949-392-1999
SHOW NOTES FOR EPISODE 403: HOW TO SAVE BIG MONEY WITH COST SEGREGATION
One of the great advantages of real estate investing are the amazing tax benefits. But did you know you can save literally hundreds of thousands of dollars on your taxes through a special legal depreciation technique called cost segregation? In this podcast episode, cost segregation expert and real estate investor Yonah Weiss shares this incredible tax strategy that has saved his clients tens of millions of dollars.
What You Will Learn
- What cost segregation is and it can save you thousands in tax benefits on just one property
- How you can get the benefits of multiple years of depreciation in just one year
- Why cost segregation works best for properties valued at over $1 million
- How a little known new tax regulation can generate “bonus” depreciation in this year’s taxes
- What special bonus tax savings there are for value-add multifamily investors
- Ways to to get tax deductions on land improvements like landscaping, parking lots, fencing and more
- What “accelerated depreciation” is and how it can benefit you today
- How to save thousands in taxes today on properties you’ve already owned for a while
About Our Guest
Yonah Weiss
Yonah Weiss is a powerhouse when it comes to property owners’ tax savings. As Business Director at Madison SPECS, a national Cost Segregation leader, he has assisted clients in saving tens of millions of dollars on taxes through cost segregation. He has a background in teaching and a passion for real estate and helping others.
More About Yonah
- Yonah first exposure to real estate was through his parents, who owned a number of out-of-state rental properties
- Was a teacher for 15 years
- Raising a family with 6 children
- Stumbled into real estate through a number of friends
- Got his broker’s license
- Worked in commercial mortgage industry
- Wanted to learn all he could about real estate
- Do a few fix ‘n flips with a partner but decided that was not for him
- He was more interested in commercial real estate – specifically multifamily
- About 3 years ago, was hired by Madison Commercial Real Estate, working in the Cost Segregation Division
- Working in cost segregation gives him a very close view of the commercial real estate industry
- As a cost segregation expert, he interfaces with property owners and investors
- He learns directly from them about what they are going through and their struggles and tries to help them overcome their challenges
- This has inspired Yonah to invest himself
- He is currently working on some multifamily deals with partners who have more experience than Yonah
- He hopes it will open a new chapter in his journey
Cost Segregation Defined
- There are a lot of misconceptions of what cost segregation is and isn’t
- The bigger the property, the more beneficial cost segregation is
- Single family home investors probably don’t know about it because it is just not relevant to them
- It has a strange name for a very cool tax benefit
- Cost segregation means “component segregation”
- It is a way to accelerate depreciation
- Depreciation is a tax deduction that every property owner gets as a tax write-off
- Depreciation sounds negative, that a property goes down in value
- But it’s really a very positive thing
- It’s a concept that says, since a property goes down in value as time goes on, when you buy a property, even if it’s an old property, you get a depreciation tax write-off
- That means you are able to write-off the entire value of a building’s purchase price, minus a small amount for land value (land does not depreciate), over the course of 27 years or 39 years if it a commercial property
- You get a huge tax write off, but it is a little bit every year
- You gets this tax write-off based on the fact that you bought a new property
- It’s actually kind of hypothetical because it starts over every time you buy a new property
- For example, if you buy a new building for $1 million dollars, over a 27 year period, you can write-off $30,000 in taxes a year – a tax deduction from your income tax. If you sell the building to someone else 5 years later for $5 million, that person can start all over and can now deduct based on the new purchase price
- This is one of the biggest tax benefits out there today
- But, it gets even better…
- The IRS says there are certain things in a property that actually depreciate on a much faster schedule, meaning you can take MORE deductions on specific items on the property AT A FASTER RATE
- So, for example, personal property or things in the building not connected to the structure depreciate on a 5 year schedule, which means, sometimes 20-30% of the property you just purchased can be written-off over a 5 year schedule as opposed to a 27 year schedule
- So, on a $1 million dollar building, that means you can deduct $70,000 instead of just $30,000
- Items that could be cost segregated include:
- Furniture
- Fixtures
- Appliances
- Carpets
- Cabinets
- Counter tops
- For land improvements, you can get a 15 year depreciation:
- Plants
- Trees
- Landscaping
- Pavement
- Parking lots
- Sidewalk
- Curbs
- Retaining wall
- Fencing
- Golf course – one of the best write-offs because it’s usually 70-80% and improvements
Professional Assessment Required
- In order to qualify for cost segregation, the assessment must be conducted by a trained professional and/or engineer to qualify deduction items and calculate the values to be deducted
- They will do a full tour, take pictures and measurements of everything in the building
- Jonah’s company has engineers on staff that will do this, who know all IRS regulations pertinent to cost segregation and can generate a report based on their calculations, square footage and value
- His company has “industry standard values” for everything/all assets you would encounter in an apartment building and local standards
- For newly constructed building, they would look at invoices of items purchased
- It is extremely difficult – that’s why IRS makes you jump through all the hoops
- Most regular owner/investors would not be able to do this on their own
- There is something called the “Cost Segregation Audit Technique Guide” created by the IRS
Value-Add Benefits of Cost Segregation
- If you buy a property and do improvements after you purchase the property, the items associated with those improvements are additional items that can be deducted/depreciated IN ADDITION to the existing items in the building when you bought it.
