How To Use Cost Segregation To Maximize Profits! OCREIN

But today we're going to talk about cost segregation. And the thing is, we want to be very interactive, so if you have any questions, comments, or experience, we would love to hear about what you have to say. My name is Matthew Warren. I'm a tax CPA. I say tax CPA because I want to tell people that I am focused on tax, but we do also bookkeeping, accounting, and various types of of work for clients, but tax is the big thing. I am a CPA but also an enrolled agent with the IRS, with the Department of Treasury. That helps me to be able to practice tax across, across the United States, not just in California. We really want to help individuals and small businesses reduce their tax liability and be able to create, you know, deploy their funds and assets to create a lasting legacy. We have our new logos there. You know, the Mountains to Sea is literally our Saddleback Mountains to the ocean. That's the territory that I'm claiming after having worked across the United States for several years. But let's get into the cost segregation stuff. So this is a bit of a word dump now. We're not going to go into every slide here, but— or into every word here on the slide, but we wanted to get a basic overview of what cost segregation is. So let's say we have a renter that buys a property and then they're going to rent it out. And let's say that they're a real estate professional. They're considered a real estate professional. They're not passive in this business. I think a lot of people here are active participants in the business. But you purchase the property. Let's say it's for $1 million. In that property, the land value might be 30% of that. Now, you all know better what the rates are these days, but let's say the land value is going to be 30% of that, like $300,000, and then the building value will be $700,000. Within that building, there are different assets and structures that have different levels, durations of depreciation. So the walls, like the actual wooden frame structure, That's the 29-year property or 27.5-year property, or in the case of your short-term rentals, that's going to be 39 years. But then a lot of other stuff, like if you think about the countertops and landscaping and, and flooring and bathroom fixtures and things like that, those are going to be 5, 7, and 10— 5, 7, and 15-year properties typically. And so the benefit there is with the current tax landscape with bonus depreciation. We can take the bonus depreciation for that immediately in the year that the property is placed into service. Now, placed into service is a very important term, but— and we can get into that more detail— but the date and the year that it's placed into service, we can take that bonus depreciation. And then, so, and the, the bonus depreciation is typically around 30 to 40% of the, the building value. So, or yeah, 20 to 40%, I would say. So if we take that, if we go back to that million-dollar property, $700,000 building value, about 40, 30 to 40% of that might be, might be property that we can immediately depreciate. And that means that we can, we can take a depreciation deduction off of our income for that amount. And the cool thing about this, it's, it's It's very powerful, which that depreciation, that deduction that can be taken can offset ordinary income. So I have people that make— well, I have an example here. I have had a client that makes around $500,000 a year with W-2, but then buys a property and then takes the bonus depreciation. In this case, it was a $700,000 property. We're able to take about $180,000 for the bonus depreciation, and then that offsets their ordinary income. So it reduced their taxable income by about $180,000. We'll get into more detail on that in a moment. But some of the rules, like, so I say generally you must be a real estate professional. Now, you can do a cost seg and not be a real estate professional. The problem is you're going to be limited. by your income. You're gonna— you'll still be deferring that for a long time. But— and then, again, it's based on placed in service. Now, the newest rules are based on placed in service as of January 20th, 2025, but there is an election that exists for if you purchased a property early, and we do have scenarios about that. And so, again, extraordinary claims require extraordinary evidence. These are the main sources of authority. Let me get back to that. The main authorities that you can go to for a lot of this are out there, so I want to be able to show you that. But in any event, those— these are some of the things about caustic. Now let me stop there. I'm talking a lot and I mumble a lot and you'll excuse me. Questions? Yes, sir.

Yeah, so you were saying like countertops, you can—

Could you do cost segregation more than once on the same house?

Yes, sir. In fact, what we're gonna talk about is what's called a partial— I have the term for it later, but it's a partial replace— it's a partial situation where you're removing something that has value. Like if you— let's say you have countertops that are like granite, okay? I have granite countertops, I'm removing the countertops. That has value. And then you're replacing it with quartz, all right? So you're gonna replace that, something that has value, with something with more value and there's a value to what you're basically destroying and then there's a value of what you're replacing. But yet the answer is yes and there is a scheme where you can, you have to take back some of what you previously deducted and then you can add it with that other thing. But we'll talk, we can talk about that a little bit later. Does that make sense at all? Okay, did somebody else have anything? Okay. All right, so I wanted to keep this very interactive. By the way, interrupt the heck out of me. I love it when people interrupt. You know, this is really all about you. It's not about me. But who has done a cost segregation study about here? Yes, sir. Anybody else done one? Is there anything that you could share about the cost segregation one you did that was enlightening or—

Yeah, so when I did it, I mean, I just worked with an accountant. It was a property that I bought in Indiana.

