Yonah Weiss on Mastering Cost Segregation for Investment Success

Foreign. Hello. Jenny Bowling here with Pivot to Prosperity, brought to you by Pivotal Real Estate Investments, where we help our investors build wealth and income through commercial real estate that improves communities. And today our guest is Yona Weiss, the one and only Yona Weiss. Welcome.

Thankful to be here. Thanks so much, Ginny. It's awesome to join you on the show.

Well, I appreciate you coming and I want to read your bio, so I will let you fill in what's not in the bio after that. Okay. Yona 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 hundreds of millions of dollars in. I lost my place there. Tax savings through cost segregation. I could have said it. He has a background in IT in teaching and a passion for real estate and helping others. He's a real estate investor and host of the top podcast Weiss Advice. Very good. Thank you.

There you go. Awesome.

So tell us where you are, what you do these days, how you spend most of your time.

Grateful to be here. Like I said, I actually live in Israel, so I am remote in pretty much everything that I do. But I work, meaning my business and everything I do is based in the U.S. grew up in California, so that's obviously where my accent comes from. And, but yeah, focus on the cost segregation. That's been my main business for the past seven years or so. Doing a lot of investing on the limited partnership side as passive investing for the past eight years or so. And that's, I mean, that's in a nutshell, what I got going.

Very good now. So when you are looking to invest yourself, let me ask you then, are you usually looking for the tax write offs for yourself or are you looking more for cash flow or appreciation or what's your play on it since you know so much about the, the tax savings aspect.

Listen, they're all awesome, you know, parts of the real estate investing, to be honest, the tax savings, because I'm not a real estate professional per se, they are something that, you know, obviously you can't overlook the benefits of the tax savings that come along with real estate investing. But for me, cash flow and an appreciation have always been the number one. You know, things I look at in an investment. You know, it's hard to gauge. You know, obviously appreciation is a little bit hard to, to predict. You can do it based on, you know, your due diligence and factors that historically have had appreciation in areas. But, but cash flow is obviously a big one as well, right?

Right. Yes. So why don't you start maybe with explaining what cost segregation is and that will of course segue into the rest of it.

Absolutely. So it's a weird way and you know, obviously you know the history behind this, but it's, it's kind of a weird name of breaking down a property in, into its components for tax purposes which allow you to depreciate certain components of the property at a faster rate than the standard long 39 or 27 and a half year depreciation. And so the way I like to look at consequent is that it's a cash flow mechanism. Cash flow allows you to pull from potential deductions, you know, and pull them and use them in the current year so that you can have less tax liability, have more cash flow to then reinvest.

So why don't you go ahead and give an example?

Yeah, I mean, so for, for example, anything that is interior in a property that's non structural, like furniture or fixtures, appliances, even things like cabinets or countertops in a multifamily property, you know how you'll have flooring, carpeting or vinyl flooring, all of that the IRS defines as a five year depreciation schedule, which means you can identify through the process of cost segregation work, identifying what everything is in a property and then assigning a value to that and then taking those deductions over a five year period as as opposed to that longer, again like I said, 27, half or 39 year period. Now there's something called bonus depreciation as well, which, which is a law that allows you to take as a lump sum all of those accelerated deductions in the first year. So that's a huge aspect of it. But again, what we're doing, instead of taking a small amount, an equal amount of tax deductions every single year, which don't get me wrong, depreciation in of itself is amazing. Right. Depreciation is probably one of the best tax advantages that come with real estate. It just allows you to take a deduction as if the property were going down in value, when in fact it, it's not, it's not intrinsic to the property and the property is not actually necessarily going down in value, but you're allowed to take a write off from your taxes as if it were. And so what we're doing, costing, is essentially just like an accelerated or advanced form of depreciation.

Great explanation. Great. So, and if we took that example just another step further, say, say I'm a new investor and I'm looking to put $100,000 into a multifamily property. That's a value add scenario. So you're going to be improving the value as you add dollars. The capex money is an investment to improve it. But at the same time you have this cost seg study. If you're the GPS and you bring in someone like yourself to do the cost segregation study, then even before closing, oftentimes we would know roughly what those numbers are. And so we would try to relate that to our investors and the way that comes out. I'm going to hand this to you in a second would be following would be that if somebody invests that hundred thousand, they might have a rate down. Go ahead and take it from there. How does that enter your with your stuff?

