Cost segregation strategies to minimize your taxes (Ep584)

In this episode of “Get Paid for Your Pad,” I had the incredible opportunity to sit down with Yonah Weiss, a true guru in the realm of real estate tax strategies. Our conversation took us on a deep dive into the world of cost segregation, a groundbreaking concept that promises substantial tax benefits for real estate investors. Despite a few technical hiccups during the podcast, the wealth of knowledge Yonah shared was nothing short of enlightening.

During our chat, Yonah masterfully unraveled the complexities of cost segregation—a strategy that involves dissecting a property's components to accelerate depreciation deductions. Unlike the conventional linear depreciation approach, where the property's value is spread over decades, cost segregation enables investors to categorize elements into shorter depreciation schedules, ultimately leading to considerable tax savings.

What truly caught my attention was the revelation about “bonus depreciation.” Yonah elaborated on recent tax amendments that have elevated bonus depreciation to a staggering 100% for qualifying assets. This game-changing strategy empowers investors to claim the entire depreciation deduction in the very first year, potentially slashing tax liabilities and releasing funds for additional investments.

Our conversation seamlessly transitioned to the practical side of cost segregation, from the nuts and bolts of the cost segregation study to the tangible benefits it offers. Yonah underscored the importance of engaging specialized professionals to conduct comprehensive cost segregation studies. This study involves classifying components, cost allocation, and crafting a meticulous report that ultimately becomes your new depreciation schedule—an essential tool with significant implications, especially for recently acquired properties or those earmarked for significant renovations.

The timing of cost segregation studies was a key topic we explored. Yonah stressed the importance of conducting these studies promptly after property acquisition. He also shared a golden nugget of advice: if you're contemplating substantial renovations, it's wise to initiate the cost segregation process on the original asset before implementing changes.
As we neared the conclusion of our conversation, Yonah extended an offer that piqued the interest of listeners—a free upfront feasibility analysis for those intrigued by the potential of cost segregation.

If you're keen to explore this strategy for your properties, Yonah can be found on various social media platforms, including LinkedIn, Twitter, and Instagram. Alternatively, you can reach out through his website at yonaweiss.com or Madison SPECS (Specialized Property Engineering Cost Segregation) at madisonspecs.com.
To wrap up, this episode of “Get Paid for Your Pad” provided an immersive dive into the realm of cost segregation. Yonah's insights illuminated a tax strategy that holds the promise of reshaping the way real estate investors approach their financial endeavors. The allure of cost segregation lies not only in its potential tax advantages but also in its ability to equip investors with the tools and insights needed to make astute, forward-thinking decisions that amplify returns.

Jasper Ribbers:
All right, so we have some technical issues here. Jona did a great job of keeping this podcast going as my camera went off and my sound went off and my computer crashed and all sorts of things happened. So amazing job, that's one of the advantages of having a fellow podcast host on the show. But yeah, you did a great job of explaining everything as I was panicking and trying to figure out what's going on. But I did manage to kind of multitask and listen at the same time.

Yonah Weiss:
Mm-hmm.

Jasper Ribbers:
And I think you broke it down really, really nicely. Cause that was actually the next question I was going to ask is like, well, you know, what's the difference between like a, a fridge or a couch and the wall, right, or the roof. And so you, you kind of answered those questions already, which is awesome. Now, my next question was, what if we, what if we purchase during those 27 and a half years, right? What if we construct something new or we purchase,

Yonah Weiss:
Mm-hmm.

Jasper Ribbers:
we purchase. like new furniture or something like

Yonah Weiss:
Sure.

Jasper Ribbers:
that. Can we start appreciating that as well?

Yonah Weiss:
Yeah, and it's a very common thing. So excellent question. Anytime, as I told you before that your basis, what's called your tax basis or the depreciation amount that you can take is totally based on your purchase price. However, anytime you add more money into the property, whether that being buying new furniture, like you said, or doing some renovations or constructing, you know, a new unit is, you know, very common, like an ADU or something like that, that all that money spent can be also and should be depreciated as well. So it's on time, it's going to be added to your depreciation schedule separately. And the amazing thing about that is, is oftentimes, what you can do is actually write off the value of the thing that you replaced, meaning let's say you get rid of a couch and you're like, okay, well, the cost variation when we did originally, we said the couch was worth, you know, $500 or whatever, right? So now I can you know, essentially remove that $500 from my depreciation schedule. And what that does is it, it does not have any problem of being it's called a partial asset disposition, we can get into a little later. But essentially, what that does is, it does not come later on as a recapture is not added to your basis for the for the sale. So that's, that's an important point, meaning low is your basis. And when you're placing big things like a roof, you know, very expensive item, oftentimes, that can just be That'll still be on your depreciation schedule when it's not necessary. If you do a cost irrigation, you can break down the cost of what those components are. Then you can also remove it from your depreciation schedule when you replace it.