Okay.

And I was like 21.

Nice.

But I had pretty high income that year and I basically paid nothing.

Nice.

Nothing.

Yeah.

So it was amazing, but I feel like if you're gonna do it, you have to pretty much keep the property or take care of it, right?

That's correct. And we have a few strategies around that coming up.

Yeah, well, I do have a question as well.

Yeah.

So can you do it across any real estate asset class, or is it primarily creative or like single-family residential?

Yeah, in fact, you can— the answer to your question is basically any real estate class. In fact, like, what we're talking about really here is bonus depreciation in general, but we really want to make it specific to cost segregation and the, and the assets related to that. But There are some very— we can get into some very interesting rules. I want you to be at least aware of these. For instance, if you buy a factory, there are special rules that actually make it more beneficial to do a cost seg within a factory building because of some options that exist on how that cost segregation is done. But for those of us that are doing single-family homes, things like that, it's also an option. Yes, sir?

Just confirming, this only applies to investment properties? Are these also primary residences?

It's— this is for investment properties. Yeah, that's right. Good questions. Anybody else? All right, let's keep going. All right, this is a, uh, this is a real-world example back to that, you know, the— so the taxpayer makes around $450,000. They, um, they purchase a cabin in this case, and the land value is $200K, building value $500K. They perform the cost segregation study. By the way, one of the outcomes of the cost segregation study is an IRS cost segregation report. It has to be in a specific format. It has to be approved by the IRS. And that's one of the deliverables. So you actually get something out of it. But so they performed the cost segregation. And so it turns out that they had about $186,000 of assets that were in the 5, 7, and 15-year category. So that reduced their taxable income by $186,000. So for the taxpayer, it effectively gave them a $55,000 tax So, so that's a real-world example now, and we definitely do need to talk about recapture in the future— recapture and also 1031 exchanges, but we'll get to that. So there are ways to deal with that. Let's say if you do sell the property after you do a cost segregation, you want to have something around that. But like I said, be cautious of sensationalistic claims. Like, I actually have— I'm a tax person. I actually have to do these returns, and I found a couple little scenarios which, which are gotchas that, that, that That are not— they're not easy to explain and they're not easy to receive by the person receiving the information. So for instance, if you have limited income, then we might have to carry that over to another year. And— or in the case of some other kinds of depreciation, if you take bonus depreciation but you don't have that much money at risk, then you have— then you're limited. So there's a few different things. Be careful about that. Now contingent fees can be predatory. Now when I say contingent fees can be predatory, contingency fees are a standard part of service providers. That's not a bad thing in and of itself. A contingency fee is like, if I find you $100,000, you give me 25% of that, versus if I— I'm going to help you find $100,000, but you pay me $15,000 to do it. So there's this contingency fee. So you're saying that the fees are not predatory? But if they're asking for a contingency fee, I find that it could be a little sketchy. Be careful about that. What we do is a— what we like to do is a fixed fee when we do these services. And let me stop there. Any questions or comments? Yes?

How much does it normally cost to get a cost segregation report done by a company?

Yeah, that's a great question. I have another slide coming up here. Yeah, the very next slide. That's the best segue ever. Patrick, thank you. But, but yeah, we do have some typical prices. So, um, so, so when I'm talking about single-family homes, and I'm thinking— and I'm talking about like maybe apartments up to about 10 doors, or I think another way to look at it, let's think of it as like $1.5 million or less. Now I know we're in California, $1.5 million or less is becoming a unicorn, but, um, but let's think about $1.5 million or less. So like you can do a bare bones, like, you know, it's basically AI-based, uh, thing that costs about $1,200, not recommended. The most common one is what we call engineer reviewed. It's more comprehensive. You're taking a lot more measurements, you're taking pictures, you're documenting everything. And that's typically around $2,500 to $3,500 for a single-family home or a small number of doors for a multifamily. And then, then when you get into some really high-end stuff, just to get your foot in the door would be about $5,000 to $10,000. Like if you talk about anything in Newport Coast, anything in Newport Coast would probably be $20,000 to $50,000. Whereas something, you know, something like in Irvine that's like highly customized, that still might be a $10,000 to $20,000 operation. But for most properties, you're talking about, if you, even if they're more high-end, a lot of times for single-family homes, it could be around $5,000 to $10,000. Does that make sense?

