Tax Benefits of Cost Segregation With Yonah Weiss

On This Episode of Peak Market Watch...

Tax Benefits of Cost Segregation with Yonah Weiss

Yonah Weiss, Business Director and Cost Segregation Expert of Madison SPECS, and Anton Mattli will dive into Yonah’s expertise on Cost Segregation and how investors may benefit from it.


Episode Highlights:

  • Vital information on cost segregation

  • Strategies investors may use to benefit from it

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00:05 welcome today’s episode of peak 00:07 market watch we speak with market 00:09 leaders in commercial real estate and 00:10 related services who have a close pulse 00:13 on the current market environment 00:15 my name is anton mattli co-founder and 00:17 ceo of peak financing and my co-host 00:19 today is ben suttles 00:21 one of my fellow board members and 00:22 principal with disrupt equity 00:25 that firm actively invests in and 00:28 manages multi-family properties 00:31 we are honored uh to welcome yonah weiss 00:34 business director with madison specs one 00:36 of the leading 00:37 car segregation firms in the country uh 00:40 welcome yonah it’s a pleasure to have 00:42 you with us today 00:44 thank you it’s a pleasure to be joining 00:45 you guys yeah so why don’t you give 00:47 us a brief background about you as well 00:50 as 00:50 madison specs sure absolutely as you see 00:53 my background is a brick wall 00:57 that’s my brief background for the day 00:59 but um 01:01 no but actually you know i i was a 01:03 teacher for many years 01:04 uh part-time stand-up comedian not 01:06 really just uh 01:07 just on podcast but what i what i love 01:09 to do is teach 01:10 that’s been my passion i got involved in 01:12 real estate about six years ago or 01:14 five six years ago and um dabbled around 01:17 in different things 01:18 i did a little commercial financing for 01:20 a little bit some 01:21 mortgage brokering and hard money loans 01:23 and then did some fixing flips trying to 01:24 get my 01:25 feet wet learning apprenticing from some 01:27 friends and and people that i knew who 01:28 had been in real estate for a long time 01:30 and a few years back but three years ago 01:32 came across this company madison madison 01:34 title you guys know mass commercial real 01:36 estate is a great company 01:37 amazing people and they had a position 01:40 that they were looking in this 01:41 conservation companies like 01:43 found very intriguing the taxes was 01:45 never really my thing 01:46 but uh i didn’t have a background as an 01:49 accountant but they have a whole team of 01:50 cpas 01:51 they’ve been doing this for years and 01:54 they need someone in the business 01:55 development 01:56 part of things and really what it ended 01:57 up being i found was really just 01:59 like teaching like that that was my 02:01 background so yes it has a sales 02:02 component as business development 02:04 component to it 02:04 but essentially since it’s like this 02:06 topic cost segregation that’s like 02:09 clouded in this really like mystique for 02:11 people that don’t know what i mean you 02:12 guys are laughing because you know what 02:14 it is you use it 02:15 all right it’s it’s great but for a lot 02:17 of people it’s like 02:18 what it’s basically a dichotomy right 02:20 for you two 02:21 and this was what my first impression 02:23 was when i came into the space was that 02:25 i asked everyone i knew like what do you 02:27 think about conservation so there’s two 02:28 responses basically 02:30 one was like yeah it’s awesome right 02:32 that’s the best thing ever we use it on 02:34 all our properties 02:35 and then the other response i got was 02:37 i’ve never heard of that 02:38 what’s conservation what is that and 02:39 there was no middle ground there was 02:40 nothing 02:41 so it was like i and the majority was 02:43 the latter were those people who were 02:46 told yeah just never heard of it and so 02:48 i found it was just a challenge of 02:50 just explaining it and teaching it so i 02:52 took upon that challenge to just 02:54 simplify it as best as i could been on a 02:57 bunch of podcasts um 02:59 i can’t even count anymore how many and 03:01 that’s what i enjoy doing so i just 03:03 continue 03:04 what i love doing helping people all 03:05 right so we do know a little bit about 03:07 it right but for our listeners 03:09 right you know i mean you can you break 03:11 it down maybe in the most simplistic 03:13 ways 03:14 just because i mean i think it is what 03:16 you really hit on the head is it’s a 03:17 very powerful 03:18 tool but you have to use it correctly 03:19 you need to know what it can do and what 03:21 it can’t do 03:22 and i think for our listeners can you 03:24 just kind of break it down for us and 03:25 you know what what is cost segregation 03:28 absolutely