Jasper Ribbers:
Hmm. So for example, we, we just bought a hot tub for one of the units. Well, it's part

Yonah Weiss:
Mm.

Jasper Ribbers:
of part of the renovations, but let's say, let's forget about the renovation. Let's say we just buy

Yonah Weiss:
Right.

Jasper Ribbers:
a hot tub. It's $10,000, right? Does that mean now we, does that go into the five year or the 10 year? Like,

Yonah Weiss:
Yeah,

Jasper Ribbers:
how does

Yonah Weiss:
you

Jasper Ribbers:
that work?

Yonah Weiss:
can. Yeah, the hot tub, you can just add on to your depreciation schedule. And that would depreciate over a five year schedule. So that's, you know, that's another reason why it's important to know these things. So you can take the proper tax write offs. Otherwise, yeah, you're gonna spend the money. But the question is, can you actually write it down?

Jasper Ribbers:
And then what's,

Yonah Weiss:
Rated off.

Jasper Ribbers:
and then, you know, I'm thinking in my mind, I'm thinking, okay, so the things that are kind of durable,

Yonah Weiss:
Mm-hmm.

Jasper Ribbers:
those are those depreciate, right? But there's kind of like a fine line sometimes too, because what about, for example, uh, mattresses? Can

Yonah Weiss:
Right?

Jasper Ribbers:
we, can we depreciate those?

Yonah Weiss:
Yeah, any type of furniture, you know, it gets a little complicated when you're dealing with just like household items. But when it's real, like furniture, and there's there things that are replaced, you know, over that longer period of time, then certainly you can you can do that. So yeah.

Jasper Ribbers:
What about the linens?

Yonah Weiss:
Yeah, again, linens are going to be more like household items, you know, like cutlery and things like that. So those are not going to be depreciated. What you can if they're a business expense, anything you spend on your business, you can take as just a write off. And typically, if it's up to a twenty five hundred dollar amount, that's what's called the safe harbor that you're able to just simply take as a tax write off. So you don't actually need to depreciate it.

Jasper Ribbers:
Right. Okay. So I guess either whatever we expenses or whatever we purchase for our Airbnb's like either we can, we can deduct it as an expense or if it's a capital expenditure, then we can depreciate it.

Yonah Weiss:
Yeah, exactly.

Jasper Ribbers:
Got it. OK. Wow, this is fascinating. Yeah. I didn't know much about this. Is this something that is a worldwide concept, this cross-segregation, or is this a US thing?

Yonah Weiss:
It's a it's a US thing. So again, the I have found and I'm not an expert in worldwide taxation. But I have heard that you know, depreciation itself does exist in other countries. In many other countries, this may be called something else, like in Canada, it's called like cost allocation or something like that. But the concept of depreciate of cost segregation that I've never heard of in any other country. So depreciating certain items at different schedules and breaking it down like that. I believe it's unique to the United States, although, you know, someone may be listening to this and correct me if I'm wrong. So please do.

Jasper Ribbers:
Now let's talk about the practical side, right?

Yonah Weiss:
Mm-hmm.

Jasper Ribbers:
It's April 2024,

Yonah Weiss:
Ahem.

Jasper Ribbers:
right? We're all filling out our schedule ease and our schedule season and whatnot, filing our taxes. How do we practically do this? Like, do we need to spill out a special form or do we need to hire specialists to do it for us? Like, what's the best approach?

Yonah Weiss:
Yeah, so the it is something that needs to be done by a specialist. So there are companies like our company, you know, does this cost segregation thing. It's not something that most accountants even know how to do. And so because it requires an engineering component to it, and it's a very specialized area of the tax code, you really do need specialists to be able to do it. Now, there are certain accounting firms that will have cost segregation in house. So they're very large in the big four accounting firms. They'll have engineers in house and they're doing it all on their own. Other but 99% of accountants cannot do this. But it is important that you discuss it with your accountant to make sure that they understand it and they are being able to apply it when you do it.

Jasper Ribbers:
And so if let's say that I want to start depreciating and doing this cost segregation thing for my taxes in 2024, there's this thing that you mentioned called the cost segregation study. What is that exactly and how does that work?

