Cost Segregation updates for 2025 With Brian Kiczula - Episode 512

With cost segregation, I recommend that clients do set up a cost segregation study when they acquire a property. And the reason why I recommend that is because you're setting up the fixed asset schedule correctly. We can really catch any errors that may pop up. You know, maybe the tax advisor wasn't, they didn't understand the market and they had the wrong land allocation. We can walk them through that in the year that they acquire their property.

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Welcome to Streams to Impact, where we uncover the secrets to build streams of success while living a life of meaningful and purposeful impact. I'm your host, Dr. Allen, and today I am thrilled to introduce a powerhouse in the world of cost segregation and depreciation acceleration. Brian Kiksula has been helping real estate investors navigate the changing real estate market since 2002. He's an active member of the American Society of Cost Segregation Professionals and founder of Cost Seg RX. Brian, Brian has overseen thousands of studies on properties ranging from single-family homes to large senior facilities. Brian specializes in helping investors maximize cash flow through the strategic tax deductions. So Brian, your journey, much like Equus, has been one of transcending boundaries and inspiring others through your work. So can you share with us the moment or the experience that first sparked your passion And set you on the path to creating streams of impact in your life and the lives of others. Sure.

So, I've been active in the real estate market since 2002. Primarily, mortgages and real estate was my background. But in 2019, I had a major health— let's just say a major health thing pop up that derailed me, and I literally had to stop working and, and go on disability for about a full year. And during that time, I had to really scratch my head to, to figure out how I was going to re-enter, you know, the workforce, the market, to be honest with you. Was I going to get back into real estate mortgages, um, as a full-time career? And, you know, I had some time to think about it, and the answer was no. I did have a background in, you know, reviewing tax returns and certainly real estate. So, when I had a let's say, reinvent myself. You know, I've— I decided to start doing tax returns, of all things. I was like, I know what I'll do, I'll do taxes. So I did that for a while and realized that taxes weren't necessarily something I wanted to do full-time because I was trying to, let's say, reset my, my life and really turn down a lot of the noise that That comes with, you know, being active in the real estate markets. And then the same thing was with taxes. But what I found at the time was, okay, well, I understand appreciation and real estate, and now I've got a background in taxes, and I stumbled into cost segregation, and I've been, I've been just plugging away at it ever since. So it's been an interesting journey.

Interesting. Yes, interesting. I also spent some time in taxes myself and didn't find it particularly enjoyable, but kind of a necessity there. Well, Brian, tell us, what is cost segregation?

Yeah, so that's the thing is the why, you know, why do you do cost segregation? And The reason why that you do cost segregation is to really take advantage of one of the, you know, the 5 aspects of owning real estate. And that's going to be depreciation. And it's really going to be maximizing the depreciation on the assets or the real estate that you're buying. So what I do is I'll go into a property. Let's say you were to buy a multifamily property or a storage facility. I'll go in and I'll look at the individual assets and I'll reclassify them. So we're not taking the entire acquisition over 27.5 years or 39 years, but we'll break it down into its individual components, whether it's site improvements, interior improvements, and then the structure of the building itself. So we're doing that to accelerate So give us a little bit more detail there on really how that works.

Do you—

I don't know, what do you do? Do you go in and count the number of outlets or the number of light fixtures? How do you do this?

Well, I'm smiling because the answer is yes. I tell my friends and my wife that I count light bulbs for a living. And it's really, you know, it's accurate. You know, I'll go out to a site. I was just up in Nashville last week, and I'm measuring grass, I'm counting the number of trees, you know, I'm measuring the square feet of the driveways. I'm really identifying the exterior and interior assets so that we can allocate them correctly. So yeah, I count light bulbs and outlets.

Okay.

Yeah, so that's exactly what I do.

So, I mean, you just said you're measuring the grass and counting the trees. I wasn't aware those were depreciating assets.

Yeah, so that's exactly right. A lot of folks don't realize that, you know, anything that's outside of the footprint of your building, or I shouldn't say everything, but most of the items are going to be reclassified as 15-year property. So if you go in and you, let's say you're building out an apartment complex, and you're putting in, you know, new landscaping, you know, new trees and bushes, if you were to, you know, run a, you know, run the bar test on it, you know, you're making a betterment to that property. And because it's a betterment, you really need to capitalize it. And are you going to capitalize it as a 39-year asset? The answer is no. It'd be a 15-year site improvement. And I think a lot of, a lot of folks miss that. Or what happens is their tax preparers or CPAs will just lump it in as an expense. But you have to think about, you know, if you're building, let's say, uh, you know, a hotel and you're putting in hundreds of thousands of dollars in landscaping, then you really need to allocate that properly. Yeah.

Yeah. Uh, well, I mean, I, I knew any Any man-made structure was depreciable, but I didn't realize that landscaping fell under that.

