- Toby Mathis from Anderson
Business Advisors here
and I am just gonna introduce
this very powerful webinar
that I did with accountant, Erik Oliver.
We've been doing this
for more than 20 years
and I can tell when there's
a topic that actually hits,
that is very relevant and
resonates with people.
And this particular topic
is on doing something called
cost segregation with real estate.
And the big question is
always who benefits from this?
And the answer is really,
anybody who has investment real estate
and the big factor was under
the Tax Cut and Jobs Act,
we had two major changes
that impacted real estate investors
that flew completely below the radar
where I'm talking 99% of the CPAs
don't know this stuff is out there.
And what those two things were was one,
bonus depreciation on assets
that have a usable life
less than 20 years.
And the fact that those
assets don't have to be new
and put right in service.
What really happens when you do this
is you're able to take an asset
that normally you'd be
spreading out the deduction
that you would get every year.
You'd be taking a deduction,
a smaller deduction
every year over 39 years
for commercial property
or every year for 27 and a half years
for residential property
and you're accelerating it
into one year, five years,
seven years, 15 years.
But you're actually
able to allocate it out.
And if you want, you can take anything
that is below 20 years
in jam it into one year.
The results are extremely
powerful for investors.
It can literally knock out large,
huge chunks of tax liabilities
if you do this right.
The reason most folks
don't know it's out there
is because it is very new
and because it's so focused into one area,
that little niche area
of real estate investing.
And so watch this webinar,
it's actually recording of the webinar.
And if you are a real estate investor,
then don't pass up the
opportunity to run those numbers
absolutely free at the end of the webinar.
Hey guys, this is Toby Mathis
and I'm joined by Erik Oliver.
Erik, welcome.
- Thank you Toby.
- [Toby] And you're listening to a webinar
on the new tax laws and
how the new tax laws,
the Tax Cut and Jobs Act to be specific,
how it impacted real estate
investors and what it gave us.
Like they gave us a huge
big fat wonderful deduction
and just not a lot of tax preparers
are aware or they use this,
hey, it's not for the typical
real estate investors.
So we're gonna go over that today.
I'm gonna just gonna
go over today's agenda
right out the gate.
You just heard from Erik.
Erik's an awesome dude.
In fact, I might just
wanna introduce Erik now.
So you guys get an understanding
of just how extensive
Erik and his firm's
involvement is in this area.
Erik, you still out there?
- Yeah I'm here Toby.
- [Toby] Fantastic.
So Erik, there's lots
of accountants out there
that do this stuff on the side.
Sometimes they're gonna try to do this.
Like I don't do cost segregations.
I use outside folks like yourself.
How many cost segregation studies
have you guys actually done for taxpayers?
- [Erik] We're close to 5,000 now, Toby.
We've been doing it for about 10 years.
This is all we do is cost segregation.
So we're kind of a niche in
terms of accounting firms.
We don't do tax returns or
audits, anything like that.
It's just cost segregation.
- [Toby] All right, and I'm
gonna make this real simple.
When we say cost segregation,
we're really talking about a
change of accounting method
that you're allowed to
take and it will make sense
once we go over how depreciation works.
How buildings are different
than personal property.
We're gonna go over five,
seven, 15, 27 and a half
and 39-year property.
We're gonna go over IRC,
which stands for Internal Revenue Code 168
and the bonus that was created
under the Tax Cut and Jobs Act.
So that's the new tax laws.
Tax Cut and Jobs Act was
passed at the end of 2017.
Who benefits most?
And we're gonna go over
some actual case studies
because this is actually a huge impact
and there's already a ton of questions.
Yes, you're going to, this
is gonna be recorded and yes,
we will be talking about the second year
and how it affects year two
and three and four and all that.
And so we're gonna go over that.
And then Carolyn, what was your example?
I think she said, feel
free to use my example.
I believe, if I'm not mistaken,
did you save 81,000 off
of this and a 188,000?
Was that a $188,000
deduction or did you save
$188,000 in taxes?
This is one of our audience
members' deduction.
So that's gonna save you,
I'm assuming $118,000.
Holy schmoley.
So Carolyn, Susan or Patty's
gonna reach out to you
'cause I wanna see what your study is.
And great job, great job.
And that's exactly how this stuff works.
It's super powerful.
So we're gonna dive into that.
I'm gonna be interviewing Erik
'cause he's an accountant who
is an expert in this area.
I am just a tax attorney
who likes to own real estate
in likes looking around for things
that keep money in my pocket
and this is one of the huge
ones and I'm still shocked
that people aren't catching on to this.
And here's the beautiful part.
It's not too late.
So I'm gonna jump on in.
So we're gonna go over
what is depreciation,
what period of time you take these things,
what type of property
and who can appreciate.
Erik, what is depreciation
if you don't mind answering for us.
What is it?
- [Erik] Yeah, so the IRS allows us,
anytime we purchase investment properties,
any property that's generating revenue,
whether it's a home office,
a single family rental home, duplex,
office space, what have you,
anything that generates income,
you're allowed to depreciate that
over either 27 and a half
years for residential
or 39 years for commercial property.
And what that gives you
is, as you know, Toby,
a lot of people invest in real estate
for the tax write offs.
So it allows you to take
a portion of your building
and expense it every
year for wear and tear.
So just to make the numbers simple,
if you had a $270,000 rental home
and you're depreciating that
over 27 and a half years,
you're gonna get about roughly
a $10,000 write off each year
to write off against your income.
- [Toby] So it's basically,
I kind of put it in my own definition.
It's basically an income tax deduction
and it allows you to take that
against any of the
income that's generated.
What period of time do we usually do this?
I know that you just mentioned
27 and a half and 39 year,
but are there other properties
that have different timeframes?
- [Erik] There are.
So there's, you've got
your five-year property.
Those are the stuff that's
typically inside the building,
things like carpet, countertops, cabinets.
You've got your some seven-year stuff.
We don't see a whole lot of it,
but some of your seven-year stuff
is things like telecommunications.
All your land improvement
are 15-year assets.
And so those can be
depreciated over 15 years.
So those are the three main categories
that we segregate into it.
That's the five at seven and 15 year.
- [Toby] So we're gonna go over.
There's a bunch of questions
already that people are asking.
And so I'm just gonna
kind of go through this.
When you're taking depreciation,
it doesn't have to be just that property.
And then there's a lot
of questions rolling in,
by the way.
We probably have a good 40
or 50 questions already.
And we're gonna answer it in the webinar's
designed to kind of go over this.
But the default is most people just go
and have real estate
offset, real estate income
and that's because real estate
income is considered passive
and there are exceptions to that rule
which we're gonna go over.
And so the first inclination
is people usually say,
oh I don't need extra depreciation.
Why would I do it?
And that's because they don't understand
the exact benefit.
As for what property,
it's tangible property.
It's the structure.
You cannot depreciate land.
There's a couple of
exceptions like an oil and gas
and things like that
where you're depleting,
but you don't depreciate land ever.
But it's gonna be the structure on it
and then the things inside that structure.
As for who can depreciate,
it's the owner of the property.
Now let's go over the types of property
'cause you have buildings
versus personal property.
And as Erik was just saying,
hey there is residential or
commercial real property,
which is the difference is,
whether it's 80% used for dwelling
or whether it's commercial or hotel.
And then you have personal property,
which the personal property,
the IRS has a publication
where they say here's how
long things will last.
Like for example, carpeting might be,
is gonna have a lot less useful life
than a building structure
or you're gonna have
certain software that
might have less useful life
than a tree or shrubbery,
things like that.
Let's kind of go over a few of these.
And Erik, I'm gonna ask
for your help on this.
I'm just gonna throw these up here.
The different types of properties.
This is the stuff that's
usually inside of a business
or a building and you're gonna see
that we're focusing in
this particular webinar,
we're gonna be really
focusing on real estate
and the areas that are in the real estate.
And I know there's already
a few questions out there
as to solar and things like that.
Solar is both.
Solar is gonna give you a
tax credit for buying solar
and you're gonna get to depreciate it.
Your depreciation isn't 100%.
They let you write off 85%
in the case that you took 30% tax credit.
I'll unpack that in a second, Kevin.
That's who's asking that question,
but you're gonna get a huge benefit.
Like solar gets me even
as excited as this,
but that's not the
purpose of this webinar.
