Hello.
Once again, David Moore here.
Equity Advantage IRA Advantage.
Blessed to have Jonathan Frizzell here.
He's with CBRE Cost Seg out of Seattle.
We're trying to sort of uncover or demystify
cost seg for people, because I think it's
one of those things where in the institutional
world, the bigger stuff, I mean, we talk about
families you do these things for.
There's lots of well-heeled people.
But I think it's something that's lost so
often on people that are just looking at like
a rental house.
And we talked about like a rental house.
What happens with a rental house on things?
I think this is a real opportunity that's
just missed and we need to be aware of these
things.
So, you know, if we look at cost seg, Jonathan,
and it's complicated.
As I said, if we're talking about in a 1031
context if I'm speaking, or with our retirement
accounts, I always talk about a good competent
team of professionals.
I want people paying for an opinion not paying
for people to learn.
Sure.
So, if we can look at cost seg ... I mean,
I've been in this business a long time.
30 years.
I'm still, it's like ... some of the stuff
that you do is black magic to me, honestly.
And you probably look at what I do and the
same thing about what I do.
But I think it sort of really pinpoints the
fact that it is complicated.
You need to have somebody that's really competent
and knows what they're doing taking care of
it for you, and it needs to be supported with
other people.
You have a team of people that are going to
support these things.
If there's ever a question on something, you
want definitely the person's tax people involved,
right?
So, why don't you explain a little bit who
you're typically corresponding with when you
put one of these studies together?
Obviously, the property, the principles, but
then you've got other people that you would
consider team members?
Well, that's a good point.
It's important to note, David, that it's an
engineering function and then when you get
done with the study, it becomes an accounting
function.
That's what's important.
So, why don't you explain to us what engineering
function or accounting function means?
Alright.
It's like all the acronyms in today's world.
You know?
We gotta be careful right?
It's like, "What's this mean?
What's that mean?
Well
Often times, we're dealing with numbers.
It's a good point.
We're dealing with numbers.
With all due respect, we take up with the
engineers on a onsite review.
Our civil engineers, our structural industrial
engineers they're gonna actually look at the
building and measure it out and document all
the improvements.
And then with cost and then they'll be estimating
the cost of that building reconstructing that
building.
So, a lot of times people think it's an accounting
function.
It really isn't until we're done.
Now, once we deliver the study then it becomes
an accounting function.
See we talk about exchanges and everybody
wants to put it in the tax or legal world.
I said it's not a tax or legal decision.
It's purely an investment decision.
And I would look at your stuff the same way.
I mean, you don't do an exchange.
You shouldn't be doing it just to hide from
tax.
You're punting it down the road and deferring
things and it works no differently than an
IRA or 401k plan really.
And a lot of times people come in to me and
say, "Well, gee why would I do an exchange.
I'm going to have to pay the taxes at some
point anyway why not pay it today?"
Say well, do you have an IRA?
"Well, yeah."
Why?
You're gonna have to pay the tax at some point
anyway why not pay it today?
So, what you deal with day-in-day-out is really
creating a value, creating a value for the
building, creating a return, a better return
for these people throughout that thing.
Time value of money.
Yeah.
We don't teach enough of it in our schools
public or private.
But the dollar today is always going to be
worth more today than tomorrow and it's time
value of money.
And would you rather have the dollar today
or do you want to wait 39 years or 27 1/2
years to get that depreciation?
Kinda sorta feel like that little kid with
the candy bar that's being tempted to eat
it.
They leave em in the room and see how long
they can stay there.
Yeah, I was one of those kids emptying out
those candy jars, trust me.
So, yeah a lot of my clients a lot of the
families I work with all over the NorthWest
actually on the West Coast.
They 1031 and cost seg up right up until their
last days.
They're not concerned about what their basis
is because with their heir appearance then
there's a step-up basis and then we start
all over with that whether that's with their
spouse or with their kids or their nieces
or nephews or grandchildren.
And so now I'm working with already after
13 years of service in this industry.
Almost 10-13 years.
I'm starting to work with the 2nd generation.
Kids a-
That's gotta be fun.
It is kinda fun actually.
It really is.
And-
So, how's the acceptance the 2nd gen versus
the 1st gen?
Well, it's interesting you ask.
I never lose sight where my relationship started
with that family.
So, I always look at the patriarch and the
matriarch first and then-
You gotta respect that I mean-
Well, it's funny with other particular industry
partners they want me to address the whoever
it is the eldest son or daughter and I never
lose sight of the matriarch or patriarch.
Never lose sight.
I'm very old-fashioned that way.
And when I find is that at the end of the
day the 2nd, 3rd generation appreciates that.
So, yeah and but it's funny a lot of my clients
they pretty much 1031 and cost segregate all
their properties right until it's time for
them to leave this earth and then of course
you have that nice step-up in basis.
So, you gotta a duality of deferment.
You're deferring the game but you're also
deferring the recapture too.
So, Jonathan was there anything that impacted
cost seg in tax reform?
Great question, yes.
We have the Tax Reform Act.
Never thought in my days this would happen
but Congress has legislated any acquisitions
meaning used property.
Any acquisitions after 9/27/17 meaning, September
28, 2017 going forward their subject to 100%
bonus.
