Flip and Danny explain cost segregation studies, an engineering analysis that reclassifies building components to accelerate depreciation. Instead of depreciating a building over 27.5 to 39 years, you can depreciate parts over 5, 7, or 15 years, generating 20 to 30% of your invested cost as near-term tax deductions.
Hey, everybody. Flip and Danny here, founders of the Freedom Real Estate Group family of companies. And welcome to another episode of our.
Podcast which is called Freedom through Passive Income.
That's right. And then this is another episode. This episode is entitled. And hopefully you watched one of the previous episodes when we talked about the acronyms, because this one's called what's Cost Seg?
We didn't even do that one on that episode. Oh, whoops, that's a new one.
Yeah. What is a cost segregation study? How about that? So here is your definition. The cost segregation study is a detailed engineering analysis of a property to maximize depreciation deductions and minimize the tax burden for property owners.
When we were getting ready to record this, the tax boredom, he said boredom.
Instead of minimize the tax boredom. I'm bored of these taxes.
Sorry, I just had to bring that up.
Thank you.
Because that's how we roll.
So what is a cost segregation study? There's the definition. Now give it laid out here.
Okay, so we've talked about this, we've referenced it in other episodes, so we're just getting a little bit more detailed now. So. So we've talked about types of depreciation. So this is why you want to do a cost segregation study is because of how depreciation can be taken as a tax benefit. So the first and typical depreciation is straight line depreciation that allows you, if you have a single family residence, to be able to allocate the cost of the property, not the land, but the actual building, across 27 and a half years, if it's a single family or one to four residential. But if it's a commercial property which is five doors or more, five units or more, then it's across 39 years. Again, building itself, not the land. Now there are certain aspects of a property that aren't going to last 39 years. And I'm going to the 39 year example because you can do a cost segregation study on a single family, but it's 27 and a half years. And so we're buying commercial right now. So I'm just talking in the commercial sense. So. So plumbing. Carpet.
That's not going to make 39 years.
Yeah, carpet. Certain fixtures, sidewalks, fences. There are certain things that are not going to take the entire 39 years. So what a cost segregation study does is it categorizes the certain elements of a building that the IRS says that you can take a tax deduction for across a five year timeline, a seven year timeline or a 15 year timeline. And Those categories are then put into the report so that you can say here, here, here's an allocation of things and items that you can take bonus depreciation or accelerated depreciation on, meaning not 39 years, but five years, seven years or 15 years. And it significantly impacts your taxes. We had mentioned that on average it's 20 to 30% that you can take for every like $100,000 investment. You're probably gonna get a 20 to $30,000 write off just by doing a cost segregation study like this. But we have personally seen 30 and able to write off. So this is a really big deal when it comes to taxes and kind of kicking the can down the road. And I say that because you're always kicking the can down the road when it comes to taxes because eventually what's the IRS going to do? They are going to want to depreciation recapture. Yes, give me my money back, everything that you took off and you wrote off and all of these losses. Eventually that affects your cost basis and how much you already got back from them and how much they are going to want to then tax you. And then there's different percentage whether it's going to be capital gains tax or depreciation recapture and how much those percentages move talks to your tax attorney. We actually talked about this in the tax benefits for real estate investors episode and we talked about current law and the current percentages depending on which tax bracket that you're in. We went into more detail. We're not going to repeat ourselves here, but it really depends on what's the tax law today as to what you can actually write off and how it all affects you and when it comes to the recapture. But we also talked about in that episode the whole rolling stuff. So we're just going to keep on. We're going to take that money and yes, the IRS is going to want to pay taxes on it, but we're going to put it back into another investment and we're going to get another cost to get segregation study done and then we're going to have those write off. So yeah, I could just go, I love being able to write off. So these aren't always beneficial for short term because of the depreciation recapture. And that's why I had brought that up. You want to have that rolling example going on if you're doing this short term. And I'm just going to stop there.
I like it makes me chuckle when you talked about, you know, plumbing fixtures and carpeting, you know, the five, seven or 15 years I think there was some apartments that we recently saw that they were trying to get past the 15 years on the carpeting because that the 1980s called. They want their carpet back. Yeah, that was.
Wow.
Well, anyway, we do like to keep these as short as possible for you. Make sure if you're out there and you're listening on a podcast on one of the multiple formats for listening to podcasts. We hope you're enjoying the this podcast and these episodes. Make sure you do give us a review. Five star reviews are the best that we would love to have. But if you're watching on social media, make sure you make sure you join our groups and facebook@facebook.com freedom through passive income. There you go. We're on LinkedIn as well. We have a special group there. Just go up to the search bar and guess what you get to type in that search bar.
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