On the show today we talk about… Cost Segregation with Yonah Weiss!
Show notes for Cost Segregation with Yonah Weiss
The Vantastic Life is…
– is in Seattle WA
Yonah was a teacher for 15 years with ability to learn complex matters and teach it.
Yonah is the Business director for Madison Specs LLC for Cost Segregation – Specialized Property Engineering and Cost Segregation
Talking about cost Segregation today, and a big shout to Ryan Gibson.
I’m in Jerusalem right now, and only missed Joe by a few weeks!
I actually grew up in Southern CA and we to San Diego State University, which is the same as Joe, and we even overlapped for a year.
I’ve been into real estate for years, and that led me to finding this amazing company Madison Specs LLC, where I fit in perfectly.
And I love doing podcasts like these!
You are actually the business director and speak very well, and are able to speak to some very detailed parts of the company, and get involved in a different way.
What are the general benefits of cost segregation..?
It really means depreciating of the building and breaking out the different cost.
Most people know what depreciation is… it’s a tax deduction. Every owner of a business or investment property gets this deduction.
We take the value amount, that dollar amount that was spent and we deduct that. The value of the building, not the land.
The IRS says that a commercial building depreciates over 39 years. For residential it’s 27 years.
If you make money from your properties you get a deduction, and you don’t pay tax on that amount.
And that’s a non cash deduction?
Totally! It’s so you’re not taxed on the full amount of your income.
There are actually things that deduct at a faster rate than other things.
Personal property includes anything in a building that’s not part of the structure. Think applicable and furniture, and even carpet and lighting. All of that depreciates over a 5 year period.
And you need a specialist to come in and break down those things for you.
Also, the 2nd thing is land. What’s on the land does depreciate over 15 years. Think cement, fencing, etc.
We are going to help you accelerate your deprecation.
You can actually do this and have a tax loss!
Exactly! In the first year you can actually have a 20% write off.
Again, you don’t have to be the expert, you just have to know who the expert is.
Do you have a service that can help people before they buy?
We definitely do some advisory. We’ll do an upfront analysis for free. That is based on the thousands of properties that we’ve done.
What types of assets classes are best for this?
Usually between 10-30% are what is accelerated.
One with a high percentage is elderly living spaces.
And warehouses would be on the lower end, but there are still some things, like the parking lots…
But distribution centers are a whole different type of warehouses.
The equipment and personal property must be owned by the owner and not the renter, correct.
That is correct. Unless the owner pays for the improvements.
But even the tenant can use cost segregation for their own business if they do improvements to the building.
A lot of people miss this.
What’s the optimal time to do this cost segregation study?
So, the tax depreciation starts from when it was placed in service. This means it’s ready to rent or be used.
They usually do it immediately after they’ve bought the property.
But if they do a value add (improvements) they can actually double dip. They depreciate the building and then put in the new equipments, and they can write that off in the 5 year period.
There could be an update whenever there are significant improvements.
When I was doing this back in the day we would write the date when things were installed so we kept track of all this stuff.
With cost segregation do you need to have a certain volume of renovations? Do you follow up every year, like when you replace carpets every year…
It really depends on how much the spend is and what your benefit is going to be to get those deductions.
If it’s significant enough, we’ll do a follow up study.
What size of buildings, and does it work with retail?
Everything!!! There’s really no type of property that it doesn’t work for. You want to get whatever tax benefits you can take.
Even golf courses! Golf courses are considered land improvements. We are talking about sometimes 70-80% goes into the 15 year instead of the 39 years.
What about mobile home parks?
Yes! I was actually going to bring that up.
Essentially you’re buying just the land, so the majority of it can be put into that 15 year category.
There’s something called bonus depreciation. It’s called 100% bonus depreciation. Anything that is less than 15 years, you have the option to choose to take the entire amount in year number 1.
This is HUGE, and a game changer.
Let’s say your mobile home park of 70% of 15 year deductions. You could depreciate so much in the first year!
I had a guy that was literally moved to tears when he say is taxes this year, or lack there of.
There depreciation recapture. The dark side of depreciation.
The recapture doesn’t mean that you have to repay the full amount, but you have to pay taxes on the depreciation.
And you can do a 1031 exchange to try to keep pushing off the taxes.
Does it make sense that you would want to hold a building for a certain amount of time, or have your recapture plan in place?
The time… sometimes it’s going to be relative, but generally speaking, I don’t recommend cost segregation unless you’re going to hold the property for 2-3 years.
But it’s relative. If someone is going to be buying a lot of properties… it’s going to take their taxes down.
Depreciation from one building can offset the recapture tax from another one, but there are rules, so look into this.
If you’re a real estate professional you can get a great benefit from this, but if you are not… this won’t work for you.
You have to spend 51% of your time doing something in the real estate industry. And it has to be at least 750 hours a year. You can’t sit on the beach all day.
But I recommend that everyone try to get this status!
You can use this for income tax liability, and it can be carried forward.
Very powerful! Life changing!
If you own building, and don’t know this stuff… man oh man!! You need to know this stuff!!
People need to know about lending and borrowing and taxes before they even start!
What are the areas of cost segregation that are the toughest to calculate? The ones that people wouldn’t think about.
Carpeting or vinyl flooring depreciates at 5 years, and people think it’s part of the structure.
These are things that I wouldn’t think about. Fencing, flooring, etc.
What size buildings are worth doing cost segregation on…
I generally don’t push this on any property that’s bought for less than a million dollars.
Since we are front loading percentages… for a million dollars you are going to get a benefit.
We generally charge between $5-7k, so you want it to be a significant benefit for you.
When you sell a property… it starts all over, right?
Yeah, it’s crazy! It starts over when you buy a property. Taxes aren’t based on real logic. It’s just something they came up with.
Let’s say you own a building for 10 years and you have tenant improvement costs. How does that work?
The engineers will look at the situation and figure out how to break it all down.
Have you ever been called as a consultant for the IRS?
We haven’t been called in like that. When our clients have been audited we will help them.
There are such clear guidelines that we follow to a T, with everything that we follow, that the IRS just follows it.
What about amending your tax returns?
You don’t really want to amend your returns.
This will blow your mind!
But you can retroactively do tax cost segregation without amending your tax returns. There’s a form that you have to fill out.
Cost segregation is actually considered the correct way of depreciation a property! The IRS isn’t going to call you out for doing it the slow way because they’ll get more money.
You may not have needed cost segregation in the past, but you can use this retrospective cost segregation when you have a bigger tax bill coming up.
What about your other services?
We have a title company.
We have Lease Pro. It take a commercial lease, which are not like residential leases, they are very long! So what happens is you’ll have a lease abstract.
We have professionals that only do this.
Most people would take this to their lawyer, but they don’t want to look through 100’s of pages, so they push it off.
This info can be WAY off from the rent roll!
And this is money spent during the feasibility period?
Sometimes, but people will also do it after buying the property.
You need to know that these things exist, but you don’t have to be an expert at it!
You have be be aware of this stuff! It’s a no brainer!
You can get a FREE look, feasibility analysis.
We covered so much, and there’s a lot more to learn. Feel free to reach out to me.