Unlocking Real Estate Wealth- Cost Segregation Explained

This is Wake Up To Wealth, a podcast dedicated to helping you change the way you think about wealth. And now, here's your host, Brandon Brittingham. Hey, everybody, this next segment is brought to you by my good friends at Accruity. Now, if you run a business, most business owners neglect their back office, and they don't even know where to go or who to trust when it comes to their financials or CPA or taxes. That's where Accruity comes in. You can trust them. They can give you advice and they understand the back office. Listen, you're not running a business correctly if you don't have a hold of this. And it's really hard to trust people that are out there. And most CPAs frankly work for the IRS and don't work for you. That's not the case with Accruity. Check my good friends out at Accruity for any needs that you have when it comes to helping with your back office, getting your book straight, getting your taxes correct, and they guide you and give you advice, which most firms don't. So check out my guys at Accruity, tell them I sent you. Hey, what is up, everybody? We are back with another episode of Wake Up to Wealth. And man, I cannot thank you guys enough. Every freaking episode, we are setting another record. the last two episodes, 105,000 downloads. The one after that, 110. You guys consistently are helping us top the charts in business and investing. So I cannot thank everyone enough for the support you guys have of the show. You've been telling your friends about it. You guys have been supporting it. And I can't thank you guys enough for you guys supporting and showing love because we've become one of the top shows on investing in the United States, which is just freaking crazy to even think about or say, right? And because of your guys' support, I get to consistently bring on really cool people that know what they're talking about when it comes to investing money. And today we are going to talk about a subject that is so misunderstood and misused, and it is around cost segregation and saving money on your taxes. And Jeff Hyatt, who I have here is a good friend of mine. I actually get the privilege to coach this guy on speaking on stage. I have the privilege to working with him on different transactions and probably one of the most knowledgeable guys that understands this, but can actually explain it to you where you, you can get it. So Jeff, I want to say thank you for coming on the show today. Happy to be here, Brandon. Thank you. And congrats on your, your record setting every week that you, that you post. So good for you. That's congrats. Thank you. So, you know, one thing you and I talk about this a lot and it still just blows my mind. Like what is a cost segregation, right? And what does it do? What is the benefit? Because so many people don't understand this and don't use it. You're absolutely right. And so what usually happens with folks is they buy a property. They typically, because they don't want to be thinking about the pain of tax and all of that, they just, they just, they're happy they closed the deal and they put off any of the details until later. And then they slam everything over to their accountant at year end or, you know, on March 10th and it goes over to the accountant. and then the accountant just slaps on 27 and a half or 39 year depreciation because that's all the time the accountant has to do. They don't think about anything else and they just put it in place. So what most people, 70% of the people out there end up with is 27 and a half or 39 year depreciation. And it doesn't have to be that way. In other words, when you buy a building and you pay a million dollars for it, you have to depreciate it over 27 and a half or 39 years. Well, the IRS will allow you to carve out pieces of the building and move them into a faster life so that instead of waiting 27 and a half or 39 years to write off the building, they can do it more quickly. And that's what a cost segregation study does is identify per the tax code, the items that can go into five year, seven year, and 15 year. So you get to accelerate that. And with bonus in play, those accelerated items get to move into what they call bonus. And that means you get to take it right away. So a lot of people who are listening to this, even highly educated people that I deal with, don't understand this. So let's give them a simple example. And listen, we know we're not holding you to this shit. We're not saying that this is real. This is a hypothetical because we know how accountants think. I have a CFO, so, you know, she never gives me off the cuff answer for anything, but let's just say simple math. I buy a $500,000 building residential. let's say it's a duplex so i paid 500 for it and i want to do a cost segregation on it explain to my audience what that looks like of an actual tax savings right now i know it's not down to the individual level because everybody's situation is different but like just basic help them understand what that means okay so if we're if we're going with 500 grand as the value of the building, keep in mind, you've got to take out land. So for simple math, let's say you actually paid for the whole parcel, 600 grand, and you called 100 grand land, land