Yes.

Okay.

We'll go into some examples. So let's go into like applying the right kind of study. Now, I don't know if you all can see these pictures. But, so, let's take these 2 pictures. So, above you got, like, let's think of, like, you know, the rock star pool, you know, like the rock star, you know, this is like, you know, like Taylor Swift's pool or something like that. And the bottom one is a standard pool. So, like, let's think of it. So, if we were to think about an engineered study versus, like, engineer-reviewed study, what do we think the top one's going to be? Is that going to be— The engineered one. The engineered or engineer-reviewed?

Engineer-reviewed.

Exactly, exactly. We got it, we got it. Everybody's a fast learner around here. But yeah, so if you're doing something that's heavily customized, you definitely want to do engineer-reviewed, the full-on engineered study. Whereas like a basic pool, yeah, you can do it. And by the way, some of the people among us will note that a pool happens to have a 29-year lifespan. It isn't depreciated anyway with the bonus depreciation, but all the hardscaping and things around it would be depreciated over a 15-year period. So, but in any event, I wanted to give the example, like kind of a ludicrous example of where you'd want to do that. We'll keep going here.

Okay.

So some of the scenarios that we can do. So like I said, like, you know, I think the ideal scenario for cost segregation Like, I need to do a cost segregation if I'm a new renter with REP status, I'm a real estate professional status, and I have a new rental unit that I want to take some depreciation on now. So that's the ideal scenario. So that's that top purple guy. A few other scenarios are, so you have a passive renter. So in the case of a passive renter, the deductions are going to be very limited, especially when they buy a new property, like in California. They're going to be upside down for a few years in rent, in terms of rent, rental income and things like that. They might be net negative for a few years. They might not benefit hardly at all from that, whereas the per— the person who has REP status is going to be, be able to benefit from that. And then, and then, and then another thing that we want to talk about is the short-term rental. So a lot of people will call this the short-term rental loophole. Now, I'm not a fan of the word loophole because when something is coded into the tax law, it's for a reason. So the short-term rental exception, which allows people to put 100 hours into their rentals and then they can be an active participant in that business, and it's an active trade or business, they can take that bonus depreciation. Now, why would the— and the thing is, we all know that the government doesn't do something because they're nice. They're not doing it to be nice. What they're doing is they're trying to foster a certain kind of business and innovation to take place to help spur on the economy. So that's why— so whereas with an REP status where you have to have 750 hours in a year, with the short-term rentals, if you buy that Airbnb property, you only have to put in 100 hours. Really cool feature. But let's think about if you bought the property 5 years ago. If you bought the property 5 years— I recently had a client. Their prior tax preparer put everything at 27.5 years, all the assets at 27.5 years. They've gotten no benefit of the assets in the property that depreciate faster than that. And so they're a great candidate for an election to change that method. They bought the property 5 years ago and we haven't taken the depreciation that we're eligible for. So we want to do a catch-up. So this catch-up is available. It's an election that you can do. It's a pretty standard election you can do in your tax return that allows you to catch up to what the bonus depreciation— or the depreciation should be, and then you'll be able to be aligned from then on. So then let's talk about 10 and 20 years ago. So 10 years ago, you still get a benefit from that. that, right? If you take that— if you do that cost segregation study and you bought the property 10 years ago, you still might be able to get some benefit. But as you can— as you think about it, because this really only benefits 15-year and less property, if you do it— if you bought a property 20 years ago and you do a cost seg, you're not going to get much out of it because you've effectively depreciated a lot of that value to begin with. Now, I'm talking about a lot of stuff. This is an elite group of people. This is not entirely gibberish, but I hope that some of this is making sense. Is any of this not making sense, or do you have any questions? Yes?

Is there a purchase price where it makes more sense to do this sort of study, or is there like a breakpoint to where it makes more sense?

Yeah, the question is, is there a price point where it makes more sense to do this kind of study or not? That's a great question. I don't think that that's part of the— I don't think that that's a significant part of the consideration. I know that there's people doing millions of dollars property and then hundreds of thousands of dollars property, but that's a great question and worth thinking about. I love thought experiments like that, but I can't think of anything right now. Yes, Patrick.