It does.

It's typically—

it's not going to be— we're not going to take items that were— so let's say that you have an existing oak tree on the property that came with the land, then, you know, that existing oak tree that's 100 years old, you know, it's going to have to go to the the land allocation. But if it's, if it's something, if it's an improvement that you're making, then certainly so. And all of the man-made assets as well. So we're talking about the exterior of the building right now. So really what we're talking about is sidewalks, driveways, irrigation, exterior lighting, site poles, signage, and the list goes on and on. And really, we look to IRS guidance when we're doing cost segregation studies to make sure that we're really allocating these items correctly. And, you know, I just reference, you know, guidelines. You know, that was part of my previous world, reviewing underwriting guidelines. And it's really similar in cost segregation. You know, that's exactly what we're doing.

Okay.

Well, what types of properties qualify? For cost segregation?

So it has to be an investment property. So any type of an investment property. So real estate. So you have your— when you acquire a property, whether it's a car wash or a storage facility or, you know, you name it, we're going to take a look to see what you really bought. So the first thing that you have to do is determine the cost basis. What did you pay for the asset? What did you buy the property for? Then you have to figure out, you know, what is the land allocation? You know, and that's a, you know, that's a difficult question to answer a lot of times. There's about 6 different methods that I recommend property owners use to determine the land allocation. And once you carve out that non-depreciable asset, the land, then you can really look at the other assets and start carving them out. And, you know, It's definitely an exciting job counting light bulbs and working on Excel spreadsheets because you have to remember it all starts with a spreadsheet. You're building, you're rebuilding that property one asset at a time to really give the owner a good sense of what they purchased and assign the accurate tax life to it.

What about Franchises that are renting the property rather than purchasing it, is there any benefit to them doing cost segregation, and do they even qualify for that?

Yeah, so what you're asking in this case, or let me restate, and if I'm wrong, let me know, is you're a property owner and you have a triple net, and you've got a tenant in the property that's doing all of the improvements. So in that case, as the, the property owner, you would not be able to depreciate those assets because the, the tenant is depreciating. They're, they're doing the, the tenant improvements, you know, if they're paying for them. Really, it comes down to who's paying for the assets.

Okay.

If it's the, the owner of the property is paying for them, then they're going to be their assets in the beginning. But if it's triple net and the The tenant's paying for all the improvements, then the tenant would be able to take those costs. Now, what's interesting though is let's say that there's a— the tenant vacates and the owner sells, then now the owner owns— the new owner or even the old owner owns all those assets because, you know, they're not taking the fixtures with them, you know. Most lease agreements say that that has to stay with the property.

So, so does it— is it beneficial for a franchisee to cost segregate? You know, they're not the owners, or—

They're not the owners of the property or like the, the actual real estate. They're only the, the franchisees.

They're tenants. Yeah.

So what they're going to want to do is talk to their CPA and they're going to want to look at all of their assets and they'll, they'll do a cost segregation study, but they're not going to, they're not going to include the shell of the building.

Right.

They'll take all of the buildouts that they're doing and they're going to depreciate them. And I'm not a CPA. So this entire conversation, if you're listening to it, I would recommend that you talk to your CPA or your tax advisor and look at your individual Situation to make sure it makes sense for you.

Yeah. And I'm sure it does vary from entity to entity there.

It gets complicated when you're looking at lease agreements. It also gets more complicated when you're looking at nonprofits. You know, it's a whole different set of rules. So you really have to, you know, dig in and understand what's going on on the property. And I'd say that's one of the challenges that I have because I work with real estate investors across of the country. And I know this may sound, um, I don't know, it just sounds— it is what it is. But a lot of investors, when they're investing in, uh, a lot of assets, they don't always know what they're acquiring. You know, they'll buy, you know, you know, dozens of properties per year, maybe quite a bit more than that.

Mm-hmm.

So then for me, it's, you know, really digging through it with their accountant to identify the assets that they've Acquired, so we're properly allocating them.

Yeah. I mean, the benefits obviously are the fact that it is just accelerating the depreciation. It's separating items out that can be accelerated.

What—

so what are the drawbacks of cost segregation? Why would one not want to do it?

