Matt Clark - How Real Estate Investors Save Thousands On Taxes Through Cost Segregation

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All right, welcome. We are at our monthly meetup on the fourth Monday of each month. This is August 28, 2023. We are going to be talking today about how real estate investors can save thousands of dollars in taxes through cost segregation. It's one of the main reasons why people invest passively and actively into real estate, not only for the cash flow, obviously, but for the tax benefits. And a big reason for the tax benefits is the depreciation through cost segregation. So we're going to talk with Matthew today with Madison Specs and learn all about cost Seg. So before we get going, I got a few slides one to talk about our meetup. We meet on the fourth Monday of each month other than December, so 7pm Central Standard Time where we talk about multifamily investing, have outside speakers. I also have host some of these conversations where we're just talking about investing primarily from passive investing standpoint because we really try to educate passive investors in hopes that they can make a more sophisticated decision when they're reviewing deals that come their way. I'm starting to become more competitive with this. So for those that are becoming or watching this, this show or this meetup, we are ranked number two as far as the number of people that have subscribed to our meetup, which is awesome because not everybody can join each month, but we do send out the recording to people and just love to see this number growing. We're catching up to the meetup in Hamburg, Germany and they've got about 1560, we're about1433. So pretty cool. We've done this in about a couple years so. So thanks to you. For those that are live on this meetup and those that are listening in afterwards, excited about the growth. Just a little bit about me, myself, my brand investor relations person is like, you have to update this photo because it is pretty old. So I am going to make a goal of updating my photo. We just need to get some actual photos. But I'm in central Texas area, born and raised in Austin. Moved out in Brian College Station area a few years ago, bought some land out here and really love being close to the Houston Austin area. That's where we primarily focus on our assets though we have multi family storage, build to rent communities in Texas, Louisiana and Alabama. We've got about $33 million assets under management where we are heavily involved on the asset management side and day to day of those assets. Previously worked for a Fortune 150 commercial real estate company. Transitioned out of the W2 role this past summer. So just a couple months ago went all in on our real estate investment. So super excited about that and really been doing this the last 16 years on on the commercial real estate management investment side. So going into just a couple more slides here we are ramping up our podcast. I've got speakers for the next eight weeks. We are going to be getting back into the every other week postings. We sort of slacked on that this year so I'm excited to get that momentum back going. So if you haven't subscribed, please do so The Untold Stories Real Estate Investing My goal is to bring a lot of other asset classes into the discussion. I know I heavily talk about multifamily, but we're going to be talking about other asset classes as well and so hopefully mix it up and make it more interesting for people that are interested in real estate investing in general. Also, if you haven't already go to creipartners.com there's a lot of content. We do blogs monthly, we do our podcast. We do, you know, just so much content with this meetup etc. It's all there, our YouTube channel, etc. You can all access it through there. If you're open to investing with us, there is the Investor Desk link and you put in your information. We'll have a one on one conversation and see if it's a good fit. The other thing is we have a couple offerings that we are actively capital raising for. We should be done with those both of those in the next couple weeks but wanted to mention it here and not only for those, but just for future investments. Creipartners.invportal.com you can also access it through crypto. There's that investor login link. It'll take you to the same spot. So if you're actively looking for passive investment opportunities or want to see what we have now or in the future, definitely click on Investor Login on our website crom. You can register or if you already registered, just log in and See our offerings. One of the things that we're proud of this year is we've launched a passive investor coaching program. We recently lowered the price. Really just wanted as many people to take this as possible. This is not what we make our money off of. We make money off real estate, but we really want people to accelerate their learning as quickly as possible so they can invest sooner. So if you've been on the fence about joining passive investor coaching program, definitely check it out and it there's a lot of great content and then we meet monthly and then when you have opportunities to invest, I'm definitely here to answer questions and be a resource. So enough about us and what we're doing. I want to introduce you all to Matt Clark, sales associate with Madison Specs. Madison Specs is a group I've used on two other properties that we own in Houston and they've done an outstanding job with their cost segregation analysis. So not only am I excited to have them here, but I'm also excited to talk them up because I know there's active investors that are listening in or on this meetup today. So if you haven't connected with Matt or Madison Specs in general, definitely recommend doing so. But I'll introduce Matt and then I'll stop share here and then he'll take it over. But Matt lives in Houston, Texas. He was born and raised and attended the University of Houston. So before the show he is all Houston and you know, just, just amazing how Houston has grown so much and how he's seen the growth. But his journey came into the world of real estate pivoting from the software realm where he honed his skills as a value added seller. Currently, Matt is part of the dynamic team at Madison Specs, a company with over 15 years of experience in the field and an impressive track record of completing 10,000 studies nationwide. In his role, Matt specializes in offering cost segregation studies, helping real estate investors unlock hidden value with their properties and optimize their financial returns. It's a passion for property and commitment to delivering top notch service. Matt is dedicated to helping clients achieve their real estate investment goals through the power of cost segregation. Matt, really grateful for you to join us today. I'm going to stop share and turn it over to you and excited to learn from you.

