Webinar on "Supercharge Tax Savings in CRE: With Cost Segregation"

Welcome to Think Outside the Stocks. We have this bi weekly educational series where we are trying to add value for passive investors mostly interested in real estate and other classes. Right. So we think outside the stocks. I'm your host, My name is Madhavi Nadechen and we have our guest today, Yona Vais joining in. I'm so excited to have him. Actually he's one person that I've been wanting to get to add value to you to listeners because you know, when it comes to taxes, everybody has that on the top of their mind. So Yona actually is a powerhouse in cost segregation. So I'm so excited to have him here. So welcome Yona, first of all.

Thank you.

Pleasure to be here. Thanks so much for inviting me.

Yeah. And then, you know, just so today's topic is supercharging your tax savings in real estate using cost segregation. So that's who we have Yona here who's the expert in cost segregation and who has helped many clients to save millions of dollars. Before we go ahead, a little bit disclaimer from our side that this is provided for your information and education purpose only. These are our personal opinions and if you have a prospective investor, please do your own due diligence and you're responsible for if you want to consult to any attorneys or cp, please do that. And you're also encouraged to consider that this is the examples only. This is information purpose. So the numbers, if we show it in here, there are point in time. So please keep that in mind as well. Right. So a little bit about me. Most of you know me. I'm your host Madhvi Nadechen. I'm the president and wealth strategist at Think outside the stocks. I'm you know, focused. My services are focused on providing you alternate investment options in real estate using specially Sindh simplification model which is the group investment model. And I also provide the infinity banking strategy for my clients. So it's kind of a twofold approach using saving strategy and the investment investment strategy. In my past life over 17 years I worked in IT industry. Most of it was in project management with the top five consulting company. And in real estate Journey we have a rental real estate portfolio with Airbnb, also LP and GP in multifamily syndication investments. And if you really me truly education is my passion. When I came across couple of strategies which can really make big difference in investors life, I became very passionate about bringing that education, bringing those strategy so that you can get benefit from that. So it's really, you know, this Series that we have bi weekly, every two weeks we will have something for the passive investors so you could keep on progressing in your passive investment journey and you can have that information handy. Right. So I'm like I said, I'm so excited to have Yona here. Yona is the business director at Madison Specs. It's a national cost segregation leader and he has helped his clients to save millions of dollars, literally millions of dollars using cost segregation. And his actual background is in teaching and he has a passion to help other folks into real estate journey. And he's a real estate investor himself as well. And he has really good podcast which is called Wise Advice and I like the word play there. It's, it's you know, pun intended, wise advice. Right. I love that Yona, by the way that about you. But what's really interesting is Yona is the kindest person he is. You know I love what I love about him. He's a really people connector. He is connected with so many people and he kind of keeps on adding that value to each other's life and I love that about it. He's very active on LinkedIn and he supports lot of ton of folks on LinkedIn too. So you're not welcome again, I'm so excited for today. Today we're going to talk about the cost segregation. Now a little bit about think outside the stocks. What we provide you think outside the stocks is kind of a two fold strategy for wealth maximization. A better savings system using the infinity banking system and an investment strategy using syndicated commercial real estate investments. We also connect you with different type of people like CPAs and lawyers and estate planning. And Yona here for example for cost segregation and we also focus on core is the really education. That's the free education that we are providing here. Just a little bit announcement before we go in. We have upcoming free educational events coming up. The next one which is going to be on 25th, two weeks from now we're going to talk about if you are a high, high net worth individual which is in excess of $5 million, you can use infinity banking system by using somebody else's money. That's called premium financing. So we will talk about that strategy. Not many people know about that. And we will also, you know in couple of weeks from that we will actually talk about a CPA lawyer from Anderson Advisors, Carl Zolner. He will come here and talk about you know, 2021 tax strategies or real estate professional, those kind of questions lingering in your mind. So we'll talk about that we will also talk about investing in real estate via retirement account using. You know there's a question is always that. Is it SDIRA? Is it solo 401k QRP? What's really good good about it? So Scott Moore from Advanta Ira is going to come here and talk about it and we will keep on posting about our free events. But today actually going back to Yona. Right. So I'm going to stop my sharing and Yona, you're welcome to start your sharing again. Welcome back and welco, welcome to think outside this dogs. It's on you now.

All righty.

Thank you very much. Madhvi. It is. Let's just get this up here. Okay. Email coming up there. Let's just we have a little presentation here. First of all, thank you so much. That was a beautiful introduction. Happy to be here, happy to help others also along the way. And if you guys don't know me from LinkedIn yet, please connect with me there. I do recognize a couple of names of the participants, but happy to connect with you further. And I try to be as clear as possible in the presentation. But if I'm talking too fast or something is not clear, please put the question in the chat box and we will get to that either at that time or at the end. So have a little slideshow here. Turn it into slide presentation mode. We call this supercharge your tax savings. Right with real estate. What we're going to talk about, like I said, is a lot of different things, but mostly cost irrigation. I mean this is what this is about. Before we get to that, let's just talk about what are we going to talk about throughout this presentation. And I want to try to keep it as interesting as possible. I know it's kind of like weird off that topic, but we'll try to keep it interesting. Number one, what is cost segregation? What is depreciation? They're really hand in hand the same thing. Just one is more an advanced form. So we'll talk about that. What are the benefits of doing that? What are the downfalls? Why would people do this? When should you be doing it? When I talk about bonus depreciation, who should be doing it? What's a real estate professional? This is something really, really important. And once you get this down, you are probably going to be changing your mind a little bit about how to look at real estate. A lot of people look at this especially if you are a full time employee or you're doing something else as a side investment. And that's an amazing thing. Real estate is probably the best investment you can get. But as a full time real estate professional, there's extra special tax benefits there. So we'll talk about that a little bit as well. We'll do a case study for multifamily property. Consideration can be applied to any type of property whatsoever besides your personal residence, but we'll get specifically a case study for multifamily. So, Madhavi, if there are no questions at the beginning, I'll just jump right in.

