How To Save Big In Real Estate With Cost Segregation

Hey, it's Mark Kudolski, the land geek. Your favorite niche real estate website, thelandgeek.com and on today's podcast, I've got Joe Vire from ustag.com and I.ustagi.com of course I should know this. Scott Todd is off today. If you're not familiar with Joe and ustagi.com Joe is a. Joe Biery has worked exclusively with property owners since 2001. He's an OG in the business, successfully providing tax, retirement and estate planning strategies by using legal IRS compliant and proven tax planning structures combined with effective engineered based studies. He specializes in working with those who want to protect their assets and create wealth. In addition to cost Segregation for large $500 million buildings with single family residences, U.S. tax Advisors Group offers tax saving strategies, 179D&45L, energy tax credits and savings, as well as research and development tax credits. Joe, between you and me, I've been searching the world. No one likes taxes. This is right up my alley. Welcome.

Well, thank you, Mark. Yeah, it was great transition for me to get involved in what I do because it's a situation where instead of going out there, no offense, to copy your salesman, but instead of trying to sell a copier, what I give my clients is money. So it's a great thing to help people with because I help them save money and put money back in their bank accounts and they can do whatever they want with it. But that's my goal. So it's a good mission.

So let's just get out of the way because for those of us who are like myself, landowners, right, there's not much you can help us with because land does not depreciate. It lasts forever.

Correct. Land is not a depreciable asset. And one thing is, I am not an accountant. We're an engineering based company. We work with our clients, accountants. But what you've just said, obviously these are IRS concepts. So the IRS and Congress said land is not depreciable. It kind of makes sense, but you know, it's not a Joe Virey thing. It's a, it's an IRS rule.

It's an IRS rule. But for those of us that do have physical buildings or real estate, and I'm sure there's a lot of people listening or the people that don't have these types of assets yet, it's kind of good to know what our options are. So my first question is, what is this thing you call cost segregation?

It sounds more intimidating than it really is. I can give you the elevator speech and make it very simple. What we do as an engineering company is we reallocate the building components depreciation. If you do it the easy way, which most accountants do, because they're not engineers and they have to, is you simply take the building basis and you hit the nail on the head. So if you buy a building for 100, I'm just making numbers up for 120,000. And you take $20,000 off for land, I have $100,000 to work with. And what the accountant will do is divide by either 27 and a half for residential or, or 39 years for commercial buildings. So you get this little bitty expense for 40 years. If you work with me, I will give you all of that expense up front in the tax year you do the study. So if it's tax year 2021, I'm going to give you $25,000 as a deduction to deduct against your income. And obviously for a lot of individuals that's either going to, that will reduce or even eliminate their income taxes, federal and state.

That's amazing. And we don't talk about it enough. This is, for most entrepreneurs, their biggest expense is income taxes. All that money just flows right into their pockets. So I've heard of this phrase before, and I'd love to hear just how you define it, called accelerated depreciation. And for example, if you buy a car that weighs 100,000 pounds or something crazy, a big car, you can depreciate that vehicle commercially and take all of it in that year. Is this what you're talking about as far as cost segregation?

Well, it's a little complicated. But what happened a couple years ago with the tax plan that the, that was passed by in the Trump presidency, Basically what they did to stimulate the economy was they, they came up with this concept called 100% bonus depreciation. So cost seg will work in any year. If we did not have 100% bonus depreciation, you would still get a big, big benefit. But what this did is just up the benefit, way up. So bottom line is what happened is, is now whatever I find in short term assets, meaning assets with a life of 20 years or less, you get all of that expense in 21 and 22, you get 100%. After 22, it starts to phased out. But let's not worry about phasing out. Let's just concentrate on 21 and 22. You get 100% of what I find. And all we're talking about here, Mark, it's really kind of simple. The IRS recognizes that when you own a building, it is falling apart as you own it. So it's depreciating, it is falling apart. So all the IRS is saying is, look, we're going to give the owner a tax advantage because his building is really falling apart in front of his eyes. And so we're going to let him write off his building over time. So you can do it the old fashioned way, which is over 40 years, or you can do it the correct way according to the irs, or which is to accelerate the depreciation and get it all up front. Now, we're only talking about 25, 30, 35% of the total building basis. So it's not like you're tapping the bank dry. You're still going to get 70% over the rest of the time. 39 years, or 27 and a half years. We're just giving you the personal property up front, which is bid.