Awesome. Thank you so much, Wayne. I really appreciate that. So I will get started here if I can click the right buttons. Alrighty. There we go. Excellent. Everyone good to go. Can see that. Perfect. Okay. Excellent, Wayne. So first and foremost, I just want to thank Wayne and His and the partners over at crei, thank you so much. And like you said, I'm with the Madison Specs team. All we do is cost segregation. At Madison Specs, we're part of a larger umbrella of a full service commercial real estate company, Madison Crest Commercial Real Estate Services. But all we focus on is cost segregation. So I want to just start by giving everyone just a brief overview of what cost segregation is in general and then we'll dive into just a little bit of detail on cost segregation and of course open it for some questions thereafter. So I'm a simple man, I like analogies. So I'm going to start with a very simple analogy of cheeseburgers for the cost sake. Right? So everyone gets depreciation on an asset. This is what your CPA is doing for you. If you have an investment property, they're doing straight line depreciation. So on a commercial property, all they're doing is taking your property, subtracting the land value and dividing that by 39. And that's the, that's the depreciation you're going to get each and every year the same amount for 39 years until you sell. Now this, this cheeseburger is your cost segregation, is your depreciation on cost segregation. So a little bit more meat to it, a little bit of fixings, right? So I don't know about you all, sorry if there's any vegetarians in the chat, but this is the burger I'm going to go with. So I hope this analogy makes a little bit more sense after I cover some topics. So an overview of conservation study. All we're doing is breaking down each component of the property. So a lot of people think, well I bought this property and that's all I get, is just whatever the property value is. But that's not true with the cost segregation. We're going to take each component of that property, break it down to 5 year assets, 15 year assets, and then the rest of the structure is left over to a 39 year asset. So again, the formula for cost segregation, we need to start with your depreciable basis. So what that is is your property minus land value in Texas is traditionally around 15%. Places like California, New York, typically about 25%. So you take your property, subtract land value, and that's how we start your cost segregation. So and we start also with five year properties. So that's anything in the building that you purchase that's personal, personal, tangible and non essential. So if you took all that out, you'd still have the structure, you still have the building. So this is not a comprehensive list. This is just a brief couple brief examples. But things like that can be appliances, flooring, any kind of cabling, for, for telephones, special plumbing, electrical, window treatments, even some equipment and furniture that comes with a property could be included in a five year property. Now your 15 year properties are going to be land improvements. So you walk outside, you see a trellis, pavement, sidewalk, fencing, landscaping, even a pool and a tennis court can be included in a 15 year land improvement property. So all this means is the IRS is saying they know carpet doesn't last 39 years. They know that's probably a five year asset, and they know pavement doesn't last 39 years either. That's closer to 15 years. So that's how we're breaking that up based off IRS code. And this is just a quick visual aid on a random property to show you the savings of cost segregation. Right. And some people were saying, why am I saving so much more with cost segregation? Well, you're not really saving more, right? You're saving more quickly. So if you added up all the blue bars and all the green bars, it's the same amount. We're just giving you that benefit much, much sooner. So say I owe you a million bucks and I give you two, two options. I can give you a million bucks tomorrow to pay you back or I can give you 100 grand for the next 10 years to pay you back. You know, which one are you taking? You're probably going to take all the money tomorrow. So in conclusion, a couple of high level cost segregation benefits reduces your tax liability, increases cash flow and the time value money again, would you rather have a million bucks tomorrow or 100,000 for the next 10 years? Up to you. And I'm not going to go through all these, I just want to give you all one example. I'm going to cover the top left one, the Houston multifamily property. But these are just some recent tax savings we've had for our clients. So again, you start with the depreciable basis. So we took the property subtracted land, we got $11.1 million. This particular property had about 20% of it added up into five year assets and the rest was and then another 8% on the 15 year reclass. So 20% is pretty common with multifamily. Say it's 100 unit complex. What do you have a hundred microwaves, 100 washers and dryers, 100 pieces of countertop, 100 pieces of carpet. So you can see how those small numbers start to add up very quickly, especially with a multifamily. You know, each individual piece of property has its own, you know, pros and cons, if you will. But multifamily is there is definitely large amount of savings available. So that is just my quick overview of cost segregation in general. And now with the recent tax codes in recent years, we have this thing called bonus depreciation. So what that means is, so it just ended last year on the 100%. This year we're in 80%. It's getting phased out 20% by year. But even at 80, 60, 40, 20, you're still getting large amount of savings. So all that means is with the five year assets and 15 year sets, you can take all that depreciation upfront. And again, last year, if you bought a property or any year 2018-2022, you could have got 100% bonus depreciation. So you could have got all the five year assets and 15 years assets up front to you and a tax deduction. Year one. This year we're looking at 80. Next year, 60, 40, 20. There is a little bit of speculation rumors that they're trying to bring this back, but that's just speculation rumors. This is the current tax code and how we're looking at it now. And just to give you another visual aid, this is what an example of 100 bonus depreciation and tax savings looks like. Right? So it's not for everybody, but if it's going to work for you, it works very, very well. You get a huge tax deduction year one and say, well, I didn't make $2.5 million in real estate last year. I don't need a $2.5 million tax deduction. It rolls over indefinitely as long as you own the property. So if you only made 500,000 or, you know, however much money, you'll get a rollover year after year indefinitely until you reach the end of your scheduled tax deductions. So there's a little bit of misconceptions as well in the market of who should do cost segregation. Anyone