and you hit the nail on the 03:29 head there also it is there are times 03:31 when it is appropriate when it’s not and 03:33 so let’s just break it down 03:34 it’s a very advanced form of 03:36 depreciation 03:37 that that’s all it is okay so 03:39 depreciation appreciation 03:40 exactly what’s the appreciation what is 03:42 that it sounds like a negative thing 03:44 right okay my property is going down 03:46 in value it’s really not that at all 03:47 it’s it’s not the opposite of 03:49 appreciation actually property is going 03:51 up in value but 03:52 you get a tax deduction from the irs 03:56 called depreciation and it’s based on 03:58 the concept that things go down in value 03:59 but 04:00 essentially it’s it’s not intrinsic to 04:02 your property’s value 04:04 because it’s based on when you buy a 04:06 property you literally get to write off 04:08 that entire value 04:09 of the property minus the land so a 04:11 little bit goes to land and the rest of 04:13 the property you get to take as an 04:14 income tax write-off okay 04:16 that’s called depreciation but it’s over 04:18 a long period of time so it’s over 27 04:20 and a half year period you take a little 04:21 bit every year but essentially 04:22 you’re just basically taking a tax 04:24 write-off against as if the property 04:25 were going down in value 04:27 so now i can write off a certain amount 04:28 to say well it’s going down in value 04:30 so i can instead of losing it i get to 04:33 be able to recover 04:34 those losses so to speak and that’s the 04:36 concept 04:37 of depreciation which is a great thing 04:39 basically allows you to pay 04:41 less taxes on any income you make from 04:43 real estate 04:44 very simply put so cost segregation now 04:46 understanding what depreciation is 04:49 is just like i said an advanced form of 04:50 that breaking down the property into 04:53 different components 04:54 that certain things in there actually 04:56 depreciate at a faster rate 04:58 and you can even get bigger tax 05:00 deductions 05:01 in the earlier years so that you can pay 05:04 even less taxes 05:05 up front can you give us an example can 05:08 you give us an example of some of the 05:09 things that a cost segregation study 05:11 takes into consideration right and 05:13 and some of those things that might be 05:14 in that bucket of hey this is going to 05:16 be more 05:17 on an accelerated basis versus something 05:19 that’s going to depreciate on a longer 05:21 term basis 05:22 absolutely so essentially what you have 05:24 is the structure the main structural 05:25 components of the building that really 05:27 depreciate on that 27.5 year schedule 05:29 and we’re breaking out different 05:31 components like personal property 05:33 including you know things like furniture 05:35 or even cabinets carpeting things even 05:37 if they’re attached but they’re not 05:39 integral to the structure of the 05:40 property so 05:42 like i said furniture appliances 05:44 equipment fixtures 05:45 window treatments even stuff like mill 05:48 work or certain types of wiring and 05:50 you know electric and flighting all that 05:53 stuff 05:53 it’s inside your building it all has 05:55 value to it we’re able to 05:57 assign through an engineering process a 05:59 sign of value 06:01 or really understand what the value of 06:02 each of those components are 06:04 and then take that tax deduction over a 06:06 five-year period 06:08 and that’s called accelerating that 06:09 depreciation taking a big chunk of that 06:11 earlier on yeah a great explanation here 06:15 right so for 06:16 maybe for people who have that vo 06:19 depreciation 06:20 is negative right i think it’s it’s 06:22 important to understand right that you 06:24 have 06:25 different type of accounting right so 06:27 you have 06:28 your corporate accounting gap accounting 06:31 whatever 06:31 whatever the mode is and then you have 06:34 tax accounting and what you are really 06:36 doing 06:37 with your services is take the maximum 06:40 advantage of the tax code 06:41 right exactly you hear about all the 06:44 time right one of the great advantages 06:46 of real estate investing is those tax 06:48 benefits that come along with it right 06:50 what is that i mean essentially the 06:52 biggest thing i mean ben you can 06:53 speak to this if this is accurate or not 06:55 is cost segregation like it’s the 06:57 depreciation like that’s what the 06:59 biggest 06:59 tax benefit is at least in the 07:01 acquisition 07:03 stage obviously there’s 1031 exchanges 07:05 there’s different write-offs you can use 07:07 business write-offs etc 07:08 on mortgage expense deductions but 07:11 that’s appreciation conservation is a 07:12 huge 07:13 huge part of it so so okay so people 07:16 talk about you know it’s it’s a loss 07:17 right so it’s a paper loss 07:20 you know that