If you were planning on selling the property in the short term, so if you were only holding the asset for a year or 2 and then you knew you were going to sell it, if you were to do a cost segregation study and then accelerate the depreciation, so you're pulling forward all of the short-life assets, the 5, the 7, the 15-year property, and then you sell it, you would get hit with depreciation recapture. So you would not want to do a cost segregation study in that case. So it's really understanding the asset you're acquiring and your timeline, how long you're planning on owning that property. I would encourage, you know, Again, I'm a cost segregation professional, so I would encourage, you know, all real estate owners to do a cost segregation study. And the reason why is for partial asset disposition. So let's say you acquire a property and year 3 goes, you know, year 3, you know, you own the property and you find out that you've got to replace all the HVAC units. So HVAC units are part of the HVAC system. You have to depreciate them over 27.5 or 39 years. But if you have to remove those items, dispose of them, you know, a couple of years in, then you can take a partial asset disposition for long-life assets. So it's not always, or it's not only about depreciating or accelerating the depreciation on short-life assets, but it's being able to take advantage of partial asset dispositions, you know. if you have to replace your roof, you know, or let's say you, you know, you get hit with a hurricane, you know, or a flood, you know, and you've got to replace those assets. You don't want to have them on your books for, you know, 27.5 years. Dispose of them in the year that, that you lost them. And then, you know, replace them and start depreciating it all over again. And if you have that study, then, you know, you have that You have that information.

So whether you actually applied the cost segregation, you have the study in the event of a fire, a hurricane, flood, whatever.

Yeah.

Yeah, that's good. Good to know that. So bonus depreciation. Well, I mean, first of all, is it going back up to 100% now that Trump is back in office? I haven't heard, have you?

Well, they tried to get bonus depreciation bumped back up to 100% last year. The bill failed in August, it didn't go through. You know, I mean, I do think that we're going to see bonus depreciation, if not go back up to 100%, we'll see some changes. You know, the Tax Cuts and Jobs Act really opened up the doors to bonus depreciation back in 2017. So it was 100% bonus depreciation from, you know, September 28th, 2017 through the end of 2022. And every year we're starting to see it phase out.

Right.

You know, 2023 was at 80%, 2024 is at 60%, and it's going to phase all the way out. But with the new administration, I definitely think that we'll see some Uh, changes to bonus depreciation. And I think there's a lot of good reasons for bonus depreciation. You've got to go on either side of the fence here, but what you allow investors to do when you allow them to take bonus depreciation is it really allows them to make the investments that they might not otherwise make, because now they know that they'll have that depreciation to help offset taxable income, whether it's active income or passive income, and they're more willing to make improvements to properties. And, you know, I see investors do it all the time.

Yeah.

You know, if they know they can, you know, get, you know, a large chunk of their investment back, or it'll offset other taxable income, they'll make the property— they'll make the improvements to their investment properties, whether it's a car wash or a You know, single-family home. So I do think it'll come back, but don't quote me on that.

Well, I mean, just cost-wise, is there kind of a break-even point on who, who should even be thinking about cost segregation? I mean, if you own one single-family home as an investment property, is it worth the cost of doing a study?

You know, I always tell clients, whether you own one property or you own hundreds of properties, send over your closing statements or your fixed asset schedules. Let me take a look at the individual properties. I'll work up an estimate of benefit, send it back to you, and then you could take it to your tax advisor and then review it with them to make sure it makes sense. So I think getting the estimate You know, an actual— have someone put their eyeballs on the property. So you don't want to use an estimating application. You want someone to, you know, pull up satellite images and, you know, really look at the property, whatever's available online, work up an estimate, and then make that decision, you know, with your tax advisor. So I say yes, I do studies for clients who own, you know, one single-family home. You know, it's, it just depends on their individual tax, you know, scenario. I don't know what it is. You know, I don't know what they're trying to achieve with the study as far as, you know, they're trying to bring down their taxable income so they can, you know, I would just say get an estimate and review it with your tax advisor.

Yeah. Well, Brian, tell us about Cost Seg RX and How is it that you work with clients?

Yeah, so Cost Seg RX, you know, one of the really nice things that I have is I get referred— past clients send me referrals. A lot of CPAs that I've worked with in the past will send me referrals, and it's as simple as literally getting an email Or a phone call asking me to work up an estimate of benefit. And that, that's really the way that, you know, I work with clients. It's, you know, it's, it's, uh, it's, it's nice. Like I said, my, my past world was, you know, real estate and mortgages, and everybody has a mortgage guy or a real estate agent that they work with. But if you find something really boring to do Count light bulbs, then, you know, you'll— you, you know, you're probably going to be one of a handful of people, you know, in the area that can actually do the studies. And I just tend to get, you know, repeat and referral business from all across the country. And it's really cool seeing different projects, you know, whether it's, you know, a new commercial building that, you know, someone built and they're putting in restaurant and, you know, different mixed-use, whatever it is. I get to walk through those projects and, you know, really look at them. So yeah, that's it. So repeat and referral business primarily.

Another question here is, can you do a cost segregation study on a property that was purchased in a prior year, or does this work only for new acquisitions?

