might look like before you even buy the property.
00:41:20.400 --> 00:41:24.400
So we'll have that link in the show notes uh and we'll have a discount associated with that as well.
00:41:24.719 --> 00:41:26.079
Yeah, that's incredible, Chris.
00:41:26.159 --> 00:41:26.719
Thank you so much.
00:41:26.880 --> 00:41:29.840
We appreciate you being here, and this is just so educational for everyone.
00:41:30.079 --> 00:41:40.480
Really glad that we decided to do this topic and cover a few case studies so people could see how this applies in real life and also five things that you need to know about cost segregation.
00:41:40.559 --> 00:41:52.559
So, quick reminder to make sure that you subscribe or follow wherever you're listening so that you don't miss any episodes and we can reach more people with our show to help you guys on your path to financial freedom through real estate investing.
00:41:55.440 --> 00:41:58.960
If today's episode was useful, subscribe so you don't miss what's coming.
00:41:59.119 --> 00:42:00.800
We drop two episodes every week.
00:42:00.880 --> 00:42:09.760
And if you want to go deeper, join thousands of investors getting our free weekly newsletter at newsletter.launchrei.co or check the link in the show notes.
00:42:09.840 --> 00:42:10.960
See you next time.
00:00:00.080 --> 00:00:10.400
If you can accelerate 25% of a million dollar property and get bonus on it, then you're getting a$250,000 a year deduction instead of a$36,000 a year deduction.
00:00:10.800 --> 00:00:17.440
Depreciation is essentially a 100% off discount coupon that the IRS gives you, but it's spread out over time.
00:00:17.519 --> 00:00:19.039
You can only get a little piece of that.
00:00:19.199 --> 00:00:23.600
There are two asset classes where you can't fully write off the thing and complete it, which is pretty wild.
00:00:23.760 --> 00:00:26.480
You have a million dollar property there, the whole thing is 15 years.
00:00:26.640 --> 00:00:29.280
You can write off a million dollars in your taxes in that first year.
00:00:29.519 --> 00:00:30.320
Pretty insane.
00:00:30.480 --> 00:00:31.440
His wife was a teacher.
00:00:31.519 --> 00:00:32.960
She was making like 40k a year.
00:00:33.119 --> 00:00:37.039
Instead of 40,000 a year, they would be saving hundreds of thousands a year.
00:00:37.200 --> 00:00:42.560
Rather than spread it out over 27 or 39 years, you can take a massive portion of that up front.
00:00:42.640 --> 00:00:46.640
It massively changes the cash flow so you can reinvest into more property.
00:00:48.719 --> 00:01:01.200
Today we're going to be talking about cost segregation and how we've got a nice little ATM for you today, where with cost segregation on average, what Chris has seen is if you put one dollar in, you typically get$10 back.
00:01:01.359 --> 00:01:09.359
So definitely going to be a really interesting strategy for a lot of you if you've got some of these larger assets, especially multifamily or something similar.
00:01:09.519 --> 00:01:13.120
So we're going to dive right in and uh let's get started.
00:01:13.439 --> 00:01:14.159
Yeah, awesome.
00:01:14.239 --> 00:01:15.359
Great to be here, Vince.
00:01:15.599 --> 00:01:17.760
All right, Chris, what city are you located in?
00:01:18.000 --> 00:01:19.040
I live in a really small town.
00:01:19.120 --> 00:01:20.799
It's called Salida, Colorado.
00:01:20.879 --> 00:01:23.439
We're about two hours west of Colorado Springs.
00:01:23.760 --> 00:01:24.079
Okay.
00:01:24.640 --> 00:01:27.280
So I'm thinking about I've been to Denver.
00:01:27.359 --> 00:01:29.920
I know Colorado Springs, I think, is about an hour south.
00:01:30.079 --> 00:01:32.400
So if you're two hours west of there, that's got to be.
00:01:32.480 --> 00:01:34.239
Are you in the mountains kind of in the middle of nowhere?
00:01:34.480 --> 00:01:36.159
Yeah, I'm surrounded by four teeners.
00:01:36.239 --> 00:01:38.400
I'm surrounded by three different mountain ranges, actually.
00:01:38.640 --> 00:01:38.959
Okay.
00:01:39.120 --> 00:01:39.840
Very interesting.
00:01:39.920 --> 00:01:40.480
That's cool.
00:01:40.640 --> 00:01:46.079
Uh there's a guy I chatted with, I think, who who did climb like a bunch of mountain peaks out there.
00:01:46.319 --> 00:01:46.799
I forget his name.
00:01:46.879 --> 00:01:48.159
I'll have to connect you if I think of him.
00:01:48.319 --> 00:01:51.920
But uh anyway, so you're doing you're doing cost segregation right now.
00:01:52.000 --> 00:01:56.000
I don't know how long uh you've been doing this or what you had done in real estate prior.
00:01:56.079 --> 00:02:03.760
So uh let's go back to kind of how your real estate journey started so we can kind of map back how you got here to doing cost segregation.
00:02:04.079 --> 00:02:04.480
Yeah.
00:02:04.640 --> 00:02:10.000
Um, so full transparency, I I started in business acquisition.
00:02:10.159 --> 00:02:14.560
Um, I had bought a boring service-based business and was scaling it.
00:02:14.639 --> 00:02:17.280
Uh, and it was really bad acquisition, did not go well.
00:02:17.360 --> 00:02:19.120
Uh, I lost a lot of money in that deal.
00:02:19.280 --> 00:02:23.680
So I know a lot more about due diligence and like what to look for in those deals.
00:02:23.840 --> 00:02:27.120
And it was through that business that I first came across cost segregation.
00:02:27.199 --> 00:02:29.680
So we had been running the business out of a facility.
00:02:30.000 --> 00:02:35.759
Um, and then I kind of discovered it after meeting with the owner of of our company of Maven cost segregation.
00:02:36.400 --> 00:02:53.680
And uh after like looking at different properties, I realized, oh, hey, if we buy this property, if we lease out some of the other units in this property, I can now uh do a cost segregation, accelerate a lot of that depreciation forward, and then reduce my taxes to be able to put more back into the business.
00:02:53.759 --> 00:03:00.159
So it was something we were heavily looking at before things kind of like fell apart in my hands at the time, which was which was crazy.
00:03:00.319 --> 00:03:08.240
So fast forward a little bit, um, Sean was looking to scale his business and I was able to step in and help and join in this role.
00:03:08.319 --> 00:03:14.960
So this is actually a really interesting concept and topic, and we'll talk about it at the 101 level today.
00:03:15.120 --> 00:03:16.719
First of all, because that's where I am.
00:03:16.800 --> 00:03:21.199
I don't have an extremely deep understanding of cost segregation myself.
00:03:21.360 --> 00:03:31.280
Uh, as of this episode, I will probably know a ton about it over the next 12 months just based on the rate that I'm learning from interviewing everyone and studying the things like this on my own.