This webinar, we're
really gonna be focusing
on these five, seven
and 15-year properties
and as they relate to a building.
So Erik, will you help me
with these and get my mind
around what is five, seven
and 15-year property?
- [Erik] Sure.
So your five-year property
is typically found inside the building
and those are, like I said,
are things like carpet,
flooring, window covering,
appliances, lighting, crown molding,
countertops, cabinets, a
lot of the interior stuff.
The rules behind that, if we
can easily remove the property
without damaging the structure,
chances are it's five-year property.
If you take carpet out of a building,
the walls won't collapse.
And so carpet for example,
is a five-year asset.
The IRS says that you'll
replace your carpet
on average every five years.
So that's kind of the five-year property.
And then your seven year, like I said,
we don't run into a
whole lot of seven years.
Some of the telecommunication
stuff is typically what we see
in commercial and residential rentals.
So sometimes it's 1% of
what we segregate out,
but there still is some
seven-year property
and then another big
category is the 15-year
and that's all your land improvements.
So those are things like asphalt,
sidewalks, curbs, gutters,
irrigation, retaining walls.
We'll go out and count trees and shrubs.
People look at us, they're
like, what are you doing?
We're like, these are tax write offs.
These trees and shrubs, the
IRS says these last 15 years
and we can put a value to those.
Let's depreciate those
over a shorter term.
So all of your land
improvements, some big tickets,
storm drains, if you've got storm drains,
those are in your property, those are big.
Swimming pools are interesting.
If you have an outdoor
pool, it's a 15-year asset.
If it's an indoor pool, it's a 39
or 27 and a half year asset.
So if you're gonna build
a pool, build it outside
'cause you'll get better write-offs.
But that's kinda your five,
seven and 50, some examples.
- [Toby] And let me just break
out why this is important
because if you don't break this out,
it's gonna be considered
27 and a half year property
or a 39 year property.
In other words, the
default when you buy it,
you're gonna be treated as though
if you buy a building for example,
even though it has carpeting in it,
even though it has office
furniture and fixtures,
even though it has electric system,
you're gonna be treated as though
all of that is 39-year property.
That's the default and that's
what everybody goes with under
the modified accelerated cost
recovery system or MACRS.
Quick question Erik,
'cause I'm getting a
ton of these questions.
Somebody's asking about
decks, water heaters,
HVAC, all these things.
- [Erik] So all of those have, again,
and I think you might've mentioned Toby,
we have a book that's, I don't know,
I think it's 1700 pages.
The IRS has basically outlined
every single one of those components.
So for example, decks
are, and we've seen decks
that have been classified as structural
and we've also seen decks
that can be classified
as land improvements.
So it really depends on
the structure itself.
Again, can it be easily removed
without damaging the building?
Are there awnings?
There's different things that we do.
Our cost segregation companies will do
to identify whether or
not those can classify
as 15-year property.
HVAC systems are kind of interesting.
The heating and cooling
to cool down a building
is not a short term asset property,
but let's say you have cooling
to maybe cool a room full of servers
or for example, we did a
metery up in Prescott, Arizona
where they produce meat,
which is an alcohol
beverage, fermented honey.
And so they had barrels
and barrels of honey
and they had specialty cooling equipment
just to keep that honey
at a certain temperature.
And so that, because it was
unique to that business,
that cooling equipment
we were able to take
and put it as a shorter asset life,
but typically, your standard HVAC
just to cool down the building,
that's considered one
of the building systems
and it's a 27 and a half
year, 39 year-property.
It really depends on the situation
and that's why CPAs can't
easily identify these items
because they don't always have
the constructional
engineering side of things
to be able to identify and
reverse engineer these buildings.
- [Toby] Wow.
So yeah, so the HVAC, I think
that there were some areas
where you could try to 179 it.
For the most part, no,
you're not gonna get to
There's so many people
asking the HVAC question.
Usually it's part of your building
and you might get an energy credit on it
depending on what you're putting in there.
But I don't think so.
I'm trying to think if
there's another one out there.
I'm reaching back in
the recesses of my mind.
I know that 179,
which is up to a million
bucks, you can use.
I know for 2018 you could.
It says HVACs don't last 30 years.
If you know what that does.
- They totally don't.
That's true.
- [Toby] HVACs, I get it.
But that's why what you're gonna do is
you're able to write it
off, up to a million of it
in year one with your bonus depreciation,
not bonus, year 179 deduction.
So I'm gonna show you
that there's two areas.
So we're gonna get into this.
We're gonna be dealing
with two sections tonight.
Really the big one is 168,
which is the bonus depreciation.
I'll show you how that works
and how it applies to this,
but that doesn't mean there's
not some other options
still out there in our toolbox.
And you're gonna see if
we can't get it one way,
we're always gonna get it another.
But let's just keep jumping on.
You guys will get this.
This webinar is designed
to answer your question.
So a lot of you guys are answering
a bunch of different questions like, hey,
can you do it on rental?
Can you do it on condos, restaurants?
What about a hot tub?
That's awesome.
And somebody says, what
about the $2,500 repair?
You don't have to worry
about depreciating something
if it's a repair.
And yes, you can do the 2,500 threshold.
But we're gonna keep going through this.
Let's go over the
different types of property
and I'm not gonna make you guess on this.
I'm just gonna throw it out there.
The 27 and a half year property
as Erik already laid out
was residential rental property
where 80% or more of the gross rents
are from dwelling units.
And a lot of folks think,
well, what about a hotel?
Well, hotel is commercial
because the dwelling units,
it requires a stay of
greater than seven days.
So hotels are transit.
So they're gonna be considered commercial.
Rental property, in fact,
Airbnb is quite often,
that's the big debate is
whether it's commercial
or residential, even though
it's just people staying there.
So it gets kind of fun.
There's a lot of questions here
on whether this will be recorded.
Yes, it's recorded and
you'll be able to get it.
The other thing is based off
that 168 bonus and section 179,
yes, you're able to do both.
You can only write it off once.
But we're gonna keep getting into that.
You guys just chillax.
I'm gonna jump into the 168.
Can you tell me a little
bit about section 168?
I'm gonna throw up some
information so people can see it.
But Erik, what do you think?
What is 168?
- [Erik] So yeah, it goes
back to the bonus depreciation
and bonus depreciation has been around
for a number of years.
It's kind of a, the
government put it out there
to kind of stimulate the
economy back in the early,
when was it?
I don't even remember
when it initially started.
It's been around a while
though, and every year,
they would change the bonus amount.
Sometimes you would get 30% bonus,
then they would wait until
December and then they'd say,
okay, next year we're gonna
give everybody 50% bonus.
There were some rules
that applied to that.
The asset life had to
be less than 20 years
and it had to be new
construction or new use.
And so that limited, if you
think about commercial property
or residential rentals,
those are depreciated
over 27 and a half and 39 years.
So they don't qualify for bonus.
However, if you were
to do a cost seg study,
now you've taken that 27
and a half year asset,
you've divided it up into
those different categories
and all of a sudden, your
five, seven and 15-year assets
are eligible for this bonus.
So that's kind of the old tax law.
The new tax law that the two main changes,
one is they went from in 2018,
it was supposed to be 50% bonus.
They've changed that to 100%.
So that's a huge difference.
That's basically writing it
all off in the first year.
The second thing is they
got rid of that clause
that said it had to be new use.
So now I don't have to go build a building
to be able to be eligible for bonus.
I just have to go buy a building.
So if I buy a building,
even if it's been around,
even if it's a 20-year old building
and have a cost seg study done,
I now get to take 100% of my
five, seven and 15-year assets
and write those off in the first year.
- [Toby] It's huge, by the way.
- [Erik] Yeah, it's huge.
(mumbles)
- [Toby] Erik, let me interject
because I'm getting a whole
bunch of questions on this.
A bonus depreciation.
What this means is that if you had five,
seven or 15-year property
that you can elect,
instead of writing it off over 15 years,
you can elect to take
up to a 100% bonus this
year of depreciation.
In English, you can
write it off in one year.
Even if you haven't paid for it yet.
What that means is that if
somebody says, can you elaborate,
you can actually write it off in year one.
I don't know, it's a deduction.
I don't know what else
I need to elaborate on.
You can write it off.
You get a huge tax deduction
because you have a building
and you're figuring out
what portions of it is five,
seven or 15-year property.