Absolutely. Especially when you factor in inflation. If today's dollars are worth way more than tomorrow's dollars, you want those dollars today.

It's the smart play. And if anybody. Here's one thing, and I don't pick on accountants, but accountants are great at one thing for sure, and that is filing tax returns. But sometimes they're not great at tax planning. And so they really just don't know about the engineering concept out there. But again, like I said, I mean, this is the way the IRS wants tax property owners to depreciate their buildings, not using straight line.

Fantastic. So you know who or what property owner should do cost segregation.

Here's, here's the. You know what? It's. Again, this is a really great part of my career, is that you can, you can basically use cost segregation in almost any circumstance. The only circumstances what I would, would, would want to talk to the building owner is there is a concept called passive and active ownership in real estate. So to make it simple, passive means you've got another job. You're, you're a, you're, you work for Costco, you got another job and you own real estate. That's a passive investment because your main taxable income is working for Costco. Okay? So bottom line is I would ask the client, do you need passive losses? Because the type of depreciation or losses I provide are the type of investor you are in real estate. So if you're passive, I'm going to give you passive losses. If you're active, I'm going to give you active losses. So Bottom line is if you're a passive investor, you may not need passive losses. And I would tell you, go to your accountant if you don't need passive losses, do not pay me any money because you don't need what Joe does. I see.

But if you're someone like me who's active and it's my full time business of buying and selling real estate, I can take advantage. Yeah. Active losses, yeah.

Now what that means, if you are active, that means you can take the losses and use them across the board against any income. So that's really powerful. If you're active, you're passive. You can still use what I do, but you have to get it blessed by your accountant. You to make sure you need, you can use the passive losses.

I see, I see. Okay, what if you know, I bought a building in 2015, can I, can I still take advantage of this bonus depreciation that the Trump administration.

No, unfortunately no. So here's the rule. The rule is bonus is properties acquired after September 27th of 2017.

Okay.

So prior to that we can do the non bonus cost set. And honestly the difference is in look. Those are called look back studies. And by the way, Mark, I can go back 15 years and probably make the numbers work. So what I'm doing when I say I can look back 15 years is I'm looking to see how much depreciation did you take during those 15 years. You can only take depreciation once. How much depreciation am I going to give the building owner by accelerating the depreciation? How much is my fee? And then bada bing, if it makes sense to pay my fee and whatever's left over in depreciation. And I can usually make the numbers work for about 15 years. So those are called look back studies if we're not in the current tax year. And so bottom line is you can do look back studies. It's legally approved and it's guaranteed by the IRS to go back and do a look back study. So if you bought a property in 2010, 2012, 13, 14, 15, of course you can do it. Now you're not going to get the 100% bonus. But again, I don't want to get into it, but if you do the math, it's very minor not getting bonus when you're doing a look back study.

Okay.

The minor consequence, so don't worry about that. So if you have a look back study and you're not getting bonus, it probably will still work out in your favor.

Sure, sure. I mean I can Imagine people listening to this, and they're very conservative, Joe, and maybe their eyes are glossing over this. Bonus depreciation, accelerated depreciation, cost segregation. And really, the core of the matter is, okay, if I do this, that's great. I'm going to get this money back, but am I going to get audited now? Is this going to increase my odds of getting flagged by the irs? And. And now we have legal fees. Is this gonna be a problem, Joe?