being non-depreciable. So now we're looking at 500K and somewhere between, call it 15 and 25% of that will be allowed to go into a faster life depending on the amenities that are present both outside of the building and inside the building. So outside of the building is that 15-year category. So from when you turn off of the street onto the property, now you're going to have driveways, fences, mailboxes, lighting, maybe there's a basketball court, maybe there's a deck, a swimming pool, there's shrubs, irrigation systems, all of those items go into 15-year category, maybe drainage, maybe riprap walls, anything outside. Once you're inside, you've got a lot of stuff that could go into a faster life, and that would be a five-year category. So between the two, you're able to move somewhere between 15 and 25% into a faster life. What does that mean? That means somewhere between, well, call it a hundred grand of the purchase price can be accelerated into the faster life. And Brandon, you would get to take an immediate deduction of a hundred grand from that. And if you own multiple properties, you can stack this up and do a bunch at once. So to clarify for all of you guys listening, what he said is you buy a half a million dollar property. You find somebody like Jeff that understands what they're doing. you do accelerated depreciation cost seg study, which is what Jeff is an expert at. And you get a hundred thousand dollars of a tax write-off against your income. Is that what we're saying? That's exactly what I'm saying. So I want to, I don't want you guys to miss this. This is a freaking like game changer to help preserve wealth. And I'll give you guys a comparison. If you remember not to be political, but if you remember Trump, when he was debating Hillary Clinton and she said, you lost whatever, 900 million on your taxes. I don't remember what it was, but it was this, this many, this moment went viral. And he said, yeah, I, yeah, I use the tax code that has been provided. What he was talking about was what we're talking about was leveraging the cost segregation. So he didn't necessarily lose 900 million on paper. He used the cost segregation to create that loss, which hedged against his taxes, which is what wealthy people do. Yes. Absolutely. That's exactly what they do. And going back to that, that debate, I interestingly enough was watching that debate back in, I want to say it was 16. And it was incredible because he just said, basically, the tax code is there. If you don't like the tax code and people using it, then change the tax code. But if the rules are there and allow this, why wouldn't people do this? And it's funny because what ends up happening, interestingly, later today I headed down to a big CPA convention to hang out with CPAs and educate them on this topic Exactly Because most clients most people who buy properties about 70 of them don even know about this, don't use it because they just haven't heard about it. And so what we do is bring it to CPAs and those CPAs then bring it to their clients. Yeah, I was going to say that, and I'm glad you mentioned this. So one of the things when I speak on stage or talk about this, or I've had you in the room, right. With investors where we've heard this, where, well, my CPA didn't tell me this, or my CPA said I shouldn't do it. And it's one of the two things, a lot of times, nothing against CPAs, but sometimes their CPA is not educated or their CPA doesn't have an outlet necessarily like you. But I don't, and you can certainly correct me if I'm wrong. I don't know a situation where you would not do this. Now, obviously if the value of the property is lower, maybe it doesn't make sense from a cost perspective, but I think you said, you know, 300,000 and up, it definitely makes sense, right? Yep. 300 grand and up. Yeah. And I'll tell you that we will do it under 300 grand. Now I'm different because I have a CFO and she understands how to do it, but, and I'm saying this for context, you guys will listen to this and you'll go talk to your CPA and they'll say, no, no, no, no, no. That's where you got to find somebody like Jeff that understands this because I have saved a substantial amount of money on taxes. Jeff and I are working on a deal together right now that will save both of us a substantial amount on taxes. This is one of the biggest hacks out there. Now, one thing I do want to caveat this with a lot of people who are listening to this are in real estate. Again, frame this for me so I don't fuck this up, but to get it against your active income, right? You have to be considered a real estate professional. Am I right on that? That is correct. Yeah. And so keep going. Well, explain. You're on the right track so far. I don't want to mess this up. So explain to people what that, like the actual rule is. So the way that it goes is if you're just a real estate investor, okay? So you just own apartment buildings or rent single family restles and you own 10 of them. And you're a dentist, an attorney, whatever you do for your day job. You're a sports player, you know, professional sports. Well, technically, then you are not a real estate professional. And because you're doing something for so much more of your time and more income, theoretically. So the losses