This is massive guys.
This couldn't be huge and I
will give you guys examples.
All right, so what
property gets the bonus?
Tangible property, 20 years
or less recovery period.
So everything we just went over,
you could write off in the first year.
So everything that we went over there
in the five seven 15 and this is so huge.
An example would be great.
We're gonna go over
three case studies guys
and I'm gonna show you
exactly how it works.
(mumbles)
- [Erik] Yeah, sorry to interrupt.
I just wanted to mention that this tax law
did take effect on 9/27 of 17.
So if you purchased
after September 27th of 2017 is eligible.
So if anything purchased before that,
it falls out of the old tax law.
But anything after that 9/27 date
is eligible for this new
100% bonus depreciation.
- [Toby] And so like for 2014,
it might be 50% bonus
depreciation, all those things.
- Correct.
- Do you have to take 100
or could you take 50 if you feel like it?
- [Erik] No, we quite often.
So the IRS, I think they
knew that these deductions
were gonna be massive and
so they actually added
that you can opt out of the 100% bonus
and just take 50% bonus.
You can even opt out by class life,
meaning I'm not gonna take
bonus on my five and seven.
I'm just gonna let those depreciate
over the standard five and seven years.
But I'm gonna take bonus
on my 15-year assets
'cause I don't plan on holding
my property for 15 years.
So I'm gonna bonus the 15-year assets,
take that right off in year one
and let my five and seven depreciate
over the five and seven years.
And so that allows you
to really spread it out
and be flexible with what kind of deduct.
We work with CPA and say
where do we need to hit?
What is your income?
And then we've got all
these different tools
to be able to take bonus
on this, opt out of this,
and we can usually come
up with a deduction
that offsets most of your income.
- [Toby] Yeah, let's go over
where this really benefits.
In fact that's a slide.
So you guys will figure
this and don't worry.
We're gonna go over examples guys.
We're gonna go over exactly how it works
and we're gonna go over
how is it different than section 179?
179 is only for equipment
and it's capped at a million bucks.
This is bonus depreciation.
You don't have to worry about it.
And then if you recapture 179,
if you use it less than 50% for business,
it forces you to recognize
all as ordinary income.
So 179 is neat and dandy,
but it has a nasty surprise for you.
So we don't wanna use
179 if we don't have to.
All right, so who benefits from this?
So first off, you have
real estate professionals
and the real estate professionals,
those are the folks that are involved
in the real estate development,
construction, sales.
They have their own properties sometimes
but not necessarily, and they
qualify underneath this test
as a real estate professional
under section 469
which says that real
estate losses are passive
and you cannot offset your, for example,
your W2 income with
your real estate losses.
But that's not a 100% rule.
There's an exception and
one of those exception
is real estate professional.
In order to do that, one spouse,
if you're married filing jointly
has to hit 750 hours in
real estate activities
and it has to be more than
50% of their personal time.
Like their work time.
So if they are working at a job
and they're working 2000 hours
full time for somebody else,
they would have to do 2001 hours
to qualify as real estate professional,
which means it's not gonna happen.
They also, so one spouse
could hit the 750 hours.
So think of this.
Let's say husband and wife,
husband does real estate
activities qualifies,
spends 1,000 hours to
going on real estate.
Wife is a doctor spends
3,000 hours doing medical.
Only the husband would have to qualify
as a real estate professional
to make these things
work on their returns.
Then they would also have
to materially participate
with their real estate.
And here's the big one.
You can group all your real
estate activities together.
What that means is,
let's say you have again,
husband and wife, let's
say wife makes a million
and husband is able to
generate $200,000 of losses
because they take rapid
depreciation on their real estate.
Let's say they bought a seven,
$800,000 worth of property
and they took a big fat, huge deduction,
then that deduction is gonna come over
and wipe out the million dollars.
So let's say it's 200,000.
It's gonna take $200,000 off that million,
and so you're gonna get
a $200,000 tax deduction.
That's pretty huge.
The other deal is self rental.
And Erik, you're gonna
have to help me on this one
because you've done a bunch of these,
but let's say it's a doctor,
a group of doctors and
they buy their own building
and they rent it to their active business.
Can you use the cost segregation
and the rapid depreciation
to offset their medical office income?
- [Erik] Yeah.
So there is a grouping allocation.
There are some rules with it.
The ownership has to
be set up the same way.
So let's just say I have a partner
and me and my partner
owned the building 50, 50,
and we also own the operating company,
the medical practice 50, 50,
then you'd be allowed to
group those two activities
and we would do a cost seg
study on the real estate
and take those deductions to
offset the operating income.
That's the big thing is they have to have
the same type of ownership
and then you also have
to conduct the business
out of that building.
So another example, we
did one for our roofer
who owns a roofing company
but also owns a warehouse
where he runs the roofing company out of.
So we grouped those two activities.
He's a 100% owner in
each of those activities
or in each of those entities, excuse me,
we grouped those two
activities, did a cost seg
on the warehouse, took those deductions
to offset his operating income.
So that's a great way
if you own the building
and you're operating out of that building.
Another great way to be able
to use these deductions.
- [Toby] That's huge.
So it can offset that active income.
Somebody is asking whether
you can do this for Canadians
on their US income.
I'd imagine that you could,
but have you dealt with that?
- [Erik] I believe you can.
We've done some rental
properties I know in Mexico.
And so like I said, they
were getting US income.
So I believe so.
I don't see why you couldn't.
- [Toby] I don't see
why you couldn't either.
So somebody says, why would you do 50%
when you could do 100?
Here's why.
Because let's say you're a
landlord and you have profit
and let's say you're making,
you have rentals that are
making you $20,000 a year
that's going into your highest tax bracket
and all you really need is
$20,000 a year in deduction.
Then you may only,
you might just take enough
bonus depreciation to offset it.
Cause otherwise you
take it all in one year,
you can carry it forward.
But in some cases you're looking at this
and there's something
that you gotta understand
about recapture.
You don't pay gain on carpeting.
It's five-year property.
If you're gonna hold your property
for let's say seven or eight years
and you depreciate your
five and seven-year property
to zero, you may choose
to only select those
for your cost seg because
there's no recapture.
That's all now capital gains.
It's really kind of evil the
way they set the system up.
If you sell a building and you have
and you're doing recapture,
which is taxed it at the highest of 25%
it's your ordinary bracket cap to 25%,
you're paying that on carpeting
and assets that are not worth anything.
They have zero value.
Somebody doesn't buy your
building for the carpet,
they're gonna replace that thing anyway.
You're paying recapture at 25%
on something that should be taxed
as longterm capital gains
that have maximum 20%.
If you don't separate it out,
you're gonna be paying the higher amount.
Now, so this is a reason
for why you might select
a lower amount, because you
may only want to depreciate
rapid depreciate the five
or the seven-year property.
You may not wanna depreciate
the 15-year property.
You might say, hey, I'm
just gonna pay tax on,
I'm gonna depreciate it normally,
and I'll pay recapture on it.
Or I'll pay the ordinary
income on a portion of it,
and it's still based off the calculations
and we'll show you how these things work.
It's still gonna be better off for you
and in fact, we're gonna show you a case
where somebody did the cost seg
right before they sold their building.
So we're gonna get to
that one a little bit.
The other thing is if
you're selling with profit.
So you have a building that has
a million dollars of profit,
I think, is that the example that we have?
We had that too, that I think
you sold it for three million.
So it was about a million
dollars of profit.
- [Erik] 800,000 in capital gain.
- [Toby] 800,000.
What Erik's group did
was did a study on it
just before they sold and
it was able to offset.
So it's pretty cool.
So again, we'll get into these
and so I wanna jump
into these case studies.
I'm just gonna put a caveat
that these are for
educational purposes only.
These are actual cases.
So we took names out, but
you're gonna see the numbers
in exactly how they worked.
So hopefully I don't
think we have addresses
or any identifying information on it
but these are actual case studies.
And we'll make sure if somebody says
they're in a thunderstorm
and the power just went off,
now it's back on.
Yes, you'll be able to
get a recording of this.
All right, so let's go through these.
Erik, these are fun.
So can you go over this
study that you guys did?
- [Erik] Yeah.
So this is, so one of
the big misconceptions
around cost segregation
is it only applies to new purchases.