- The engineers will review all of the improvements and upgrades in your value-add and update your initial cost segregation report
Biggest Mistake(s)
- Doing cost segregation does not raise a red flag with the IRS
- However, if you ever get audited, and you don’t have a proper cost segregation study with all the details the IRS requires, including references to the tax codes that support the deductions, you could be in big trouble
- Or, if you have someone who is not qualified doing the report who allocates more than they should. That can also get you in trouble
- Also, it’s a mistake to try to do cost segregation with properties worth less than $1 million.
- The benefit of cost segregation is the percentage of depreciation that you can front load. With smaller depreciation amounts, it’s not worth the costs involved to generate the report.
- It really only makes sense with properties purchased for over $1 million
- The cost of the studies alone is over $2,000
Where to Find the Right People to do a Cost Segregation Study
- Most of the large accounting firms (Deloitte, Ernst Young, etc.) have professional cost segregation experts/engineers on staff
- Most smaller CPA and accounting firms don’t have people on staff that can do cost segregation
- You only want to hire experienced professionals with a solid track record (his company has done over 16,000 studies in every asset class in all 50 states)
New Regulation! 100% Bonus Depreciation!
- A new law passed in the Tax Reform of 2018
- Instead of doing the regular cost segregation where you are front loading depreciation deductions (20-30% of the value of the property) to the first 5 to 15 years, you can now take the ENTIRE AMOUNT deduction in year one!
- On a $1 million dollar property, you can literally take $200-300,000 deduction tax write-off in the first year!
- There was something similar before where you could get a 50% deduction but that was only for new construction but this law is for all qualifying deductions!
Cost Segregation Success Story
- Yonah knows a guy in Southern California who is the number one residential broker in his county
- He didn’t know anything about cost segregation
- Started buying rental investment properties to generate passive income and to invest some of his commission money
- He had made over a million dollars in real estate commissions the previous year of which he paid over $350,000 in income tax that year
- In 2019, he bought a 26-unit $4.5 million apartment complex in Ventura County – He put down $700-800,000 to purchase
- Johah and this man did a cost segregation study and found 20% of the property could go into the 5 year accelerated depreciation and another 10 percent in land improvements went into the 15 year depreciation period – over $1 million in bonus accelerated depreciation, of which he decided to take all of it in year one!
- He paid zero income tax liability when he filed his 2019 taxes
Cost Segregation Can be Done Retroactively
- If you’ve owned a property for a while, you can retroactively do a cost segregation study to benefit this year
- You can go back and catch up on the “missed depreciation” in this year’s taxes
- For the biggest advantage, though, you really only want to go back to the first 5-6 years of ownership and get the credit in your current tax returns
- This is the best way to do it so you don’t have to go back and amend tax returns – just complete and attach IRS form 3115, showing a change of accounting method
How to Reach Jonah
- LinkedIn: https://www.linkedin.com/in/cost-segregation-yonah-weiss/
- eMail: Yweiss@madisonspecs.com
- Website: www.yonahweiss.com
Free Property Analysis
- Yonah’s company offers a free analysis of any property to see what your potential savings would be using cost segregation
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, iHeartRADIO and Spotify and Subscribe, Rate & Review our podcast. This will greatly help in sharing this podcast with others seeking to learn real estate investing as aCBRE means to achieve a successful retirement.
Check out our other podcasts at olddawgsreinetwork.com.
Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.
Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com