00:03:31.599 --> 00:03:43.439
But this sounds like something that could really juice your ROI on a deal because a lot of times when people are looking at real estate deals, it depends, first of all, where you're kind of positioned, right?
00:03:43.520 --> 00:03:48.400
So I'm gonna just briefly touch on the different ways that people might be investing.
00:03:48.560 --> 00:03:59.439
There might be people investing on the GP side of real estate where you're the owner, you're the one actually doing it, and you would be the one potentially pursuing cost segregation on a deal for savings.
00:03:59.680 --> 00:04:09.199
And then the limited partner, if you're investing in a larger commercial real estate deal, you're not doing anything because you're just writing a check and getting little checks back.
00:04:09.439 --> 00:04:13.039
And then I guess those are really kind of the only two plays here.
00:04:13.199 --> 00:04:28.800
Or if you're a smaller time investor where you're just doing these deals on your own and there are no limited partners investing, it's just all you, you would actually still be pursuing potentially cost segregation on some of these deals because you want these savings, they're just for you.
00:04:28.959 --> 00:04:30.399
Maybe there's no other partners.
00:04:30.639 --> 00:04:39.920
But this could really change your returns because if you think that you're, you know, I've noticed people have a buy box, they've got an ROI that they target.
00:04:40.000 --> 00:04:51.600
So, you know, if you're like, hey, if I'm gonna be active on a real estate deal, I want at least 20% returns per year if I'm gonna be actively doing it, or maybe it's more than that.
00:04:51.920 --> 00:05:00.000
But this might be something that drastically improves your returns and can maybe turn a good deal into a great deal.
00:05:00.079 --> 00:05:11.199
I'm guessing that people shouldn't go buy a deal just because of this, but if this is something they could do that takes it from good to great or great to a home run, you know, this might be something to really look at.
00:05:11.680 --> 00:05:13.199
Yeah, totally agree.
00:05:13.439 --> 00:05:16.079
Um yeah, absolutely.
00:05:16.240 --> 00:05:21.040
I mean, like you're gonna take the depreciate depreciation anyway in a property.
00:05:21.120 --> 00:05:24.480
When you get that investment property, you claim the depreciation.
00:05:24.560 --> 00:05:25.360
It's not optional.
00:05:25.439 --> 00:05:27.120
A lot of people make that mistake sometimes.
00:05:27.199 --> 00:05:28.480
We've come across that.
00:05:28.959 --> 00:05:46.480
Um if you're gonna be taking this depreciation rather than spread it out over 27 or 39 years, you can take a massive portion of that up front and it massively changes the cash flow so you can reinvest into more properties come tax time, which is a huge lever.
00:05:46.879 --> 00:05:52.879
So if we kind of illustrate this for people, because cost segregation might sound like a fancy word if people aren't super familiar with it.
00:05:53.120 --> 00:06:00.160
Cost segregation, correct me if I'm wrong, my understanding of it is let's pretend that I buy an apartment building and it will help people visualize this.
00:06:00.399 --> 00:06:08.480
Maybe it's a hundred units and the value of the land is 25%, the van value of the building itself is maybe 75%.
00:06:09.279 --> 00:06:21.040
And the things that depreciate in value over time, you accelerate the depreciation of all these things, and you get some massive tax write-off in year one.
00:06:21.279 --> 00:06:24.720
So you get all this money back that you can use to go do another deal.
00:06:24.959 --> 00:06:25.920
Is that correct?
00:06:26.079 --> 00:06:28.079
And if not, can you please correct me?
00:06:28.480 --> 00:06:29.680
You're on the right track.
00:06:29.839 --> 00:06:30.800
You're on the right track.
00:06:30.959 --> 00:06:36.000
So um first thing that we would want to start and understand is the depreciation in general.
00:06:36.240 --> 00:06:44.560
You know, depreciation is the non-cash expense that the IRS allows you to take on your taxes so that you continually invest back into the properties you buy.
00:06:44.800 --> 00:06:49.519
It's essentially the IRS saying, like, hey, you bought real estate, we don't want it to deteriorate, please put money back into it.
00:06:49.600 --> 00:06:51.199
Here's the annual deduction that you get.
00:06:51.360 --> 00:06:54.480
And that's all based off of your depreciable basis in that property.
00:06:54.879 --> 00:07:01.519
So for the most part, when you buy a million-dollar home, that's for the most part gonna be your basis.
00:07:01.600 --> 00:07:03.279
I mean, it's not taking into account land values.
00:07:03.360 --> 00:07:07.360
Unfortunately, the IRS doesn't let you depreciate the land value, so we have to take that out.
00:07:07.759 --> 00:07:10.079
So let's just say you get to a million dollar depreciable basis.
00:07:10.240 --> 00:07:14.000
Normally you're gonna be spreading that out uh over 27 and a half years.
00:07:14.079 --> 00:07:20.000
You get like a$36,000 a year deduction on your taxes from their depreciation that you take every year.
00:07:20.480 --> 00:07:26.639
Well, if we can do a cost segregation, the that process is us going into the property with our engineers.
00:07:26.879 --> 00:07:33.120
We re-categorize all the components in the property into things that depreciate on shorter life cycles.
00:07:33.279 --> 00:07:38.399
The the IRS has already outlined in the code that it depreciates faster, right?
00:07:38.480 --> 00:07:47.600
Like uh the decorative lighting, flooring, cabinets, countertops, things like that, like any kind of landscaping you do outside, all that's considered 15-year improvement.
00:07:47.680 --> 00:07:52.399
But when you just buy a property that already exists, it's kind of all lumped into 27 and a half years.
00:07:52.879 --> 00:08:00.879
So we go through, we recategorize everything, we can then put it into these different buckets and move it forward and accelerate it, which is where it's really, really powerful.
00:08:01.040 --> 00:08:07.199
Now, the really cool thing under the current tax law is that you're eligible for bonus depreciation on anything that can be accelerated.
00:08:07.839 --> 00:08:22.319
That means at 100% bonus depreciation, if you can accelerate 25% of a million dollar property and get bonus on it, then you're getting a$250,000 a year deduction instead of a$36,000 a year deduction.
00:08:22.560 --> 00:08:23.839
That's the that's the first year.
00:08:23.920 --> 00:08:34.480
And then the continuation of that over the next 26 years is still gonna be um you know somewhere in the ballpark of like$28,000 to$30,000 that you take each year, which is pretty wild.
00:08:34.879 --> 00:08:44.240
So you're getting more of the depreciation and tax benefit basically upfront or the in year one, whenever you do this, and then you get a smaller one in subsequent years, is that right?
00:08:44.559 --> 00:08:50.399
Correct, because there'd still be real property that we can't accelerate, and that's the chance for that 27-year period.
00:08:50.720 --> 00:09:03.919
So another way to think about it in like really simple terms would be that depreciation is essentially like a hundred percent off discount coupon that the IRS gives you, but it's spread out over time, right?
00:09:04.000 --> 00:09:06.240
You can only get a little piece of that.
00:09:06.480 --> 00:09:15.919
And then if you own the property for that full length of time, then you have discounted essentially the entire depreciable basis of that property.