You have to do it the year
you purchased the building
and that's just not the case.
So this is an example of what
we call a lookback study.
it was for a couple in Phoenix.
You can tell there by the rocks there
and the garden and no grass.
But basically what it was,
they bought this property,
excuse me, they built
this property in 2014.
So this fell under the 50%
bonus under the old rule
and it was eligible for bonus
because it was new construction.
So it's new to them, new construction.
So it's 50% bonus.
The construction costs were about 280,000.
That doesn't include the land.
And like I mentioned, it was
eligible for the 50% bonus.
What we did is we go in,
even though this building
has been in service,
it was a rental.
It's been in service for four years,
we were able to do the cost seg study
and of that $280,000 construction costs,
we segregated out 34% of
that into shorter asset life.
Again, five years.
So we went in and we said,
okay, these cabinets,
how much were these cabinets?
We put a value on those cabinets.
We do it through construction costs,
we've got some cost seg software,
put a value to the asphalt, the pavement
and we were able to do that
and put those into shorter asset lives.
The result of that was we increased
the depreciation on their
2018 tax return by 66,914.
And so this was a tax savings
of approximately 23,420,
that was calculated at
a 35% combined rate.
And so that's just a massive saving.
Again, a study like this
is probably gonna cost ya
maybe 2,700, between 2,700 and 3,000,
but you're gonna get about,
depending on your tax bracket,
anywhere from 20 to $30,000 tax savings.
- [Toby] I'm gonna point to this.
This was a property purchased in 2014.
The reason this is really important
is because when you guys did
the study, here's the numbers.
This is the actual numbers off the study
and somebody is asking,
hey, what if I wanna do my own study?
You don't.
There has to be a professional.
You have to use somebody
that knows how to,
I suppose that you could
try to go on the cheap
and use your CPA or something like that,
but I don't suggest it.
I don't do it.
- [Erik] Yeah, most CPAs won't do it.
They've got the tax knowledge
but they don't have the ability to go in
and put a value to all
these different components.
Even on new construction,
they might have the value of
the appliances for example,
but one of the things we
segregate with the appliance
is the plumbing and the electricity
going to those appliances.
So the IRS says all the electricity going,
like you think about an apartment unit.
All the electricity going
to any of those appliances,
which sometimes can be 40 to 50%
of the electricity going into those units,
we get to take that and put a value on it
and use that as a five-year asset.
The only reason there's a
plug in the laundry room
that's that size is because
you're gonna put a washer
there and the IRS knows that.
So they allow us to take portions
of the electrical and plumbing.
So there are some CPAs out there,
especially on new construction,
they'll pull some of the easy things
off of the construction
docs, the costing docs,
but typically they're segregating
somewhere between 10 and 12%,
where if you pay to have it done,
the additional savings, we're
gonna segregate 30 to 35%.
It's gonna far outweigh
the cost of the study.
And like you said, the first
thing the IRS audit guide says
is it has to be done by
a qualified engineer.
- [Toby] Yeah, so there's
a bunch of questions
that are out here and I'm just gonna shoot
through them real quick.
First off, there's a lot
of comments out there
that it's not advantageous to do cost seg
on single family house and
ideally for larger properties.
However, you can do a case
study on single-family.
My vacation rental properties was about
125,000 in renovations.
Yes.
I then have 'em all categorized.
Would this be sufficient
to get 100% bonus?
So if somebody did a fixed up a property
where they just did a renovation,
are they able to break it?
That makes it really easy to
do the cost seg study, right?
- [Erik] Yeah, so then again,
they'll be able to pull
apart the easy components.
Things like they'll have an invoice
and they'll know that they
spent $6,000 for carpet
and they can put that carpet
on the depreciation schedule
as a five-year asset and
take 100% bonus, absolutely.
But there are gonna be a number of items
that are gonna be missed.
And that's again, why it's important
to just have a professional do it.
You don't wanna take,
you're leaving money on the table
by not having somebody do it.
You'll be able to pick those easy things,
but you won't be able to put a value
to what was the plumbing
that went into the new
sink in the kitchen.
How do you put a value to that?
- [Toby] Yeah, so what you're doing,
and I'm just writing it up on the board
before we go through these numbers,
you're making a change of
accounting methodology.
You're pulling yourself
away from the default rule
and saying, hey, I wanna break these out
by their useful life
instead of just going off
the 27 and half years or the 39 years.
So the 27 and a half years
should be occluded, you guys.
Yes, you can do this on
residential property,
but this does not require a C Corp.
Is this additional tax staging
or is it basically getting
money back a few years earlier?
Both, sometimes.
Worst case scenario,
Erik, you always say this.
Worst case scenario is you're getting
an interest free loan from the government
for many, many, many, many, many years.
That's the worst case scenario.
Best case scenario is
you're saving yourself.
Like in this particular case,
so I'm gonna use your example.
What they did is they said
the accountants broke this thing down
and I'm gonna use a little highlighter.
If you see in year one, they
got a $23,000 tax savings,
but then they go and they say,
what's the net present value
and what are you actually
gonna be recapturing?
And so what's the total benefit to you?
So in this case, the folks used,
how much was that cost seg on these guys?
2,700.
- 2,750 yeah.
- [Toby] So these guys for $2,700,
they netted out tangible
benefit in their pocket
of 13,000, almost 14 grand.
Plus they had use of the extra money,
that extra 10 grand for
God knows how many years.
You can actually see the
the breakdown over here.
This is the cost seg
study, this is without.
So I don't wanna belabor the point.
What they were able to do is front load.
What they would have,
this is the depreciation
without the cost seg right over here.
This is what they were able to do.
They would've gotten a $5,091 deduction
and what they did is they just went bam,
and they were getting a 57
but since they did it in 2018,
they increased their
depreciation by 66,000 in 2018.
They captured all this stuff
they hadn't already taken
and they just grabbed it this year.
And then some of you guys
are correctly noticing
it's gonna lower the
amount of depreciation
over the rest of the life
'cause you just took a huge amount.
But at the end of the day,
it's about calculating this
thing and being honest.
You increased your
depreciation by 60 grand
in years one through five.
Then over the entire lifetime,
if you own this thing
for 27 and a half years,
which let's be real, a lot of you
like we're not gonna do that necessarily.
We always say we're going to
but then the average person
turns their rental properties.
I think it's still like three years,
but let's just be generous
and say five to seven.
Hopefully, it's at least seven.
There's still other tax benefits,
which is what we're gonna show you.
Why is there such bad
information out there, Erik?
Why do accountants not get this?
- [Erik] You know, I
think this kind of goes
to the question that said,
it doesn't always make sense
for residential rentals.
And I'll say that, we do a
lot of training for CPA firms.
We're accredited to give them CPE credit,
and that is one of the
biggest misconceptions.
When this stuff first came out
10 years ago, 15 years ago,
the studies were $20,000.
So in order for it to make sense,
you had to have enough tax savings
to offset a $20,000 study.
We do single family rental
homes in the middle of Tennessee
that they purchased for
70,000 under the new tax law.
We'll do those studies for 1500 bucks
and they'll save 10,000 on
their taxes in the first year.
So I think the miscommunication
or the misinformation
is a lot of CPAs, a lot of
tax advisors still think,
I mean I hear it all the time.
I talked to my CPA about this,
they said it doesn't
apply to my five duplexes
because they're all under
a million dollars a piece.
And a $10,000 tax savings for
somebody who owns a duplex
is just as good as $100,000 tax savings
for somebody that owns, you
know, 100-unit multifamily.
So I think that's the
biggest misconception
is it doesn't apply to smaller properties.
And that's just not the case.
The studies have come down,
the price has come down.
Two factors.
One, the price has come down
and now the benefits have
gone up with the new tax law.
- [Toby] All right, so I'm gonna hit
a whole bunch of questions
here, rapid fire guys.
Leo, your taxes are due on 10, 15 2019.
You can still do a seg study for 2018.
Yeah.
You could always just do 2019
and capture what you didn't
take in 2018 and 2019 also.
Can I do a cost seg on a property?
I live in one of the rooms?
Yes, you can.
You're just not gonna get
to take the full amount.
You're just gonna have to,
you're gonna take a
portion of the depreciation
that's for the investor.
Is a cost seg applicable only
to real estate professionals
or to any investor?