And then-
So, explain for the benefit of the audience
bonus.
I certainly and I was just going to do that.
So, bonus is defined by young Bush 9/11/2001
it was a genesis the beginning of bonus depreciation.
And bonus is defined as anything 20 years
or less, 20 years of depreciable life for
less.
So, that would include the 5 and possibly
the 7 year on the personal side that we get
and the then the 15 year and the land improvements.
So, literally if you're an active real estate
professional, active investor, you may very
well be qualified for 100% bonus.
And you get the benefit all in the first year
as opposed to the first 5 years.
Which is huge.
And the good news is, of course, even if the
LLC can't chew up those losses they travel
very very nicely right to your personal returns.
So, if we look at what you said we talk about
1031 loss.
The ability to do 1031s on personal property.
A lot of what's happening now is really a
result of taking the bonus depreciation fully
expensing and acquisition not set the gain
realize on disposition.
If we're talking the personal property world.
Right, yeah.
And it's my understanding now 1045 is recognized
personal property is recognized and I would
like to say quietly that becomes the point
because on the replacement property you still
got bonus, 100% bonus opportunities.
And so far in the year and a half since this
change, the Tax Reform Act, it seems to me
to be a point and there seems to be a high
level of activity in trading going on every
more so.
So, I don't think it's gonna be a problem
if 1045 is recognized now and 1031 exchanges.
Okay.
So, and we haven't really talked about this
and I'm gonna ask you as far as the cost of
something like this if you're doing a rental.
And I'm sort of coming at from perspective
of things like this that have probably been
around for a long time.
But before business like yours existed you
had to pay somebody that had this secret knowledge
a lot of money to get a study done in your
case or 1031 exchanges for example.
If we go back in the 80s and even early 90s
I mean we made twice what we made today on
just a set-up fee.
But it's changed with all that's happened
but 1031 was sorta looked at in tax reform
as something for the wealthy and it's anything
but it's something that anybody can do.
I mean, an exchange of 1/1 and a basic transaction is $1,000 today.
I mean, that's nothing.
So, it's not something for the wealthy it's
something for the everyday Joe to use.
And it's cost seg, I mean, if we're talking
about cost seg say we've talked about the
benefit even on a rental house.
Ballpark cost of getting a study done.
And how long would it take if somebody just
had a rental house, for example?
Well, I asked this because we've got rent
control.
It just got passed and
people are gonna be pinched and their gonna
be looking for more ways to make more money
on these properties.
Well, -
If they wanna stick around.
I understand.
Good question, David.
Tends to range depending on product type but
usually $5,000 to $10,000.
Now, we've got a member of the Oregon CCIM chapter who referred me to a client.
I did quite a bit less on that because it's
compadre, a colleague, within the chapter
and I'm nothing more than a janitor and a
custodian of depreciation sense.
So, I can go lower than the 5,000 number to make it fit.
Yeah, and I don't want a hard number but just
a range so people understand this not something
that's going to break the bank.
Not like we're gonna give you $20,000 benefit
but just do 25.
No, yeah I wouldn't pencil that one in, for
sure.
But one thing about part of my success is
well as the Cost Seg CBRE we try to focus
on scope instead of actual estimated tax savings,
tax savings dollars.
The IRS frowns on that even though the big
four do it all the time.
But the truth of the matter is if you got
a 50,000 square foot warehouse with nothing
but no electrical, nothing inside there that
might be a little easier than a 10,000 square
foot full service dental office.
But one's probably going to be about the same
amount of money as the other because there's
a 1/5 of square footage.
So, about $5,000-10,000.
For single families we've got a program that
we can perform to up to $500,000 cost bases.
Where I can get this done for $400-$500.
Molly and I did that for one of our esteemed
long time members long time family here in
Portland for his gas station believe it or
not.
And it's a modeling program we can actually
do and now it's not a full blown cost segregation
study but-
It's cost seg light.
It's very cost seg light but we will defend
it.
That's another beautiful thing about CBRE
is I negotiated with my Managing Director
about the possibilities of what kind of scope
we can have for my book of business and their
happy to do it.
All our studies regardless of what type of
product type it is you're gonna have a beautiful
comprehensive expanded detail.
So, I'm gonna break it down into hundreds
of pieces from 1045 the personal side, the
1050, and land improvements.
So, but you'll have an executive summary,
the breaking down of the buckets.
But the good news is that I'm gonna break
it down to assemalies and subassemalies so
when they do improve their property going
forward they're gonna find out what that unit
of property or that component costs at the
genesis.
At the time of service, time of acquisition.
And guess what let's get it off the books.
So, there's an additional value for working
with Jonathan at the Cost Seg Group CBRE.
I would to say quietly not all cost seg providers
are created equal.
And it's not in the U.S. Constitution but
it's true.
You wanna get a real cost seg provider that
has a true engineering group cause there's
a lot of we're not regulated by anybody until
there's review so you wanna have a quality
product out there.
Great.
For a lot of reasons.
Great.
Well, thank you Jonathan.
We're gonna wrap this segment up but don't
go away we'll be right back.
David Moore, Equity Advantage IRA Advantage
with Jonathan Frizzell, CBRE Cost Seg out
of Seattle.
Thank you.
Thanks, David.