Yes, no questions. And actually this is really great with what you pointed to. Start with that people quite often think that this is for commercial real estate only. But cost segregation is every kind of investment, Right. So any kind of real estate. And I think, please keep that in mind. If you are a passive investor and think that this does not apply to you, it very much does. So just pay more attention. That's exactly why we are talking about cost segregation here. Thank you, Yona.

That's right. And it is important to note if you're just a passive investor, the syndicators or the operators of that property may be doing this, but nevertheless it's going to apply to you as well. Obviously you may not have the decision making on that, but it's really important to understand these little kind of nuances within real estate because they play such an important factor, even though it is such a small thing. So what's depreciation? Now, it sounds negative, right? And if you know what the dictionary definition of depreciation is, it means that something's going down in value as time goes on. But from an IRS tax standpoint, which is what we're talking about tonight, it is a borrowed term. It doesn't mean your property is going down in value. Actually, your property is probably going up in value. It's appreciating. But you have a deduction, a tax write off, that's called depreciation. And it's based on the principle that things go down and value as time goes on, which they do. You know, essentially the building is going down, some of the things. You're going to have to replace the roof at a certain time, you're going to have to replace the carpeting, et cetera, so on. Usually when you buy a property, you get to take the entire value of that purchase price that was spent minus a certain amount for land. And you can take that entire amount as a tax write off. That's right. You get to literally write off the entire purchase. Okay. Which is huge. But it takes a long time. So it's over a 39 year period for commercial properties or 27 and a half year period for other types of residential or multifamily properties. However, what we're doing today is cost segregation. We're going to talk about is actually segregating that cost, taking that overall purchase price and breaking it down into different categories that actually depreciate faster. Meaning you can take tax deductions at a much faster rate. And it's a pretty straightforward process. We'll talk all about it. However, if you don't do it, you're missing out probably on a lot of potential tax savings and which means cash flow for your investments. So how does this work? How does depreciation work? And again, consultation is really just an advanced form of depreciation. Let's talk about regular depreciation for a second. If you buy a building for a million dollars, okay, Single family, multifamily, self storage, doesn't matter what it is, you always have to subtract a certain amount of land that doesn't depreciate. Okay, we're going to give an example here. 15%. Because I found that the national average, there are certain locations and those depend on the property type and the location, sometimes what that land value is going to be. But that gives us an $850,000 depreciable basis. That means that's the total amount you can write off from your taxes. Okay? Divide that by 39 years or 27 and a half years. Again, commercial or residential, that's called straight line depreciation. This is going to be your tax deduction every single year. Okay? The first year is going to be less because it's prorated to the date that you bought it. But you get the point. So if you bought a commercial building or you bought a multifamily property for a million dollars, your tax deduction is going to be $30,000. Okay. Or 21 if it's going to be commercial. Think about this for a second. What is a tax deduction? It means you've made money and now you get to lower that tax liability and only pay tax on the remaining amount. So if you made $50,000 from your investment property over the course of a year, you get to immediately subtract 30,000. You're left over only paying taxes on the remaining $20,000. Now, I want to talk about this for a second and dwell on this because this is a bit of a paradigm shift for people who are used to working in corporate America. You're worse used to getting a paycheck where Your taxes are automatically deducted from that. So you don't even see the money that you made. Okay. Automatically, it's happening with real estate doesn't work like that. Real estate, you're the owner, you have an llc, corporation, doesn't matter. You now have made money. At the end of the year you have to figure out how much money was made, what are all the expenses and mortgage expense, there's all kinds of other expenses that can be deducted and then what is left over after all those deductions on the remaining amount, that's what you have to pay taxes on. Consegration can very well allow you to literally have more deductions than you have income, which is going to pay zero taxes. So you're never going to have that possibility of getting the taxes taken out even beforehand. So some fundamentals when understanding how this process actually works. So one of the main fundamentals here is that is required to be done by an engineer. So even though it's an accounting method, we're talking about taxes. Taxes, we're thinking about it. But don't get too confused. Most people, myself included, a lot of times we talk about taxes. Kind of brain fog, right? Shut off a little bit. I don't want to. I don't understand this. It's too complicated. I have a cpa. No, just keep it simple, okay? This is an engineering method. So even though it's accounting creates the depreciation, which is a tax deduction, it must be done by an engineer. So that's why there are firms out there like Madison Specs and many other national companies and local that specialize in this process. And the reason why the engineer is necessary, because their job is to go into a property and identify all these different components that depreciate on shorter life. The IRS has given a whole workbook, a whole guideline of every detail from the screws to the carpeting to the cabinets to different types of fixtures and wiring and plumbing and landscaping, all that stuff that all those things depreciate on different lifespans, not just that 27 and a half year lifespan. Okay? That's why the engineer comes in, identifies what those are, creates a very detailed report and then that's where you're going to get your depreciation deductions from. So here's an example, and this is pretty detailed list over here of from a multi family property. What actually are we looking at? What is the engineer going to find? And then once he identifies what these things are, apply a value, a cost, so to speak to These individual assets, how much of them there are and how much square footage, how many units, et cetera. And now take the value of that as a tax deduction at a faster rate. So, for example, we'll have the building that's the main structure of the building. That's really the only thing that depreciates on a 27 and a half, 39 year schedule. That's like the walls, floor, roof, doors, windows. However, there are five year property, which means things that depreciate on a five year schedule. This is usually called personal property or tangible property. But what it means, essentially anything that's not integral to the structure. So even things that are attached to the ground, like carpeting or cabinets or millwork, it still depreciates at that faster rate. And the concept is that really these things are probably going to have to be replaced over a certain period of time. So that's why you can take the tax deduction at this five year rate. 15 year, which is the second category, are land improvements. And these are things you don't even think about. They go outside your property. The concrete, the pavement, and there's a lot of different types of concrete, different types of pavement, asphalt, fencing, landscaping, you know, if you have a swimming pool or playground equipment, any of that stuff, anything outside the building, outside the Property, that's all 15 year land improvements. That means you can take the value of all that and depreciate it and take the tax deduction over a 15 year period. So essentially what we're going to do is front load a large portion of these, of the building value into these faster categories. So you can take much larger tax deductions at a faster. Can you guys hear the parakeets or are you just hearing me? Because I hear the parakeets are going a little wild over here. No, I don't hear anything.

