EP9: Eliminate Paying Taxes with Real Estate

Welcome to the Mundo Show. My name is Mundo, I am your host and I am one of Pace Morbi's business partners where we own a 181 unit apartment complex together. I'm a two time CFO of the year. I own multiple companies, I have been featured in Forbes and I've spoken on the same stages with some of the best such as Grant Cardone, Cody Sanchez and Pace Morvy. I am your host where we talk all things related to real estate and business. So let's go ahead and dive right in and talk to today's guest. Welcome back to another episode. My name is Mundo. I'm here with my good friend Rob and today we are going to talk about eliminating taxes with real estate. So welcome again to the show, Rob. Appreciate you coming on board.

Hey, thanks for having me, man. I didn't realize I was, I was coming on this is, this podcast was such an esteemed resume that you got going here. Window. This is, this is good.

You like, you like the intro video?

Yeah. Let's go.

Well, let's dive into talking about how you can save money on taxes. Everyone loves paying the tax man. Right. So real estate is a phenomenal way to avoid paying taxes.

Yeah.

So I mean just, let's just start it and go into what kind of questions do you have on that topic.

So investing now for a couple of years I started investing being like, oh man, I'm, I mean this, this is going to be like a business that I'm going to start that's going to generate a ton of cash flow and like kind of, kind of generate some, I don't call it quick, quick wealth. Right. But like I had a little bit of that perception and, and I feel like through listening to people like Cody Sanchez and she's, she's been doing a lot more with Pace even recently too.

Yeah.

I have, I've kind of shifted to be like subscribe to what she says so often of like real estate's really about long term wealth and the cash flow. Even Pace says this a lot like the cash flow is actually more for like you know, sustaining like your day to day operations and things like that. So anyways, I've heard you mentioned so many times too is like being accounted guy like all the tax benefits and you've hear, you hear that all the time too. So that's another thing that I, I have personally along with saying, okay, real estate is really about long term wealth. It's almost like under a different bucket. It's like man, it's about tax Benefits. And I guess from your perspective, what's like the biggest, really, what does that mean in terms of, like, what's, what's the biggest incentive from that realm of investing in real estate? Like, how does it really help you so much if you don't have a ton of businesses or even just on your personal, you know, cut. Cut the taxes you owe.

Yeah. So, I mean, there's really two ways that it can benefit you. One, and by and large, the biggest bang for your buck, where you can really reduce a lot of your tax liability is by being a real estate professional. And that's, you know, it's really a box that you check on your tax returns certifying yourself that you're a real estate professional. Now, any, like CPA or anyone preparing your return, they're obviously putting their name on the line. So they're going to want you to substantiate that or at the very least, make sure you have the ability to substantiate that claim if you were to get audited by the irs. Now, if you're someone who's concerned about getting audited by the IRS, once you make that designation, it does increase your audit risk. So it doesn't mean it's guaranteed you're going to get audited, but there is a higher chance that you're going to get audited when you make that election because of the tax benefits involved. And basically what that means is you're saying you're a real estate professional. So by association of that, all the income you generate is considered active income. So if you think about, you know, if I try to highlight tax benefits, there's really two buckets of income. You have your active income and then you have your passive income. And passive income is really what real estate income is. And that's really classified as this passive income on, you know, on this right side. And then on the left side, you have active income, which is typically what most people have in their W2. So W2 is considered active income. If you have businesses that you own, that's considered active income. And where that comes into play for taxes is you can't just go buy a property and then do a cost segregation. And let's say that cost segregation allows you to Capture, you know, 30% of the depreciation in year one. You can't just take that. Let's just say it's $50,000 worth of depreciation, right? So you take that and let's say you make a hundred and. Or just a hundred thousand dollars a year. You can't just take that $50,000 depreciation and combine it with your $100,000 active income and reduce your tax liability that way. That would be great if you could, but that's not typically how it works. So because that's classified as passive income, the IRS doesn't really allow you to cross over between active income and combine those two buckets, if that makes sense, unless you're a real estate professional. Now, when you're a real estate professional, you it's all combined and aggregated into essentially one class of income as opposed to not being a real estate professional. It's not viewed that way and it's very distinct and separate. So no matter what you do over here on your passive side, it's going to be a completely different tax snapshot than your active side and it's going to be treated separately, two different calculations. And that's the big benefit of being a real estate professional. And what a lot of people, a lot of people have challenges qualifying it when they make a lot of money on their W2 side. Because it's really hard for you to substantiate that you're a real estate professional if 100% of your income or a very large percent of your income is coming from your W2. So I think the qualifications for that on the real estate professional side is you have to have 750 hours of active participation in real estate. And there's actually some things that are excluded from that 750 hour calculation. Like for example, if you're going to acquire a property, you and I both know how long it takes to acquire a property and how many hours. Sometimes it's hours wasted. Right. You know, how many deals do we look at before we actually do a deal? Right. I could look at 20 deals and underwrite 20 deals and have 50, 60 conversations with sellers and agents before I even get a deal under contract. Right. All of that time you spend is not considered towards that 750 hours in the eyes of the IRS.