00:09:16.159 --> 00:09:22.960
But what we do is we change up the math on how you're claiming that coupon so that you can take more of it up front.
00:09:23.279 --> 00:09:24.320
Okay, that's interesting.
00:09:24.559 --> 00:09:31.279
So, does this really make sense for someone that thinks they're going to have a very high income year to help offset some of that?
00:09:31.519 --> 00:09:39.039
Because, you know, if they've got a lot of income in that upper tax bracket above 33 or 35%, it helps avoid that a bit.
00:09:39.120 --> 00:09:41.519
Or does this just make sense no matter what?
00:09:41.679 --> 00:09:48.159
Or are there some cases where, you know, this this may or may not make sense depending on certain circumstances?
00:09:48.639 --> 00:09:54.159
Yeah, to your last point there, there are absolutely uh circumstances where it does not make sense to do it.
00:09:54.240 --> 00:10:05.440
And if I ever talk to a client that's in that situation, I'll absolutely tell them, like, hey, this if you're fixing and flipping and you come to us for cost segregation, that's not a good fit as an easy example.
00:10:05.759 --> 00:10:09.919
It to the bigger question there, it depends on the situation you're in.
00:10:10.000 --> 00:10:20.879
If you're a high income earner, then you want to buy properties and be actively involved in those properties so that if we did a cost segment, it actually offsets your higher income, your higher tax bracket, not passive income.
00:10:21.120 --> 00:10:21.360
Right?
00:10:21.519 --> 00:10:31.759
You don't want to be a high income earner or physician and just invest passively into deals because now if you do a cost segregation, that's only gonna offset your passive income.
00:10:31.840 --> 00:10:36.320
So we have to make sure we're offsetting the right bucket that we want to be offsetting.
00:10:36.720 --> 00:10:49.279
So yeah, uh, I was just gonna say, am I understanding this correctly then that cost segregation is basically the act of going through the study with the engineers and finding those components that you can depreciate and ultimately get the tax benefit from?
00:10:49.360 --> 00:10:58.559
And bonus depreciation is simply the definition of, hey, you were gonna get this much depreciation over 30 years or so, but we're gonna get you like half of that in year one.
00:10:58.720 --> 00:11:04.960
Is that kind of how you you would define and kind of separate those definitions and then like how they work together, or how would you describe that?
00:11:05.279 --> 00:11:08.720
Yeah, I'd say I'd redefine the bonus definition you give there entirely.
00:11:08.879 --> 00:11:13.120
Everything else is like as far as coming through the property and recategorizing it, that's accurate.
00:11:13.279 --> 00:11:18.559
Um, bonus is really a tool that the IRS gives to incentivize investors to continue to invest.
00:11:18.799 --> 00:11:20.000
That's ultimately what it is.
00:11:20.080 --> 00:11:21.840
It's a it's a tax break.
00:11:22.240 --> 00:11:38.399
Um the the bonus uh has changed over the years, but even if you bought a property in previous years, if you didn't cost segregate that, we can look at that again and we can still see if there's bonus left or anything left that we could accelerate and you could still get benefits from it.
00:11:38.480 --> 00:11:40.960
Um oftentimes there is, which is pretty interesting.
00:11:41.279 --> 00:11:46.240
And can you do this on a property that you've owned for a long time, or is this better to do when you just bought something?
00:11:46.639 --> 00:11:55.759
Yeah, if you've owned the property longer than, I don't know, maybe since like 2018 at this point, um, we can absolutely look at it, but it I haven't seen many of those make sense.
00:11:56.000 --> 00:11:56.960
Um got it.
00:11:57.279 --> 00:12:04.799
Unless uh like on the fringe circumstances or that they did like a maybe it was a primary residence that they bought in like 2015, we'll say.
00:12:04.960 --> 00:12:08.399
And now they're um flipping it into a short-term rental.
00:12:08.480 --> 00:12:14.799
They drop a half a million into the property in a massive renovation to prepare it for being an Airbnb.
00:12:14.960 --> 00:12:19.200
Now it actually makes sense because that 500,000, you might be able to get back through a cost segregation.
00:12:19.279 --> 00:12:23.600
In the process, we would actually be able to accelerate some of the normal property as well from 2015.
00:12:24.159 --> 00:12:31.200
Because of the time value of money, this potentially is something that can be extremely, extremely beneficial in the ROI.
00:12:31.440 --> 00:12:44.080
I think that one of the top things, I don't know where it would rank it in in my top five, but it's one of the top things that investors should be thinking about and prioritizing, but they're not, is the velocity of money.
00:12:44.399 --> 00:12:55.279
And it's important because if you're investing in a deal actively, how fast are you going to get your capital back so that you can recycle it into doing more deals faster?
00:12:55.600 --> 00:13:05.120
Because whether you are working at your job or you're doing real estate investing or anything, something that I think about constantly is what's kind of the rate of progress that you have?
00:13:05.279 --> 00:13:12.000
You imagine this Y-axis chart, and is it kind of like this where it's really steep and it's straight up, or is it this slow upward thing?
00:13:12.080 --> 00:13:17.679
Like, would you rather have, you know, three, four, five million dollars when you're 65 or when you're 35?
00:13:17.840 --> 00:13:26.879
And so you can pull these levers and these strategies and learn the rules of the game to figure out how you really can go faster.
00:13:27.039 --> 00:13:31.679
And if you can get your money back faster, then you can do more deals faster.
00:13:31.919 --> 00:13:33.519
And this compounds.
00:13:33.759 --> 00:13:40.159
So I've seen people grow eight-figure real estate portfolios in less than 10 years from scratch.
00:13:40.320 --> 00:13:44.399
I've actually seen a lot of people do it because I've had talked to dozens of them.
00:13:44.639 --> 00:13:56.799
So um this seems like one of those things that's really important, but I want to talk about potential drawbacks because I don't know if there's any free lunch out there.
00:13:57.039 --> 00:14:06.320
And, you know, in what in what ways would people kind of get burned by this or it's not gonna make sense for them if they're thinking about selling it at some point?
00:14:06.480 --> 00:14:10.159
It are there any effects if they're gonna do a cash out refinance?
00:14:10.399 --> 00:14:16.159
I want to know what kind of situations where you know you have to pay this back, or there's any drawbacks here.
00:14:16.799 --> 00:14:25.919
Yeah, I mean, if if you're gonna be like I mentioned fix and flip earlier, um, where you're not gonna be holding on to the property very long, it doesn't make sense.
00:14:26.000 --> 00:14:27.919
The longer you hold a property, the better.
00:14:28.000 --> 00:14:30.799
Um, and the sooner you want to actually do the cost segregation.
00:14:30.879 --> 00:14:38.399
So if you know you're gonna be holding a property for you know at least like two years, like the net benefit makes sense.
00:14:38.879 --> 00:14:43.039
The on the flip side of cost segregation, there's recapture tax.