who invests in real estate. If you're planning on holding the real estate asset for longer than, you know, a couple years, do a cost. So, and some people are also, they're a little curious about who is eligible. It doesn't matter. Individuals, trusts, estates, corporations, partnerships, LLCs, anyone can do cost. Okay, this part is a little bit more particular to you all or will be in the, in the forthcoming years after you make your first investment. So there is a difference between an active investor and a passive investor, right? And so I'm going to go into detail on that now. Active investor, you need to qualify as a real estate professional. So I have a couple of qualifications there. Essentially what that means is on your tax form you're able to check certified real estate professional. And what that means is you have 750 hours of service during your tax year in real estate. So it doesn't really work. If you have a full time W2, the IRS is probably not going to buy that you've spent 750 hours in real estate traditionally. And those activities include, but not limited to developing, constructing, acquiring, converting, renting, operating or brokering real estate deals. So that's just a brief overview of what active real estate professional means. Now for a lot of you, in the short term you'll probably fall into this passive real estate professional side of things. But don't worry, you still qualify for savings. It's just not quite on par with what you get with the active investor. So again, you still qualify. And all your passive losses will be offset by with passive profits. I think I wrote that backwards. Actually your active profits will be offset with active loss or passive losses. So you can't put it against your active income, such as a W2 or 1099 in most cases. But you could essentially almost see your passive profits being all tax free as long as you have the qualifying passive losses to offset that. And then you want. This is a discussion to have with your cpa. But there is also examples of where you are able to write off passive losses against your active income. Again, a W2 or 1099 work is active, not related to real estate would be active income. But you just need to have your modified adjusted gross income, $100,000 or less, which I know some of you are like, well, I make way more than that. That is what you make on paper, right? So again, that's a conversation to have with your cpa, see if you can get to that number. But that is an option available. The best time to do a cost segregation study is after an acquisition, after any major renovation or addition to the property, newly constructed properties, and also look back studies. So a lot of people think, oh, I already paid taxes on the property, I'm out, I can't do cost seg anymore. Not true. We can do a look back study and get you that additional savings. All we're going to do is subtract any depreciation you've already acquired. So if you had it for three years already. We're going to subtract that one 39th or three 39 from whatever your cost study might save you. And we're going to bust some myths as well on cost seg. So a lot of people think that, oh, my building's too old to do a cost segregation study. This building's already 100 years old. So we, we beat that. We're way well past that 39 year schedule. That's not true. So once ownership changes, the depreciation schedule starts all over again. Doesn't matter if your building's 2 years old or 150 years old. If you just acquired that property, you're reset on a new depreciation schedule. Residential 27 and a half years, commercial 39 years. And some people also say, well, my CPA already handles all the depreciation for the property. True, true. They do straight line depreciation, right? So they're just taking that property minus land value, dividing it by 27 and a half years and, or 39 years. And that's all you're getting. So they plug in your tax loss numbers. They're not doing cost segregation for you. They need to have a third party independent engineer do that for them to give you the line items for each asset. And some people also think of, I do cost seg, I'm going to get flagged by the IRS and I'm going to get audited. Again, not true. When you go with a certified professional cost segregation like Madison Specs, they want to see clean, nice cut engineered cost studies. And that's all we do. So again, if you did a cost seg with Madison Specs, our IRS audit is not of your concern. Now a lot of people also say sounds a little too good to be true. You know, what are the downsides? So essentially the only downside of cost seg is going to be tax recapture. So if you're selling the property next year and you just bought it, don't do a cost segregation because you're going to have to pay the dip. You're going to have to pay those taxes back. The difference on what you owe from the cost seg study versus the straight line depreciation, you have to, you need to pay that back. So if you're going to plan to hold it for three, four, five, six, seven years, do cost seg. But otherwise, we always tell flippers, stay away, don't do this. You're gonna, it's just not worth the headache. So that pretty much wraps it up for my cost seg Overview I just want to very quickly go through a little bit about Madison Specs, my company, and actually some of these numbers are outdated. So we actually are closer to 70 professionals now that solely focus on cost segregation and we're actually closer to 20,000 studies done across the country. So that tax savings number is also a little bit larger. Now during COVID we came up with it was hard to travel to sites and it was hard to set up meetings and get cost done. So we came up with a virtual smart tour. So for some properties we're actually able to do them virtually. No one has to go there and do the engineering work on site. We can do them virtually, so it's much quicker and saves some expenses as well. For the travel costs we typically have to charge a customer. So virtual tours are streamlining the process and saving people even more money. And again, I mentioned this briefly, but Madison Specs is just a Division 1 division of Madison Commercial Real Estate Services. We are a full functioning commercial real estate services company. And here are just a couple. Here's a little bit of what we do. Title work, 1031, so on and so forth. Awesome. And then also we do offer free feasibility analysis so that what that means to you is all we need is an address and a relative purchase price and we can give you a preview of what your cost segregation will look like. And we use very conservative numbers on the feasibility analysis, so we can almost guarantee whatever number we provide you is going to be your savings, if not a little bit more. So that's it for me on my presentation. If anyone had any questions, I'll do my best to get some of those answered, but otherwise I really appreciate time and thank you Wayne. Thank you everyone else for listening.