Yonah Weiss:
it's a, like I said, an engineering study of a property breaking down the property into its components. And so what we're doing is creating this report that shows every individual component, like you like we said, like, you know, the furniture, the, you know, the pavement, the shelving, all different things, identifying how much of that no square footage or unit amount in the property there is, and then identifying the value of those components. And then create a calculation to add that all back up, reverse engineer, essentially this to the purchase price, because it's something that happens. You may buy a property for 2.75 million dollars, but it's really, you know, only worth like if you were to, you know, replace it and the replacement costs may only be a million dollars or it may be $5 million. You know, you, so there's, there's a lot of times discrepancy, but the conservation report needs to add up all of those components to equal that purchase price. And so there is a you know, calculations that are involved in doing that. And this report creates at the end of the day, also, the IRS has rules, what needs to go into it, there's a whole numbering system, there's a whole nomenclature that needs to be used, you have to identify and refer back to the tax code, every section of the code to all the different components and where they get that from, etc, etc. However, there's really one page what we're doing in that whole report, that's your new depreciation schedule. And so that's Essentially the number that you can take the amount dollar amount that you can take is your depreciation deduction and apply that to your taxes year after year

Jasper Ribbers:
Is there a best time of the year to do this study? Or does it not matter?

Yonah Weiss:
It doesn't really matter. I mean, it needs to be done before your tax filing for, for the property, you know, so for example, right now we're holding in 2023, but there are still people that are, we're, you know, in the midst of getting a lot of costings done for 2022 taxes who are on extension and are filing in September or October. So it still can be done at that time. Most people like to get the cost segregation done in the first year of ownership, which means you know, just to get it set up in the right way. And especially if you're planning renovations down the road, you make sure to get the conservation done on the original asset at the time of purchase. So it is important to get it done before, you know, before you do those renovations and as soon as possible after closing. It's not necessary, like I said, but it is, it does help in many ways.

Jasper Ribbers:
And then once you do, so let's say I purchased property 2.75 the week after I purchased it, I do the study. So I know my exact schedule for the next 27

Yonah Weiss:
Right?

Jasper Ribbers:
and a half years. As long as I don't buy anything that's durable, I'll be good for the next 27 and a half years essentially. I don't have to do another study again few years later, right?

Yonah Weiss:
Correct. Yeah, it's a one time thing. You set it up and you're good to go.

Jasper Ribbers:
unless I do start doing capital expenditures, right? If I buy new furniture, do I have to do a complete new study or can I just kind of add it to it?

Yonah Weiss:
Right, usually you can just add it to it and we're just going to update the study to include those new those new expenditures. So you're not going to have to redo the whole thing. It's just kind of update. And in many cases, if it's just like small things, or small purchases, you don't even need to do a cost segregation because the purpose of the cost segregation, we think about we're segregating out these costs, all these different components, you know, hundreds and hundreds of parts from the whole of the property purchase. But if you're just, you know, buying a hot tub, That's just a write off. That's a line item. You know exactly what that is, what that cost. You don't need to segregate that out from anything. It's already segregated on

Jasper Ribbers:
Mm-hmm.

Yonah Weiss:
its own because it is, you know, an individual cost.

Jasper Ribbers:
Right. Okay. Yeah, that makes sense. So it only makes sense to do a new study if you're doing like massive renovations, I guess.

Yonah Weiss:
Correct, exactly. Because then there's going to be a lot of different moving parts, a lot of things going on.

Jasper Ribbers:
What's the cost of a cost segregation study and can you deduct that from your taxes?

Yonah Weiss:
Yeah, so the cost of getting it done is a tax write off and you can deduct that from your taxes like any other business expense to get it done. It's varies from size and type of property. As we mentioned earlier, you can do this on single families on multifamily on commercial properties, you know golf courses right mobile home park self storage office industrial retail, you name it any type of property. However, it is going to be contingent on the size and the scope of work involved not contingent on the tax savings meaning. even if you buy a property for a million dollars or $10 million, the cost is probably gonna be pretty much the same, but the tax benefits are obviously gonna be much greater the more expensive the property is. Typically right now, it can be anywhere between, I'd say like three to $10,000. That's kind of the general range for most types of properties.

Jasper Ribbers:
Mm-hmm. And then what are some things that I don't know that I don't know if that makes sense?

Yonah Weiss:
Yeah, there's a lot that we don't know, you know, we don't know, we don't know. I think the most important thing to remember when you're dealing with constipation is just to have that discussion with your accountant, whoever's doing your taxes, so that they're on board with it, that they understand it, believe it or not, there are many who are not real estate specialists. And so they may not be so aware of all the different, you know, strategies that are in the tax code as major and as important as they are. they sometimes get overlooked by people who are not focused on looking, you know, out for your best interest. They're just kind of sometimes just punching numbers and, uh, or as a accountant friend of mine says, you know, be encounters, you know, they're, they're not there to, to give you strategic advice of what you should be doing and what you shouldn't be doing. Um, they're, the other important thing is that every property is different. Okay. Every single property is unique and is different. And so the benefits are going to, you know, the range of benefit is going to vary. And so what's important to do is get, we always offer a free upfront feasibility analysis so we can show an estimate, based on the specific property, what the potential tax savings would be. And therefore you can know ahead of time before spending even a dime, what you're gonna be getting by doing a conservation study. And so that's an important educational piece because you can make an informed decision.