00:14:43.200 --> 00:14:49.039
So if you do not 1031, then you will experience recapture tax as well as capital gains, right?
00:14:49.120 --> 00:15:05.039
So if you the property sells for more than you initially bought it for, uh, which I think we all hope in our real estate portfolios that that happens, uh, then you're gonna get hit with recapture and that gets added back depending on the category that it's in to uh your normal tax bracket.
00:15:05.200 --> 00:15:10.879
If you're in the really high tax bracket, there's some sections that cap at 25% as much as that.
00:15:10.960 --> 00:15:15.279
So there's a neat little arbitrage that you can do uh if you're in that really high income bracket.
00:15:15.360 --> 00:15:21.279
So that's where it can make sense more to have for like a year or maybe even a little less, like nine months on a property.
00:15:21.679 --> 00:15:28.240
Um but to to when you get hit with that recapture, it's it definitely raises your taxes.
00:15:28.480 --> 00:15:33.360
So the longer you have that, the the more balanced the recapture is.
00:15:33.440 --> 00:15:40.879
Now the thing to think about too with recapture is that um whether you do a cost segregation or not, there is recapture.
00:15:41.440 --> 00:15:45.039
We're just speeding up the rate of that depreciation.
00:15:45.519 --> 00:15:58.159
So if you hold the property longer, uh let's just say 15 years, then it would be much closer to what you would have had in recapture had you not done a cost segregation.
00:15:58.399 --> 00:16:02.159
So it can still help free up that cash flow uh a lot, which is pretty interesting.
00:16:02.559 --> 00:16:10.240
So there's definitely a number of factors that will come into play of people deciding how long they should hold the real estate that they own or not.
00:16:10.399 --> 00:16:16.320
Um, there's a lot of factors in there optimizing the ROI, the market, your personal circumstances.
00:16:16.399 --> 00:16:28.639
Uh, but it sounds like one of the components that maybe should be in that equation is if someone has done a cost segregation, then what does their recapture tax look like based on how long they've owned this property, right?
00:16:28.960 --> 00:16:40.399
Yeah, that's oftentimes something a CPA has to calculate for you, um, like your whoever your current tax advisor is, um, which we we work with all kinds of different uh CPAs and partner with them uh a lot of times.
00:16:40.559 --> 00:16:45.200
So um a lot of times this isn't something like your CPA actually knows how to do.
00:16:45.279 --> 00:16:51.679
So they know how to do some things of that, uh like you know, a 1031 exchange and creating a new adjusted basis in a property.
00:16:51.759 --> 00:16:57.039
Um that can then be the standpoint for a new cost segregation, things along those lines.
00:16:57.200 --> 00:16:59.600
But uh, you know, to your to your point.
00:17:00.960 --> 00:17:01.679
Uh yeah.
00:17:02.480 --> 00:17:11.200
What are what do you think are the most common questions that you're answering over and over for clients that you work with that are exploring a cost segregation?
00:17:11.519 --> 00:17:13.839
I'm curious what things come up the most.
00:17:15.200 --> 00:17:24.480
Yeah, the probably the biggest one that I see um is like how do I accelerate more?
00:17:24.960 --> 00:17:30.559
Like how how do I how can I get to a hundred percent accelerated depreciation in year one?
00:17:30.880 --> 00:17:37.759
Um it's an interesting question that I get because that's that's a big red flag.
00:17:37.839 --> 00:17:44.960
There's very few asset classes in real estate that can be completely written off on the depreciable basis in the first year.
00:17:45.039 --> 00:17:49.039
There's like maybe they just don't know and they're asking that by default.
00:17:49.359 --> 00:17:56.720
It's like exactly it's like people asking me, like, you know, I work as a realtor and they're like, you know, will you work for me for free?
00:17:56.799 --> 00:18:00.160
And it's like, no, like they just don't know, they've no idea how it works sometimes.
00:18:00.400 --> 00:18:01.200
Yeah, exactly.
00:18:01.279 --> 00:18:08.400
So there's definitely some like I mean, I have to help educate people a lot in what I do because it's uh and that's what we love to do too.
00:18:08.480 --> 00:18:10.000
Like we could talk about this all day.
00:18:10.240 --> 00:18:15.200
Um the the the answer to that question though, like how do we accelerate more?
00:18:15.279 --> 00:18:20.960
There are actually two asset classes where you can fully write off the thing and not in a complete year, which is pretty wild.
00:18:21.039 --> 00:18:26.000
So, like a car wash when it's structured the right way, and a gas station when it's structured the right way.
00:18:26.160 --> 00:18:32.319
Um, a lot of times those can be completely categorized as 15-year site improvements, like the entire depreciable basis.
00:18:32.400 --> 00:18:40.480
So you have a million dollar property there, the whole thing is 15 year, you can write off a million dollars in your taxes in that first year, which is uh pretty insane.
00:18:40.799 --> 00:18:41.519
Oh, that's interesting.
00:18:41.920 --> 00:18:48.240
Normally we're gonna get between 20 and 30 percent that we can accelerate on your depreciable basis.
00:18:48.319 --> 00:18:50.720
That's very, very standard across the industry.
00:18:50.960 --> 00:18:55.359
So so there's probably a minimum property value that starts to make sense.
00:18:55.839 --> 00:18:56.960
Yeah, correct.
00:18:57.119 --> 00:19:02.640
We we think uh, like in our opinion, anything over 400,000 and above definitely makes sense to look at.
00:19:02.799 --> 00:19:09.039
Anything below uh is a little bit more of a discrepancy, and you'd want to like be a bit more discerning when looking at the numbers.
00:19:09.359 --> 00:19:09.839
That's interesting.
00:19:09.920 --> 00:19:12.160
Foreheads are 400 is actually lower than I thought.
00:19:12.240 --> 00:19:13.920
I thought you were gonna say something like a million.
00:19:14.000 --> 00:19:16.960
Uh so it looks like uh the door's kind of open to more people.
00:19:17.119 --> 00:19:22.880
Um yeah, I'm curious, like the top five things that you think that uh people need to know about cost segregation.
00:19:22.960 --> 00:19:27.519
So, or the top five most frequently asked questions that you get uh or that you're having to explain.
00:19:27.599 --> 00:19:39.200
So, number one is you know, people wanting 100% depreciation or in year one, you know, if you had to pick maybe four more, the things you're most commonly answering or having to clarify or teach people.
00:19:39.759 --> 00:19:40.799
Number number two.
00:19:41.440 --> 00:19:45.920
Number two, um it's funny, but what is depreciation?
00:19:46.000 --> 00:19:46.640
I get that a lot.
00:19:46.960 --> 00:19:47.599
No, that's okay.
00:19:47.680 --> 00:19:52.000
It could be as elementary as it needs to be because a lot of people just don't know about this.
00:19:52.240 --> 00:19:52.720
Yes.
00:19:52.960 --> 00:19:55.519
And then uh, you know, what is depreciation?
00:19:55.759 --> 00:19:59.920
The the third um is probably what's the short term on a loophole.
