Cost Segregation With Yonah Weiss

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Welcome to the Next Level Income show where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larson. You can get your free copy of our book@nextlevelincome.com just click on the book link. Today's show is sponsored by Money Insights and their investment optimizer strategy. In my book, I share how I've used this strategy to invest my money in two places at one time. The strategy has been used by the wealthy for generations for estate planning, minimizing taxes, preserving wealth and increasing stability for their investments. Money Insights can help you develop a plan to not only build an emergency fund, pay for college, fund a business and plan for retirement, but also optimize your investments. You can check out more information@nextlevelincome.com banking on today's show, I'm excited to have Yonah Weiss. Yonah is a powerhouse with 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. And he is an investor himself. He is also the host of a new podcast, Weiss Advice. Yonah, welcome to the show.

Thank you so much, Chris. Pleasure to be here. Joining you on the Next Level Income Shaw, I love that name and I love the concept, so I have to be joining you.

Oh, likewise. You provide so much value to not only your clients but also your listeners on your show. So I'm excited to hear more about that at the end of the show when we talk about it, it looks like. Are you coming to us from Asheville as well today?

That's right. Just out my window, the hotel I'm staying. I love the virtual backgr over here. Love the green screen. I could be anywhere in the world and like to do. I've been a guest on close to 150 podcasts and lately I enjoy since I got this green screen just having the background match the host's hometown. So I'll try to make you feel a little more at home.

Well, I love it. I know you're going back and forth between the Biltmore estate and downtown Asheville. I love that picture. And yeah, this is just a beautiful time here as we record this in October in Asheville. But for those in the audience that don't know much about you, Yonah, tell us where you're based out of and also how you came to be an expert in cost Segregation.

So actually based. A lot of people don't know this because I work for the largest national conservation company based out of Lakewood, New Jersey, but I actually work remotely. So I live in Israel, in Jerusalem, been here for many years. It's a beautiful place and I'm kind of living the dream. Everyone right now in this time being hit with this work from home, work remotely. How do I do it? I've been doing this for years and. And it's just incredible that I have that opportunity to live wherever you want and work wherever you want. What we're doing nowadays, thank God I have an incredible team on the ground in the us A big national footprint. Said the largest national company. But what I do, which is basically having fun on social media and you're doing podcasts and that kind of stuff. No, but it's more client interface, phone, telephone, emails, it can be done from anywhere. And so that's the beauty of it. I didn't start in consegregation as, you know, a dream of mine. When I grow up, I want to be a consequent expert type thing. It was more I just followed my passions. I never really wanted a career of any kind. I really just love to do, just live. And for me, living is like teaching. That's part of life, is just how do you teach? And so I was a teacher for many years, enjoyed it. I have a big family, six kids. So that for me is just like a daily thing you're teaching your kids besides for just helping them with work and stuff like that. It's how you are and how you. You're a role model. So I love that aspect of it. But at a certain point, salary does not really fit the bill. Foot the bill, I should say. And I was looking for something that would help me kind of take it to the next level and take my income to the next level. And real estate came up as one of those a surefire path to in the long run. So I started out doing a bunch of different things from thing to thing to thing. Fix and flips and some brokerage and some commercial mortgages, hard money, doing all different, just kind of learning the tricks of the trade and apprenticing from people that I knew that had been in the industry for many years and just kind of hanging out with them, doing what they, following them, working with them. And with that I learned a tremendous amount over a short period of time. And I networked with incredible people, which really led me to where I am now, which was connecting with this company, Madison, which they're doing incredible things in the commercial real estate industry, specifically in the cost segregation. And so that's kind of how I got into it. I don't have a background in accounting. I don't have a background in engineering, which is what the cost seg is all about. However, our company has those team members who've been doing it for decades, and I just learned from them. And I took my teaching expertise and just took a spin on it and really learned whatever there is to learn and continue to learn everything there is to learn about the subject and just over like any good teacher is. So I'm very grateful and blessed to have that team behind me, that they're the real experts and I can just play one on tv.