Okay, well, there's a couple of quick answers to that. When I first started out doing in the cost segregation industry in 2007, that was the number one question. Is this a scam? I can't believe it. There's no way the IRS and Congress would allow this to happen. This has gotta be a scam. And then, you know, and I'm sure I'm gonna get audited, and I don't want anything to do with being audited. The answer, though, Mark, is no. This is the way the IRS wants the building owner to depreciate a building. So they don't audit for cost segregation. Now they'll audit you for another reason. And they may see, oh, you did a cost segregation study. And then they may pull it out and dust it off and say, okay, what's this all about? Who did it? What were their qualifications? Was it competently done? Did you, Mr. Building Owner, did you try and do this on your own? You're not an engineer, Mr. Accountant. You're not an engineer. You'd be in big, big trouble. But we back up all of our products, all of our services. So in other words, if you get audited, we will defend our work at no extra cost to the irs. And we have never lost a question by the irs. In other words, if the IRS had a question about our studies, we've defended it, and they've said, we agree with you, and we're taking your work as you filed it. So never had one.

How did you even get into this? Who wakes up one day and says, you know what? I'm going to save people taxes and not be a financial planner or a cpa.

Well, this is a funny story, because basically, I've always been entrepreneurial. And so in the year 2000, I sold the business that I had done for. For many years, for 20 years. And I got involved in financial planning, and I was in work. I worked with the California association of Realtors, which is the largest realtor association in the country. I was doing great. I was helping Realtors out with all types of financial Planning products, income taxes, etc. And then something happened in 2007 and 8, and basically before that, I had a friend of mine who kept telling me about cost segregation, and I had no time. I, like, was, everybody, it's a scam. I don't have time for you, Mike. Finally, I said, okay, let's go to lunch. He told me what it was. I had clients who had a big tax burden. I got them all settled, and they were thrilled. And then the car went off the cliff with the Depression. And the guy that I worked with, the company that I worked with, the owner of the company I worked with, called me and said, joe, you're great at this. You've got a lot of contacts in the real estate industry. Why don't you come work for me? And I never took a backward step. Cost segregation, even in the depression, took off because I still had a lot of property owners out there that what they were doing is they were buying properties from distressed people, getting rid of their properties. So they had a lot of income taxes they needed to pay. So they didn't. They weren't hurting. And so I never looked back.

Wow, fantastic. So if I'm looking for a cost segregation company, what do. I don't know. I don't know. What questions should I ask? How do I find one that's going to be competent versus one that might be overpriced? I don't even know.

Okay, here's my tip of the day. Number one is this is the number one question to ask. Because what happened during a very seminal court case in 1997 is the Hospital Corporation of America sue the IRS they want. And what they're suing them for is they said, we want to accelerate all of these building components. And so the judge in that case was disgusted with the irs, his comments, their defense, their actions. And he said, look, okay, Hospital Corporation of America, you win. And now irs, you have to publish a guideline for everybody. Because if you weren't telling people how to do this, then you have to tell them now. So it took them five years, of course, so they finally published in 2004 the audit technique Guidelines. That is our bible. That is my bible. My engineers use that step by step by step. That's why we can defend our work and we can come out on top each time because we're doing it the way the IRS wants us to do it. So bottom line is you have to find a company that uses the Audit Technique Guidelines as their base. They understand that they use it, and they apply it. And if anybody wants to read the audit tech guidelines, be my guest. If you need to go to sleep at night, just go in there and type in IRS Audit Technique Guidelines ATG for cost seg. You'll find a 200 page document. And if you want to read it, go ahead and read it. The bottom line is, and then number two is to have the top level study is it has to be with an engineer. Not an appraiser, not an accountant, not anybody else. But they want a licensed engineer to do the studies. And that's all we have at U.S. tax.

Okay, well, I mean, Joe, what should I have asked you? I didn't ask.