Are there a lot of companies that do these cross-segregation reports? Or is it like a competitive thing where there's only 2 or 3 providers and you're always in a lineup waiting for them?

Yeah, that's an interesting question. There are a lot of people that are popping up that are doing this, and, and, and, uh, and, um, there are a few major players. Like if you go to AI, there's, you'll find that there's a few major players. And then what's really important is that there's these, there's certain databases that are out there that have the IRS-approved pricing for different assets and things like that. And there's, There's one of the references that I provided earlier was related to the methodology that's allowed by the IRS. So all those publications. So there's a smaller number of people that actually have the keys to the kingdom on that. And then there's a bunch of people coming out and saying, oh, we have something better and ours is better. But I have to think that a lot of those people might be using similar types of tools that are out there. But the most important thing is what I think, what I think like for someone like me that's doing that, I say, hey, I'm not some Johnny-come-lately. I've actually, I'm actually working with tax. I help people with actual tax strategy. And I'm not gonna give some people a highfalutin claim as to what the benefit's going to be. I'm actually gonna help them say, this is gonna be your benefit and this is gonna be the ramification of you doing that. So that's kind of where I come in. But does that answer your question?

Yes.

Yes, madam.

New STR with 100 hours.

Yeah.

Does that mean that you've rented it for a week?

So new STR with 100 hours is the question. What is— what does that mean? So with a real estate professional, you have to have 750 hours per year in order to be considered a real estate professional, and I believe that the other rule is it has to be higher than any other role that you have. So for a full-time professional, they effectively would have to have 1,000 hours. They'd have to be working like Elon Musk or something like that. That's ridiculous. Now, with short-term rentals, you can, if you perform 100 hours of work on the property and you perform the most work, more work than anybody on that property, whether it's property management, like, you know, like there's a number of things you could do to get that 100 hours. Like, so people are fearful about Like, I have a property, like Airbnb manages my reservations. Don't they spend the— No, they don't spend any time. There's a computer behind that. Like, there's not— there's like, you are the single identifiable person. Okay, so let's say you have a maintenance crew that comes out and cleans the place. Oh, the maintenance people spend 300, 400 hours a year to clean these short-term rentals. But guess what? That's not one person. That's any number of people that may or may not be cleaning the unit. So that's not— not— that's That's not an individual. If that— does that make sense at all? So, so like a cleaning group.

Yeah, if you use it for your own personal sometimes, but you're also renting it out.

Exactly, and we have that situation too. That's a great question. The question was if they're using it for their personal property sometimes, but then they are also renting it out. And that is what that is. So in the tax code, when we create a short-term rental for a client, when we're doing a Schedule E— a lot of us are familiar with a Schedule E— The type of property that we're creating for a short-term rental is a vacation home. So that's going to be a vacation home. And then with a vacation home, there are direct costs and there are indirect costs. So like, for instance, let's say you use the property 50% of the time for personal use, but then you rent it out the rest of the time. So let's say your electricity is $100 a month. So your direct costs are $50 a month. But your indirect costs are $50 a month. And so, so that's how the return goes. And so there's a direct and indirect component to that, but that is, that is actually the way to do it. And I think, I think the Schedule E with the, you know, with the vacation home thing and all that, so I think that that was created well before Airbnb ever existed, but that's the way that it's done. Great question.

Does it work in Texas?

That is the great question. I love that question because that's the reason I'm an enrolled agent, I can work in any state. Yeah, I love being a CPA, but I also love— enrolled agents are people too, by the way.

Yes. Question on audit risk for this type of cost segregation.

Yeah.

Once you prepare the report, and it depends on which one, yeah, if somebody gets audited, yeah, do you show up to the audit with them to explain what you did?

Yes, yes.

Yes.

Yeah, so, okay, so all of these providers for the cost segregation that are out there, so I'm not the only one, so people that are out there performing, that are providing the service cost segregation, they will often provide as an additional cost audit support. Now, I haven't personally experienced audit support by any of those people, but, so I don't know what the degree is that they will support. they'll back you up. Because like if the IRS comes after you and says, this is a sham, and not only are we not going to allow you that deduction, we're going to penalize you for a fraudulent return or something like that, you know, something horrendously scary like that, I don't know what degree that they would support them. But for, again, back to me as a tax preparer, and I'm going to— first of all, I want to be— my position is that I'm going to Do my darndest to be able to believe that every single return that we're doing is supportable by the the standards that are necessary. In in this case, it might be a more likely than not scenario that it'll be upheld by the IRS. But you know, but these things are audited. And and to answer your question, Joe, I have not been audited for these. But but you know, we're going through all of the scenarios to really understand what they might pick at and then try to anticipate those issues. But, yeah, anytime you have a Schedule C or a Schedule E, there's additional possibility of risk. There's a heightened level of possible audit risk, but we try to manage that and not do anything frivolous, you know, just— If it sounds too good to be true, it probably That's where— that's back to that situation of if it looks sensationalistic, it probably is, you know what I mean? So great question though. Any— does that help or is that—

Yeah.

