A $10 million capital gain can be offset using cost segregation on real estate. Instead of spreading a $3 million building deduction over 39 years, breaking it into components like lights and flooring lets you write off much more in the first few years, potentially recovering the full amount quickly.
Michael got a $10 million paycheck selling a company. So when you pay, when you, when you declare $10 million income, you got to pay $3 million in taxes. How do you avoid that? Go spend it on something. Instead of spending that $3 million on paying taxes, he spent $3 million on buying a building. So when he bought the building, the IRS says that you can write off portions of that building as deduction, right? You can deduct part of it. So when he bought it, the IRS says you can only write off, you have to take the $3 million and divide it over 39 years. And then you can write that off every year for 39 years. So if you take 39 and divide that by $3 million, it's only like $150,000 a year. Michael's got a $3 million tax bill. So he spent that on the building, but he only got a $150,000 deduction. Does that make sense? No. Well, does it? Does it? Like he still has to, he only gets to deduct $150,000 instead of $3 million. He's got to figure out where to come up with another $3 million, another $2,900,000, $2,800,000. Right?
So when you say tax deduction, for example, if you owe $200,000 in taxes, but you invest So if you invest $150,000 in real estate, that means that now you only owe $50,000 in taxes?
No, because the $150,000 is divided over 39 years. So $150,000 divided by 39.
Okay, that's $3,846.
You only get to write off $3,500 every year for the next 39 years.
Unless you do cost segregation.
So here's, here's how cost segregation works. That house only is deducted— you only get to deduct $3,900 a year. I'm going to do a cost segregation study and I'm going to write off every single part of that building. They only last 5 years. So I get to write 100% of those off. Those lights cost $3,500 and I, and they're only going to last for 5 years. So I get to, I get to all 100% of that $3,500. Now, do you see what I just did? If I take the building over 39 years, how much was my thing?
$3,000 per year.
If I take the lights day one, I get $3,500.
Okay.
And how many, how much other stuff do I have in here? Lights is one part of this whole building. So if I cut the building up into little pieces, meaning lights, floor, windows, like—
And do you do cost segregation in everything?
You take the cost of every component of the building and add a lifetime to it. The IRS has a list of what lifetime is for light bulbs, for flooring, for windows, for drapes, for carpeting, for whatever. So whatever you got in there. The IRS has a life limit for it. Some's 5 years, some 10 years, some 15 years, some going all the way to 39 years. Right? So what you do is you tear it, take it apart, you itemize everything in your building, and then you see what you can write off 100% of, and you'll come up with $3 million really fast that way.