Yeah, anyone who's investing in a property, even if it's as a limited partner, a passive investor per se, is going to receive a portion of the depreciation. And so depending on how much the cost seg can, you know, return in many cases with leverage is an important factor and I'll touch on that in a second. But you're able to get back as a first year tax write off, you know, 100% of your investment in the first year. That's how powerful the cost can be. You can put in a hundred thousand dollars and receive $100,000, you know, tax deduction. Sometimes it's less, sometimes more, but that's what cost can do. Now I did mention earlier, kind of in passing, that I'm not a real estate professional. And what that means is there's specific rules in the tax code of who can use these passive diversity deductions or these depreciation deductions. And that does depend on your occupation, unfortunately, because typically speaking real estate income, okay, if you have rental properties or, or you're passively investing, all that income is considered passive income. Even though, you know, real estate isn't necessarily passive by any means, but the IRS treats it as such from an income perspective, which means depreciation being a passive deduction is only allowed to use to offset that passive income, that real estate rental income. So if you're not a real estate professional, if you're a high earning W2, you know, employee, or you own your business, but you're not a full time real estate professional, then you have a limitation. You're not able to use those deductions from cost to offset your active income or any other source of income. So that's a huge thing. You know, I find tons of people in, you know, you talk about, you Might know, you invest $100,000 and you're going to get back this big, you know, tax write off but. And they don't tell you the but. Right? The but is the most important part is that you may not actually be able to use that beyond your passive income. It doesn't get lost, but it's limited and so you can use it, it carries forward. You can use it next year or in future years for tax deductions or it can be released to help to offset the sale of the property as, as these passive losses or these passive deductions can be used to offset passive gains from the sale of real estate. So it's not all lost, it's just a little, in my opinion, a little bit misleading. When syndicators will put in, oh, invest $100,000, you're going to get back, you know, $100,000 deduction. And people are like, awesome, I can now, you know, write that off my W2 and it's just not the case.

Right, right. Very important point. And so, so for those W2 employees in that situation, do you have some advice? Do you recommend they go get a rental property or two and then have that passive income to, to write up right. Against it or what do you, what do you usually say there a couple things. Number one, and, and we're not attorneys. We're not.

Right.

This is not financial plans. So this is exactly. So it's not advice. I take that back. Suggestions or possible answers?

Okay. Yeah. I mean this is general education and I think obviously everyone needs to contact their own advisor for their specific situation. But generally speaking, there's there's a couple things that are really important to note. Number one is that first of all, a, there's almost no other investment vehicle that has this deduction that allows you to offset the income from the property. So if you're, if you're earning returns from your rentals, then the cost can be used to offset that income. So in, in of itself, I mean, that's an awesome benefit. However, like you said, getting more rental properties, having more rental investments, depreciation from one property can be used to offset income or gains from any property. So you may have, you know, a portfolio and do cost seg on one and then use that income to, or those losses to offset the other income. So that's the first thing. So yes, having more rental properties, having more real estate investments is a great strategy just to help to use the costing benefit. The second thing, which is obviously not necessarily for everyone, but the rule about the real Estate professional status, it's one of a couple. Meaning if you or your spouse qualifies as a real estate professional, then you get to use this benefit of using cost to offset your active income or your spouse's active income. So the suggestion I have is, you know, convince your spouse to become a real estate professional or, you know, or if you're not married yet, you know, find a dating site that, that specialized in real estate and get, you know, something like that, you know, tongue in cheek aside. I think it is actually a very powerful tool when used. And I have, you know, tons of clients that actually do this. That one is a, you know, the husband or wife is a real estate professional and the other is a high earner and they own real estate and they get to use these benefits.

Right, right. And if you're in real estate, it's not that difficult to become a real estate professional if you're spending the hours and meet the criteria of the irs. You just have to pay attention to it and document it. Right?

Yeah, absolutely. It is a little bit tedious, the documentation process, but it's, it's possible.

Right, right. Good points. So going back to that 100%, do you want to talk about the, the current law and if 100% is still achievable and where all that is today?