Okay. But all right, we'll keep going, but thanks a lot for the great questions. All right, all right, applying the right kind of study challenge 2. Okay, so on the left we have, I think we have like an NBA basketball player's home or something like that, and on the right And then on the right, this is like the home that like 10 of us here grew up in. So on the left, what kind of study would we want to do for this particular property? Would we want to do engineered or would we want to do engineer-reviewed?

Engineered.

And what about on the right? Because I— could we make a case on the right? On the right, do we want to change that?

Engineer-reviewed.

Right on, right on. Yeah, so you get the idea. So like if you want to get a really— if you have a lot of really gnarly features, I was going to— try to find a picture of like, you know, one of those TVs that come up out of the floor and stuff like that. But, you know, we don't need to belabor that. I think the outdoor stuff. But yeah, if you get to Newport Coast, that looks like the Hollywood Hills or something like that. If you get one of those places, spring for the fully engineered report. But in any event, but we're gonna get into the actual process of the cost segregation. So it's relatively straightforward, by the way. How are we doing on time, Joe, by the way?

Good.

Okay, okay, good. All right, so the day of— so what we're going to do on the day of is— well, on the day of, and I say that, but what we're going to do is some pre-work, first of all. When we're going to do a cost segregation study, we want to get everything that you have available to be able to assess as much as we— do as much homework as we can before the actual day of. Of the segregation study, so we're going to look for appraisal report, inspection report. We want to look at your tax assessment, and then we just want to get an overall idea of like what's going on on the property. What what kind of cool features do you have? What kind of cool installations do you have? Things like that, and also what kind of improvements you've done. And and we'll get into that in a second in terms of when you're replacing a valuable property with another valuable property. There's a partial partial. I'll I'll see. the term in a second. But in any event, there's a process for that. And then we want to anticipate as much of what we're going to see as possible. Then we want to start understanding, you know, what do we need to take pictures of? What do we need to measure? Things like that.

Yeah.

So, you know, like in several of the cases, what we've had is like, you know, like we did a multifamily home and then— and all of the people were home at the time that we did the And so, of course, we want to make it very dignified for the people that are living there. We arranged it, in this case, in one case, we arranged it on a day that there was some maintenance taking place, and so we had a good excuse to just come on in and kind of get in there and take some pictures on that. But if you do have occupants that are in the property, you know, we just want to arrange the time to get in there. We want to take as many photos as we can. I like to take photos from every corner of the property. And then the most important— some of the most important things when you're inside the units are the, like I said, the countertops, the flooring, the bathroom fixtures, and your window coverings. The window coverings is also very important. And things like any internal appliances that that may exist. Like, for instance, if you're doing the tankless water heater or you're doing any fancy things like that, you want to get all that. You want to get all those measurements. And so, you know, interestingly, we can use Google Earth for a lot of stuff. But what we want to do is we want to get the lengths of fences. We want to know what kind of fence. There's chain-link fences and then there's rod iron fences and there's really, really fancy fences and things like that. We want to— So, you're going to Capture use Google Earth to get all that information? those because obviously there's a significant price difference between a chain-link fence and a wrought iron fence. And then even with trees and plantings, we want to see how many peach trees do you have, how many lemon trees do you have, what is the area of grass that you have, and then all of the hardscape, you know. So all the cement areas, all the walkways, all the patios, and even balconies. Like if we have a second-floor unit, If it has a balcony, we want to take all the measurements. We want to take all the railways and things like that. And things like— and there's oddball things, and I'll show you a couple of pictures later, a few oddball things that we come up with. So, for instance, Tesla chargers or your EV chargers. Another one is retaining walls. Retaining walls are really expensive to replace if you've ever done a retaining wall. And so, like, you know, like a retaining wall in and of itself is like, if you didn't know what it was, it would be kind of unassuming to look at, but then— but to actually replace that could be an enormous undertaking. So, just things like that. Then we just crank all that stuff into the system and then generate the results and everybody's happy. It usually takes around a week, by the way. But any questions about that? Any comments about any of that so far?