created by a cost seg would only offset income from those rental properties. So that's called passive income from the rental properties. and we're creating a passive loss. Right. So that's if you're just a real estate investor versus somebody who's gotten themselves designated as a real estate professional. And if they're a real estate professional, they spend 750 hours a year doing real estate related stuff, which is negotiating, looking for deals, putting deals, making stuff happen, managing the property for 750 hours or more and 50% of their time is spent doing that. then they're going to be very close to being a real estate professional. And if they're a real estate professional, not only would the losses go to offset income from the apartments, any excess loss would spill over and wipe out their income tax on their day job income. OK, now I'm going to say real estate professional light. So this is like it's kind of like it, but not exactly, is what I would call short term rentals. So folks in the short-term rental space, they get to basically, if they're actively involved in their short-term rental, then what they get to do is just what I said, their losses would wipe out income from the short-term rental. But because they're actively involved, it would then spill over and wipe out their day job income tax as well. So that can be a real nice tool. Now, a lot of people on the internet call it the short-term rental loophole. Well, it's not a loophole. I mean, any deduction is a loophole. do a lot of business with a lot of people. Mark has transformed a ton of people's lives. If you're in a situation where you need help, reach out to my good friends at I am a comeback. And that's I am a comeback.com. Mention the show, mention you're a friend of the show. These guys will take good care of you and they do it for all the high performers that need this help. They've transferred a ton of lives. They're who I trust. And Mark is a good friend. So check them out at I am a comeback.com. it's really not it's i i call it the short-term rental advantage because loophole sounds like oh you're getting away with something or oh you're going to get on it and oh there's risk with that there's not it's part of the tax code but many accountants don't know about it yeah good point so um those of you that are listening if you're a real estate agent i like scream this shit like you should not be paying taxes if you are a high income earner you can offset it with investing in real estate, you're going to, so who would you rather pay the money to? Would you rather invest in an asset that appreciates overtime and it's going to cash flow or give it to the IRS? And the IRS has given you a chance to avoid paying taxes and investing in an asset that you know, which is real estate. It frustrates the hell out of me when I speak on stage or people reach out to me to coach them. And they're like, man, I paid a hundred, 200 grand in taxes last year. And I'm like you don't need to, right? Because of this. And another thing that's happened recently, right? The big, beautiful bill, there was, we kind of skipped over this, but I want to lean into it is there's now more incentive than ever to use cost segs, right? Because the ratio has changed. Talk about that. So from, so we've been doing cost segregation studies since 1996. I joined the firm in 99. From 96, when we started to 2017, we did about 15,000 studies in that span of call it 20 years. So, you know, we did a lot of studies and bonus depreciation never, ever applied to existing buildings. Bonus came in in 01 after 9-11 as an incentive for new construction because the economy had tanked and there was no construction going on. And they said, Congress said, hey, let's throw some gas on the fire. Let's give bonus depreciation for new construction. So bonus came into play for new construction and it went from 30% to 50%, then 100%. And it kind of bounced around a little bit for a while. But then in 2017, the Tax Cuts and Jobs Act came into play. And it said, hey, wait a minute, that bonus thing that was only good for new construction projects is now going to be eligible for existing buildings. So if Brandon goes out and buys an existing building, anything that goes into five-year, seven-year, or 15-year depreciation is now eligible for bonus, just like it would have been for new construction, but it's for existing buildings. And when they put that law in place in 2017, it was such a big impact, they had to build what they call a sunset provision into it. And that's where it started to step down. So what they said was for five years from 2017 through end of 22, you would get 100% bonus because your logical brain is going, wait a minute, he was talking about five years, seven year and 15 year write-offs. What's he talking about taking it immediately. Well, bonus allows you to take all of the five-year, all of the seven-year, and all of the 15-year in the year of acquisition. So now you get to take it all at once. But then after 22, it started to go down. So in 23, if you bought a property, it was 80% bonus, 20%. And then if you bought in 24, it was 60% bonus, 40%, 5, 7, 15. Along comes 25 and you were down to 40 bonus But then in July they passed a retroactive one big beautiful bill or OB three