It's on any real estate,
that's investment real estate.
If you sell the property,
do you have to repay the bonus tax?
No.
You recognize it as,
realistically and you'll see this,
it'll probably be longterm capital gains.
It's gonna be better than recapture
and I'll show you why when
we do our third study.
Is it available to C corps
or individual investors?
Both.
Is the new tax laws, is there any benefit
to properties bought before 2017?
We just showed you an example
where we bought the property in 2014.
So yes.
Are you gonna do a cost seg
on your individual residence?
No, unless you're gonna rent it out.
Is it wise to depreciate the asset class
based on the number of years
you plan to hold the property?
For example, if my plan is
to hold it for four years,
is it best to depreciate
the 15 year asset?
No, I'd probably do the shorter.
I'm gonna answer for you Erik.
I'm assuming that's right.
- [Erik] Actually, I would do the 15.
I would take the bonus on the
15 because year five and seven
will almost be fully depreciated.
- [Toby] Oh, you're
depreciating it any way.
Yeah, yeah, yeah, yeah, yeah.
- [Erik] We do that quite
often for investors.
If they don't want us to
take bonus on everything,
we always start with the 15 years
so they can realize all those
deductions in the first year.
- [Toby] I'm thinking
about if you sold it,
then you don't have to
worry about the recapture
because four-year property
is pretty much worthless.
You're only gonna have to
have one fifth of the carpet
that you actually have to recapture it.
What about depreciation recapture?
Doesn't that result in a higher tax?
No George, I'm gonna show you the example
when we show we're doing
a cost seg right before.
It's a misnomer.
Accountants are lazy.
They don't like doing the calculation.
If they do the calculation,
you're gonna see almost always
these things are in your benefit.
What is the cost of a cost seg on a 2019
property worth about 400 grand?
I know you can't just do it.
I'll show you guys a way where you can get
this free analysis done
and he can actually give you a quote.
But on a $400,000 property,
what's the typical cost seg cost?
- [Erik] 3,000 maybe.
- [Toby] Yup, so you're
gonna want a seven or eight
or nine, 10 times return on these things.
If I take depreciation, I
need to pay back the tax
when I sell the property
sometimes, but usually not
depending on the length of the property
or the asset that you depreciate.
So example, I use carpeting.
Carpeting is gonna last for five years.
If you rapidly depreciate
it, that carpet is worthless,
which means you're not gonna pay gain
on carpet that is worthless.
You're not gonna recapture
on carpet that is worthless.
Is this good for multifamily
units five or more?
Yes.
Just joined dah, dah, dah, dah.
I never mentioned the
name of the cost seg firm.
It's Cost Seg Authority.
That's where Erik and I'm gonna give you
all of this information
and then we keep getting
tons of questions.
So let's go into this next one.
Can you go over this duplex remodel?
This is an interesting case
where they were able to get,
I was really taken by the amount
that they were able to depreciate
on something that they rehabbed.
Can you go through this one?
- [Erik] Sure.
On this one, so the couple
actually purchased the duplex
in May of 2018.
They had some tenants
that were living there.
Once the tenant's lease was up,
they actually rehab the property.
So the original purchase price was 315.
The remodel costs was about 85,000.
Again, the remodel was
completed that same year
because both the original
purchase and the remodel
occurred after that September
27th, 2017 deadline,
both of those were eligible for
the 100% bonus depreciation.
So on the original
purchase, we segregated 31%
and then on the remodel,
we segregated close to 43%.
So total, the increase in depreciation
was about 120,000 in the first year.
And that was made available to them
on their 2018 tax return.
They were at about a 32% combined rate,
so that's a tax savings of about 38,451.
- [Toby] How much did it cost them
to do that cost seg study?
- [Erik] That was I
think like 32, 33 maybe.
Between 32 and 35.
- Hundred.
- Yeah.
That's a 10 times return
on this specific example.
- [Toby] A lot of people
again are thinking,
hey, this is a, yeah, I'm
just gonna circle that.
This is 38,000 and it cost them about,
what'd you say it was?
- [Erik] I wanted, it was 30,
I think it was 3,500,
3,450, something like that.
- [Toby] So it still is about 3,500 bucks.
This is money in their pocket.
This isn't the tax deduction.
The tax deduction was 120,000.
The money in the pocket
was closer to 38,000.
Here's the actual numbers
on that, by the way.
And I am stealing your stuff.
And somebody says, can
you do this on flips?
You're not gonna do this on a flip
because it's gonna be
added into your bases.
You're not gonna be depreciating.
Can you do a cost seg on a property
that's not earned income yet?
Yeah, I don't see why you couldn't,
but you have to have something to offset.
Okay, let's keep going through this.
The taxpayer's marginal rate was 32,
so if you're in a higher
or lower than this,
would alter this.
This is why you actually
do the study on yourself.
You increase the depreciation.
Wow.
I'm looking up here.
The total depreciation was 101,
so the increased
depreciation from this number
to the 96 or excuse me,
to the 101 was 96,000.
- [Erik] Right, and this is just Toby,
just so you know, this was
just on the original purchase.
So if you see there on the
left it says cost of property.
This was just on the
315,000 original purchase.
Something else to note here, Toby,
you'll see in that green
section there at the top
where it says five year.
If you remember on that last
graphic we went through,
that five-year stuff was
depreciated over five years.
You'll see on this one
that because that 61,000,
because this property
falls into the new tax law,
that 61,000 the 3,100 and the 28,000
all gets depreciated in year one
and that goes back to that 100% bonus.
So we still have the same
amount of depreciation
at the bottom.
If you look at the bottom, it says 315
in the green section in the bottom right
and then it also says 315
under the depreciation without cost seg.
We're still appreciating
$315,000 worth of assets.
We're just taking in our
example by doing the cost seg,
we get to take 100,000 of
that in the first year.
It's taking the roughly, what is it, 11,
almost 11,500 per year over there,
where it says depreciation
without cost seg.
- [Toby] This is cool.
A bunch of questions real quick.
- [Erik] Yeah.
- [Toby] Can you write off
the cost seg as an expense?
- [Erik] Yes.
- [Toby] Does it make
sense to do a cost seg
on a property you've had for 10 years?
- [Erik] Yes.
Well, I say yes.
Always run the numbers first.
So we do a free benefit analysis
depending on the purchase
price, fee of the study
and the type of asset typically yes,
but we would wanna run the numbers first.
- [Toby] Just remember the
five, seven and 15-year property
that you've been writing
off over 39 years.
You're gonna take all that into year one,
so it's gonna be huge.
Then somebody says, hey, how
does that affect recapture?
It's not.
It's either gonna be ordinary income
or longterm capital gains.
It's not gonna be 1250 recapture.
- [Erik] Let me just add to that, Toby.
Even if on the recapture,
that's a question we get quite often.
Whenever you recapture,
even if we were to recapture
100% of the depreciation we've taken.
So we get that question quite often.
People say, well, why am I
gonna accelerate my depreciation
if I have to turn around
and pay it all back
when I sell my property?
And there's a couple of reasons.
One is the time value of money.
So a dollar today is
worth more than a dollar
27 and a half for 39 years from now.
That's the first thing.
The second thing is you
take your deductions
at your ordinary income.
So for example, this example,
your total marginal tax rate is 32%.
We're taking these deductions at 32%
even if I had to pay 100% of it back,
which you're not gonna have to,
but if I did have to pay
100% of my depreciation back,
upon sell, I'm paying
that back at a recapture
or a capital gains rate
of either 20 or 25%.
So that's seven or 12% difference.
That's permanent tax savings
that goes in your pocket.
And then the thing that
you alluded to, Toby,
is you actually, you do
have to pay recapture,
but it's gonna be on a lower
amount at a lesser rate.
And I think that third
example we have, Toby,
kind of walks them through how that works.
When you sell your
carpet after five years,
carpet is a five-year asset.
When you've owned the building
for five years and sell it,
your carpet didn't go up in value.
So you don't have to pay.
There's no gain on your carpet.
And we'll walk through that
here in a second, Toby.
- [Toby] Then the next
study is gonna show that.
Somebody just asked what is recapture.
When you take a deduction on something,
when you sell it ordinarily,
they call that 1250 recapture,
which is taxed at your ordinary
bracket, capped at 25%.