No, I love the story. And that's what's great about real estate. I said I raced bicycles for 20 years. And there's all these different areas of cycling. There's road cycling, there's mountain biking, there's downhill, there's track. You can have people built like football players. You can have people that kind of have bellies that are tremendous downhillers. And then you got these guys that are racing the Tour de France that are 135 pounds with 4% body fat. But real estate to me is very similar. You have all these different types of real estate. You can swing a hammer and do well at it. You can crunch numbers and do well at it. And I was listening to your story on one of your podcasts about how you learned a lot from bigger pockets and was able to do your first deal listening from them. So it's tremendous to hear where you've come from. So some people may be hearing cost segregation or cost segregation analysis for the first time. Listening, for those that haven't heard it before, can you talk about what it is, why you would want to do it, and how you help your clients apply it?

So it's pretty straightforward. Is a weird name, I will admit that. But it has to do with depreciation. So tax deductions for real estate, essentially, it's an advanced form of depreciation. So if you own a commercial building, any property whatsoever, investment business property, as long as it's not your personal residence, you are allowed to take what's called a depreciation tax deduction. And that's which we love. Yeah. Which essentially helps to offset our income tax from our rental properties. What that means is essentially buy a building. The IRS is incentivizing you and saying, well, things go down in value as time goes on. And so therefore you can take this deduction as if your building is going value, it's depreciating. So now you can take a loss because you're going to be losing money essentially, which is really not true. It's kind of hypothetical because your building is probably going up in value as time is going on. And that's what depreciation is. Okay? So you take your property and you divide that by 27 and a half years, your purchase price, or if it's commercial building, 39 years. And essentially that will determine what your depreciation deduction from your income tax is every single year. In a nutshell, depreciation, which is a great thing, okay. However, it's oftentimes not enough to cover the entire cash flow, the entire income that you have from any number, if you have one property, many properties. So the IRS came up with this cool system called the recovery system, which allows you to actually depreciate different assets in your building, different components of your building at faster rates. So instead of lumping everything together over a 39 or 27 year period and taking a little bit every year for that period of time, you can actually, by identifying what those things are from an engineering level, engineering perspective, identifying all the personal property stuff in the building that actually depreciates on a fast level at a five year scale or a seven year or 15 year, you can now take those tax deductions at that faster rate. So essentially that's what the cost variation, it's a tax engineering strategy that allows you to take accelerated depreciation or bigger depreciation upfront, which I love.

I mean, being a finance guy, I heard about this for the first time and I made some phone calls. I had single family portfolio. I was like, hey, can you help me do this? Let's take some additional depreciation. Because I was getting hit some big tax burdens. This was about 10 plus years ago, Yana. So for those just to recap here. So depreciation, I talk about this in my book. You can pick up a copy and read a little bit more about it. It's basically a paper loss. So if you're making say $10,000 a year from a property and you have $275,000 building a residential building, and you're depreciating over 27 and a half years, you can offset that entire 10,000 typically with that depreciation loss, correct?

That's right, yeah. Which is incredible.

It is because your building's making money, it's appreciating. And I have investors Call me. And they're like, I don't understand. I have my K1. I get my tax summary at the end of the year. And I lost money. Chris said, well, do you have money in your bank account? I said, yeah. I said, well, that's what you give to the irs. And it shows them that, yeah, it's gone down. So going back here, I have these single family properties and I cost segregation company and talked to them and they said, it doesn't make sense for you to do a cost segregation in a single family house. So I guess kind of explain why would you not do it if you own a rental house versus why would you do it if you have 100 or 200 unit apartment building?

Yona, it's really interesting and I'll touch on that in a second because it has to do a lot with the actual value and the percentages. We'll touch on. But what amazes me the most about your question is that most people that I talk to that own single families have no idea what conservation is for this reason, which is incredible, because a lot of people start out that way. You start on real estate in single families, especially people from bigger pockets, starting out in residential, starting out small maybe. And they're never taught about irrigation. Okay. And partially because it may not apply, as that person told you, but regardless, it's good to get education. So if you're someone listening to this and you're like, well, it's not going to apply to me, so I don't really care anyway. No, you need to understand it. You need to know what it is so that when it does apply, you can take advantage of it. So why is it not necessarily advantageous on single families? Because your depreciation deduction is based on your purchase price. Okay, let's say you bought a building, single family, $100,000. Okay? Divide that by 27 and a half years. You have to take off a certain amount for land first, right? And then whatever's left over, divide that by 27, you're left with.

So stop right there. So if you buy a property, you do not depreciate the land. You separate the land and then you apply this to just the actual building itself, the structures itself.