And unless, unless you get under contract.

Well, even, even. It's not even in that whole process like you have to own the property to then it's essentially looking at the management once you own the property. Once you own the property. Correct?

Right.

Yeah. So you have to own the property. It's hours you spend managing it. You know, do it like from property management perspective, doing repairs on the property, like that kind of stuff. And there's a list of what the IRS will, and it's a very broad list. It's not super specific. It's just kind of like general classes of activities that is allowed. But one thing that I know is not allowed is the time that you spend, you know, looking at properties, acquiring properties, studying the real estate market. If you're looking at industry trends, that's not something that counts towards those hours. So you really have to get in the nitty gritty and keep a really good ledger of your time where it's spent because it will be challenged if you are ever audited.

Yeah.

And so getting past the 750 hours is not a challenge for someone like myself. However, what can be a challenge if you have a W2 and you're earning a lot of income that's non real estate related is the materiality test. So in that materiality test you have to spend more than 50% of your time involved in real estate. So you kind of have two tests you have to meet. So you have the 750 hours, that's great. But if you're working a W2 and let's say you're spending 2,000 hours a year in your W2, by definition, if you have to spend more than 50% of your time in real estate, that means you have to be working over 2000 hours in real estate. Right. And that's the big hurdle that people have to jump over to meet that materiality test. So that can be pretty challenging because you know, who has 4,000 hours in a year that they can. I mean, that's a lot of hours in a year. It makes it really, really challenging. I think the sweet spot is pro you, you probably have to get it to where you're spending 30 hours a week on your active income, like whether that be W2 or whatever you're doing, and then 35, 40 hours a week on real estate activity stuff. And you know, if you're looking, that's 70, 75 hours a week. I mean that's a, that's really getting after it. Right. And that's where you can start pushing yourself into that materiality above that 50%. Now if you're full time real estate, like all you do is live, breathe, sleep and eat real estate. You're a real estate professional, you're spending 100 of your time in real estate, you're earning 100% of your income in real estate. It becomes really easy to meet those tests. Right.

So what you're saying is if I want to, if I really want to.

Use.

Real estate to help my tax benefits, I need to be a real estate agent or run a full Time wholesale company. In addition to, in addition to growing. If my goal is to grow a portfolio and use the tax benefits.

Yeah. And I think it's more like because wholesale is an active business. Right, right. And there is a fine line on what you can consider real estate activities related to, you know, your properties. Right. So you really want to drive as many hours as possible related to the direct management of your properties that you own. Right. If you own one property, it becomes pretty challenging to justify that you're spending 3,000 hours or 2,000 hours on your one property. Like what are you doing? Right, yeah, there's just not that much to do. But the more properties you get, the more involved you are in real estate. You know, if you have a wholesale company, it's still real estate related. I would just be careful about like what you are calling, what you're, what you're spending your time and what you're claiming your time in those situations.

Yeah, you, I would assume like you, you talked to me about how you have created a property management company and I remember asking you, well, don't you, you need a license for it to own an operator property management company, a real estate license. And you go, well, not if, not if you're, you know, managing your own properties.

Yeah, yeah. So I have a property management company, I don't have a agent license whatsoever. But I'm managing my own properties. It's no different than me owning the properties and me self managing it as a landlord. Right. That's essentially what you are now. I'm not going and managing, putting down.

A real estate professional, having that.

Yeah, absolutely, yeah. I'm actively in that entity. I'm actively managing the property. And those are all hours counted towards, you know, that real estate professional designation.