as they call it now So OB three came into play and said wait a minute 100 bonus is back for any property put in service after 1 of 25 So after January 20th which interestingly enough was the inauguration day, back to there. So, you know, I would have thought, hey, let's do it for the whole year, but there was a point being made there, I think. So it was a 100% bonus on any project property put in place after 120 of 25. And it's permanent now. It's called permanent. And you say, okay, because I had somebody on a call earlier today. So, well, how long is this going to be in place? And I said, well, it's permanent. And I said, but understand anything in the tax code that says it's permanent is until the next administration comes along and doesn't like it. And they say, oh, we're changing it back. Yeah. A hundred percent. So thank you for that explanation. And so the point being right now, we know we got some runway where you guys, that if you're listening to this, you can leverage it. And you would be, it would be, I'm just going to say it, it would be stupid not to because of the amount of money it can potentially save you. And again, shield you from tax liability and put the money into an asset. Right. So also in the big, beautiful bill, there were some other things that people that are listening to this might not understand. What else could you share that you think is some things that would benefit people? Well, some folks are going to know, you know, the real estate folks out there, if they're, you know, dealing in commercial stuff, one of the other really cool things. And if you think about what I need to back up from that just for a second, what the tax code always is, is either a carrot or a stick. If you think about, they're trying to either incentivize or disincentivize certain behaviors. So they put a tax on cigarettes. They put a tax on boobs. In some states, put a tax on fast food or other things. They're trying to steer you away from that. Then there's the carrot. So the carrot is incentivized. So what they're trying to do now with the 1 OB3 is bring back production into the U.S. and give manufacturing companies an incentive to do production in the U.S. So now there's one new whole category called qualified production property, QPP. And what QPP is, is if you're manufacturing something in the U.S. and you're doing, let's say, new construction or new spending for this manufacturing process, 100% of everything you spend for that production facility is now bonus eligible. 100% of it. So where we were talking about before on that on that apartment on that single family rental, and we were talking somewhere between 15 and 25 percent. Bam. Now it's 100 percent is eligible for QPP. Now, is that going to apply to a lot of your folks listening today? Maybe not, but it's it's a neat way to understand what the tax code is doing there to incentivize. Yeah. Another thing I want to talk about, and I learned this from you, right? You touch on this, like mobile home parks and RV parks for those listeners out there that approach the, the, that go after those have way more depreciation attached to them. At least the ones I've looked at with you as far as a percentage of purchase price. I'm doing back in the napkin math, but we are in the process of buying a one point three million dollar mobile home park right now. And I think you told the cost seg was somewhere around four hundred and seventy thousand would be the would be the write down, which is freaking substantial. It definitely can be. And it depends, of course, on what's in the park and the RV park. You know, if it's basically just dirt and you drive across a dirt area and you park for an RV, then it's not going to be as exciting. But if it's got, let's say, pavement, not only do you have the pavement, but you've got the compacted soil. Then you've got trees that are part of a landscape plan. Then you've got maybe you've got canopies above so that people aren't just baking in the sun in, you know, Bakersfield, California or wherever the heck RV park is. You're going to have some sort of septic system probably at this place. You're going to have electrical outlets and wiring going to each unit. You're going to have water somehow, some way delivered. Interestingly enough, it's not just the underground water, the underground electric. It's the conduit and wiring in the compact soil around. Which is, this is shit I never knew. right like i didn't know this even existed yeah it was so when you hang out with a tax dork like me hey you learn stuff that is so obscure that gives a lot of people ice cream headache but but saves you a bunch of money yeah saves you a bunch of money another uh two other things i want you to touch on that i didn't know like the touch on like the you know like the under roof mini storage like if someone's listening to this and they're they buy mini storage the under roof mini storage gives you some better opportunity too. Right. So, you know, basically, um, again, imagine like a drive up type, um, self storage, that's going to have probably a little bit less because so much more of it is going to be structural. But once you're inside of the building and it's like a, uh, climate controlled building, then you've got a lot more, uh, stuff That's