Jasper Ribbers:
Does it require the cost of the configuration study, does it require somebody to be physically at the property?

Yonah Weiss:
Um, typically it does require somebody to be physically out of the property. Who that is, is up for debate. Meaning what I mean by that is, you know, over the years, we always sent our engineers physically to the property, do a site tour and, uh, you know, walk the property, take pictures, video, whatever, um, measurements and with COVID, you know, a few years ago, we were kind of. had a challenge, how can we send, we couldn't send anyone anywhere. People still needed the concentrations done. So we, we started doing a lot of them remotely just through like a video call. So someone had to be there to walk through with the engineer on the other line, but it didn't have to be the engineer themselves actually going out and spending the time traveling there and back, et cetera. So yes, it usually does require that we've to this day, we've continued to do that, which means I'd say the majority of the studies we're doing right now are still being done remotely.

Jasper Ribbers:
some good things that came out of COVID, right? Some new creative

Yonah Weiss:
And, you know,

Jasper Ribbers:
solutions.

Yonah Weiss:
yeah, you know, a lot of people in the businesses had to pivot, and they had to figure out ways to keep things going and to figure out new ways to utilize technology that maybe they weren't doing it before.

Jasper Ribbers:
Yeah, yeah, 100%. Awesome, well, this is very interesting. Before we wrap this up, is there anything we haven't discussed that you think will be important to mention?

Yonah Weiss:
Yeah, well, we didn't we did cover the bonus depreciation. I think it's a huge, huge part that a lot of people don't understand don't know about. Like I said, every property is different. So if you're thinking, well, you know, I own a mobile home park, can you do it on that? Yes. Yeah, I own self storage. Can you do it on that? Yes. But again, they're going to be different things. And depending on what's in the property is also going to depend on what can be depreciated faster. So but yeah, I mean, there's a lot that goes into this. The probably the most another really, really important thing to mention over here, which we didn't discuss is something called the real estate professional status. And the reason why this important is because constrogation depreciation is a great tax deduction. However, there are limitations of how you can actually use those deductions. Okay, unfortunately, you can't just use these deductions against your W two to reduce your you know, full time income. unless you are what the IRS considers a real estate professional. So if you have a full-time job in real estate, you own properties, you rent them, you operate them, you manage them, you buy them, etc. Renovate, then you're considered a real estate professional. And there are a couple other criteria. But if you or your spouse qualifies that then you're great, you can actually use construgation and these depreciation deductions not only to offset your property, your rental income, but also to produce any other source of income you have. Whereas if you're not a real a lot of people out there, we may have jobs and we just, you know, own real estate or invest in real estate on the side, then you're going to be limited to use this depreciation deduction to only offset your rental or property income. Okay. And so

Jasper Ribbers:
Mm.

Yonah Weiss:
that in itself can be great because essentially any money you're making from your properties essentially will be tax free. However, you know, it's just important to know how much of that you can use against your active income as well.

Jasper Ribbers:
Right, okay, so that makes sense. And so how do we know if we qualify as a real estate professional?

Yonah Weiss:
Well, have a conversation with your accountant. It's essentially just a line you write out when you write your occupation, like what, that will determine whether you do it. There are essentially two main criteria the IRS considers. One is that you're spending more than 50% of your working time during that year, materially participating in the real estate trader business. And so what that can mean, like I said, the things I mentioned before, operating, managing, buying, renovating, et cetera, brokering, even a real estate broker's consider that. And the other condition is it has to be a minimum of 750 hours a year. So you can't just, you know, not work and also get this status.

Jasper Ribbers:
Okay, that makes sense. Awesome. Well, I appreciate you coming on the show here and explaining all this stuff. I definitely learned a lot. If people are listening to this and are interested in working with you on this, what's the process?

Yonah Weiss:
Well, like, like I said, we always like to run a free upfront analysis. So feel free to reach out to me, you can find me on all the social platforms, you know, very active on LinkedIn, on Twitter, Instagram. And you can also find me at my website, yona Weiss calm or our company, which is Madison specs. Madison like the president specs, which is SP CS, it's an acronym, but has a double meaning as well. And We'll run that free analysis and happy to speak with anyone if you have any other questions. It's a pretty straightforward, simple process once you know what it is. And again, going back to how we started the process, the podcast, it's all about education. It's about learning this. And just like you've if you've listened this far, thus far in the show, you've probably learned quite a bit about cost segregation. And so, too, there are so many other things out there, you know, even in real estate that. are really game changing when you just you learn about them.

Jasper Ribbers:
Yeah, 100%. Awesome, and I appreciate you coming on. And to the listeners, hope you enjoyed this podcast. Hope you learned as much as I did. I hope the technical issues we had wasn't too disruptive for the listener experience, but we'll make sure to fix that for next time. So, Jonah, thanks so much. And to the listeners, thank you, and we'll see you next time.E