In other words, if I'm
writing something off,
that's giving me, in my
case, it's 37% tax savings
for every dollar, I'm saving a 37 cents,
then when I sell it,
I have to pay 25 cents
unless it's worthless.
If I do a cost seg study,
I can get that down
to it's just longterm capital gains.
Somebody says, can you
still use a 1031 exchange?
And somebody else had asked earlier,
should they do a cost seg study
right before at 1031 exchange?
- [Erik] We always
recommend doing it after.
I think the benefits are
a little greater after.
But yeah, it doesn't
affect the 1031 exchange.
I would, depending on the size property,
your 1031 you're exchange into,
it probably makes more sense
to do it on the second
property than the first one.
But we could walk through that.
It's kind of a case by case on that one.
- [Toby] Yeah, and yes, you can use this.
The depreciation is rental depreciation.
So if you have rental income
or you have gains from another property,
you could take this depreciation
and offset that other income.
The other thing is these
carry forward indefinitely.
Is there any time period,
so like, let's say
I had a massive deduction
in year one of 200,000,
and it offsetted my
$20,000 of rental income.
Is there any period of time
that I'm not allowed to
keep carrying that forward?
- [Erik] No.
So under the new tax law, it
carries forward indefinitely.
Under the old tax law, it
would expire after 20 years.
But with the new tax law,
you get to carry that
forward indefinitely.
So you'll offset your first
20,000 of income this year
and then you'll have
100,000 to offset income
in future years.
- Yeah.
So this is...
- [Erik] Toby saying
that, if you only have,
let's say we create a
$600,000 depreciation expense
and you only show 20,000 of income,
then you're not gonna pay us to do a study
'cause there's no reason
for us to accelerate it
for you to then sit back
and only take 20,000 a year
and just postpone.
- [Toby] It's worth seven
grand a year on some people.
- Right.
(laughing)
- [Toby] I'm serious.
It just depends then does it
offset personal service income?
Yes, if you're a real estate professional.
So if you're not, then no.
It's just gonna offset your rental income.
If you are renting it to yourself,
so Tom, if it's your
business and you have a LLC
that holds your building
and it's renting to your active business,
then yeah, you can
group those two together
and you can offset your income
from your other business.
So it's different deals.
It will not offset gain from stock market,
unless you're a real estate professional,
in which case then
it'll offset all income.
Let's go back to this one
where you did the cost seg
right before you sold it.
So this is a good example.
Can you explain this one?
- [Erik] Yeah, so this one's
a little more in depth,
but we'll do our best to walk through it.
So basically what it was
is a client had called us
and they were talking
about doing a cost seg
on a new property they
were gonna purchase.
And we got to talking and found out
that he hadn't sold his old property yet.
And I asked them, I
said, have you considered
doing a cost seg study?
I kind of walked him through.
And the way it works is in this example,
they had purchased it
in 2015 excuse me, 13.
In 2013 for a purchase
price of 2.5 million.
So it's an apartment complex.
They purchased for 2.5 million.
They sold it for five years later,
sold it five years later for 3.3.
So they had a gain of about
800,000 over the five years
and we completed the cost seg study
and we'll walk through the numbers here,
but basically, when all
this stuff flows out,
there was a tax savings
upon sale of about 73,159.
So when you sell a
property you have to pay,
like Toby mentioned, you
pay your capital gains tax,
which is usually 20 or 15%,
sometimes it could be zero I guess,
but typically it's 20 or 15%
and then you pay a recapture tax.
Those are the two taxes you pay upon sale.
And by doing the cost seg study,
even though it was right before the sale
and you're thinking to yourself,
why am I gonna hurry and
accelerate everything
if I got to turn around
and pick it back up?
Again, you're picking
it up at a lower rate
on a lesser amount.
And Toby, if you can just
go to the next slide,
I'll kind of walk through those numbers.
- [Toby] Yeah, I was answering
a bunch of questions.
We have a very active group here?
How are capital gains taxed?
It can be zero, 15 or 20%.
Yes, you could do these.
Erik's firm can do this.
They have a national group
so they can do this before
October 15th in any state.
Yes, you could still do it,
but you always run the numbers first.
I'll show you guys right after
this how you run the numbers.
So go through the numbers here, buddy.
I'm sorry to throw in.
A lot of emails.
- [Erik] So yeah, like I said,
there's a lot of numbers on this slide
and it took me four years
to figure this slide out.
So I don't expect you
guys to figure it out
in the next 30 seconds.
But basically, the whole concept is,
remember we own this
property for five years.
So when we did the cost seg study,
you have to pay recapture tax
on the lesser of the amount
of depreciation you've taken
or the gain on the sale.
And I'll say that again because
that's really important.
The lesser of the amount of
depreciation you've taken
or the gain on the sale.
So let's just look at
our five-year property.
Our five-year property, after five years,
we've taken all of the depreciation.
In this example, there's a number there,
and that first green box
all the way to the right
of 425,000 under five years.
So after five years, we took 425,000.
It's fully depreciated
according to the IRS.
So the gain on the sell
by doing a cost seg study,
it allows you and your CPA
to manage the allocation
of the sales price.
And the way that works
is if you think about it,
when you sold this for 800,000,
if you didn't do a cost seg study,
excuse me, when you sold
it for a gain of 800,000,
if you didn't do a cost seg study,
what you're saying is that that 800,000,
everything in your
building went up in value
by that percentage,
whatever that percentage is.
So you're saying my land
went up, my building went up,
my dirty old carpet went up,
those old countertops went up
and that's just not the case.
The land went up, the structure went up,
but all your personal
property on the inside,
your carpet, your countertops,
all that kind of stuff,
that actually decreased in value.
So there should be no gain
on the sell of your old
five-year-old carpet.
So again, by doing the cost seg study,
at the end of the day,
the most important thing
for you guys to remember
is I'm not gonna sell my carpet
for a gain after five years.
By doing that, when you
flush all these numbers out,
you reduce your taxable gain
and recapture tax on this
property by about 73,000
and this is conservative, Toby.
You'll see that over
there on the top left,
we've actually, even though we've had
this five-year property for five years,
we still said, well, it's
still worth something.
We're gonna give it a 10% valuation,
and so you'll see where
that correlates to.
Instead of 425,000, we're
gonna do it at 42,000
and in personal property,
year five and seven
is actually recaptured at
your ordinary income rate.
- [Toby] Going over here.
He's going over here at the ordinary rates
capture at 37% like
he's showing the amounts
that you're actually recapturing.
And at the end of the day,
all you really care about
is how much tax you pay.
Hey, I'm gonna pay 285
if I don't do anything
or if I do this study, I paid 211.
- [Erik] Correct and
where you circled Toby,
that's the exact reason why.
Instead of paying recapture on 425,000,
I'm now paying recapture on 42,000
which again, that's conservative.
We work with CPAs all over the country
who will say, you know what,
the IRS says my five-year property
is worth zero after five years.
I'm not paying any recapture on that.
This is a conservative example,
and so that's exactly right.
When all those numbers flush out, Toby,
you're basically shifting your gain
over to the appropriate bucket,
which is your capital gains bucket.
And then the difference in rate
is where you see your tax savings.
- [Toby] What did you guys
charge for this by the way?
- [Erik] This study was, I
had it written down here.
It's 6,200.
- [Toby] So you paid, somebody asking
6,200, let me just write it down.
If I could actually make my pen work.
6,200 to save about 77,000.
So not a bad return.
Some of you guys would be
excited for a 6% return.
Here you got gotta what is that?
110 times return.
So whatever that is.
Some of you guys are asking
about the Cost Seg Authority.
Good timing 'cause I'm gonna
show you guys how to do it.
If you want a 10 times
return, you do a study,
here's where you do the study
and I'll show you exactly how to do it.
This is free and this is free
because this is what these
guys do all the time.
It's you're gonna go to
AndersonAdvisors.com/CSA
That stands for Cost Seg Authority
and they're gonna do it for you for free
because you guys are awesome
and 'cause we know you guys
are gonna actually do this
because our customers rock.
Actually it's mostly
a lot of the people that follow the tax
and do the Tax Tuesdays
and all that fun stuff,
you guys tend to be of the mindset
where you'll actually calculate
things and that's the rule
is always calculate, calculate, calculate.
People are gonna ask, well
what is the benefit to me?