Yeah, so with cost segregation, I recommend that clients do set up a The— a cost segregation study when they acquire a property. And the reason why I recommend that is because you're setting up the fixed asset schedule correctly. We can really catch any errors that may pop up as far as, you know, maybe the tax advisor wasn't— they didn't understand the market and they had the wrong land allocation. We can walk them through that in the year that they acquire their property. Now, a lot of clients are concerned that if they do You know, you know if they can do a study on a property they acquired, you know, in 2019 or 2020. The answer is yes. You can definitely do look back studies. And what we're doing when we're doing a look back study is the first thing that I'm going to ask for is I'm going to want to see a copy of your fixed asset schedule or depreciation schedule, so I know what the in-service date was on the building. I can see what the building basis was, and I know what the accumulated depreciation. you know, has already been. I know what you've taken. So then when I'm working up the estimated benefit, I can take that into consideration. One of the concerns clients have when they're looking at doing a lookback study is they're concerned that they're going to have to go and amend a prior year's tax return. And you don't have to amend a prior year's tax return. You file, it's called a Form 3115. It's a change of accounting method. And what you're doing is you're pulling forward the missed depreciation Using a 481 adjustment. You're just pulling forward that catch-up depreciation. It is important that you work with a tax professional who understands how to complete the form. And you can work with the cost segregation specialists that can, you know, work with your tax preparer to make sure that the form's completed correctly. And yeah, so I do lookback studies All the time, and it's, uh, it helps out clients tremendously. It really does.

I don't know how many people actually are aware that they can do that. What, what percentage of your business is look back?

Um, you know, I would say, you know, it's probably split 50/50. I mean, I don't have any number, but I mean, again, it could be the way I, you know, operate too, is I do ask clients if they do have properties that they've acquired in previous years, you know, to send over their fixed asset schedules and I'll review it. And again, it's just a matter of, you know, them setting up that, you know, or having the conversation with their tax advisor to see if it makes sense for them to do it. And then also, you know, for them to understand, you know, it's how much longer do you plan on holding the property? Are you planning on exiting that property? And then if you are, are you looking at doing a 1031 exchange? So there's a lot of questions that just have to be answered.

Well, having been in tax prep myself, I would suspect that there are a lot of properties that could benefit from a look-back study, being that, well, there's not a whole lot of qualifications to be a tax prep.

So, uh, with that said though, what, what I really respect about, uh, whether you're a tax preparer, an enrolled agent, or a CPA is just the, the knowledge they have to have in so many different— you know, it's just so encompassing. So, you know, I literally work on one page of the tax return. It's your fixed asset schedule. That's what I focus on. So I work closely with CPAs that are, you know, they're dealing with insurance and, you know, gains on the sale of stocks. And, you know, just, there's just so many things.

Yeah.

So yeah, the other, the other big piece, you know, that the client needs to know is, you know, how are you going to use the depreciation that I'm providing? You know, are you using it to offset either active income or passive income? Because most real estate Investors, they're passive, so they don't have an active role, uh, in the real estate. And it's, it's crazy when you look at, you know, the way the guidelines are written, or, you know, the publications are written. You know, if you own one rental property, even if you self-manage that property, that's still not active income. It's a passive income source. So the depreciation that we provide, or I provide, is passive in nature. It can only offset passive income. So that's why I recommend that clients take the estimates, run it by their tax professional to make sure it makes sense for them to move forward so they really have, you know, the return on investment for doing it. Most of the time they do. I mean, the answer is yes, almost all of the time. Now, if you're an active real estate professional, you're You know, you're a real estate professional, which doesn't mean that you're a real estate agent. It just means you're involved in the real property business. Then all of a sudden, you know, it's really powerful because it can help offset active income. So that's, you know, that's, that's where it really becomes powerful.

Yeah. Well, Brian, what are Your last words of wisdom.

My last words of wisdom. I would say just reach out to me if you guys have any questions regarding cost segregation. It's like most things, you only care about it when you need to, so it's just-in-time learning. So just know that if you have questions, uh, you know, feel free to reach out to me. I encourage clients, if they're looking to buy property, they're getting into you know, real estate investing, and they're going to go shopping for whether it's a single-family home or they're going to buy a hotel, give me a call and let's look at it. I can work up an estimate of benefit ahead of time. You can talk to your financial advisor and your CPA prior to making the acquisition. That way, once you do move forward with the purchase, you'll have a pretty good idea of where things are going to land. So my advice or word of wisdom is to really reach out Well in advance, because you know I'm certainly here to help, and I can answer any questions you know that you can. And if I can't, I could certainly look for experts and forward forward you their contact information, and hopefully they can they can help you out.

So you can get hold of Brian at his website costseg rx dot com. That's cost.

C-O-S-T, S-E-G, S-E-G, R-X dot com.

So Brian, thanks for being with us. And Enlightened Investors, as always, it's been a pleasure having you with us. Please take a moment to like, share, and subscribe, and we'd be really appreciative if you could leave us a rating and a review. So until next time, live abundantly, and we'll see you in the next episode.

Thank you.

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