Yeah, yeah, yeah. So I got a friend who had really, you know, started a roofing company, had a couple of really great startup years and is kind of sitting on a bunch of cash. And he came to me and said, you know, I know you've been doing a lot of real estate investing and I think I need to, I need to, you know, put this money somewhere to offset, to basically write it, write it off. Like a big expense to write off on my taxes. Is that, is it that simple to have that type of write off? Right. Like if you're someone who owns a business and your business is doing well, is that part of what you can do a little bit where you go, go just put your money into. Either you buy, you know, another single family home, that's a vacation home that you rent out to other people or maybe you buy a small multi family, or maybe you buy a share of a large multi family. Right. Like is that something that can be a part of the tax benefits of real estate?

Yeah, absolutely. So kind of getting away from the real estate professional designation because not a lot of people are going to be able to do that. Right. Because you obviously, you know, for all the reasons we just discussed, you got to be in real estate pretty much full time, which doesn't represent the large body of people that are investing in.

Real estate want to invest in like invest. Because that's less time.

Yeah, exactly right. But there's still benefits that you can get out of that. So for example, there is a special allowance that their IRS allows you to take in terms of deductions for active participation in real estate of passive activities. So what that really means is just because you're not a real estate professional doesn't mean you can't get some large benefit. But there is a cap to that benefit. So for example, if you have a modified adjusted gross income of below $150,000, you can actually get this benefit. So in order to get this benefit, and I got this benefit on my tax return, and the way to do that is if you have a portfolio of properties or even if it's just one property, but you actively manage that. And active management in the sense of this deduction isn't necessarily like having to control every single component of it and have to be running the day to day operations. You just have to have management authority to hire tenant or put tenants in the property, you know, hire contractors, like that kind of stuff. You just have to have authority and you have to be involved. From like a management perspective, you also have to own at least 10% of the property. So if you want to take advantage of this type of deduction, you have to have some equity in the deal. And basically what it does is it says, hey, we will allow you to take a portion of this, you know, passive deduction that you have over here. Let's say you have all this depreciation from the cost segregation that you did. We'll allow you to take that as long as you report under 150k on your tax return. And that is a great benefit. So if you have, let's say, you know, your friend is generating $200,000 a year in income, that doesn't necessarily mean that's what his modified adjusted gross income is because he could report losses on his tax return. Even though from like a financial perspective, his Company made money. Right. And that's through various things like, you know, depreciation. Right. In his business, like if he bought equipment, he could drive that number down.

Right, Right.

And essentially, if, you know, he is wanting to actively participate in real estate and it owns at least 10%, that's an additional way for him to get some benefit. But if he makes over 150k, that kind of takes that away. Right. And so really what that limits him to is two options. Option one is he invests in a short term rental. Right. And he has to actively manage that short term rental problem.

It can't be like somebody else's and he's just the money.

He has to be active in it. He has to manage everything, you know, day to day communication with all the Airbnb guests. He has to play an active role in repairs and doing all that kind of stuff. And that's probably not suitable for a lot of people because again, going back to what you were talking about, people just want to be passive because that's what it's supposed to be, is passive real estate. Right.

Right.

Now that may not be an option.

Right. I, I, sorry. One quick clarification though, about that. For someone that is watching and being like, yeah, this is, I mean, there's like no tax benefits then because I gotta, I gotta do a bunch of work and I don't want to do whatever. Right. Like being active in the properties that you own can simply mean, right. That you, and clarify this for me. You can hire a property management company still. Yes. And like you're, you're still active as the, I mean, even if you hired like multiple people to do multiple things to help you operate this business. Right. That's what it is. Short term rental is its own business. You're still active. Like you're, you're just now the cfo.

Yeah.

That get really cloudy when you report your tax.

It does get a little cloudy, I think it's, it's very situational and depending on what you're talking about. So if you're looking at the short term rental component of it, you do have to actively manage it yourself. You wouldn't be able to have a property management company. Like if you're going to claim that and try to take active depreciation on that property, because that's what you're trying to do. You're saying, I want to take depreciation on this property because it's an active business. And that's really the, the only way to make that an active business is by you being involved in it actively.

Right.