Sure. So there's something we talked about, cost segregation, where we're accelerating depreciation into faster categories. Like there's the five year property, the interior, as I mentioned, there's something called 15 year property, which is land improvements, anything outside the property. So once you've done a cost seg, you have this law that's called bonus depreciation. Now, bonus depreciation has been around in many forms over the years and over the decades, but in 2017, with the tax Cuts and Jobs act, it actually came into its current form, or not entirely current, but there was something introduced called 100% bonus depreciation, which says once you've done a cost segregation, you're able to take 100% of those accelerated deductions in the first year. So instead of spreading some of the depreciation over a five year, 15 year period, which increases, you know, in doubles or triples your deductions during those earlier years, you can take a lump sum of those deductions. So just to kind of give a. And I'll get more into the specifics of the law and how that may change in a second, but just to kind of visualize it for people, I think. Okay, he's talking about this five year and 100%, like what does that mean in dollars? Like tell me how much money I'm going to save. So think about it like this. If you buy a million dollar property, your typical normal depreciation without cost, you know, divide that by 27 and a half. You have to take off a little bit for land which doesn't depreciate. But divide that by 27, you're going to have about $30,000 of deduction. That's called your straight line regular depreciation deduction. Now that's amazing. First of all, let's just put it there, right? You buy a property and you're able to just automatically, just because you bought it, write off $30,000 from your income tax. Okay, I think everyone can agree that's amazing. What bonus depre or what cost does is. Let's say we're going to take 25% of that and take in the first year or over five year period, let's say first cost seg. Okay, so $250,000 we're now going to spread over a five year period and getting you an extra besides the 30,000, getting about an extra $50,000 a year of deductions during those first five years. That's simply how cost seg works. So again, that's $80,000 together of deductions over the first five years instead of 30. So again, really beneficial in of itself. What bonus depreciation said was you have the option to take that lump sum $250,000 deduction in the first year. Right. So instead of a $30,000 deduction, okay, a big whopping $250,000 tax write off. Now that can be extremely beneficial for someone who has more income and, and, or they're a passive, excuse me, a real estate professional and they can use that against other sources of income. So that's in a nutshell, just the numbers. So it's not so abstract. We're talking about a huge, huge, huge benefit. And I'm using round numbers, you know, 25%, $250,000, it varies on type and size of property, et cetera. But on average that's 25% is for many types of properties, is the average amount that we can accelerate depreciation of. Excuse me.

Right.

So back to the, back to the actual law. Right. So it was 100% bonus between when that law was passed at the end of 2017 through 2022. So in the law it stated it's going to start phasing out to reduce the amount of bonus depreciation you can take. So in 2023, if you bought a property in 2023, it was only 80% bonus depreciation, which means you can take 80% of those deductions in the first year. The remaining 20% still spread over those faster 5 and 15 year accelerated depreciation. 2024, currently we're at the time of this recording, is at 60% and will continue to phase out by 20% each year on that. Now you asked if that's going to change today at the time of this recording. Okay, we're recording this. I don't know if you want me to tell you, but we're January, January 29th. Okay. Is today on the floor in another hour from now. They're actually a vote in the House if there's a law that is going to be passed to reinstitute the 100% bonus depreciation for 2022 because again, it went down to, to 80% then. So it's going to reinstate it retroactively through to 2025. So it's going to continue the 100%. I think it's, you know, a huge, it's called the Tax Relief for American Families and Workers Act. It's, it's a big, you know, reform that has, you know, hundreds of different things in it. One of them is also wiping out the, the employee retention credits. Right. The erc, which was a little bit controversial over the past few years, but again, it has a lot of different things in this bill and one of them is the restoring 100% bonus depreciation for, for property. So that's, that's a huge thing we're all obviously waiting very patiently for, for this law to be passed. And I think it will, you know, the goal of it, I think is to increase or stimulate the economy is really what it did be. Because giving people tax deductions allows you to reinvest. Right. Essentially. And so you're creating more jobs, you're creating more opportunities. And I think that's the goal behind it.