00:20:00.160 --> 00:20:01.119
Wait, wait, sorry, really quick.
00:20:01.200 --> 00:20:02.640
I w I want to make sure we define these as we go.
00:20:02.720 --> 00:20:03.440
So we did the first one.
00:20:03.519 --> 00:20:03.839
Yeah, yeah, yeah.
00:20:03.839 --> 00:20:03.920
Sorry.
00:20:04.079 --> 00:20:06.240
The second the second one, what is depreciation?
00:20:06.559 --> 00:20:07.279
Depreciation.
00:20:07.359 --> 00:20:11.680
I can give you the the I'll give you the official definition, then I'll break it down in layman's terms.
00:20:11.920 --> 00:20:19.039
Official definition by the IRS is that it's a non-cash expense that can be deducted from your taxable income.
00:20:19.200 --> 00:20:21.519
Uh so it's a pre-tax deduction.
00:20:21.759 --> 00:20:27.839
Um the the layman term that I like to use is that the IRS coupon.
00:20:27.920 --> 00:20:36.960
They're they're essentially giving you something to uh you know put back into the vehicle because it does cost money to operate investments and things, and they recognize that.
00:20:37.039 --> 00:20:39.359
Um, so they give you a little bit of that cut up front.
00:20:40.000 --> 00:20:40.319
Okay.
00:20:40.640 --> 00:20:45.920
And then the third thing that you find yourself having to explain or teach or being asked about.
00:20:46.240 --> 00:20:48.400
Yeah, short-term rental loophole.
00:20:48.720 --> 00:20:49.279
Oh, for sure.
00:20:49.359 --> 00:20:49.920
That's a big one.
00:20:50.000 --> 00:20:50.160
All right.
00:20:50.240 --> 00:20:51.519
What are your what are your thoughts on that?
00:20:51.599 --> 00:20:52.240
What's your take on it?
00:20:52.480 --> 00:20:57.759
Yeah, man, this is probably one of the most powerful things for high income earners in in real estate, in my opinion.
00:20:58.079 --> 00:21:02.480
So the the loophole in uh what it what it consists of.
00:21:02.720 --> 00:21:18.720
So um if you operate a short-term rental, um, if you are materially participating in the involvement and management of that property, there's like seven questions the IRS outlines, um, but only one of them has to be true to me material participation.
00:21:19.119 --> 00:21:27.759
And then the average day has to be less than seven days uh across a calendar year, um which that that's pretty easy to do.
00:21:27.839 --> 00:21:33.119
And when it comes to the IRS, they if it's over that, then it's considered long-term rental.
00:21:33.279 --> 00:21:37.599
So all midterm rental stuff when it in the eyes of the IRS is just considered long-term.
00:21:38.000 --> 00:21:54.000
Um so if you meet it's a short term rental and you're managing materially participating in the property and you're actively managing it, now the income or losses from that property are go against your ordinary income.
00:21:54.079 --> 00:21:58.400
You're looked at like you're operating in a hotel, you're you're a hotel year, and the IRS treats you that way.
00:21:58.559 --> 00:21:59.759
So now we have this depreciation.
00:22:00.319 --> 00:22:06.799
Bucket that's spread out over 39 years because a short-term rental by the IRS is categorized as a commercial asset.
00:22:07.039 --> 00:22:08.880
So it's depreciated over 39 years.
00:22:09.359 --> 00:22:19.519
And now what we can do is things that would have taken 39 years, we can accelerate up into year one as a paper loss that offsets your ordinary income.
00:22:19.599 --> 00:22:22.480
So if you make a million dollars a year, you're a physician.
00:22:22.960 --> 00:22:24.880
I use a million just because it's easy math.
00:22:25.200 --> 00:22:25.440
Right.
00:22:25.599 --> 00:22:29.519
And then you have a million dollar depreciable basis in a property.
00:22:30.559 --> 00:22:36.079
If we cost segregate that, I'll say conservatively, we can accelerate 20% of that.
00:22:36.160 --> 00:22:37.599
It's probably going to be closer to like 30%.
00:22:38.400 --> 00:22:43.680
But at 20%, that means you get a$200,000 accelerated depreciation.
00:22:43.759 --> 00:22:46.559
That's a deduction that you would claim in this in the current tax year.
00:22:46.720 --> 00:22:56.720
So instead of being taxed at 37% on a million, I've just cut$200,000 at 37% tax rate from your income.
00:22:56.880 --> 00:23:06.079
Now that's uh do the math on it, that's like$130 something K that you've just freed up in your taxes that now you can turn around and reinvest.
00:23:06.400 --> 00:23:16.880
So that's that's the loophole, and that's how it works because it essentially is taking something that would normally be passive, but you're actively involved in it, and therefore it can apply to your ordinary income.
00:23:17.200 --> 00:23:22.079
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00:24:11.680 --> 00:24:16.720
All right, number four, the fourth thing that you find yourself exploiting or teaching most often.
00:24:20.480 --> 00:24:24.000
Probably probably real estate professional status.
00:24:24.079 --> 00:24:25.440
A lot of people for sure.
00:24:25.519 --> 00:24:26.240
That's a big one.
00:24:26.319 --> 00:24:30.319
I bet there's a lot of people that are trying to claim that or think that they have that, and they're not.
00:24:30.559 --> 00:24:37.839
And you know, if you've got to provide proof of that, I think I think that there's a lot of people that are probably not doing that the right way because they don't understand it.
00:24:38.000 --> 00:24:43.759
And even after that's been explained to me by CPAs, I do real estate full-time, and I was even like, I don't know about this.
00:24:43.839 --> 00:24:47.599
It just seems like a not good rule that people can easily mess up.
00:24:47.680 --> 00:24:49.279
So I want to hear your perspective on that.
00:24:49.519 --> 00:25:02.319
Yeah, well, on the flip side of that, too, there's a lot of people to think and just kind of have preconceived notions they don't qualify for, but they have this real estate portfolio, they work a full-time W-2 outside of real estate, and their spouse doesn't is a stay-at-home mom.
00:25:02.400 --> 00:25:06.799
It's like you can the spouse can be the real estate professional.
00:25:06.960 --> 00:25:12.000
Now you get all these amazing tax benefits from them being able to be involved in the real estate.
00:25:12.079 --> 00:25:14.960
Uh, and you can still buy and sell and and be a part of it.
00:25:15.119 --> 00:25:25.759
So uh real estate professional status, it it's again uh showing material participation and the uh acquisition, management, development of real estate.
00:25:25.920 --> 00:25:32.160
And there's there's definitely more of like you're involved in real estate transactions on a day-to-day basis with your job, even right?
00:25:32.319 --> 00:25:36.559
If you're a real estate agent, you qualify for real estate professional status.
00:25:36.799 --> 00:25:48.240
So any of your investments that you then make personally, even though your job is with another brokerage, personally, you invest in real estate, it can be as passive as you want it to be.
00:25:48.400 --> 00:25:54.960
But because you're you already have real estate professional status, any income from those passive investments is considered ordinary income.