But when you go back to that special allowance for what we were talking about before, where you're taking like a portion of that passive deductions, like for all that depreciation, in that case, you can hire a property management company. You just have to have the ability to place tenants yourself. So I think that kind of goes back to the language in whatever that property management agreement is. It needs to be crafted in your favor and you just need the ability to have control of the situation. And if you're releasing complete control to them and they're handling everything, then that probably is not qualify. But if you have control in that situation, it probably would qualify. So it all depends on kind of what you've agreed to.

Okay, interesting.

If that makes sense.

Yeah. So, so this is, I get, putting it all together, if you make over 150 000, you. It gets a lot harder where you have to be very active. But if you make less than150,000, there's a lot more options available to you.

Well, what I would say is if you're making over 150k, you may be asking like, okay, well, I, I don't hear anything about eliminating my tax problems. Like you've said nothing so far. Right, right. And the benefit is really looking at the bottom line and where you're putting your money. So if you're putting your money in the stock market, whether that be pre tax or post tax, you know, there is a tax impact at some point in time. Like you will be paying taxes either on the front end or on the back end. And let's say you're getting 6% annual returns, you know, year over year. Right. Well, eventually you're gonna have to pay taxes on that. And whether that being capital gains or whatever your tax situation is, you're going to pay taxes. So that's going to erode your 6% return at some point whenever you decide to pay the tax man for whatever your plan is.

Right.

The beauty of the passive play in real estate is for one, you're getting higher returns. You're getting, let's say 10% or 12%, you know, really just depending on the deal.

Yeah, you, you, you, you cut out right up right before you said a.

Cat out of here.

You're good. So.

Right on my cat. Which cat did I get? He's a camera guy. He definitely is. Yeah.

He's like, listen, they need to see me. I'm a part of this.

Yeah. So, you know, we, we talked about the Erosion of margins. Right. If you're investing in like stocks and that kind of stuff, you, you heard that part? Okay, cool. So when you talk about like investing in passive income, you could easily make 10%, 12%. I mean, I've seen even making 15% just interest only payments. Right. So you can make a lot more money in real estate. Plus your investment is a lot more secure. You know, when you're investing in stocks, especially in something like crypto, I mean, that investment can go to zero. And trust me, I've, I've seen it go to zero. I've been on the receiving end of that and it's not pretty. But when you're investing in real estate, your investment, let's say you're putting in 40 or $50,000, you're putting yourself in a secure position in a recorded lien against the property. So no one can sell the property without that lien being addressed. Right. And that's about as secure as it can get. So eventually, at some point in time when someone wants to go and sell, hopefully it's appreciated in value by the time they're getting ready to sell, there would be enough funds to pay off that lien. Because no buyer, unless you're taking a property subject to, is going to be taking a property without addressing those liens. Right?

Right.

And so when you look at it from that perspective, you're getting much higher returns, but you're also being able to take the depreciation that's generated from that passive activity. And let's say you're an owner, right? You have equity in the property, what they call a pmp, private money partner. Let's say you gave it, you gave someone $50,000 and you agreed to earn 10%. Right? So you're getting a 500amonth payment, interest only. On top of that, you also negotiated equity in the deal. So let's say you got 30 equity in the deal. So you're getting 10% interest on your money yearly outperforming the stock market. And then you're also getting 30% equity in the deal. I mean, that sounds pretty awesome to me. On top of that, you're getting the benefit of depreciation. So you're getting 30% of the depreciation, whatever that depreciation is, for the year. And especially if you're doing a cost segregation where you're accelerating that depreciation and capturing more, let's say 30% in year one, you're getting to take that benefit. So every single payment that you're getting, that 500amonth, every month. You know, if we're looking at, you know, 6,000 a year, that's all tax free because you have, let's say, 30, 40, $50,000 of depreciation that you're able to claim and then continue to roll forward into future years. I mean, you're getting tax free money every year for several years and that's where you can win, just being a passive investor.

Okay. So that, that's really, I think, what a lot of people would be attracted to and a lot of people, myself included, don't, don't fully understand. So it's, what you're almost saying is like, listen, the money that you actually get from investing in real estate is money that you are, you're saying you don't need to report it doesn't make enough to you for you to report or because it's real estate money, it's, it's tax deductible, tax free.