You know what? You did a pretty good job. One thing I will tell you is that this important is that we do a study that is kind of unique in the audit technique guidelines. The IRS lists, starting at the top, their, their top seven methodologies. They do list one. It's called modeling. And basically what we did is we looked into modeling about six years ago, and now we have modeling out there. And what modeling allows us to do is we can do a cost segregation study for, you know, our fee is about $650. So it's very affordable. And depending on the circumstances, we can, you know, sharpen our pencils a little bit. But basically what this allows property owners to do for properties that have a building basis of 100,000, 50,000, we can use modeling to get the accelerated depreciation. So we do modeling as well as the detailed engineering. The difference between the two is, is for the detailed engineering, we have to go out and we have to inspect the building. So obviously somebody's got to get on an airplane. Somebody's got to take photos, take notes. The engineer's got to do all the calculations. With modeling, it's a statistical analysis, so we don't go in that kind of detail, but it's affordable. Wow.

Well, I mean, this is fascinating to me. I've been podcasting who knows how long now, hundreds and hundreds of podcasts, Joe. I've never had somebody talk to me about cost segregation and this type of analysis.

And here's the good news. We do the first step for no charge. So the first step is we want to give you an estimate and we want to tell you what the fee is. And the fee is a little complex. It depends on all kinds of factors I threw out there. Our normal fee is like 650. But, you know, we'll work with your listeners, Mark, and, and we'll give them a discounted fee. But the point Is that everybody who needs to write a check to the IRS should, bottom line, call us first, because we don't charge. We're going to give you the estimate for free. Call us. Or actually, the best thing is don't call us. Go to my website and get on the website and then we'll do a free analysis, no cost analysis. And then basically you can take it back to your accountant because remember, we're not the accountants. You have to work with your accountant. We want him to bless this. We're not trying to, you know, take any, anything off his plate. There's a lot of work he can do for you that's better than what we can do. And what we can do is we can show him and a lot of accounts don't think this is, you know, they don't even understand it. So we'll be happy to get on the phone and explain what we do and verify everything that I've said on this podcast.

Fantastic. Well, Joe, this has been fascinating, but we're at that point in the podcast now where we're going to ask you for your tip of the week. A website, a resource, another thing that's actionable for the auto passive income listeners to go improve their businesses, improve their lives. Before you do, just got to give a shout out to our sponsor, which is flight school. Learn how the next 16 weeks can transform your life. Go up the mountain of land investing with Scott Todd, who's done it thousands of times. He'll take you up that mountain quickly, safely, efficiently start building that passive income without renters, rehabs, renovations or rodents. Oh, yeah, and that tuition ain't going to cost you nothing. Guaranteed you're going to make it back 180 days or less. Just show us your work. Joe, what is your tip of the week?

You know what, here's the deal. I find this happens so often. Do, please, if you own any kind of investment property, do some tax planning. Don't try and do it on your own. Don't get your own QuickBooks and think that you're doing it. Get somebody who knows real estate. Not an accountant who knows somebody who works for Costco. Get somebody who knows real estate. That's my tip, you know. Yeah, you may save a few dimes, a few quarters, but man, if you're going to be writing a check out to the IRS for $20,000 that you don't need to, come on, man, don't do that. You know, get a tax planner out there that understands and if he has questions and you have questions, go to our website, ustagi.com all right, well, that's.

Also my tip of the week, which is go to ustag.com there's lots of information there. Tell Joe you heard about this incredible technique to lower your taxes on the Auto Passive Income podcast and you generously offered a little break there on the fee. So, Joe, thank you so much. I want to thank the listeners. Remind you the only way, the only way I'm going to get the quality of guests like a Joe Vire from Usagi.com is if you do us three favors. You got to follow rate, review the podcast, send a screenshot of that review. Supportlangle.com I'm going to send you a signed copy of Dirt Rich. So please do it. It really helps. Joe Virey, Are we good?

We're good. Thanks, Mark. Good job.

All right, well, Land Geek Nation, thank you. Let Freedom Ring. Thanks, everybody.

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