Hey listeners, it's Wayne Courageous. I just want to pause real quick to say thank you for listening to our show. I hope that you're getting a lot of value out of it. If I could ask you to go ahead and like subscribe and share this podcast, that would mean a lot. It will get a lot of other investors like yourself learning about the process and the steps to successfully invest in real estate, either as a passive or an active investor. I also wanted to do a quick introduction of CREI partners. I'm the managing principal for CRI partners and we started it back in 2019 with one goal, to grow your wealth passively in real estate. We do so by buying assets in multifamily, build to rent communities and RV boat storage facilities. And we do so in areas that have strong market fundamentals and also have strong partnerships with other real estate investors such as ourselves. We personally discovered that passively investing in real estate was a really great blend for people that are busy like yourself, and that you can invest passively in real estate and still reap the rewards of the returns, the tax benefits, et cetera. If you're interested in learning learning more about passively investing, check out our website. We do a lot of content through our passive investor coaching program, through our podcast, our blogs, and just other information that we do on a daily basis. Check out creipartners.com again creipartners.com if you're interested in building the relationship and joining our investor club. There's a link there to to join. We'll set up a call and continue building the relationship with you. We're super excited to have that opportunity and I want us to get back to the show and hopefully again you're enjoying the conversation and look forward to connecting soon. Thank you. Great job. Summarizing cost seg. So for multifamily investors that are looking to invest, this is not something that you all have to go and reach out to, right?