Yeah. You're still, you're still going to report it? Yeah, absolutely. You're still going to report it. And this, this only applies if you have ownership in the property. So this would be a PNP private money partner type of situation where you have 10%, 20%, 30%, whatever percent. Right. You're going to get the depreciation relative to your share of ownership in the property and that's where you get to claim that benefit. So let's say you show $6,000 of passive income because you got paid, you know, throughout every month, you know, your interest only payments you can take. You know, let's say you have 30,000 of depreciation. That's your portion that is going to essentially wipe away the $6,000 of income that you generated for the year. And that's where you know it's going to be wiped down to zero. You're not going to owe any taxes on it, but you're still going to report the income that you received and you're still going to capture obviously the depreciation. Because whatever you don't use, let's say you use the $6,000 of depreciation. So now you have $24,000 left. If you started with 30, that 24,000, we're just going to roll that forward into the future years and then the next year you're going to offset another $6,000 and then another $6,000, right?

Y. Yeah.

And then in a cost segregation situation, you know, that 30% that you captured in year one, you're going to capture additional depreciation in year two. Three, four, and five. So you're still going to get continuous benefit if you have ownership in the property.

And to be honest, the whole concept of depreciation related to tax is still a little confusing to me. Like when you mentioned you get to capture this depreciation, you're going to capture $30,000 worth of depreciation because. And I know it's two separate things, right. We know that a property's value, typically based on the market, appreciates over time. And maybe this is a whole separate, big tax lesson when we talk about depreciation. But as I understand it, we're talking about the, like, tangible things that are a part of the property, from your appliances to your. I mean, I don't know, maybe even like deck in the back. Right. But like what. When we're talking about capturing depreciation in this most simple way, what. What exactly does that mean?

Yeah, I think the easiest thing would be just to show you. So I'll pull up a cost segregation study that I did if I can figure out how to share this screen here. Yeah, so let's go ahead and just dive right into that so you can see my screen.

Yeah, I got it. Yep.

Cool. The one with the pie chart.

Yep.

Awesome. Let me figure out how to zoom in here.

All right, cool.

So this is a cost segregation that I did for a property that I own. And if you look at this summary over here, this additional year, one tax deduction, that's a lot of money, right?

Yeah.

So if you look at the purchase price was 275k, and you can see what it's doing as a result of this cost segregation study and the benefit it's given me, and I'll kind of show you this summary down here. So if we look at this $275,000, this cost segregation that was done, actually, this is probably a good, better representation. And this kind of breaks down exactly what it's doing. It's taking apart the different components of the property. And you can see it got floor coverings. Looks like that generated a lot. You have appliances, cabinets, you know, all these things that when you're just taking normal depreciation, let's say over 27 and a half years, that's not all being factored in. Right. You're just taking the entire purchase price of what's allowable, and you're depreciating over 27 and a half years normally. Well, in this case, we're saying, wait a second, we got all these different things that really shouldn't be depreciated. Over 27 and a half years. They should really be depreciated over five years because they're not really a part of it. Right. And so they're pulling these things out and capturing that depreciation at an accelerated pace. And so by doing that study, it generates additional depreciation. So if you look at my tax benefit for 2023, just on this one property was almost $49,000. And then if you look at what that is in year two, it's almost $11,000. Right. So if we go back to that same scenario that we were just talking about, and I'm a private money partner and I am getting $500 a month. Right. And I have that $6,000 of income I'm reporting that is going to get completely wiped away by this year 1 depreciation. And it's going to get completely wiped away for a really long time because I'm continuously accumulating this depreciation every year. I mean, you can see I'm not getting below $6,000 until year 2051. Right. So I'm pretty much getting tax free money this entire time. And that's the power of real estate, even if you can't qualify as a real estate professional and even if you are not investing in short term rental properties.

So when we're talking about depreciation, we're talking about the value of those things. If you scroll up, we're talking about the loss in value of things like floor coverings and ceiling fans and window treatments in closet shelves.

Correct. In the eyes of the irs.

In the eyes of the irs, Right. You're saying, and now when you see that number there, 18,000 for floor coverings, that means that the value like of the floor coverings went from a value of 40 down to 20, 40k down to 22k. So you lost $18,000 in value of that tangible item in your property kind of thing. Is that what that means?

This is, this would essentially be what they're saying here is this is worth 18,000, right?

Yeah.