All right. I have a question.

So far, so good.

You can deduct the retaining wall?

What's that?

You can deduct the retaining wall and you can—

I'm sorry, you can—

there's value in that cost segregation for retaining wall? Exactly. So the retaining wall itself is— I think it's a 15-year property. So the retaining wall is— so here's a couple of pictures. So, like, so on the left, we have a very basic retaining wall that's only about 18 inches tall. And then we have a retaining wall that's like 20 feet tall. And, you know, but both of those things require significant engineering and preparation in order to be able to hold up. You know, I was at a— I had a property in Lake Forest where we wanted to put a pool in. We had a retaining wall up against a, you know, a hill in the backyard. And the undertaking just to move a retaining wall 6 feet back, like, you got to be kidding me. It's like parting the Red Sea or something like that. But anybody else have anything?

Yes.

All right, good. But yeah, that's your retaining wall. All right, so a few things to be aware of. These are the gotchas. These are the things that, you know, might affect your return for the year and things like that. So we want to make sure that, uh, that we think about that. So, so the, so the recapture— so like, again, the government isn't doing this to be nice. They're, they, they're doing this to, to promote, uh, you know, the economy and things like that. But if you sell— if you take that— if you take that bonus depreciation, if you take that cost segregation, you take— get that depreciation, and then you sell the property, you'll have a gain there that's a built-in gain that you'll need to Recognize if you sell it, and the way around that is to do a 1031 exchange. We have a 1031 exchanger here, which is awesome. But here's here's the challenge. So like like you know you you have you have this you have this challenge, and and we've talked about with with Joe a time or two. Like we have to we have to be aware of basis. So when when we have when we have when we take a property, let's take. Let's say we have that million-dollar property. We take $200,000 in a bonus depreciation. Now our basis in the property is now $800,000. So if we were to do an exchange and convert that to another million-dollar property, that million-dollar property now has a basis of $800,000. So we can only cost segregate based on that $800,000 rather than the million dollars. And that's the catch that I think that people need to be aware of. If they want to like do the rinse and repeat, quote unquote, you know. So, but, but it is still feasible to, to deal with that floor plan pricing. There's a couple of different options. If people are getting into like factories and really large business, really large buildings, let me know. We can deal with that. Oh, it's the partial distributions that I was talking. So I think that Brian, I think you were asking about about if you can do bonus depreciation multiple times on something. So like, say you have a kitchen, I got the granite countertops, I'm going to take bonus depreciation, get that? Awesome. I say, I don't like these beautiful granite tops, I'm going to go with the quartz. So we're going to destroy the granite and then replace it with quartz. There's a partial disposition process where you have to You'll have to recapture the original and then you can redo the disposition on that. So, but the older value— but you still might get a net benefit because the older value might have been less of a depreciation than the newer property. So you might still have a net benefit. A few questions. Other things here. So we can get into more of the— let me see if there's anything. So I think, I think the biggest thing is for loss limitations, you just need to be aware of that, that you might, you might be limited by the amount of income that you have, or you might be limited by the amount you have at risk. So then you might have to carry back or carry forward some of the, some of the things. So you might not get all the benefit at one year, but it's still good to have in a lot of cases. So let me stop there. Any questions at the moment? Yes, Joe.

There is one more way to get rid of depreciation recapture.

Tell me.

Death.

Yes, yeah, yeah. In fact, yeah, and in fact, by the way, that's a great, that's a great point. We are going to have— we're going to— on the last slide we have a A number of different strategies relating to tax, and inheritance is a big one. But we're also going to have a stump the CPA part, so you all can get your loaded questions ready on that. But I think that's one of the topics that we'll cover. So back to a little fun exercise here. So a couple of things here. So let's look at this, if you can see this. You can't really see my mouse, but in the top left sucker, what would we call this thing in the top left? Does anybody have any description for that?

Outhouse.