I don't hear anything.

Okay, they quieted it down right now. I think they're not used to talking about that. Okay, they quieted it down.

No, I don't hear the thing. So you're good.

Okay, good. Great. So what types of properties can this work for? And we mentioned it could work for any type of property. Here's an example of different types of properties. And how much of the property is going to be on average reallocated to these faster life. And it's really important to note on average because every property is unique. Every property is different. Okay. There's no cookie cutters. I mean, unless you have literally like townhomes and they're Cookie cutters. But you get the point. There's going to be different square footage of all the different assets in there, et cetera. For apartments, multifamily, usually looking at between 25% and 30%. That's on average how much of the building value you can or the property value you can now accelerate or reallocate the depreciation to these faster lives. You can see retail, grocery stores, hotels are a little bit higher. Manufacturing, especially heavy manufacturing, there's a lot of equipment. Okay, so all that stuff depreciates faster. Medical centers, office, et cetera. So many different types. The second to last one over here, you see it's kind of off the chart. That's mobile home parks, mhps. That is an interesting asset class in that usually we're finding anywhere between 65 and 80% of the property on average can be depreciated on these faster lives. So that's really unique. And warehouses at the bottom do not depreciate very. There's not a lot in there besides for the land improvements outside, inside a warehouse, maybe just some shelving, maybe some lighting, things like that. But essentially there's not a lot there. Next slide. That's me I'm talking to, on average. So what we're talking about here is reallocated depreciation. Essentially what this does is time value of money. So the concept of time value of money means it's better to have a dollar today than it is to have a dollar five years from now, right now, not just because of inflation. If you guys know about inflation and now with the printing trillions of dollars, that's going to create a lot of inflation. Which means until this point, average annual inflation was between 2 to 3%. So anyways, that's pretty crazy if you think about it. But now it's probably going to increase quite a bit. But having money now that you can use to invest in real assets, that is so valuable. So that's really what the time value of money is. What we're doing is we're lowering our tax liability many times to zero. In this first years and those early years, we're increasing cash flow again. Cash flow is really what it's all about. If you made money your property, you're not getting that deduction out of your paycheck. You can use that cash to reinvest and make more money. That's going to create compound interest. Just do that over and over and over and over again and it creates so much more than had you paid the income tax. When again you don't even have to. So that's really the point we're talking about here. Paying income tax is only something you are liable to do if you have a tax liability. If you create these deductions that you don't have the tax liability, guess what? No income tax you have to pay. So we'll talk about bonus. Depreciation is so huge in a few minutes. But first let's talk about who should be doing this. Okay, Is this for everyone? And I know Bobby mentioned earlier she's going to have some specialist come on to talk about retirement accounts. And it was a very popular thing. Make sure if you're doing it right to use your retirement account to invest in real estate. It's a great way to maximize the savings. However, there are certain retirement accounts that are tax shelters, which means they're not taxed. Investing in real estate, you don't get the depreciation for those. So that's one thing to keep in mind. I don't have it here on the chart, but that's just someone who really can't benefit. Also, if you're not making, if you're a nonprofit, you don't get the tax deduction depreciation. It's only someone who's taxable or an entity that is taxable. So individual corporation, llc doesn't matter if you have a partnership, the partnership, or if you're investing passively and you have an equity interest in the property, which most passive investors do, you get this depreciation deduction according to your percentage of ownership. So if you had 10 investors or 10 partners in a deal, each one would get 10% of the overall depreciation of that property, pretty simply put. But again, this is pretty much for anyone, any type of property. And we'll talk about where that threshold is in a minute when it really makes sense because it has to do with the tax savings, number one and the cost of the study to get it done. So we'll talk about that in a second. But before we get that, just so you know, I mentioned this in the beginning who's a real estate professional because this is really important to know if you or your spouse, so maybe one of you is a full time employee, maybe one of you has a great job, never think about giving it up and you are just investing passively in real estate, which is a great way to get another stream of income. It's a great way to get that stream of income which hopefully if the sponsor is doing consequent, to have it tax free. So it's really an important thing to do. But if one spouse decides, you know what, I'm going to go and operate my real estate, I'm going to manage our own properties, I'm going to become a broker, I'm going to be involved in that. You can actually get this status, which gives you like a golden ticket when it comes to taxes. Literally. You will probably never pay taxes again, Even on your W2 if you do this right. This is a strategy. Again, everything we're saying here, disclaimer. You got to take this with advantage. Obviously, speak with your cpa, make sure this applies to you. But if one spouse has the following two qualifications. You apply. You not just apply. It's not an application. You qualify as a real estate professional. You have to spend more than 50% of your time in the real estate trader business. You really can have another job full time, and you have to be more than 750 hours a year, which is not a lot if you are actually involved in running the day to day, week to week of property management, of running your own properties, whether you're managing the construction or brokerage, et cetera. This is really important. Why? Because as I mentioned before, depreciation is a passive deduction. Okay? Income, property rental property income is considered a passive income. Passive income is granted taxed differently than your ordinary income. And this passive deduction called depreciation or consolidation goes and offsets your passive income. Okay, Pretty simple. You have one bucket, your active income, another bucket, your passive income comes depreciation and knocks off the passive income. If you have more deductions than you have income, guess what happens? You create a passive loss. Passive loss means it creates this, like, imaginary bank account that says you can't use any more of these deductions this year. You've used them all up, meaning you've used up all the income you can use against it. It carries forward, you can use it next year, you can use it in future years. But you're limited to being able to use it this year on anything else. However, once you get this real estate professional status, you no longer have that passive loss limitation, which means you can use those depreciation deductions, guess what, to offset your W2 or your other income from any other source, or your spouse's income from any other source. So let's just give an example, because I think this is really important. I literally have had clients that quit their jobs in order to go full time in real estate because the tax benefits were so great. And I'm not suggesting everyone Go out and run and do this. But if you start investing in real estate and getting all these huge tax deductions saying, wait, all this income is being tax free and I'm left over with all these losses, I can't use. What if I quit my job? I can use this to offset my spouse's income. That's like it's a huge paradigm shift. But it's going to happen one day that if you're investing enough, that equation is going to make sense. Okay, enough on that topic.