Right, right. And, and that's kind of an amazing part about real estate and taxation that I think a lot of people, regular people busy with their families and their jobs don't realize is that these tax laws really do encourage reinvestment for those that are in that world. And, and more and more people are joining these syndications and learning holy moly, this is pretty easy to get into and I don't have to do anything and I can write all this stuff off and it's people are talking. So I explained it as like a new product. It's like reinvented after the jobs Acts of 2012 and 2017. And so even though interest rates slowed it down a bit, people are, are realizing they can also participate in owning these great properties. So, and getting great, great write downs. So for people like myself that have been audited before and hate tax code in many ways it makes you really appreciate that it's written that way for a reason. And it really does potentially for the people that, that follow those, those, those codes, they can write off more stuff. So yeah, it's kind of a great thing.

Absolutely.

So tell us if you would, about how the cost segregation can apply to new construction. I think that there's a case for that too, right?

Absolutely. Yeah. Cost seg can apply to, I think the novelty is that it applies to a existing property more than a new construction, because new construction, you know, you depreciate everything that you are spending money on, right? So if you buy, you know, build a property and you know exactly the cost of everything. And so therefore you can break that down with the conservation study. And I show, you know, what, you know, the windows cost, what the, you know, flooring, the pavement, etc. Every component of that and then write those off and depreciate those on, on their respective schedules. But the, the novelty is buying an existing building and now you can, you know, it was built in 1925 and now you can write off the property as if it was brand new today from a depreciation perspective. And so the job of the, the Costner agent engineers is a little more difficult because we're looking at a property and we have to essentially reverse engineer that property and show how all of the components of that add up to the purchase price, whatever that was, when in fact, you know, if you were to reconstruct, wouldn't, you know, you know, you know from, from being an appraiser that the, the replacement cost is often, you know, more or less, you know, obviously depending on, on certain scenarios of what the actual building, you know, is. So from a depreciation perspective it becomes very complicated to assign those values. And, and that's why the cost engineers are needed in a situation like that.

So is it fair to say you are looking at those components, whether it be the short lived items or the long live, estimating value new and then value in place. So you're applying the depreciation as it is, but looking at the remaining contributory value that contributes to that price that's being Paid when somebody buys it. And it's actually the contributory value that ends up being the write down. Is that right?

It's a combination. So it is a, it is a little bit of a calculation because like you said, the. You're looking at a property buy for $1 million and in it has, you know, cabinets and countertops and, you know, carpeting and appliances or what have you. And we need to assign a value to all of those and essentially add back up to reach that million dollar part. Right. So we're not saying the cabinets, if you were to replace the cabinets, let's say it cost $10,000, but within the whole of the purchase, it may be, you know, worth, you know, $20,000 because it's a percentage of the whole. And so that's why the calculation based on the useful life as well as what the tax code defines the useful life of it. That's why it can get a little bit complicated adding those values.

Yeah, right, right. Yeah. It's, it's, it is a little different from when we did it in the 80s or what we did. And I can't even remember exactly why we did the age life, you know, a short and long live. It was different tax code then. But anyway, so, so what is one of your most interesting stories about some situation that came up on a commercial property, whether it be multifamily self storage, anything that's got a funny twist to it.