You got to know how
much it's worth to you,
like how much you're actually
gonna be able to get versus,
and then determine how much
it's actually you're gonna
put back in your pocket.
So if you're not making money
in real estate, for example,
and you do a cost seg study,
could it still put money
back in your pocket?
It depends on whether you're selling,
it depends on where you're at
and you do not lose the deduction.
It carries forward.
So at a minimum you're
gonna still have that loss
when you sell the property.
But let's just keep going through this.
How much will it say, and by the way,
the loss is an ordinary loss
when you're selling an
investment property, correct?
- Correct.
- Yup.
So this will offset your other income,
like your ordinary income.
Somebody says, what about futures trading
and all this stuff?
Yes, this will offset that.
If you ended up at the loss and you sell
or if you qualify as a
real estate professional.
Now, somebody is asking what
do you need to do the analysis?
Here you go, it's four
pieces of information
and I'll show you, it's on our website
that AndersonAdvisors/CSA.
And I think you guys should
have that link sent out to you.
I'll make sure you guys all get it.
You're gonna need the date
you acquired the property,
the price you paid for the property,
the type of building
and what are the types of
building you're looking for, Erik?
- [Erik] Anything, any revenue generating?
Oh, on the types, it's the
type of building would be,
is it a residential,
single family rental home,
is it a medical office?
I think there's a list on the form.
I have it down.
- [Toby] I was putting you on the spot
and seeing whether you can
remember and then address.
I'm just evil.
I know that if somebody did that to me,
I'd be like square box, roof.
What if I sold my
property in the past May,
could you still benefit?
Could you still go back,
like if they sold it
in May of this year or last,
could you still do a cost seg on that
and attribute it to the property?
(mumbles)
- [Erik] Yeah, that's a great question.
So the one that was sold this year, yes.
If you haven't filed
and great, we'll do it.
The trick is the IRS does require us
to do a site visit on the property.
So you do have to a relationship
with the new owners.
- [Toby] So you have to go in
there and take a look at it.
But yeah, I guess it sounds
like you'd still do it.
How long does it take to
do one of these analysis?
- [Erik] So the cost
seg studies themselves
take anywhere from 30 to 40 days
from the time we get all the information.
So the biggest portion of that though
is setting up that site visit.
So we wanna come out, we have to come out,
look at the property, send out
one of our costing engineers,
they go through the
property, do take offs,
take pictures and then they come back.
Once we get the information from them,
it's usually two to three
weeks to get the report out.
- [Toby] I'm gonna make this easy
for some of you engineers out there
'cause you're gonna say,
well it's 30, 40 days.
How are you gonna get this thing done?
If I tell you guys I
wanna do one for 2018,
dah, dah, dah, dah, dah, dah, dah.
You can make a change
of accounting election,
the 3115, use the placeholder number,
get this study done later
and then amend your return
and grab the actual numbers
if it's better than what you
used as your placeholder.
These guys will actually give this to you
pretty quick though.
Like how long does it
take to actually get back
an idea of how much is gonna benefit him?
- [Erik] So we like to turn
around the benefit analysis
in 24 to 48 hours.
So once I get the information from you
and I've got everything,
we'll put in some calculations
and we'll get you, it's a very
conservative number to say,
hey, here's what the study is gonna cost.
Here's what a minimum of what
your tax savings would be
and then you can determine with your CPA
when would be the best time
to utilize those deductions,
whether it's this year or hold off
until next year, et cetera.
- [Toby] Yes, I have a few
questions to go through here.
Will this only offset income
if you're a real estate professional?
Salvino, not necessarily.
If you sell and you have a loss,
you can offset your income.
If you're a real estate professional,
you can offset your active other income.
Otherwise it's just your rental income
and you can group all
your properties together.
What is step up?
George, step up is so somebody
was writing in questions
that I was answering
about step up in basis.
So if you do a cost seg study,
you own it until you die.
Your properties basis, what
you can start depreciating
steps up to the fair market
value on the day of death.
So you get to write it off all over again
or not you, but whoever you leave it to.
Can bonus depreciation
from rental property
be adjusted against other K-1 income?
- Yes.
- Yes, yes.
So I'll make that really easy.
If it was rental property.
If it's K-1 from like a S Corp,
then you'd have to be a
real estate professional.
Otherwise, if it's rental.
What if I was clueless
before I met you guys,
never depreciated anything
while I own my property for 10 years?
Susan, the IRS makes you pay
tax on that if you sell it.
So you're gonna do this
now, you crazy chica.
- [Erik] And Toby, I'll add to that.
One of the great things is when
you don't take depreciation,
when we do the cost seg
and we file that 3115 form,
we correct all that.
So it's a great opportunity
if you have a property
and you haven't been
taken depreciation on it,
do the costs, let us fix
it with that 3115 form
and then you'll be all sorted.
- [Toby] Yes, Susan,
the IRS is mean to you.
They make you pay tax even
though you didn't deppreciate it
if you sell that property.
So you're gonna wanna grab
all that depreciation.
A lot of accountants will
say you can't, but you can
if you do a 3115, you can
change accounting electing,
and grab all.
I think you're almost required.
You don't have to do the
cost seg to do the 3115,
but you definitely wanna take it
and this is worth the ton of money.
Like you're gonna pay
tax on that otherwise.
What about a rental property
that was purchased in 2018?
We want to possibly
retire in that property.
So if you do this, can
you still move into it?
- Yes.
- Yeah, absolutely.
So I answered that
myself with echoing you.
Jinx.
All right, request a free
cost seg benefit analysis.
This is our website.
This is what it is.
And somebody is asking
about a septic system.
Do you know what the timeframe
of a ceptic system is?
- [Erik] I'm 95% sure, that
is part of the building.
So it'd be 27 and a half to 39 years.
- [Toby] Yup.
So all right.
So here's some fun ones.
Nine out of 10 find our
numbers easy to understand.
So when you do the cost seg,
it's gonna be very clear.
This is how much it's going to save you
if your tax bracket is this.
We will be able to figure it
out or Erik's accounting firm
will be able to figure it out.
We have a great relationship with them
and they do the cost seg analysis,
we do the tax prep with their 3115,
and the cost seg analysis as
is required under the law.
10 out of 10 will save
money on who implement this.
In other words, you're not
going to implement this
if it doesn't make sense.
You're not gonna do a cost seg
and it's gonna benefit you.
And remember the rule for all things tax
is calculate, calculate, calculate.
Go to AndersonAdvisors.com/CSA
and just see whether
this is gonna help you.
There's no cost to it
and nobody's hitting you over the head.
It's just gonna say,
here's what you could do,
here's what you could benefit.
And if you could benefit,
let's say it costs you 2,000,
it's gonna save you 20,
then you could decide
whether that's worth it.
I can't make that decision for you.
What if we borrow money
to do the improvements?
Is the interest included
in the depreciation?
No.
You get to write off the interest
and you get the depreciation.
You get best of both worlds.
Regarding depreciation
not taken for a property
already sold, is it too late
if that property was sold in 2018?
- [Erik] No if they haven't
Well the answer--
- It's all the returns.
They filed the returns, but I
think you can still make it.
Yeah so Fabiola you're gonna
need to do what's called
a 3115 change of accounting
method to grab that.
Otherwise you're gonna pay tax
on something you never wrote
off, which is really bad.
- [Erik] And that form
just to mention Toby,
that form would have to be filed
before either the October 15th
or the September 15th deadline
even though the cost seg study
wouldn't be done by then,
we would still wanna file that form.
- [Toby] Yup, and you go back.
(mumbles)
And then you can keep doing this.
Like you can do this next
year, you could do this,
I just think that, hey,
is there any reason why I
would wanna do a cost seg
if I already have enough deductions
to offset the rental income?
- [Erik] No, not unless you
are a real estate professional
or qualify as a real estate professional
because then you can
offset your other income.
- [Toby] Right, and Daniel,
unless you're renting it to yourself.
If the property is held
in a limited partnership,
what's the implication
to the limited partners?
You're all getting your depreciation.
Spread the word.
All right, so you can go back.
You can actually go
back to 2016 and amend.
So you wanna make your change
your accounting methodology
like this is how long
must a property be used
as a rental to do this?
There is no requirement
as long as it's an investment property.
As long as it's available
for rental, you can do it.