Yeah.

And it looks like you have a question.

Yeah, I just wanted to remind everyone, March 11th is actually we have in a Carl coming from Anderson Advisors and Real Estate Professional is one of the popular topic. People do want to know more about that. What exactly do I need to do? So come with your questions. And Carl is going to talk about that.

That's awesome.

Just wanted to, you know, interject that. So thank you.

It is a very popular topic and it's something that is a little confusing because there's a lot of rules.

Yep. So many questions around it.

There's a lot of rules and regulations. So definitely a good topic to get out to. There is one exception to this, which is if you make less than $100,000 or less than $150,000 a year of adjusted gross income, then you can actually use some of those passive losses against your ordinary income. That's the one exception to this. But it's, you know, obviously that's something to discuss with your captain as well. Let's talk about the tax cuts and jobs. I see we have a few questions here. Madhv, you're going to moderate those questions. If there's something that's relevant, obviously chime in. I'm happy to stop in the middle.

Yeah, I have a question about can we use the cost segregation for duplex? And I think you are going to discuss what kind of properties you are. So I think we'll just wait for that.

Yeah. Any type of property, even if it's single family. But yeah, we'll talk a little more detail at what level. Tax Cuts and Jobs act was one of the biggest tax reforms this country has ever known. And one thing that happened there was created a rule called bonus depreciation. Well, it wasn't a new rule. It was an adjustment of an old rule that just applied to new construction projects and made it now applied to any type of property that you buy. You can now use this thing called bonus depreciation. What it means in very simple terms is once you've done a cost segregation study and as I mentioned before, you've identified all the property, all those things that depreciate faster and now you've identified all that. You have the option to now take that entire amount of accelerated depreciation and take it up front in the first year as a huge tax deduction. So just to illustrate what that looks like. Oh, and I see I don't have a, I don't have that slide anymore. So I'll illustrate it just with my hands like that. You guys will follow along. If you're not, I'll try to make it as clear as possible. Let's give our example where you had that million dollar property, right? And you were taking regular depreciation, no cost irrigation, about $30,000 a year tax deduction. Well, let's say you do cost segregation. It's a multi family property and you're getting 25% of that after land, it's about $200,000 of extra accelerated depreciation. So instead of spreading that out over a five year period, where again $200,000 over five years, an extra $40,000 a year. Pretty simple. That's awesome. Because on top of your $30,000 regular deduction, you get an extra $40,000 for the first five years, basically knocking out your tax liability. What happens if you take bonus depreciation and take that entire $200,000 in the first year as a tax write off. That's what bonus depreciation is. So this is huge for someone who has a lot of tax liability. Okay. And you can use it. It's not necessarily for everyone, especially if you're not that real estate professional status. But if you are in a syndication, let's say for example, or you are passive investing, you're going to create this huge passive loss which now those extra depreciation, maybe you only have $100,000 invested in a syndication and you're getting, I don't know, let's say an 8% return on that. That's giving you $8,000 this year. But all of a sudden you look at your tax bill, your K1 statement and it says you made $8,000 and you have $50,000 of tax deductions. Well, how does that work? Right? You're not paying taxes on the 8,000, you have this extra 40 some thousand dollars. Well, if you have other properties and other rental income, passive income, you can use that against that income as well. And if you're a real estate professional, you can use that against your ordinary income or your spouse's ordinary income income. So it's. This is really where the bonus depreciation comes in as a big, big help. And there was something with the CARES act, and this really doesn't apply anymore. I apologize. This was taken from a presentation I did back in December. But what this CARES act allowed you to do, really for 2020 taxes, which if you haven't filed yet for 2020, this may still apply to you. It created this new rule called the net operating loss carry back. So essentially what that means is normally, like I said, if you have more deductions than you have income, it carries forward that passive loss. Okay? Carries forward. You can use it next year. What the CARES act did, they wanted to stimulate the economy. They wanted to find ways for people to get cash, get more money. What did they do? They said if you have an extra loss in 2020 from your taxes, you can actually carry that backwards and amend your previous year's tax returns. If you paid taxes on any previous years, you can literally now go back by amending those returns and apply those losses back to those previous years and get a refund check for any taxes you paid. So that's something that a lot of people are doing now. And really a great strategy to really pay less taxes. Because like I said, if you made a lot of money in previous years and now you get the consequent 2020, you can carry that back and get a refund.

Can they do that in 2021? Now, is it just for 2020?