I love it, I love it, I love it, I love it. Okay, yes, I love how everybody went to the outhouse concept, but it is an actual— it's a shed. I love the she shed concept, but it's a cool shed. But here's the thing with the shed. It's actually made out of really nice wood. It's got a cement base and it's wired. And inside there's all kinds of shelves. So what is that? It's not part of the— Yeah, exactly. Like an ADU. It's an ADU there. But the thing is, how do you value something like this? So it's got the wood structure, it's got the cement base, it's got the electrical, and And, you know, so what we did, we treated it as a 15-year property and we combined all the features that it had and then did that. But this is an interesting scenario because it's built off a lot of things. And then in the top right, that's another retaining wall situation. It's not as interesting since we already talked about that. But in the bottom left, you know, so that's your Tesla charger. But if you look at that walkway, what do you see about that walkway? It's a ramp. Anything interesting or noticeable about that walkway? It's not a test question or anything, but— But, you know, the thing about this is that there is the fencing or there is the railway system there. So you have the cement walkway and then you have a railway. Railing, and then of course you have the Tesla charger. So all those things are different things. So all of those things are different depreciation periods, so you want to make sure you capture all those and don't miss out on anything. So anyway, and then on the bottom right, it's a similar situation. So we have a gazebo, we have a hot tub or a jacuzzi or whatever we want to call it, and then of course we we still have an electric— or we still have a concrete pad. And in addition, even though this is an above-ground Jacuzzi, it's not built in, you effectively have to build it in because it is hardwired. It is permanently wired in. So that is, in fact, a depreciable asset for the purposes of cost segregation, but one of the questions is how do you— How do you— value something like this. You have the, you have the, you have this, you have this gazebo that, you know, we can all imagine what a price would be in Southern California to replace that. And then the jacuzzi itself, those are cheap as chips relatively, probably you get those $7,000, $8,000, maybe $15,000 brand new. But then you have the, and then the cement pad, of course, the cement pad is still rather costly. And then of course the electrical wiring. And when you think about the wiring, it's not just wiring the, um, an outlet for that unit, it's also wiring from that unit all the way back to where the electrical box is, which can be 50 or 100 feet sometimes, or sometimes more. Yes?

So is there like, let's say I have a hot tub or whatever, and I, you know, It's a plug-in. I don't even know if, I mean, I don't know if it's a 110 or 220.

Yeah.

Is that one that can be used as an asset or does it have to be hardwired and then it counts?

That's an interesting question. If you're buying it for the purpose of the business, I think the IRS would allow you to, like if you get one of those 120-volt things, and I'll tell you why. Like for instance, with a lot of these, This is one of those trust but verify. So let you know what we want to do is really look at that in detail and let's get an assessment for that. But I think that they would allow it based on the fact that so for instance Airbnbs, a lot of people will buy an Airbnb and they're saying they're so I'm not going to rent this Airbnb out if they don't have any features. I got to have nice countertops. I got to have nice bathrooms and oh let's put in a hot tub because like I know a number of people that have a property in out out by Palm Springs or something like that. and they'll put it, you know, they'll put in a hot tub or a pool or whatever. So there's things like that, you know, as long as it's for business purposes, I think that they would allow it. But, you know, I think that would require further review. That's a great question. Yes.

I'm seeing certain markets softening in value. Yeah, I'm just curious, let's say you buy it at a higher price than what the value is, maybe a year later when you do the cost segregation, Right. Or, you know, when you sell the property, right, how does that impact your taxable income? I mean, is it just you take the loss on it, so there's no benefit to this?

That's a great question.

So let's—

so, so the question is, if we buy, if we buy a property in 2026 and, and God forbid that in 2027 the value has gone down for For some reason, and then we do a cost segregation then, is there— is the cost segregation now going to be less than it was? And, you know, there's a few different— and to answer your question, I suspect that it would probably be flat or very close to it because we're also in an inflationary period. So even though property value itself might go down, like— The stuff that is in that property might not be going down that much.

Right.

But we don't want to guess on that. But what we can think about though is, so when we do the cost segregation study, we can base it on appraisal, tax documents, and I think there was one other thing, like, or purchase price, I guess you could say. So there's the purchase price, there's the appraisal, and then there's the tax value assessment. So those are all things that we can use as inputs, and we can use the one that makes the most sense. And so like, let's say it does go down to 10%, does that mean like, does that mean that the value of the stuff for cost seg goes down 10%? I don't think so, but maybe some percentage of that. But I guess that might be a good thought, a good argument to possibly do the cost seg sooner than later. That's a great question, but I think that would be hard to answer. But I think it would— I think if I was to think about it, I think it might be in the flattest range.

Thank you.