all part of the process of management of everybody's units. So you're going to have all kinds of security in there. You're going to have the roll up doors and things like that. You're going to have any kind of air conditioning that's going on. All can be can be depreciated. It'll all be depreciated. Some of it is going to be able to be eligible for faster, depending on what all is going on there. So it all just depends on each situation. And like you said, with your CFO not wanting to be too committal on a venue like this, you got to, I got to back it down a little bit, but yes, but it's all really good. Reallocations are available. another thing i learned from you was i don't want to butcher this so i'm gonna let you say it but we actually did this on from your advice was the if you've got a property that you're going to you know you're going to tear down you place it in service and then tear like talk about that so so there the problem is when somebody buys a building and they immediately bulldoze it Yep. Whatever the land building allocation might have been, so that going back to our $600,000 purchase, 100 grand for land, 500 grand for the building. If the next day after you buy it, you bring in the bulldozer, bam, that whole 600 grand becomes land. Yep. It's non-depreciable because you effectively bought that building for the land and you didn't need the building, didn't want it. You just got rid of it. Okay, well, that's, it is what it is. There is a provision that some people use. And the way that works is you would buy that building, you would do the land building allocation, 100 grand for the land, 500 grand for the building. now you can do the cost seg and extract the accelerated data out of that the 100 grand let's say we pull out 100 grand now bam you're depreciating 400 grand over 27 and a half years i know i'm throwing out a lot of numbers here and that can be painful sorry but um what would happen is if you don't if you haven't made this election that i'm going to say in a minute If you haven't made that election, the 400 grand when you bulldoze would go away as well. That's kind of not a great outcome. So you can make a designation. It has to be done the first year you acquire the property and put it in service. It's called a GAA election. And your accountant would do that on their tax form. And in doing that, what that's going to do is allow you then to continue to depreciate that 400 grand, even though the building was bulldozed. And so what that means is you need to put it in service first. So you have to start renting it out or let the old tenant stay in there while maybe you're trying to decide what the highest and best use. That could take a year, two, three, whatever it might be. But you going to let that situation settle out And then maybe if you decide to bulldoze it the GAA election worked out very well for you and life is good And you get to keep depreciating that building even though the building is gone and you've now built something else in its place. Yeah. So one thing I'll, for all my listeners, I know some of this can sound complicated and complex. Here's the summary of this. A lot of people don't use this. A lot of people are not knowledgeable about this, right? And a lot of CPAs aren't. And that's why I brought Jeff on here because he is, and he can do this for you. The other thing, correct me if I'm wrong, if someone is listening to this and they're like, man, I've got properties and I know I didn't call seg. Can they go back and do it? Thank you for asking. As you started down this path, I was like, oh, I want to bring that up. So yes, you can step back in time, technically to 1986 when the tax law changed, but typically you won't go back that far. Typically the window of opportunity for this to really make sense is you've bought, built, or improved a building for 300 grand or more in the last 10 to 15 years. So if you've bought anything in the last 10 to 15 years or built it or renovated it, so you may not own the building, but you spent a bunch of money fixing it up. So you can step back in time without amending your tax return and grab that depreciation in the current year. Even if your accountant says, oh, you're going to have to amend and you can only amend three years. That's incorrect. For cost segregation, there's a thing called a change in accounting method you can use. And that's what we do is help you and your accountant get that form filed correctly, because if it's filed incorrectly and there are errors on it, it will trigger an audit. Good to know. So if you're listening to this, by the way, the show's free and you haven't done it. We just made you some money if you do what he said. I was funny yesterday I was speaking and your your coaching really helped me there. So thank you for that, Brandon. I'll give you a little plug there. Of course. I had about 40 real estate agents in the north of Boston in a room and they were all listening and probably 25 of them owned their own investment properties. and three of them knew about cost seg, only one had used cost seg. That's crazy, bro. It is, isn't it? It's crazy. And one guy was saying- But it's all the time. Like that doesn't surprise me at all. You're right. And one of the guys said he owns nine properties, one