No, it was just for 2020. I haven't heard anything about 2021 yet. You know, the new legislation is now passing all kinds of. All kinds of bills and all kinds of stuff. So who knows? But no word of this discontinuation as of yet. We shall see. Thank you. So when is the best time to get this done? Again, this applies to obviously the sponsors of the deal more than the. More than anyone else. But it's usually like people like to get it done in the first year of acquisition. Okay? So if you, even if you're under contract on a property and you're looking, you want to see how much is this going to save me, you can reach out. We provide a free analysis for any type of property. So you can see ahead of time what the potential tax savings are going to be, how much is it going to cost to get it done? And this is a really important thing to note, it's not contingent on your tax savings. Okay? None whatsoever. Which, to be honest, is a little. If someone is going and telling the irs, how much income tax you have to pay and then getting a cut of that, a percentage contingency, that's a little bit of a. No, no. So what we do is charge a one time flat fee. It's pretty reasonable, I'd say typically between 4,000 to $6,000. Pretty, almost nothing if you think about the hundreds of thousands of millions of dollars of tax savings potentially there. And so you can get that ahead of time. You can do this on a renovation project, you can do it on new construction, and you can actually do this retroactively. We call look back study. If you've owned a property for a year or two or five or even 10, you can go and just take in straight line regular depreciation. You can go back and without amending your tax returns, just by filing a special form that's changing your accounting method going forward, you can go back and get those tax deductions that you missed of that accelerated depreciation in previous years. Now, I will mention one thing here about the renovation. We mentioned at the beginning that your depreciation basis, meaning the amount you can take over the course of period of life of that property, totally depends on how much it was purchased for the day that you bought it. So it doesn't really matter that the building was built in 1910. If you bought it today, in 2021, you can now start that 27 years from today. It doesn't start again. This is a borrowed term. It's not intrinsic to the property being depreciated. It is based on your situation, based on your purchase price the day that you bought the property. Now, that purchase price and that basis that you can depreciate doesn't change if the building goes up in value. In fact, if you do a refi or you get a new appraisal, that doesn't change your tax basis. Okay? The only thing that's going to change is that there's actually more money injected into the property. So with capital improvements, a major renovation, you go ahead and take out the carpeting, replace the appliances, whatever it is, repave the parking lot. All of that money being spent should now be depreciated and that's going to be added to your depreciation schedule. That amount spent can also be cost segregated and you can take the bonus depreciation on that as well, even if it was done after you own the property for a year or two or five or however long. Okay, so hope that's clear. The next slide is we're going to jump right into the. The case study over here. So as long as there's no questions.

So we have few questions, Yona.

Sure.

Of course. You know we do still have that about duplex and we did that. Answer Rekha asked. I bought a residential 12 years ago. 14 years ago. It is 27.5 years after I bought bought it or property life. Is it after I purchased it? That's 27.5 years after or it's a property life.

Yes.

Again, yes, that's a great question.

It's after you bought it. The depreciation schedule starts the day you bought the property. So if you bought it 12 years ago, that means you've already depreciated almost half of the amount that you can take as tax deduction. And so that's something that is probably not going to be beneficial to do the cost of a property that you've held for that long because again, almost half of that's already been taken.

Yeah. And then we have a question. How many years can you take tax deduction from the first year? K1. So if you basically you have unused kind of.

Yeah. If you have a passive loss, that passive loss carries forward either until it's used up or until the property is sold. So once the property is sold, any of those suspended losses get released. But if you're holding it for 100 years, whatever. If you have losses, they're always going to carry forward use in future years. Yeah.

Thank you. Yona and I do have a question. I mean I think it'll also help audience to talk about recapture a little bit. If you have coming it up, we can just address it then or we can talk about the recapture at the cell whenever you think it's a logical point.

Yeah, that's a great question. We're going to talk about it right after the case study. It's a great question and so we definitely want to touch on.

Perfect. Thank you, Anna.