Yeah. You would reap the benefits of it.

You reap the, you reap the benefits of it. You just want to know. I mean you should ask it, but it should be, you know, I think it's probably good to ask and not assume that a cost seg is happening. Hopefully your sponsor, you know this sort of.

Right. You should definitely ask. Right. It's pretty easy to see on the K1 you get at the end of the year, but you should be asking before that for sure. Yeah. So that's a good point. Wayne. One thing I forgot to mention, it's one cost seg per property. It's not if there's 100 investors in a property that you don't need to have to do 100 cost segregation. Whoever owns the building, or if it's a 5050 partnership and they have it syndicated out to passive investors, they handle the cost tag and they pass. They should be passing the savings down to you.

You also mentioned the 39 years and the 27 and a half years. So multifamily benefits right through that 27 and a half years of depreciation.

I'm pretty multifamily typically considered commercial property, so that'd be, that'd be on the 39 year scale for the most part. Even things like short term rentals such as Airbnb and VRBO are also considered commercial as well. If you had a Residential property with a long term lease, typically about 12 months or more, you could get, you could get the residential. The break was actually a good point. I actually just did an Airbnb cost seg for someone and the difference was very minuscule. On I accidentally submitted it as a residential property. We had to, we had to take it back and resubmit it as commercial. And she went from $301,000 in savings to $297,000 in savings. So even though it sounds like a lot of years, the difference is not as large as you think.

So the commercial is 39 years and residential is 27 and a half.

Correct. And don't ask me why those are those numbers because I looked everywhere to find that. I don't know why that. Just, just the numbers. But yeah, yeah, residential 27 and a half, commercial 39. So multifamily falls under commercial. And then now since Airbnbs verbose that type of thing are newer, there's not as much tax code with those, those do follow, follow under commercial. As his hand raised.

Yeah, one of the questions we got is cost. Does cost segregation benefit commercial multifamily more versus small multifamily?

I mean, and to keep it short, yes, because you know, again, we're adding every little piece of the property. So if you have more pieces to the puzzle, there's a bigger, you know, lump sum, if you will, at the end. But it's not to say it's not worth it to do it on a small multi family. And again, that is why. So every now and then there, if it's, if it's smaller, if it's a smaller building or 2 units or duplex every now and then, it's not tech, you know, the, the savings or the value of the savings isn't really worth paying for the cost segregation study. But for the most part, if you have an investment property, it typically is. But yeah, the bigger, the bigger, the more you got going on with a building, typically the bigger the savings will be. More moving parts.

Yeah, we have one hand raised, Johnny, if you want to mute yourself, definitely ask a question or put in the chat. Thank you, Matt, for, for, for the presentation.

So my question is, is, can you.

Still do a cost after acquiring the property?

So yes, again with the look back, typically the, the, the cutoff is seven years, typically. But there is workarounds and special scenarios. But yeah, about seven years is typically where the IRS will cut you off. But every now and then there's workarounds. You get back to 10 years. But yeah, it don't wait too long to do your cause, I'll say that. But if you had a handful of years, you know, you still have time. Yeah.

And for the active investors too, I mean a lot of times you, you can reach out to say Matt, in this case and they can start doing a cost seg even before you purchase the property. So if you've got investors, right, that, you know, like for example on the CRI partner side, we have a lot of investors who want that tax depreciation in some cases even want it more than the cash flow. You know, they just have, they like that, they want that depreciation with losses. So.