That's right. So first thing you have to do is apply a certain value to the land which does not depreciate, and then whatever's left, that's what we're taking our depreciation, basing our depreciation deduction on. So that $100,000 property might get you a $3,000 tax deduction every single year. Right now, with the accelerated depreciation, what we're doing is front, and oftentimes it's around 20%. Okay, 20% of that basis that you can take in the first five years in extra depreciation. So of your $3,000 deduction, that's great. In the first five years you could take 20% of that $100,000. An extra $20,000 over a five year period, that's an extra 4,000. You're doubling more than doubling your depreciation deduction. But the cost of the study itself to get it done is usually cost prohibitive to matching those tax savings. So it may cost a couple thousand dollars to get it done on a property minimally, whereas your tax benefit, we're getting these deductions, but again, it's not your refund check. What you're doing with those deductions is you're lowering your taxable liability, offsetting that. So what's the net value of that is going to be less than the actual deductions themselves. So on $100,000 property, you can apply this, your net savings might be in that example, maybe $5,000, $10,000 to pay a couple thousand dollars, $2,000, $3,000 to get a net savings of $5,000. Doesn't really make sense. Just the math doesn't add up.

Yeah, so at what point, at what scale does it typically make sense? What are you seeing?

So just 10x that, I mean 10x that and you're looking at a million dollar property and you're looking at a minimum of a 50 to $100,000 net tax benefit. That's sweet. And to pay the same fee, basically a few thousand dollars to get that done, that makes a lot of sense. So you can scale that back and say, okay, well I have a $500,000 building, right. So it's not the unit count, because I spoke to a guy yesterday, he's like, we got a bunch of single families in LA and they all cost a million dollars minimum each. So it doesn't depend on the actual unit count, it depends more on the purchase price.

Gotcha. Now that makes a lot of sense. And you said something else. So you can accelerate this. And that's what we're doing here. So 5, 7, 15 year buckets. What are some examples of stuff that falls into those buckets?

So you have those two main categories or five year and 15 year, five year property is personal property. And essentially it's anything that is inside of the Building or inside, that's not part of the structural components. So we're separating out from the structure, the main structure, like the roof, doors, windows, walls, floor, all that. Actually the infrastructure that depreciates on a 27 and a half year scale schedule.

Gotcha.

Everything else we're accelerating, we're segregating, so to speak. We're pulling out reallocating stuff like personal property. So personal can include furniture, equipment, appliances, countertops, even cabinets, wall coverings, carpeting. Right. Vinyl flooring, stuff that even though it's attached, but it's not permanent and it's not structural. So all that stuff and all the value of those things depreciate on a five year schedule.

Awesome. No, that's what's amazing. And I guess it also, there's certain ways to affix certain things to make sure that you can apply these so they're not part of the structure. Which as I learn more about this, it's just amazing how that's where you guys come in to figure out how to optimize this. And correct me if I'm wrong, but multifamily to me seems like one of the best areas to do this. Whereas. So if you took a warehouse, for instance, Yona. So warehouse is going to be a commercial Property depreciate over 39 years. Probably not a lot of stuff inside the warehouse that you can accelerate versus a 200 unit multifamily property. Lots of washers and dryers, lots of dishwashers, lots of cabinets.

The value of the flooring, carpeting. Yeah, it's a lot.

Yeah. So that's where it's very advantageous. That's why my book, I talk about multifamily being the holy grail. That's one of the reasons. What about stuff like landscaping, would that qualify?

Yeah, I'm glad you brought that up. Landscaping is the second main category, the bucket that gets accelerated through depreciation, which is on a 15 year schedule. And so not just landscaping, really. Anything outside the building, that's considered land improvements. And that would include landscaping, fencing, pavement, concrete. So if you have a parking lot of driveway, any of that stuff, the value of that concrete, you can take that as accelerated depreciation. Storm drain, things like that, a swimming pool, playground equipment, all that stuff, anything that has value to it. And the engineer comes, identifies how much of that is in there, what's the square footage, et cetera, and what's the value applied to that. Making those calculations gets you those tax deductions at a faster rate.

Yeah, again, I'M a nerd, but I think that's super cool. You can break all that out. So you guys have your team that comes in and does this. Yonah. So you have engineers, you have accountants who are the main characters that are working on the team and what do they do when they come into a property? So walk us through a day in the life of your team when they jump onto, let's say, the property that we're acquiring in Raleigh, North Carolina, for instance.