Okay, no problem. My pleasure. So yeah, this case study is basically a multi family property and this is someone that used to own a lot of single families. I'm going to talk about why that's important to this story in a second. But this was a 32 unit purchased for 1.75 million. Again, this was a guy who owned many single families. He tried to do a 1031 exchange and if you don't know what that is, it's a way to defer your capital gains tax and also defer depreciation recapture tax which we're going to talk about in a second. Well, actually let's Talk about it right now, because I want to just make sure this is clear. When you buy a property again, you're doing depreciation you take every year. When you go to sell it, you have capital gains tax. If you made any money on a profit, you pay a tax on that and you have what's called a recapture tax. Capture tax means you're paying a tax on the amount of depreciation taken over the course of ownership. Now, that recapture tax and that capital gains tax can both be Deferred. With a 1031 exchange. This is what this guy. There's also other strategies to get around as well. But this guy wanted to do 1031 exchange and a bunch a big portfolio of single families he had. What happened was 1031 exchanges are a little bit complicated, and if you're not doing it right, you can mess it up. And that's exactly what happened for this guy. So he had a failed 10 to the 1 exchange, which means he wasn't able to identify the right properties to buy. You're exchanging, but you're buying new properties. He wasn't able to identify at the right time. So he was going to be hit with a big capital gains tax bill, which some people would say, you made a lot of money, so you have to pay some taxes on that. Right. But in real estate, we say, no, if you make a lot of money, find out ways to get tax deductions that you don't have to pay tax on all that money that you made. Okay. So that was what he did. He researched it, and he ended up buying this multifamily property. Doing the cost irrigation. I just want to paint this picture a little bit. He would have had close to $300,000 of capital gains tax to pay. Okay. Not only was the consolidation able to wipe out his income tax bill from the property, but also the capital gains tax bill. So without consolidation. I'll repeat that again in a minute. Without consolidation, would have had approximately $54,086. Again, that's taking $1,075,000. Dividing it by $27,000. Subtract the certain amount for land. That would have been great. However, this property was making pretty good money. Pretty good cash flow. Was making over $120,000 of net operating income, which means he was still going to be paying taxes on about $70,000. Okay. Which not a whole lot to pay, but it's still money you can wipe out. What we did with the consequent is by identifying what those assets are in the property that depreciate faster. We found that again, land doesn't depreciate. We're applied about 72% again, the majority of to the 27 and a half year, that's the structural components of the property. 8% to the 15 year, that's the land improvement. So that's over $120,000 to the land improvements, landscaping, pavements, fencing, signage, et cetera, anything outside the building and 20% to five year property, which is $298,000. So altogether the accelerated depreciation on this property was 28% of the property value. Okay, $421,000. That was what he took as the 100% bonus depreciation. Again, you had the option to take that all up front in the first year. I just want to paint this picture again. $120,000 of net operating income from this property, okay, that $420,000 knocked that off. He's paying zero taxes on your $120,000 of income, cash in your pocket. Then he had close to $300,000 capital gains tax. He decided to use the extra losses to offset the capital gains tax in the current and same year and he paid zero tax on that as well. So this is something that can be used across multiple strategies to utilize this benefit. And this guy literally called me up with tears in his eyes because he couldn't believe it. That you think about it, you just saved hundreds of thousands of dollars that you would have had to pay out of your pocket with this simple strategy of paying a few thousand dollars to get this study done. It's just mind boggling. So what should really go into this and why is this so complicated? And we talked about before, why don't I know about this or why didn't my CPA tell me about this? And really, to answer that question, we have to understand, well, again, this is not an accounting thing, this is an engineering thing that applies to your taxes. So most accountants aren't necessarily proactive enough to tell you about, hey, you should be doing this and you should be doing that strategy, usually reactive, right? Taking those numbers and just applying them to your return. But this is taken directly from the Conservation Audit Techniques guide. You can go on the IRS website, you can find this. You want to look very detailed into consideration study. As if this presentation wasn't detailed enough, you want to take a deep dive and especially if you have insomnia, I highly recommend you checking out the Incarceration Audit Techniques Guide. And you're going to find a lot of plethora of information over there, including this page here, which is the 13 principles that go into getting this study done, which we're creating a report that's about 80, 90 pages long. And in that has one page depreciation schedule that you're going to hand off to your accountant. But that 90 pages is very detailed. There's all the calculations, there's a whole nomenclature, there's a numbering system that needs to be used, et cetera. It's very, very detailed. That's why you need to hire experts to do this and something you really cannot do on your own. So that's really what this is all about. I did mention recapture tax beforehand. I'll just mention it again here. It is something that you definitely want to be aware of, that you have a tax that you're subject to. And I'll emphasize you're subject to because in real estate investing, just because you have a tax you're subject to does not mean that you actually have to pay it if you can find other means and other strategies to lower that or to offset that. And so there are many strategies, including partial asset disposition and other things that we can talk about at greater length. But I think this has been probably enough information for anyone to soak up in one evening. So with that, just leave it at a little bit about our company. As I mentioned, we're the biggest at this point, largest national company that's focused specializing incarceration. Done. 17,000 of these helped save over $3 billion in taxes and counting. It may be up to four by now. I really hope I haven't been counting recently. But most important thing is you want to make sure this is audit protected, meaning you never want to get audited. It's not a red flag to do a conservation because again, this is all laid out by their IRS and they actually encourage you to do a conservation because really the correct way to appreciate your property, but you just want to make sure that it's done correctly. So want to make sure you have experts that can back up their work and that's it. So we'll take questions.

Thank you, Yona. That was awesome. I mean, I've learned so many new things. I did not know that you can depreciate things like the closet shelvings and cabinets and the window treatments. Right. That's kind of the smallest expenses that you don't even see. So thank you so much for such a detailed explanation about cost segregation. I'm sure many of the listeners today, the viewers today, had this question about how do you really save taxes Using the, you know, the cost segregation, I think that got answered today. Some of the questions actually I have, you know, we do have some costs associated because you know, it needs to be done by professionals. Right. So what is that sweet, sweet spot where you can spend that money and get that benefit? Say for example, if somebody has a single family residential rental real estate or a portfolio of real estate, can they do that study on that portfolio? If it is like you know, three, three, you know, the rental houses or it's a duplex or a fourplex, what is that sweet spot where the cost of cost segregation can be effective to use that tax benefit?

Absolutely.

Excellent question. So my usual answer to that is it really depends on the situation and especially if it's something that, if you're a real estate professional, that's really where it's going to make the biggest difference. However, usually if you have a property that was purchased for over a half a million dollars, usually it's a no brainer, meaning the tax savings are 10x beyond what you're going to pay to get it done. There is something to be said about single families especially, especially if they're all of smaller single families. We have a special deal with single family properties that we do at a much more discounted rate, especially if there is a portfolio.

So even though on a multi family.

We charging four or five thousand dollars to get it done, the single family will charge about $1,000 or so per property, which actually makes it much more feasible because again, if you're going to take 20%, let's just use that as an average. Number your tax of your cost basis of that purchase price that you can now depreciate faster. It's going to make a lot of sense. But again, it's going to make sense most for that person that can use those deductions.

Okay.

And I want to emphasize that because if you're not a real estate professional, you're going to be limited to how much of those deductions you can use. You know, it's going to be limited to your tax savings from your property.

For your rental property income.

And that's, that's brilliant.

Thank you so much, Yona. That's great. And we have another question from Rekha here. If I have not done cost segregation, I'm planning to sell the property this year and I believe this is either a single family or a condo, something like that. Can I still do cost segregation, apply that loss towards the gain from this property?

That's a great question. I love the, you know, Love the fact that it's a very detailed property question as well. Yes, you could. I would definitely speak with your tax advisor because you want to make sure that it's going to work for your situation, but ostensibly it is something that you can do.

Yeah, that's, that's awesome. And I think I have another question. It's just my question. I think I have, I've reached the end of the questions that's been asked. But you know, when it comes to cost segregation, especially for the passive investors, and you had an example in your slide about a person who's outright buying that multifamily. Can we go back to that example? Consider that passive investors and I believe if it is 1.75 million property, if it is about 20, 30%, if the investors money is coming to the table, it's almost like a 500. Right. So for coming to that 500, can we go back to that share, Yona, and can we kind of display it in terms of passive investors? If they're like five passive investors coming up, what that looks like, that losses looks like for them just a paper loss.

You want me to pull that slide back up?

There we go. See it there.