And I did want to just say one quick caveat for multi family 5 and 5 or more doors is commercial. If you have anything 4 or less that you can still get away with the residential. But again, I wouldn't let you that scare you away too much because although those years are pretty far apart, when we break it down, you'll see that the savings is not a whole lot different. You're still going to save a lot of money on that 39 year schedule.

All right, any other questions?

Johnny, again, Johnny. Yeah, sure, I can, I can shoot.

A whole bunch of questions to you.

So.

So last year was 100% bonus depreciation. This year's 80% looks like it's going to be phased out 20% every year. So two questions is, is what do you see?

Will, will it go back to 100, do you think? Or and at the same time, if.

It does go down to zero, what would you actually be pivoting to if there's no more cost seg.

Right, so there'll still be cost seg. There just won't be bonus depreciation. Right. So you'll still get large savings. You just can't take it all in a lump sum in the first year. And anything I would say on it coming back or not would be like largely speculative. So I don't want to say. But there is murmurs and rumors. There's a certain, you know, elections are coming up, people are trying to garner interest in themselves for votes. So sometimes, you know, they'll, they can re up on a tax code that's been largely, largely beneficial for a lot of people, especially, you know, people that are doing very well for themselves. But you know, again, that's all speculation. I saw Parker asked a question in person versus virtual study. Is there much of a difference? Again, I, I'm saying like general, I'm covering every property all at once on cost Seg right now. So it just depends what kind of property you have. You know, if there's lots of pictures of it online, you know, it's fully, every piece of the property is fully available on Google Earth, things like that. It all adds up to being able to do virtual versus not. If you have a 200,000 square foot commercial property, we're going to go check it out. Right. If you've got, if this, if it's that large of a scale, we're going to go in person and look at it. But if you have something that maybe potentially been listed on Redfin before, say it's like residential property that has tons of pictures and you want to buy it and make it an Airbnb now, you know, we can definitely more than likely get away with, with the virtual study. Yeah. So again, it just depends on the property, what's available online and what's not and how up to date that information is as well.

Yeah, really great question. And going back to the question on, you know, will cost seg be relevant without bonus depreciation? And you mentioned the five year schedule and I think you said a 15 year schedule. So just, you know, depending on the.

Right. And again, we've been doing this for 15 almost, you know, a little bit longer than 15 years. Right. So we started before bonus appreciation with this thing. Obviously it's very beneficial for our division in our industry, but yeah, we'll still be around.

Well, it's also nice you're very diversified with all your other, you know, title.

Right, right. Like, hey, can Title give me a job?

Yeah, you can transfer within departments.

Awesome.

Any other questions? This is really great. I love, love the questions. And you know, we had a, a meetup that was recorded and posted out there about K1s and you know, the numbers behind the K1s is from the Kaseg. Right. It's all part of the, you know, to get those numbers and to maximize our, our tax, you know, savings to our investors. It's through the, through the cost seg. So such an important subject. That's really not, you know, that hasn't been one of our meetup conversations. So I'm really grateful that you joined us. I'm gonna go ahead and stop recording, but before I do, Matthew, for people that are going to listen to this as a podcast, can you see how people can reach out to you and then what I'll do after that, I'll stop recording and then.

Yeah, of course. Yeah, yeah. So if you guys want to find me LinkedIn, I'm very active on LinkedIn. So I if you send me a request five minutes later, I'll see it. So that'll be Matt Clark. And I'm with Madison Specs on LinkedIn. Also, McLark, Madison specs.com if you want to send me an email, that works as well. But those are probably the two best ways to reach out to me. So I appreciate it.

All right, Matthew, thanks so much for joining us. And then for those that are live on this call, I'm going to stop record and we can take the conversation.

That's all for this episode. We hope you subscribe, share and leave a review of the show. For more information about passively investing in multifamily apartments, check out Wayne's free ebook by going to creipartners.com eBook. Also, follow us on Facebook by searching Creipartners. This was the Untold Stories of Real Estate Investing.