00:25:55.119 --> 00:26:00.319
That means we can do a cost segregation, accelerate those losses, and we're still offsetting your ordinary income.
00:26:00.480 --> 00:26:06.720
So like real estate professional status might be the golden ticket to have within within cost segregation for sure.
00:26:07.200 --> 00:26:11.440
Do you think that it's reasonable for people?
00:26:11.599 --> 00:26:12.960
Because I've heard people talk about this.
00:26:13.119 --> 00:26:22.160
Do you think it's a reasonable approach that maybe, you know, potentially you have a guy or a woman who is a really high earner in the relationship?
00:26:22.400 --> 00:26:27.039
The other one just earns a lot less or you know, is maybe kind of staying home with the kids.
00:26:27.279 --> 00:26:38.480
Does it really make sense to for that other person who earns less to maybe quit their job if it's low paying to be the real estate professional person full-time and actually fulfill the things that are associated with that?
00:26:38.640 --> 00:26:43.839
Like, is there what kind of situation makes sense where that actually comes out ahead?
00:26:44.880 --> 00:26:46.559
It's funny you asked that question.
00:26:46.720 --> 00:26:49.759
I actually helped a client come to this exact realization recently.
00:26:49.839 --> 00:26:53.759
He had a he's been investing really heavily, he has an awesome W-2.
00:26:54.400 --> 00:26:57.359
Um, he was making a million a year.
00:26:57.839 --> 00:27:02.880
And his wife was a teacher, she was making like 40k a year, and it was just like charity work for her.
00:27:02.960 --> 00:27:04.640
Like she just liked being with the kids.
00:27:04.880 --> 00:27:20.720
And what he realized is if she left her job and got to spend more time with the family, which you kind of wanted to do anyway, she could be the real estate professional, and then all of their portfolio could offset, and instead of 40,000 a year, they would be saving like hundreds of thousands a year.
00:27:21.119 --> 00:27:25.920
And it made so much more sense um on like the net benefit for them to do that.
00:27:26.000 --> 00:27:33.759
And she can still substitute teach, like she can still be in the classroom, she can still have that, and it really does become more of like a charity work for her.
00:27:33.839 --> 00:27:37.039
Uh, but it it freed up all kinds of cash flow for them.
00:27:37.759 --> 00:27:38.880
That's interesting.
00:27:39.200 --> 00:27:46.880
The number five uh item in cost segregation that you find yourself having to explain or teach or being asked about.
00:27:49.599 --> 00:27:56.960
This is probably this is gonna be like really, really like deep, I think, but it's very it's common.
00:27:57.200 --> 00:28:01.279
So we'll we'll run a cool an estimate on somebody um for like a property.
00:28:01.519 --> 00:28:08.079
And um, if you bought a property during the previous tax law, um, or really before 2025, right?
00:28:08.160 --> 00:28:20.079
The tax law that we're currently under one of the beautiful bills placed into effect January 20th, 2025, or made retroactive to that date, even though it was signed on, I think it was signed July 4th of 25.
00:28:20.960 --> 00:28:28.400
So if you bought a property before that, you fall out of the current tax bill rules, but there are still benefits from cost segregation.
00:28:28.960 --> 00:28:36.240
So the question I'll get is why don't I get 100% bonus depreciation, even though it's under the current tax law?
00:28:36.960 --> 00:28:43.839
And that would be like if you bought a property, Vince, in 2022 and you place it in service, right?
00:28:44.000 --> 00:29:00.319
Maybe it's like you you had it for a while or you uh uh it was a primary residence, and you place it in service in 2024, but you're only eligible for 60% bonus depreciation because under that previous tax law, they were grandfathering out bonus depreciation.
00:29:00.880 --> 00:29:07.839
But between like the end of 2017 and through 2022, there was still 100% bonus depreciation.
00:29:08.400 --> 00:29:17.759
And the short answer of like, why don't I get 100% bonus is it depends on your acquisition date when you bought the property.
00:29:18.000 --> 00:29:23.279
That puts you uh that determines which tax law we have to look at.
00:29:23.440 --> 00:29:28.799
And then your in-service date determines how much bonus within that tax law you're eligible for.
00:29:29.039 --> 00:29:34.640
So we have to look at a handful of different things, and that often determines the the 100% bonus or not.
00:29:35.599 --> 00:29:44.319
And if you're if you're investing as a limited partner passively in real estate deals and they do cost segregation, do you benefit from that?
00:29:44.480 --> 00:29:55.359
Does that does that pass through to the limited partners that are investing passively in these deals, or is it just on the GP side, or does it depend of actually I haven't asked anyone that before, so I'm kind of curious, really.
00:29:55.680 --> 00:29:56.880
Yeah, it can benefit you.
00:29:56.960 --> 00:30:00.400
It's it's just based off of whatever the operating agreement is.
00:30:00.720 --> 00:30:04.319
The it's gonna affect however those incomes are taxed.
00:30:04.480 --> 00:30:09.119
So as an LP, that's passive income, that's passive real estate income.
00:30:09.279 --> 00:30:22.720
So if you are still making a lot of money uh in like a W-2, that's what you do, then uh you get a cost segregation, like the GP does a cost segregation for them, the GP, they're probably rep status.
00:30:22.799 --> 00:30:25.759
So that's gonna affect their ordinary income, their active income.
00:30:25.920 --> 00:30:31.920
They're gonna get a little bit more benefit from it because they probably have a higher tax rate on their ordinary income than their passive income.
00:30:32.160 --> 00:30:40.640
As an LP, when that passes through to you in the K1, you're still gonna get benefits from it, but it's gonna affect your passive income, not your ordinary income.
00:30:40.799 --> 00:30:50.799
So you might be taxed uh arbitrarily, picking examples here, like 20% on your passive income and uh 35% on your active income.
00:30:51.119 --> 00:30:58.160
Well, you're you're not doing a pre-tax deduction on that active income, you're only doing a pre-tax deduction on that passive income.
00:30:58.240 --> 00:31:00.640
So you're it still benefits you, it's just not nearly as much.
00:31:00.799 --> 00:31:05.839
And the good thing too uh with a lot of the passive losses is there's passive loss carry forward.
00:31:05.920 --> 00:31:16.000
So, like let's say uh you know GP does a cost segregation, it passes down to me as an LP, and it's like$100,000 of uh depreciation that I get to claim.
00:31:16.079 --> 00:31:19.279
But I only get$20,000 a year from that investment.
00:31:19.680 --> 00:31:21.920
Well, now it's just gonna slowly chip away at that.
00:31:22.000 --> 00:31:30.160
I'm not gonna owe any taxes on that passive$20k that I collect that year, and then the next year I'll have$80K in that bucket too for whatever income comes in there.
00:31:30.240 --> 00:31:31.279
It'll just kind of chip away.
00:31:31.359 --> 00:31:32.559
So it does carry forward.
00:31:32.880 --> 00:31:33.200
Okay.
00:31:33.680 --> 00:31:36.480
It is really incredible how much you know about all this.