So yeah, this portion the of 420,000. So what happens if they're partners now? The partners again are going to get their percentage of that depreciation according to their percentage of ownership. So if you have five partners in this property now actually there's something here I did not mention which is really, really important. That it's something that I realized I really should have in the slide deck and I forgot to put it in, which is that it your depreciation, I mentioned this a couple times already, is based on the purchase price.

Okay.

Now that means that you don't even have to put any money down. You can literally buy a property that was seller financed or you can buy a property that maybe you put down 20% and the bank is financing the rest, but you get the tax deduction as if you paid for the whole thing.

Okay.

So this is really where there's actually a big difference between an all cash deal versus a leveraged finance deal. So an all cash deal, it means you're putting in $1.75 million, but you're also only getting 1.75 million of the tax deductions.

Okay.

Which means your, you know, your investment is very large and your tax deduction is going to be relatively smaller.

Okay.

You put in 1.75 million that first year, you're only going to get $420,000 of tax deduction, bonus depreciation. But if you bought this property for a leverage, let's say for 25%, right? So guess what, you're putting in $400,000 to buy the property and in the first year you're already getting back a $420,000 tax deduction. So again, if you have more equity or more cash in the deal overall in the capital stack, there's going to be less proportional depreciation per investor. Does that make sense?

Yeah, absolutely. And that's exactly what happened with one of my properties. We had invested 50,000 in it and we got 49,000 cave and that's the cavan losses. So we could write it off. So even though we got like about 8,000 something cash in cash. And if you're a real estate professional, as you know is mentioning, you can take all that 50,000, 49,000 CA1 losses applied to your active partners, which is the active income. But if not that, you can carry it forward to the next year and the next year after that so that you can utilize it whenever, till the time it gets done. It gets right. So the next question I have is, you know, do want to talk about that recapture? Right. A lot of people know about recapture a little bit, not so much in detail, but can we talk about what that recapture is, how much needs to be recaptured and how you can even stack up cost segregation on top of cost segregation? We did talk about it a little bit in detail, but how you can just stack up cost segregation on top of cost segregation to get rid of that, even the recapture. Can you talk a little bit about that just starting?

Yeah, absolutely, absolutely. So without getting too detailed, there's basically two different categories of depreciation recapture tax.

Okay.

It's a tax that you're subject to on the sale of property based on how much depreciation was taken during the course of ownership. So one category is something that's capped at a 25% tax rate. Okay. There's another category that's taxed your ordinary income rate. Okay. There's two different categories depending on how much was used. A lot of the five year property that you've taken from the bonus, depreciation or cost segregation is actually taxed at a higher tax rate on the sale of the property. So if you hold a property for one year and you took bonus depreciation, you're going to get taxed with the recapture tax at that higher tax rate of what you've taken. However, if you wait five years until.

You Sell the property.

You're basically what you said is to the irs, I have now assigned a value to all this stuff that depreciates on a five year schedule, which means after five years there's no more value to it. No more value to it. Now you can actually do what's called a partial asset disposition on the sale of the property. Again, a very detailed form that needs to be filed with the tax return.

But what you do when you, when.

You do that is you essentially take away any recapture tax on that portion of the, the depreciation. So that's a huge strategy people use. But another one as you mentioned is.

If, remember I mentioned before, that your.

Depreciation is a passive deduction and that's used against your passive income. And that's lumped together if you have one property or if you have 10 properties, all those properties, that passive income that's on your schedule E, that's all lumped together. And any depreciation you have can now also be lumped together to offset that. What happens if one year you sell property A and you buy property B and in property B you cost segregation and you get this huge amount of bonus depreciation.

More losses than you can use. Right?

More losses than you have income like you said, your income of 8,000 and losses of 49,000. What happens, you're going to have recapture tax on property A and the extra losses from property B you can now used to offset the recapture tax on that. So just another strategy that can be used. I know a lot of people think about recapture tax and it's actually a lot of people understand it wrong because they hear the word depreciation recapture and I've seen this on Bigger Pockets forums time, you know, time and time again and they think it means you have to pay back all the depreciation. That's not what recapture means. Doesn't mean you pay back that those deductions. It means you have a tax where you're subject to a tax on the amount of depreciation taken, which is anyways usually less than your ordinary income tax rate. And again, there are many strategies to lower that tax on the sale as well.

Thank you for sharing that, Yona. Because with recapture of the depreciation, a lot of people have misconception about it. And I have heard people even say that, hey, I'm not taking depreciation because I don't want to recapture it. Right. So if you take it or not, you know, you have to recapture. That's, that's one.

Yeah, it's not exactly, you're not recapturing anything. You're, you have a tax you're subject to just like you would have a capital gains tax you're subject to.

So, so that clarification definitely helps. Right? I have another question from Winky. How about the IRA account? How and when can you deduct for you know, the investors, the IRS investors like ira so.

Hi Vinci, thanks for joining. First of all, this is great.

It's an interesting thing.

There are multiple different types of IRAs and retirement accounts, many of which as.

I mentioned at the beginning or somewhere.

In the middle, you cannot get the benefit from depreciation on some of those. For example a Roth IRA or 401K, a traditional self determined IRA. You can actually, you can use the depreciation especially if you know if it's leveraged because you can get your pay, you have the tax on that. So you're going to be able to take the tax benefits from that. However, like I mentioned, there's certain retirement accounts where you cannot get it use the depreciation because there are already tax shelters in place already.