of which he was selling. And his accountant told him he was just going to have to pay the tax on the gain. And so 1031 comes up as a possibility. but he didn't like the idea of having to rush to get the 1031 done. And, you know, there's moving parts with that. But what I said to him was, well, for your other eight buildings, why don't we do a cost seg, see what we can. Probably wipes the gain. Yeah. And it wipes out the gain for you and you don't have to do a 1031. And he was like, you can do that. And I said, yeah. And he goes, my accountant said, I couldn't do anything. I was just going to have to pay the tax. I said, maybe it's time for a new account. Yeah. Yeah. So. Yeah. And by the way, friends of the show and sponsor Accruity, if you need a good accountant, it's good people to talk to. So wrapping up, here's the key to all this. You need an expert. Jeff is an expert. So a lot of CPAs, which is sad and scary to think about, don't know or understand this. This is what Jeff does. so for those of the people that are listening to this and they're like man i need to figure this out i i've got like i need help with this how do they get how do they get with you so you can dm me on instagram or facebook um i'm depreciation doctor on on instagram and i think it's jeff hyatt one at facebook i don't know exactly yeah but it it's close enough um and then um also um My email address is JDH at Revenue Banking and or JDH at Cost Seg Studies. So I've got two things there. And then we'll drop a link to in the show notes to get in touch with you, too. There we go. That's easier. So just drop the link and follow me on Instagram or Facebook. That'd be great. Yeah. But Depreciation Doctor, he gave you his email and we'll drop the link in the show notes. Perfect. OK, so last question. we ask everybody the same question on the way out. We call this show waking up to wealth because I was not born with money, wasn't educated on money and was taught wrong about money. And when I started to make money and get around wealthy people, I realized that people that were wealthy thought about and moved differently and were educated differently about money. So we call the show wake up to wealth. And the key to it is bringing people on like you that can teach people how to be wealthy with information that they would not necessarily be able to get to, but I'm not charging them to get this information because I want them to wake up to wealth and wake up to become wealthy. So I ask every guest at the end of the show, what does waking up to wealth mean to you? And it's whatever you want it to be. It's your version. So that's a great question. And I've heard you ask that question to other guests before. And so for me, yeah, the money thing is part of the wealth conversation and the metric there to kind of keep score. But somebody that's really wealthy has done stuff to help other people. In my mind, it's not just the money. It's what have you been able to do to contribute back to either society or other folks that could use your help? And so what I've done is make it a point of spending a lot of my time helping veterans. So I end up helping raise a lot of money for veterans through some charities around here that support veterans in trying to wipe out veteran suicide. One of them is called Swim With a Mission or Swam.org. And we've raised about $15 million since 2017 for veterans. So for me, giving back to other folks that, you know, have protected the way you and I, Brandon, do our business without them, we couldn't be in business. We would be, you know, not safe. And so my goal is to help them. Other folks might want to help dogs or whales. I definitely want to help dogs because I got 10 of them. I know. I know. So that's why I mentioned that. So, you know, just give back. And that's the way it will pay back to you. The whole karma thing. Well, I want to say thank you. Always a wealth and breadth of knowledge. Guys and gals that are listening to this, stop fucking giving the government all your money and reach out to someone like Jeff that can help you not give them all of your money. Who's an expert who knows this stuff and stop listening to dipshits that tell you you can't do this because you definitely can. I want to say thank you so much for your time today, brother. And the audience, reach out to him. He's a guy that I trust. He'll take care of you. Thank you so much for your time today. Hey, thank you, Brandon. You have a great day too. And your people too. Hey, this next segment is brought to you by my good friends at Rocketly.ai. That is Rocketly.ai. If you're in the real estate business, especially the investment side, and you need a platform that can run your real estate business, and talk to leads through AI when you're not able to talk to them and can qualify and get to all the leads you can't get to. Plus, it has an amazing piece of technology with it called Lead Detector that helps get all the people that come to your site and not opt in to opt in to turn into a lead. These are my good friends at RocketLeague.ai. I'm part of this company as well. I use it to run my real estate business, my real estate investment business. Go check them out. Again, RocketLeague.ai. And thank you guys for sponsoring the segment. завис finance