00:31:36.559 --> 00:31:53.359
I know that you're doing it full time, so you know it's it's probably similar for me as a realtor or where I'm getting to with my knowledge base as a as an investor, but you really know a lot about this, which is very helpful because I think that it's a topic that many people will ask about, but they just don't understand.
00:31:53.599 --> 00:31:55.119
There's very few people.
00:31:55.359 --> 00:32:03.839
There's there's no way that it's more than 0.1% of people understand cost segregation at a deep and correct level.
00:32:04.000 --> 00:32:09.359
So it's really useful and helpful to kind of get a baseline level of education here.
00:32:09.519 --> 00:32:12.319
And I'd like to dive into a couple case studies.
00:32:12.480 --> 00:32:16.480
Uh did Jay-Z do a cost segregation?
00:32:17.119 --> 00:32:19.359
Uh it's it's very possible.
00:32:19.519 --> 00:32:23.359
Uh if you have examples of it, I we can definitely take a look at it and see.
00:32:23.599 --> 00:32:24.640
Did I did I read it wrong?
00:32:24.960 --> 00:32:28.559
Because I actually had like I wrote out my notes for the episode based on like what was on there.
00:32:28.720 --> 00:32:34.640
And or was there some I don't know how I got this, but it said like the Jay-Z comparison to property side by side.
00:32:34.720 --> 00:32:36.640
What did Jay-Z actually save in dollars?
00:32:36.960 --> 00:32:38.240
Or was this like a person?
00:32:38.720 --> 00:32:44.559
Or or was this like I'll have to go back and look how I how I got that, but maybe Yeah, I don't know.
00:32:44.640 --> 00:32:45.839
I don't know if that was me.
00:32:46.160 --> 00:32:46.480
Okay.
00:32:46.720 --> 00:32:50.559
I I don't know how I got this, but maybe that's just straight up not true.
00:32:50.720 --> 00:32:52.319
So completely disregard that.
00:32:52.480 --> 00:32:55.039
But I want to I want to dive into some case studies that you had done.
00:32:55.279 --> 00:33:04.640
So if there's maybe uh maybe two or three that really stick out to you, some cost segregation studies that you had done uh for some clients, you know, what what was the situation?
00:33:04.799 --> 00:33:10.319
What asset class was this in, and what kind of results came out of it for them on the back end?
00:33:10.640 --> 00:33:11.200
Yeah.
00:33:11.440 --> 00:33:19.440
Um, there's one that like really stands out to me, and it's probably one of the coolest implementations of the strategy that I think I've seen.
00:33:19.519 --> 00:33:20.480
So I want to share that.
00:33:20.559 --> 00:33:22.880
That's uh we'll call that the Hawaii property.
00:33:23.119 --> 00:33:32.559
And then the other one, um the other one is like storage unit, storage facility.
00:33:32.640 --> 00:33:33.839
We'll talk about that.
00:33:34.240 --> 00:33:38.880
Um so the well, and we'll talk about the storage facility first because that's a little bit more in line, right?
00:33:38.960 --> 00:33:55.519
So um the I I have a um referral partner that I I work with a lot, and he coaches people how to invest into storage facilities and like how to get into um storage facilities as passive investment so that they can still rent, right?
00:33:55.599 --> 00:33:59.359
Like it's still real estate, you're still leasing it, you're just leasing like miniature units.
00:33:59.599 --> 00:34:01.599
It's very similar to multifamily in that sense.
00:34:04.079 --> 00:34:14.480
You can this guy bought a property, one of his clients bought a property for$500,000, and the location that he bought the property in um had really low land value.
00:34:14.559 --> 00:34:16.719
I think it was in Tennessee or Alabama.
00:34:16.960 --> 00:34:21.519
Like, as if you you know, opposed to California, California has incredibly high land values.
00:34:21.599 --> 00:34:26.320
I've seen land values as high as 90% in California, which is kind of crazy.
00:34:26.719 --> 00:34:27.760
Oh, that is interesting.
00:34:27.840 --> 00:34:29.280
I've never heard of something like that.
00:34:29.599 --> 00:34:33.119
So you're saying the building would have 10% of the total value and the land would have 90%.
00:34:33.760 --> 00:34:35.280
Yeah, so so think about it this way.
00:34:35.679 --> 00:34:36.320
Oh, that's so interesting.
00:34:36.559 --> 00:34:38.239
That's like a side quest, right?
00:34:38.559 --> 00:34:40.800
Same, we'll give it the exact same property.
00:34:40.880 --> 00:34:43.920
We'll use the Swords Facility, million dollar purchase on it.
00:34:44.079 --> 00:34:52.480
It's got 20% land value in Tennessee, and it's got 90% land value in San Diego, California.
00:34:52.880 --> 00:34:57.840
In California, that depreciable basis would be$100,000.
00:34:58.239 --> 00:35:00.880
That does not make sense to really do that property.
00:35:01.039 --> 00:35:06.400
So it's not even really based off the purchase price, it's your purchase price minus your your land value that we have to determine.
00:35:06.639 --> 00:35:11.599
And then in Tennessee, that property still has a depreciable basis of$800,000 because the land was only 20%.
00:35:11.920 --> 00:35:14.320
That's like significantly more advantageous.
00:35:14.880 --> 00:35:18.000
So yeah, that's that's something to kind of be aware of, too.
00:35:18.079 --> 00:35:26.880
That like sometimes you don't know the the value of the land and how much that's gonna eat into your depreciable basis and what you can claim from these tax benefits.
00:35:27.039 --> 00:35:29.440
And that's something to look at ahead of time before an acquisition.
00:35:29.760 --> 00:35:32.960
So this guy buys a uh storage facility for 500k.
00:35:33.280 --> 00:35:34.719
Uh land value is really low.
00:35:34.800 --> 00:35:36.400
I want to say it was like 10% on this.
00:35:36.480 --> 00:35:40.960
So he so the depreciable basis is 450,000 in this property.
00:35:41.440 --> 00:35:45.280
He's able to uh cost segregate it.
00:35:45.440 --> 00:35:57.920
We do the cost segregation for him, and we found uh I'm looking at my calculator here, we found uh 29.5% that we could accelerate.
00:35:58.239 --> 00:36:05.039
So 450,000 times the uh 0.295.
00:36:05.760 --> 00:36:06.800
I'll do the math for you.
00:36:06.960 --> 00:36:10.800
425, 425 times 0.29.
00:36:11.519 --> 00:36:12.480
So about 30%.
00:36:13.119 --> 00:36:13.760
450.
00:36:13.840 --> 00:36:14.639
So like we're getting.
00:36:16.480 --> 00:36:17.840
So that's over 120k.
00:36:18.239 --> 00:36:19.920
Uh 132, 132,000.
00:36:20.320 --> 00:36:21.840
As a dep as a deduction, right?
00:36:22.000 --> 00:36:24.639
As a depre that's the depreciation that hits in year one.