And they're depreciating that over five years. So at the end of five years, this is going to be worth zero.

Gotcha. Okay.

And that's, you know, when they take all of that personal, the tangible, personal property, which is what you're seeing here. Yes, that's kind of what they're doing and how we're capturing that additional accelerated depreciation.

Gotcha. And then when you go to report this on your tax report, you're essentially able to say.

That'S what I'm taking in year one. That's my depreciation. So whatever passive income I have, and when you look at the grouping of passive income, it's not limited to just that one property. So if I have multiple properties, right, and I have a bunch of income, but let's say I only did the cost segregation on this one property, I can still take that benefit of this depreciation here and use that to offset all my other passive income. I just can't use this to offset my active income unless I'm a real estate professional.

Totally. So really, that second scenario we talked about. Well, I guess, yeah. I mean, honestly, to me it sounds like, you know, the PMP life can be a pretty, pretty great way, especially for someone who is saying, listen, I want, I know the benefits. I know there's a ton of benefits of real estate and I know there's a ton of tax benefits to real estate. But first of all, I don't have the skills or even desires at all to manage tenants, you know, put, you know, correct. Even design things and renovate things and all the stuff. And they're saying, I just want to, I want just the benefits. It sounds like the private money partner, where you're the money and you let the partner do those other things. You can capture a lot of best of both worlds.

Oh, yeah, absolutely. I mean, that's, that's the beauty.

You got to really have a great. Either have a great accountant or really study this stuff in more detail though, to make sure you are taking advantage of that.

Correct. And that's really, at least for me, you know, I'm taking on that responsibility as the operator to make sure things like that are getting done. You know, I'm the one getting the cost segregation study. I'm the one making sure the K1s are done correctly and all that information flows through to the PMP. And then obviously the PMPs, you know, CPA or whoever's preparing their returns, they should be validating that. But I'm the one taking the responsibility in getting all that for them so they don't have to worry about figuring all that stuff out.

Well, that's really what it comes down to, right, Is like, you know, people, I feel like, do some of these things, make some of these investments, get into real estate and then they come time to report their taxes and they haven't really prepared all the things that they need for the accountant or just done the things over the course of the year that'll put them in the position to Be able to capture all these tax benefits.

Yeah, exactly. Yeah. I mean, that's the beauty of real estate. I mean, you don't have to be. You don't have to know all this stuff to invest in real estate.

Right.

So if someone just has capital and they just want to invest, I mean, that's an easy way to get involved in real estate and still get all the benefits and then let an operator like myself, you know, figure out all that other stuff.

Totally. Yeah. And the benefit of having some idea, though, of what should be happening is at the very least similar to what we've talked about, even with contractors and renovations, is like, I'm certainly never going to be an expert and like, all right, let me get in here and either do all this work or know exactly what needs to be done here. But I certainly don't want to be taken advantage of. Right. And I certainly don't want to miss out on from a tax perspective like the benefits and even consulting someone and saying, okay, how should I start preparing? It's February, and I just invested as a partner in this property. Right. Are there some things I should be even doing now and starting to collect along the way or do along the way so that when November and December come, I'm in the perfect position to capture those benefits?

Yeah, yeah. I mean, honestly, the operator should be the one handling all that as far as maintaining the books and records, or if they're not doing that directly, which is completely okay. If they're not, they need to be hiring the person and managing the person that is keeping the books and records. And then once a year closes, they need to be producing the K1s. And really, it's pretty simple. You know, the investor, the PMP, they just get a K1 tax form, and it'll tell them everything that they need to know about what happened on the property and what deductions they can take. So it's pretty simple. You know, if you're a PMP and you're not having to do all the bookkeeping and all that, you just wait till you get that form and then you file it with your tax return. And it's as easy as that.

Yep, yep. Yeah. No, that's good. This is. This is. This is very helpful. I. I feel like it prepares me to be a better operator and invest more wisely, you know, as a partner, too.

Yeah. What other. What other questions you got on that?

Those are. Those are the big ones. I mean, even just understanding depreciation, I think that's an. That's kind of an over. A continuous. Like, even just doing it right. Doing it more helps. Helps me understand. But there's a. I hear. I've heard a lot of these words and heard a lot of these phrases for a long time, but I've never really understood what they mean. So just getting that first, like, dive into all of it is a good starting point. So I think. I think, like, as we go and as. As my journey continues and comes back, I think I'll probably even have some better questions for you that maybe we could dive into in some other sessions regarding tax. But this was. This was really good, I think, for today.