You know, there's a lot of twists and turns that can come about. I think, you know, I think when. And the tax code is not logical. Right. So you're going to have things in there that when a certain situation happens, the tax code says one thing where logic might dictate something else. And one of those things is actually when there are, when there's a disaster of some kind of fire or a flood, you know, hurricane, and the insurance covers the cost. Right. Of the property and you may be able to replace it. You know, hopefully there's not been any physical harm to people, but even a building, you know, can be replaced. However, the tax code says, sorry, you can't actually depreciate money that was spent from the insurance from the replacement. So you may have, you know, I had a guy who had a multifamily property and there was a fire in one of the units. Right. In one of the buildings. I think it was like eight buildings all together, like, you know, next to each other. It was like a hundred, 100 plus unit property, eight buildings. And there was a fire one of the Buildings knocked out like eight, know, eight or ten units or something like that. So he was able to replace that. Now, from a costig perspective, we already did the cost, which means we able to write off whatever he did, but their insurance company was giving him, you know, whatever 5, $600,000 to, to replace the building. He's like, oh, yeah, why don't we, why don't we go ahead and do a costing on that as well? You know, the new, new construction. Now if you're doing a new construction, let's say he were, you know, there's eight buildings and he was going to add on a ninth building. Now you could depreciate all of that, right? Whatever, whatever money was spent on construction, you can now do a cost. They can depreciate that. Like we talked about new construction, but when the insurance company's paying for that, you can't. And so that's a really weird kind of law that kind of gets overlooked. People think, oh, insurance money. Yeah, construction and renovation. Weird things happen like that all the time. But one really fascinating project that I love talking about is because it's so multifaceted and that's where, you know, Kaseg can just be exciting to see so many different aspects of it is a good friend of mine, actually a client for many, many years who owns resort properties. And this property was, you know, kind of a rundown resort and they revamped the whole thing. It has a golf course as well as a vineyard, a hotel, you know, hold, you know, meeting hall, etc. A lot of different aspects to this one property. And so they revamped it, you know, and the interesting part was, is that it was really like three different, if you look at it, it's like three different projects because you have the hotel and resort, you have the golf course, which in and of itself is very interesting when it comes to Costa, because almost all land improvements and land improvements depreciate on a 15 year accelerated schedule, which means it can be fully written off from, from bonus depreciation perspective. And then you have a vineyard which is also really, really weird. The vines themselves can be depreciated and written off at an accelerated schedule. So.

Thought you were going to say that. Wow.

Yeah, so all these different moving parts aspects. So in the end of the day, it was a huge, a huge project and a huge benefit for them. For them and their investors.

Yeah, that would be. Wow.

So, yeah.

And, and do people compare this to oil and gas write offs?

Sure, it, it has comparisons to it. You know, obviously that's one other really great asset class where you can have, you know, deductions that can offset your, your income from the investment itself. Which again, besides real estate, oil and gas is really the only other thing that does that. But yeah, I mean there's definitely a lot of comparisons.

I don't know if their losses can carry forward. Their depreciation carries forward though. But the great thing is that it sure does with, with real estate. And if that W2 earner buys the rental property later, that pre earned, previously earned write off can still work against that new asset. Right. So that's good. That's good. So who are your clients generally?

We have, being, you know, the biggest cost company in the country. We have thousands of clients across, across the country from you know, one off mom and pop or, or you know, regular kind of investors who own single family homes to you know, large billion dollar corporations or REITs and things like that. So you really have everyone and everyone in between. So there's, I don't think there's one, you know, target, you know, client that's out there. I think our specialty is everyone and everything, you know, every asset class. And because we have that experience, we're able to do that. One thing that I love though is really for me personally, I love educating the individuals, you know, the big players, corporations and REITs, they're going to do cost, they've been doing it for decades there. They're the ones that, you know, they don't really need much. It's just kind of a commodity, a service. But for individuals who are looking to, you know, change their trajectory of their lives or their, their wealth, for me that's, that's really special to be able to relate to people and educate them on a subject that they wouldn't know otherwise anything about and allow them to actually use this tax deduction to help, you know, increase their wealth by, by paying less taxes, using it to, you know, reinvest, et cetera, to scale at a faster rate. And that to me is, is the most meaningful.

So true. That's, that's great. That's, that's important too because a lot of people get into investing without understanding every aspect and this is confusing to some people. So yeah, very much so. So let's just talk about if, if, say you're called by Joe, new investor who's buying his first 50 unit apartment project, what should they expect from you?

Start to finish, pretty straightforward process. So the first thing we always like to do for any property is run a free upfront feasibility Analysis. So we're going to run an estimate of sorts which can show you ahead of time for educational purposes and also for tax planning purposes what the potential tax savings would be. You know, without, you know, without lifting a finger. You just kind of give us some information we can show you. So a lot of people like to get this done. Even the due diligence stage. You're under contract in a property and you want to know ahead of time. So that's a really kind of valuable tool. The other thing we do is, you know, once we engage with the customer with the property, we're going to sender engineers out there either physically or remotely. You know, since the onset of COVID we've transitioned to doing a lot of our engineer site visits through the help of a video call. Right. And so we're able to get them out to the property in that way. Obviously some properties are larger and need that in person kind of touch to, especially if there's hours involved in that site visit. But that's the, the second stage. We're going to collect some documents like closing statement appraisal. And with that we're going to create a very detailed report, you know, 80, 90, 100 page report in that is detailing everything, you know, think about it similar to an appraisal. Right. We're literally looking at every aspect of the property and, and breaking it down. And then what that creates is a new depreciation schedule, a tax document that essentially allows you to, you know, plug those numbers into your tax return and show you what the deductions, what the losses would be. So pretty straightforward. It's about a four week process from beginning to end on our end. And, and that's pretty much it.