So first thing we do is always send an estimate so our engineers will actually run the numbers. But even before you acquire the property, just based on some data, without going to the property, we'll schedule an engineer to either come to the site physically or now. We've actually moved into the virtual space. So because of the current situation, we've moved into doing a lot of virtual site tours, even though we have a full team of engineers, and they were up until six, seven months ago, traveling the country throughout this station in different locations. But this has cut down travel time a lot. We're doing a lot of virtual site tours with them. They come and do measurements, pictures, so they're taking a video or pictures of everything in the building. And then once they gather all that data, they come back, take an accounting of all of that and then make the calculations, apply it. We have the accountants review. We have an operations team that helps with making sure it's all streamlining through the process and reviewing everything at least four times. And that's pretty much it. It's a pretty straightforward process, literally doing a lot behind the scenes. But as a owner, it's literally scheduling someone to come providing a little bit of information about the property and then walking them through if they need to, and sitting back and waiting for that report to come back in a few weeks. And that's pretty much it. That report that we create is about 80, 90, 100 pages long and very, very detailed. But in it essentially just has a one page depreciation schedule that that's all you need. And going forward, you take that and you apply that to your taxes.

Yeah, no, again, it's super powerful and getting and drilling down into that. So one thing I noticed as an investor, I get my K1s. I see this depreciation in 2018. I think it was actually last year, it was 2019, but I was getting my 2018 K1s. I noticed that the depreciation seemed higher and we had the Tax Cuts, Jobs and Recovery act that passed at the end of 2017. How did that change the Depreciation that we're seeing.

Yeah, that was huge. What it did is it introduced something called 100% bonus depreciation.

Anything that's 100% bonus can't be bad.

Anything that's a bonus. We all love bonuses, right? What it did was it allowed you to have the option to. Once you've done a cost segregation study, you have identified all that property, all those assets that depreciate faster, you can now take all of it upfront in the year. 100% of that as a tax deduction. So we had discussed a 20% reallocation, sometimes up to 30%. Other types of properties could be even more. Think about that. You'd buy a million dollar property and you can take per million dollars, approximately 200,000 of that, 20% of that as a first tax write off. I mean, it's just ridiculous. It's crazy. That's why your K1s came back with huge losses.

Yeah. And again, these are paper losses, just to clarify. So I was a little bit stunned and a lot of bit happy when I saw that. And this is where people talk about Donald Trump not paying much in taxes. If you're not like Donald Trump, what happened? You get all these year one losses, you just roll those over into the following years? Is that how that works?

That's correct. You have any passive losses that you can't use, meaning if you have more deductions than income, that creates a passive loss that gets carried forward so you can use it in future years?

No, I love it. And I've learned about how if you have other properties and you have depreciation, sometimes those can work together and apply. So if you're a real estate investor out there, definitely talk to your accountant if you want to learn more about how this can benefit you. So shifting gears a little bit, Yonah, I'd love to hear why you started your podcast. And also you're in Jerusalem. Where are you investing? Are you investing in Israel? Are you investing in the United States?

I'll answer the second question first because it's easier investing in the United States. I actually started out in Israel doing real estate. Well, partially started out here as a broker and then doing some investments here and found it was very difficult. The only way to really make money in Israel because of the taxes and because of financing situations, things like that, is through development. There's a lot of new development, there's incentives for it. The financing is much, much better. Commercial financing for residential, building and multifamily doesn't even exist here. Really, the concept of multifamily properties, very, very little. There's a lot of people developing large apartment things, but they're selling them off as condos. And that's kind of the concept that exists here. Much more so. And individuals will buy those and then rent them out. So it's kind of like a different concept. Anyways, long story short, not interested whatsoever in that because even the development process itself is not easy.

I think when they say they're not making any more land. Israel, you guys, I mean, that's more than true in Israel, right?

Yeah. I mean, there's great locations and real estate has appreciated tremendously over here. But, yeah, long story short, only investing in the States. Currently actually working with a couple guys, partners that were under contract on a property in Atlanta right now. Yeah, that's exciting. It's a 70 unit multifamily building.

Awesome. Love Atlanta. Yeah, we have four communities down there, so great area.