Anybody else have anything? All right. We are getting there, folks. We are getting there. Here's the errors. So thank you for that one, Joe. But so here— so what we want to do right here, I know that, you know, I know you all are very busy. It's getting late, and I want to respect everybody's time. I want to respect Joe's time. But I'm more than happy to answer any questions related to real estate tax incentives and things that are available. And this is just a small sample of all the different tax incentives that are available, and I can talk to you about why some of those are. But— and then we can also— I'm also happy to do a Stump the CPA. Madeline, just Gave me a great stump the CPA question. I love that. But you all are way smarter than me. You all have a lot more experience. So you, you know, it's not very difficult to stump me. But if there's anything else that we want to talk about, anything. But a few things that I do want to mention though, like mileage and travel deductions. I'm seeing a lot of people that are investing in real estate that are missing those. They need to really document the mileage that they drive to the properties and the travel deductions. I always say golf is won on the short game. It's like if you're making 20 trips of 70 miles each, that's a few hundred bucks that's due back to you. So why wouldn't you take it? I know for some people that's not much, but why wouldn't you do it? Another thing is for if you're an active participant and you buy a vehicle to go to your different properties, things like that, you might be able to take bonus depreciation for that. But I want to stop there. Any questions or comments? Any of these things that they might want to cover? All right, I've said too much. No, but Joe, I think we can pass it back over to you, but I think we covered the main stuff.

Thank you. Thank you. Very, very informative. Any other questions? Questions? No?

Yes? Is there a max limit annually you can take?

Yeah, yeah, yeah.

I didn't hear the entire question.

Is there a—

Is there a max limit annually?

Like a dollar amount? $2 million, $3 million? Like a max?

I don't think there is.

On the cost seg? Yeah, and it's the— you can get a cost seg for whatever you want, but you might have to carry it forward or carry it back. If you don't have enough income to— if it generates a net operating loss. So if you—

I think what he's saying is that the max limit is how much money you made that year. That's the max limit, because if you make more or less, then it has to be carried over to the next year.

Yeah, you don't lose it, it just carries over.

So yeah, that's actually a really good question because, yeah, if you're not making $1 million and you do a cost seg Yeah. Getting a million-dollar write-off, you're not paying any taxes at all.

Yeah.

You get a $2 million cost segregation write-off, you're writing it off. And, you know, that brings up another question for me, is that you, you accelerate everything up front— not everything, that's my question. Not everything is accelerated up front, so you still have deductions up to the 27.5 years.

Exactly.

But they're not as big as they would be if you split them up all at once.

Exactly. So the frame— let's think of the frame of the house. The frame of the— so the frame of the house is typically your 30 years, and then like I said, the pool is also 30 years or 39 years in the case of a short-term rental, 27.5 or 39. years, that is. So that's— those are the ones that are going to depreciate over time, but that's still a significant amount they'll be able to take. And so— and those are also subject to the net operating and passive activity loss rules as well. We can talk about more about that, but, but yeah, it's, it's still, it's still beneficial. And what I saw with, you know, a couple people is that they put everything in the 27.5-year category, even HVAC— excuse me, HVAC stuff and stuff like that, and And then they're really missing out on a lot of deductions. So that's where we really want to make sure that they get the right timing. Thank you.

Okay. I've been holding this event for the last 10 years, and this event is live every month at the end of the month. I do have the next one planned I think it's a financial planner coming next month or whenever. Hopefully I can see all of you next month. I also do meet with whomever would like to meet with me. My only requirement is that you buy me coffee or lunch, okay? And if you're just starting out, I'm happy to talk to you and get you headed in the right direction. I see a lot of familiar faces. We'll talk about that. If I don't meet with somebody during the week, I starve. I don't eat. So it's very important that you book an appointment with me, because if not, then I get really skinny, and that's not good. One of my assistants at work says that we always go out to lunch together. Like today, we all went out to lunch together. She says the only time Joe doesn't go is when he's meeting with somebody, and honestly, that's the only time I eat, when I'm meeting with somebody. So please don't forget to meet with me.

You lost weight, you look great.

Thank you, thank you.

Uh, please, uh, does anybody have any real estate-related questions they need to ask? Yes? No? No? Yes? Okay, well, if not, then please, hopefully you heard somebody here that's very interesting and that you want to speak to, and please reach out to them and talk to them, and maybe you guys can put some deals together. Battery's going. You're yelling at me like my wife.

You're doing it wrong.

Are you my day wife or something? Okay, well, thank you for coming. I appreciate it.

Thank you.