So for like on a 50 unit project, can you ballpark a price range for something like that?

Yeah, it's not, it really does depend. It's not contingent on tax savings whatsoever. Which means it's, you know, if you have a million dollar property or $100 million property, the cost of getting it done is going to be pretty similar, whereas the savings are going to be know, obviously tremendously different. It currently, you know, our pricing structure ranges from about, I'd say 3500, 4000 on the low end to about 5, 6, 7000 on the high end. You have some commercial properties that are much larger, maybe up to, you know, 10,000 or so. We're talking about, you know, like a shop, 500,000 square foot shopping center or something like that would be up on the higher end.

Right, right. Okay. And about Four weeks, you said. That's really helpful to know. And did you say that you do a free estimate in advance?

Yes, absolutely.

That's huge. Yeah, yeah. You probably can end up doing a lot of free work, but. But it's so beneficial. You probably end up doing the reports. So it probably pays for itself, I. I would hope.

Yeah, absolutely.

Yeah. Great. Great. Okay. Well, I want to respect our time here. I always ask everybody one main question, and that is, is there a pivotal person or event that happened to you that brought you to where you are today?

I would say there are so many. It's hard to count so many pivotal events and people who have brought me to where I am today. But I do want to just highlight one person who I think really brought me to the real estate industry. I was kind of at a pivotal time in my life where I had a health crisis in my immediate family and was looking for kind of additional income and figuring out how to maybe get a second job or something like that. And I had bumped into a friend of mine whose name is David, and, you know, we'd been friends for. For years and years. And I was like, hey, I'm looking for something to do, something else. And he's like, well, why don't you come work with me? I was like, okay, what do you. You know, I knew he was in real estate. I didn't know exactly what he did, but he was a commercial mortgage broker for many years, was very successful at that. Also owned a lot of properties and, you know, managed them, multifamily properties. And. And I literally was like, okay, why not? Like, I didn't know the first thing about commercial real estate, but I sat with him in his office for, you know, almost every day for about nine months and literally apprenticed him and learned so much about the real estate, you know, commercial real estate. We did obviously, like, he was doing mortgages. We did that. I listened in on calls he had with, you know, property, property management and things like that on that side as well. So really did a ton. So that was one person I think had a very pivotal effect on. On my career, on. On my life.

Well, that's great. That is. That is. So you can do a shout out if you want to do his whole name. We'll put it in the hashtags and. But it's up to you.

Oh, yeah. David Weinstein, really amazing guy. He's started several companies and not sure what. What his latest is called, but he is a commercial lender as well as an investor.

Well, that's Great. Then he'll get a little perk out of it maybe, too. Who knows? So I also, since I happen to know we're both in the same mastermind, probably a couple different of them, but you are all about teaching. You are a pivotal person yourself for that reason. So I have this special series you probably don't know about called Local Legends and Pivotal People, and I am going to declare you a pivotal person. So that makes you go on a special screen and whatnot and special promotion on my podcast as a pivotal person. So welcome and thank you for doing all that because it does take a lot of patience and a lot of repetition explaining this over and over and over. I know, but it's. It's fantastic that you're out there and you're really out there doing it in all different places. I know. So thank you for that. Thank you. Tell people how they can reach you.

Well, the best place you can find me is my website, yonaweiss.com or you can reach out to me on LinkedIn. I'm extremely active on LinkedIn and on many, many of the social platforms as well, but give me a. Give me a shout.

Great. Great. Well, thank you again. And we'll probably have you back at some point as well here.

Absolutely. Thanks so much.

Love it. Take care.