Yeah, great question Vicky. Because you know, not many people understand, understand that they think that if it is a retirement account and you are investing into real estate, that's basically the tax free growth. That's not how it works. If you have leverage and you have, you know, say for example if you're investing in the, in a multifamily syndication and if the sponsor is taking that 75% loan or 70% loan on the leveraged amount there is that you bet the, you know, the taxes that can apply on your retirement account. So being really good question, you know, a lot of, you know, viewers would get benefit from that. But with cost segregation, if you are in SD IRA you can get that benefit. And we actually have Scott Morick from Advanta IRA coming in March or so. He will talk about how you can invest using other options where you would not be taxed in the way it's the SDIRA could get taxed for the leverage amount. So you know, if you want to come back and join us for that, do come back. That's going to be a really interesting session too. So coming back to the cost segregation, I mean this was great. And I don't see any more questions in the Q and A window. I'm just going to go check the chat window. Yeah, I think we covered everything. So great session. Thank you so much again. All right, we have more questions. Hold on a second. EQRP is UBIT exempt. Yes, EQRP is UBIT exempt. And so is solo 401k or QRP, if you want to do that. And Scott is going to actually talk about that, too. Do you want to talk about that, Yona, as well about eqrp?

I can't really talk about EQRP because it is a. It is something that is trademarked and it is something that is someone invented. Basically, it is a qrp, which means a qualified retirement plan, which is another.

Name for a 401k.

Yeah.

Someone decides to trademark that and make some money off branding it that way. But essentially it's no different than a 401k, which means it's not eligible to get the depreciation deductions. But you want to make sure you're very careful with those type of things because they're a little confusing. You just want to make sure that any retirement account that you are using to invest in real estate, that all your bases are covered in terms of having the proper custodian and filings. And, you know, first of all, most importantly, you know what type of retirement account you're actually using because the rules.

Are different for each different type of account.

Yeah. And exactly. You know, when Scott is going to talk about, he will talk about these differences from Advanta Ira and he's the expert in this area, so you can actually come back and, you know, have this question. And what I like about Advanta Ira is that it's very cost effective. You know, we do set this up. That's another thing that I like always to be cost efficient in terms of what the services that I can bring for the investors here so that, you know, you don't have to spend so much money like, you know, other people charge and you can still have the same benefit here. So now I have more questions. Thank you for hanging in with us, Yana, and thanks everyone else too. You know, it's a little bit over one hour and thank you so much for still hanging in with us. We have Haj. Welcome, Hajj and I have a question from him. I could have missed it. Can Yona talk about real estate? Professional. Professional. So, yes, he did talk about it, but Karina, do you want to just take a couple of minutes and talk further about that?

Hutch, you're gonna have to catch the replay, my friend. No, and all seriously, we, you know, we did, we did talk about it. It essentially, it's a very detailed topic and as Mavi said, they're gonna have an expert from Anderson come on a few weeks to talk about that. But what essentially the main thing you need to know about the real estate professional status is that if you qualify for it, you can now use any of these passive deductions to offset your active ordinary income or your spouse's ordinary income. And this is going to apply to really anyone. But getting that status is something that you want to make sure. You're tracking your hours and you want to make sure that those hours of time you're spending are the activities that qualify to get that status. So things like brokering properties, acquiring, you know, managing or operating all those things are, you know, hours that can be spent to get that status. However, there are other things just like you know, maybe doing some accounting or bookkeeping or you know, et cetera or negotiating necessary or looking or underwriting. That kind of stuff is not actually hours that can be counted towards that real estate professional status. So you want to make sure you discuss this with your tax strategist or CPA and get it clear. But you always know where to find me. Can get a little more details there?

Absolutely. Thank you so much Yona. And I'm just putting back the event schedule of upcoming events where we are going to talk about you you know with the Carl Zollner from Anderson Advisors on March 11th. He's going to focus on you know quite a bit time on this topic. He's going to talk about 2021 tax strategies but the real estate professional I'm getting so many questions on that. So we will have a dedicated topic there and for the SDIRA. So look your 401k QRP, that's the topic coming on March 25th. So just please join us back if you have more questions or you want direct person to answer to ask these questions to. Right. So going back to our Q A or chat I think yeah we have message from Rekha. Thank you so much. Very very informative. Thank you so much Rekha for joining. Yes, I think this is, this is a great topic and Yona is here does a fabulous job of simplifying things. I love about it. So just to summarize, right. I mean the cost segregation is not just for the commercial real estate but you as a single family owner of rental property you can also take advantage of it. Of course it's more beneficial if you are a real estate professional but there are things that you can depreciate much faster especially the five year depreciation schedule. There is certain things you can depreciate 15 year and those which are 5 year if you're holding that property for more than 5 years, you don't have to recap so almost 20% in what Yona said in that example, you don't have to recapture if you're holding it for more than five years. So if you haven't done it and you want to go back and do it, it still can be done. If you're planning to sell the property and use that kind of depreciation as a tax benefit, you can still do that. And even as a passive investor in multifamily syndication investment, that's kind of what comes back to you. And I have seen, you know, anything between 60%, 70% or even 100%, like the example that I give if I reinvested, you know, like 100k, you can in the first year very much see almost 60 to 100% of that depreciation. So that's, that's the benefit of real estate investments because the taxes is the biggest leakages I think can happen to our investments, our money that coming in, whatever that extra dollar that we are making, you know, if we are giving that big chunk to the Uncle Sam, these are the ways that you can avoid doing it. And if you want to get in touch with Yona, he is, you know, big on LinkedIn, so please get in touch with him. Yona, is there any other way that they can get in touch with you if they want to create that cost segregation study for, you know, whatever the duplexes, fourplexes or single family, please, please indicate in the chat. Yeah. Thank you so much for everyone for joining in. I know it's kind of tricky over the weekday to spend this time away, but I really appreciate your time and Yona, I really, really appreciate you joining. We have a lot of folks joining in here today as well as live on Facebook. If you have any questions, please come back and you know, please come back and ask that questions. And Yona has posted his, his website, so get in touch with him as well. Thank you so much everyone for joining and thank you, Yona, for joining as well. For Think Outside the Stocks, Please go to www.thinkoutsidethestocks.com and you can get in touch with me as well. Thank you again for joining everyone and thank you so much, Yona, for all your knowledge bombs today.

Thank you. It's been a lot of fun. Thanks so much.

Thank you so much. Bye.