Yeah, beautiful neighborhood. It's really excited about this deal. It's for me, my first large multifamily deal. So that's exciting.

Yeah.

And I'm interested in the Southeast. So you guys are in North Carolina, definitely, like a lot of the markets there, Raleigh and Charlotte, and that's where I'm looking. So specifically focused on Southeast.

Sweet. Now, we've loved that. We moved here for the demographics and we continue to invest here for the same reasons. All right. Yeah, listen, I was listening to some of your podcasts. I think last one I listened to is with Brandon Turner of Biggerpockets. So that was a fun podcast. Tell us a little bit more about why you started it. Maybe some sneak peeks in upcoming episodes and how it's going so far.

So it's a lot of fun. So I had been a guest on, like I mentioned before on many, many podcasts, and I enjoy this. As you can tell, we're, you know, we're having a good time. It's a good conversation. And I was like, well, listen, I. I like doing this. Like, I really enjoy this and I'm doing it all the time. Why don't I just, like, start my own and I can give back and be able to give back to, you know, those people who have been guests, you know, have hosted me and give back to my community, give back to my connection. I have a very big following on social media. How can I do that? And it was like, I don't want to just like, have another podcast, like a multifamily that's out there, that's just like educational and just giving it a little mini me University. Right. I think there's enough of them out there and there are a lot of good ones. I don't need to compete with that. So I was like, I just want to interview my friends and people that I know and people that are successful and have great conversations, get some advice from them and hopefully that will add value to the community at large and listeners. And really it's kind of getting to know behind the scenes, getting to know these people who you may have heard of before, you may have heard them on podcasts, but don't really know much about them per se. So that's kind of the premise of why I started Weiss Advice was for that. And I've been loving doing it. The one problem that I had was I got so excited about launching it. And my favorite part about it is just these conversations, the interviews themselves. So I got so excited launching it. I let it literally sent out to tons of people, like, I really want to interview you. And I was just doing, I don't know, like 10 interviews a week, just recording because I loved it. I was catching up with people and just like, great. But then I had this huge backlog of episodes that I'm like, I don't know, should I do a daily podcast? Because I have so much content. So I've been struggling with getting them all out. That's really been my biggest struggle right now.

Yeah, there's really magic in figuring out what's the right cadence, how much is too much, how much is just right. And same thing, we've juggled with how much we put out there. But same thing, we love having people like yourself on our premise, people that can help you make more money, keep more money, and ultimately grow your money. And we love that you're talking about how to keep more money when it comes to taxes and depreciation. Yona. So if you could go back in time, you started as a teacher, I'm not sure how old, but were you when you started? But one question we always ask our guests, if you can go back and give your 25 year old self a piece of advice, what would it be?

I would say what I know now that is probably the most valuable thing, didn't really know then, is that, and I say this literally the beginning of all my episodes, my podcast, the intro is that your network is your net worth. I love that quote. Those people that you know and the connections you have, they can really open your world up to opportunities that no idea about. And I learned that through you know, through trial and error and through, you know, just getting started in real estate. And that's kind of how it led me from one thing to another to what now? And even, you know, getting, you know, investing in multifamily. Like a few years back, I had a dream and I'd like to do that, but I had no idea how. I didn't know with who, where. So just through the networking and the conversations and the meeting people and developing those relationships with great people has just been this industry specifically. I've found and met so many people that are just on that next level. They're always looking to prove themselves, not only in business, but as people. And to me, that's really important.

Look, man, you truly are a powerhouse, not only in the tax savings arena, but, but I've seen you in the social media space, LinkedIn, you know, your new podcast, all the connections that you have. So for anyone that wants to get in touch with you, check out your podcast, check out what you guys are doing at Madison Specs. What's the best way to get ahold of you? Yonah?

Best way to find me is on LinkedIn, believe it or not. Like, connect with me there, a little message. You listen to the Next Level Income podcast and go to yonaweiss.com also to find out a little bit more about everything else I'm doing.

Yeah, well, I highly encourage you to check it out if you're listening. Yona's super, super entertaining. Has a ton of great content out there. I love your podcast. If you want to learn more about cost segregation, check them out. You can also read about it in our book. You can get it@nextlevelincome.com click on the book link and if you put your address in, I'll even send you a free copy. Yona, thank you so much for joining us today and sharing with our audience everything you know.

Awesome. Thank you, Chris. Sam.