Dah, dah, dah, dah,
dah, dah, dah, dah, dah.
I have past the invested
in for property this year
in which are taking
the bonus depreciation.
How can I qualify to write it off
with my material participation?
I know what I can't do.
The IRS is, could have explaining that.
So Barney it's gonna depend
on whether you qualify
as a real estate professional.
Your material participation.
You can wrap all of
your properties together
to meet that material participation test.
And there's nine tests underneath that.
So I can't just sit here
and answer your facts and circumstances.
It could be zero time,
it could be 100 hours.
So long as nobody else is
spending more than 100 hours,
it can be 500 hours
between you and a spouse
and then you'd also have to
hit the 750 hour and 50% test
which we went over earlier.
You can file and still amend
the partnership returns.
Like if you did this on,
let's say you did your 3115 and you're up
against this September 15th
deadline on a partnership,
you could do the 3115,
and then you could go
and amend your return
with the actual members.
Is that a good way to put it?
- Yeah.
That's correct.
The tricky part right now as
we approach these deadlines
is the IRS requires that form
to be filed in a timely manner
by the end of filing dates.
So yeah we just have to file.
- We gotta do it.
2018 individually, you
could still do that.
Impartial election,
you could do different asset classes.
So you could do five,
seven, 15-year property.
You could do that with with any...
You could pick which
classes you wanna take
the bonus depreciation on.
And if you don't wanna take 100%,
you could take 30% 50% 60%.
You can take whatever number, right?
- [Erik] There are some specific
numbers they have to take,
but yeah, it's very flexible.
- [Toby] Somebody says,
who follows the 3115?
Your accountant files
it with your tax return.
So if it's a partnership tax return,
they would file the 3115 with the 1065.
If it's your 1040, you'd
file the 3115 with your 1040.
- [Erik] And just to mention, Toby,
that form is something
that's filled out as part of,
it's a nine-page form
that sometimes they charge
as much as $1,500 for that form.
But that's part of the service with us.
We provide that form, so you
just hand it to your CPA.
They'll love it.
They don't do enough of those
forms to be familiar with it.
So they love when they have us do them.
- [Toby] Somebody asked if they
already did a cost seg study
like last year, the year before,
should they redo it or
probably no reason to redo it?
- [Erik] Yeah, you can only
do a cost seg study once.
So once you do it,
you're basically setting up
the depreciation schedule
until you sell it or until it expired.
Until you hit the 27 and a half years.
So every time it changes hands
or has a step up in value,
that's when you would redo the study.
- [Toby] All right client says,
I have multiple property
is I would like to have
cost seg study analysis completed for.
Should I complete multiple
forms on the Anderson CSA link?
So if they just do one,
is that enough to get you started?
- [Erik] If they do one,
that'll give me their contact information
and I'll be contacting everybody
to go over the specifics.
So yep, just do one.
And I think there's a
spot there for notes.
Just say I have multiple
properties and we have some forms
that they can fill out that makes it easy.
- [Toby] Somebody says,
can I depreciate properties
owned by my LLC on my personal income
if I'm the sole owner of my LLC?
It depends on whether you're,
it depends on if you're a
real estate professional.
Otherwise it'll be, that
LLC is just gonna go
on your schedule E and offset
your other schedule E income.
That's from rental properties.
Does it make sense to do a cost seg
on a property that was 50% burnt
and rebuilt with insurance proceeds?
- [Erik] Possibly.
Again, we'd have to run the numbers,
but we've done a number of
homes that were burned out
and did the cost seg
studies on the remodels
and it worked out very well.
- [Toby] Jenny is asking for the solar.
You don't do a cost seg on it.
You don't have to.
It's equipment, so you
get to write that off 100%
but you get a solar tax credit of 30%
of the cost of the panel
plus its installation.
So if it costs you $30,000
to install a solar panel
on a rental property, you
get a $10,000 tax credit.
That's not a deduction.
That's a tax credit.
So it's just cash in your pocket,
plus on that $30,000 property,
you're going to get to
write off, what would it be?
$26,500 on your tax return too.
So you get the best of both worlds.
It's ridiculous how much you get
when you put solar on a rental property.
All right tax too,
if you guys like this stuff,
by all means join us for Tax
Tuesday every other Tuesday.
You can go there at Anderson
Advisors Tax Tuesday.
Again, it's free, it's fun if
you like that sort of stuff.
If you like this sort
of stuff, let us know.
We'll keep bringing guys like
Erik on if you guys like it.
There's Erik Oliver,
look at his pretty face.
There's my ugly mug.
I wanna just say thank you
guys all for attending.
Please fill out the
cost seg analysis form.
I thought we were gonna
be done in 45 minutes.
I think the money was
on the over on this one.
- [Erik] Hey Toby, can
I just add one thing
before you get us on.
And I hope this is okay, Toby,
but I'm not here to plug
you guys, but I kind of am
because we work with a number
of CPAs across the country
and I can't tell you how important it is
to work with a business
advisor and a tax preparer
who understands real estate.
I've been doing this for four years now
and I was shocked at how much
money gets left on the table
by not having the proper
people on your team.
And so just kudos to you,
Toby, to you and your team.
You guys are exceptional.
And like I said, I know we're
not here to plug each other,
but just working with you guys,
these guys are top notch
and I just wanted to put that out there.
- [Toby] That's really nice, Erik.
I'll give you $10.
(mumbles)
Hey you guys, there's a
bunch of other questions.
Somebody says Erik's email address is,
Cost Seg Authority.
Is it dot com?
- It is dot com, yeah.
- [Toby] Look at me.
I'm just bad.
Here, I'm gonna put dot com.
There we go.
Yeah, so you can go to
erik@costsegauthority.com.
You guys, if you have questions,
go ahead and email in the
cost seg or email Erik
or email me and I'll
answer your questions.
The way I look at it, like
if you guys know Tax Tuesday,
it's spreading tax
knowledge to the masses.
We believe in that and I believe in that.
We just try to make sure that everybody
makes knowledgeable decisions.
If some of you guys are like,
why are you guys doing
this cost seg stuff?
Well, it may not be for you.
In fact, if you're really negative on it,
then maybe it's not gonna
give you any benefit,
but it doesn't hurt to see
how much it could actually save ya.
So you'd go in with your eyes open.
There's lots of things you could do
that we pass up on saying,
oh, I don't really wanna do that.
It's not gonna be enough
bang for the buck.
You get to decide.
That's the beautiful part.
You don't let other people decide for you.
If I could get three times,
like we were talking about this earlier.
One of my property managers used Erik
without me even referring him over.
He just happened to know about cost seg
and listening to my mug on a Tax Tuesday
and ends up going out and
looking and somebody refers over
and says, this is the best company,
which is always nice when
the company that you refer
is what everybody else is
thinking as the best company.
And in his case, it was
a three to one return.
He was willing to spend
four grand to save 12.
Nothing wrong with that.
It's always, again, worst case
scenario is a tax free loan
or an interest free loan.
So I always kind of look at that.
Somebody says primary
residence solar system,
can you do cost seg?
Jenny, it has to be investment property.
So you can still get your tax credit.
You get a big old tax
credit for doing that.
But I think the rest of them
has to be investment properties.
Anyway, so there's a whole bunch
of people asking questions.
What you do is see.
Shoot, we are all 2019.
Oh, look at this.
So they're asking.
You can still do cost seg in for 2018.
So you guys are not too late.
You're just really
close to being too late.
So you wanna jump on it.
For 2019 you got plenty of time,
but at the end of the day, ask Erik.
This is what these guys do.
It's all they do.
Yes, you can do cost seg for 2017.
Yes, you can go back.
Yes, you can go back
on properties 10 years.
Yes, you can go back on
properties five years.
So like it's not too late.
You can absolutely do this.
The tax laws are a gold mine
if you know where to search for the gold.
And Erik is a professional gold digger.
(laughing)
Anything else you wanna
add in there, Erik?
- [Erik] No, no, that's it.
And like Toby said, please
use me as a resource.
We don't bill by the hour
or anything like that.
Please use me as a resource.
Call me if you have any questions
regarding cost segregation
or depreciation,
and we're happy to help you.
- [Toby] All right, thanks
guys for joining us.
This recording will be made available.
Share it with all your
friends and spread the word.
There's gold and then there are hills.
(upbeat music)