Yeah, I think. I mean, for me, the big takeaway is I get a cost segregation on every single property I do. I want to capture as much of that accelerated depreciation as I can because I know, you know, for my growth plan, I'm going to continue buying real estate every single year. And especially now in a period of time where we have this bonus depreciation for however long it lasts, which I think Trump will actually bring back 100%. It makes all the sense in the world for me to get a cost segregation study. I mean, I think I paid like 800 bucks for the cost segregation study per property, but it's well worth it. I mean, we're talking, you know, just that one property, $48,000 of tax benefits in year one. I mean, you can't really beat that. And whatever I don't use in the current year, I just keep rolling it forward.

Yeah. Do you order that through an accounting firm or.

There's actually quite a few services that are able to provide this. The one I picked is pretty affordable, in my opinion. You know, there's. If you go through an accounting firm, you're. They're probably going to charge you 2,500 to three grand. You know, if you went through, like, an actual, like, engineering firm. This one charges me pretty cheap. I think if I want an additional engineering component to it, it's probably like another 500 bucks. I feel comfortable just using what I have. And if the IRS were ever to challenge it, I think there was enough documentation to hear that, you know, shows that there was a legitimate effort to, you know, produce a cost segregation study. And at that point, I'm removing myself and letting that company take on liability of doing that. Like, they offer, like, audit protection and stuff like that. And then if need be, if we need to get an engineer to come out and assess it, I'll just worry about it at that time.

Do you do that? Right away when you first acquire property or do you wait, you don't have.

To do it right away. I mean, I just do it within before filing the taxes for that year. So you don't even have to do it for that year. Like we're running up, you know, we're almost at the end of the year.

Right.

I'm not even going to do the cost segregation study for some of the properties I bought this year until, you know, probably a couple weeks from now. So that'll be in January, but it'll be effective for the prior year. Now your exit strategy needs to be considered in what you're doing. So go back to my statement of I always do a cost segregation study. That's not always the case because I have a property that I'm pretty sure I'm going to exit in a lease option in three years. So knowing that it would not be smart for me to take accelerated depreciation on that property, knowing that I'm going to have a problem to deal with in depreciation recapture in three years from now, if I take all this accelerated depreciation and I've effectively taken the majority of the benefit in three years, whenever I go and sell that property, the IRS is going to be like, whoa, whoa, whoa, wait a second, you were only supposed to get this much benefit over that three years. Here's your bill. Thank you very much. And then I'm going to get a huge tax bill. So your exit strategy plays a role in your decision to get a cost segregation study or not. So there are as I, as I think, I think that's the only property that I know of as of now that there is like a defined planned exit. All the other ones is really long term buy and hold. So I don't have any problems with getting a cost segregation study now because I'm in it for the long haul.

Yeah, yeah. So as long as you're certain, it's more of a long term play.

Yep.

Yeah, yeah.

And that, I mean it, you know, maybe today it's certain, maybe in five years from now it's not certain. You know, things change. Right. And if I want to exit a property and I've taken all this benefit, I have to take that into consideration of, you know, that property better have appreciated pretty substantially for me to then take on additional tax liability of this depreciation recapture. So it better be worth it at that point. Right. And sometimes that decision, you know, it is for some people and sometimes it's not. Sometimes it's a wash and you look back after you get your tax bill and you're like, why the heck did I do that? You know? So it all just depends.

Yep, yep. Good stuff, man. No, this was, this was really helpful. Anything else you wanna watch out or want to kind of conclude with?

No, I think that pretty much covers it, man. I think that's a good first start. And yeah, if you get through some more stuff later and want to have follow up conversation, we definitely can, for sure.

Love it. Hey, it's a privilege to come on the Mundo podcast, my man. Can't wait to be back.

All right, man. I can't wait to have you back as well. Appreciate you coming, killer.

Appreciate.

All right, see you, man.

Yeah. Thanks for watching. Subscribe for more.

In a period of time where we have this bonus depreciation for however long it lasts, which I think Trump will actually bring back a hundred percent. It makes all the sense in the world for me to get a cost segregation.