00:36:24.960 --> 00:36:33.519
And so if your tax rate is around 30, 32 percent, something like that, then you might be saving around 40 40,000 or something like that.
00:36:33.840 --> 00:36:44.079
And and part of what I like about this example is the the the guy who bought this property is uh he's pretty like average middle class guy.
00:36:44.159 --> 00:36:48.559
Like he was making like one like I think 100 to like 150 a year.
00:36:48.800 --> 00:36:52.400
I all I know is like his tax bracket was between 20 and 22 percent.
00:36:52.559 --> 00:36:58.000
So he's he's not like a physician making a million dollars a year, right?
00:36:59.440 --> 00:37:11.280
So his income from that property, the way it was cash flowing, he was making um like 50k a year uh on that property, and he didn't owe any taxes on that.
00:37:11.360 --> 00:37:12.400
So now he can turn that around.
00:37:12.559 --> 00:37:15.199
He was able to reinvest into other storage facilities after that.
00:37:15.599 --> 00:37:17.519
So that's what's that was really cool.
00:37:18.000 --> 00:37:20.639
Um the Hawaii property I think is really interesting.
00:37:20.880 --> 00:37:27.679
So this is significantly more sophisticated, but it's one of the coolest things I've heard of.
00:37:28.239 --> 00:37:36.400
And it it kind of combines real estate investing with uh traditional like 401 or Roth investing too.
00:37:36.559 --> 00:37:43.280
So uh this guy in Hawaii, uh, or he whether he I don't I don't think he actually lived in Hawaii, but he had a condo in Hawaii.
00:37:43.519 --> 00:37:50.239
So he's he's actively involved in the management of that property in this uh in this uh Hawaii condo.
00:37:50.320 --> 00:37:51.920
The purchase price of that was like 2 million.
00:37:52.079 --> 00:37:58.559
That's his like basis after we depreciate land, which is really nice about condos um is you there is no land value.
00:37:58.639 --> 00:38:05.440
So Hawaii has really high land value, but if you buy a condo there, or like you bought a condo in San Diego, a million dollars, right?
00:38:05.760 --> 00:38:08.559
Now there's no land value associated with that.
00:38:08.639 --> 00:38:13.920
So we might be able to accelerate a little bit less percentage-wise, but you have a significantly higher depreciable basis.
00:38:14.079 --> 00:38:16.480
So he buys this condo, 2.2 million.
00:38:16.639 --> 00:38:18.000
Uh there's no land value.
00:38:18.079 --> 00:38:20.480
So 2.2 million is the depreciable basis.
00:38:20.719 --> 00:38:26.719
We are able to find uh it was like 20 uh that was like 31%.
00:38:27.760 --> 00:38:29.519
So I'll pull up the calculator.
00:38:29.599 --> 00:38:39.199
We got two 2.2 million times 0.31,$682,000 that we can accelerate for him.
00:38:39.280 --> 00:38:39.440
Okay.
00:38:39.679 --> 00:38:41.360
Oh my gosh, that is insane.
00:38:41.440 --> 00:38:42.880
That is a game changer.
00:38:43.440 --> 00:38:44.639
Huge, huge.
00:38:44.880 --> 00:38:47.760
That's a so here's what's really cool.
00:38:48.079 --> 00:38:53.920
He had uh a large amount in a traditional like a 401k, right?
00:38:54.079 --> 00:39:01.519
Like a pre um like a tax benefited when you put it in, but you have to pay taxes when you get it out.
00:39:01.760 --> 00:39:03.519
Yeah, so just like a traditional 401k.
00:39:03.760 --> 00:39:04.079
Exactly.
00:39:04.159 --> 00:39:19.519
So he had he had he had a job, he had a bunch of money in there, and he realized that um like if you if you were to take a big portion of that and roll it into a a Roth that now grows tax-free, he had that huge tax bill because of the conversion.
00:39:20.480 --> 00:39:39.039
He has a COSEG, he gets his 682,000, but he's able to calculate uh like whatever the tax difference is from his traditional, from his 401k, convert that, have a net neutral benefit on his taxes in that year.
00:39:39.199 --> 00:39:45.760
And now 682,000 is now growing tax free in his own.
00:39:45.920 --> 00:39:54.559
So now it's not just 682 off your taxes, it's 682 growing tax-free for a really long period of time.
00:39:54.719 --> 00:39:57.039
That's probably like one of the coolest, most sophisticated ways.
00:39:57.119 --> 00:39:58.320
I've had two clients do that.
00:39:58.559 --> 00:40:02.159
Um, and it's it just is absolutely incredible.
00:40:02.239 --> 00:40:16.639
But you do have to have like a 401 or a traditional uh account with a significant portfolio there, and you have to structure the ownership of the real estate the right way when you do the cost segregations so that it's offsetting the the correct bucket of of income.
00:40:16.960 --> 00:40:25.360
It's really cool because there's so much strategy involved with real estate investing between the different asset classes and the different tax strategies that are available.
00:40:25.519 --> 00:40:36.239
And you can just get so creative, and if you do it right, you can absolutely hit a home run that can build you hundreds of thousands or even millions of dollars in long-term wealth.
00:40:36.400 --> 00:40:49.599
And the more educated that all of us become and the more that we're learning, you know, the odds get higher and higher that you're able to achieve that through the community that we're building uh with the mastermind, you know, where you've got all sorts of people like this in one place.
00:40:49.760 --> 00:40:54.559
Uh, it just really accelerates your progress and you have access to so many resources there.
00:40:54.719 --> 00:40:59.760
And I think that we've got uh something to share with you guys today that we're gonna link in the show notes.
00:40:59.920 --> 00:41:04.000
Do you want to mention um what we're gonna share with the people who uh listen to this episode today?
00:41:04.400 --> 00:41:05.199
Yeah, absolutely.
00:41:05.360 --> 00:41:13.440
So um we'll have a link in this episode and you guys can do uh free estimates on any property that you either have or are even looking to buy.
00:41:13.519 --> 00:41:16.400
We do a lot of estimates for people that are looking at an acquisition.
00:41:16.559 --> 00:41:20.320
And that way you can kind of see what pulling this lever might look like before you even buy the property.
00:41:20.400 --> 00:41:24.400
So we'll have that link in the show notes uh and we'll have a discount associated with that as well.
00:41:24.719 --> 00:41:26.079
Yeah, that's incredible, Chris.
00:41:26.159 --> 00:41:26.719
Thank you so much.
00:41:26.880 --> 00:41:29.840
We appreciate you being here, and this is just so educational for everyone.
00:41:30.079 --> 00:41:40.480
Really glad that we decided to do this topic and cover a few case studies so people could see how this applies in real life and also five things that you need to know about cost segregation.
00:41:40.559 --> 00:41:52.559
So, quick reminder to make sure that you subscribe or follow wherever you're listening so that you don't miss any episodes and we can reach more people with our show to help you guys on your path to financial freedom through real estate investing.
00:41:55.440 --> 00:41:58.960
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00:42:00.880 --> 00:42:09.760
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