goes on to your tax return 07:21 that will offset 07:23 you know real profits too right you know 07:26 and what you’re saying is that you’re 07:28 essentially kind of condensing down 07:30 instead of taking 27 and a half years to 07:31 depreciate all this stuff and 07:33 take all those losses you’re trying to 07:35 say hey you know the first five years 07:37 i’m going to take majority of those 07:39 things 07:39 and i’m going to shove them into the tax 07:41 returns for the first five years and 07:43 what we’ve seen 07:44 too and really this is dependent on when 07:45 you do your cost segregation study right 07:47 we typically try to do it 07:48 right when we take over the property 07:50 right that’s probably maybe you can kind 07:51 of give some tips to 07:52 some of our listeners that own 07:54 properties as well but sure you know 07:56 that year one 07:56 is huge right and then it’s gonna start 07:58 kind of going it’s gonna go down from 08:00 there 08:00 right because you’ve already taken a ton 08:02 of that depreciation 08:03 you know but the one thing that i wanted 08:05 to talk about because there is 08:07 there’s there’s there’s strategies 08:10 involved in everything that we do 08:12 and people need to realize when to do 08:14 cost segregation and when not to 08:16 so maybe can you kind of talk us through 08:18 because people are gonna be like oh i’ve 08:20 got a commercial property but 08:21 you know it might not be the best fit 08:23 for cost segregation 08:25 exactly so can you kind of talk to us 08:26 about kind of the the times when you 08:28 might not want to do it or you want to 08:30 at least think about doing it 08:32 sure absolutely and i love that you 08:33 called it you know a strategy and you 08:35 really do have to it is that’s what it 08:36 is it’s a strategy it is not necessarily 08:38 for every situation 08:39 and for every and you do have to combine 08:41 some other strategies on the exit 08:43 sometimes in order to really maximize 08:45 the benefits so 08:46 my general rule of thumb is and i’ll get 08:48 into the reasoning for this 08:50 but is any property that is purchased 08:54 for over a half a million dollars so 08:56 this is going to exclude a lot of 08:57 smaller properties 08:58 first of all and you’re planning on 09:00 holding the property for at least two 09:02 years 09:03 so there’s really two components to this 09:05 the first one is obviously has to be a 09:07 certain amount because as you said when 09:08 we’re able to front load a certain 09:10 percentage 09:11 of that depreciation to those earlier 09:13 years 09:14 then you know the bigger or the more 09:16 expensive the property is the more of 09:18 those tax deductions proportionately 09:20 are you going to be able to take up 09:21 fronts so the smaller less lesser the 09:23 value 09:24 the less tax deductions the less benefit 09:25 is going to be because there obviously 09:26 there’s a there’s a fee involved in the 09:28 service 09:29 although it’s not a it’s not a really 09:30 big one whatsoever and 09:32 almost nothing compared to the the tax 09:34 savings but the smaller the property you 09:36 get 09:36 the more that actually comes into play 09:39 is it worthwhile or not 09:41 um and that second factor is how long 09:43 you’re going to hold the property for 09:45 and the reasoning behind that 09:47 is because there’s something called 09:48 depreciation recapture tax 09:50 okay so when you sell a property you 09:53 have to pay a tax on the unrealized gain 09:56 okay so besides for the capital gain 09:57 what you’ve actually realized you’ve 09:59 you’ve you know made profit on the sale 10:01 you have to pay a tax on that amount or 10:03 you’re subject to that tax you’re also 10:04 subject to 10:05 what’s called the unrealized gain the 10:06 amount of depreciation you took 10:08 you know are taxed on that as well on 10:11 the sale 10:11 now there are strategies to get around 10:14 that or defer that like a 1031 exchange 10:16 you can defer that tax you can also you 10:19 know find other ways to get 10:20 losses from other properties the great 10:22 thing about real estate 10:24 is that if you are a real estate 10:26 professional 10:27 and this is something that is another 10:29 really important component here 10:31 that this is when it’s going to make 10:32 sense the most okay 10:34 if you’re not a real estate professional 10:36 then which means you’re involved 10:38 materially participating in a real 10:40 estate trader business 10:41 then you’re limited to use those tax 10:44 deductions 10:45 against your real estate income okay so 10:47 without getting too 10:48 complex over here or too deep into you 10:50 know tax code 10:52 income from real estate is called 10:54 passive income okay it’s different 10:56 treated differently than any active 10:57 income w-2 income you might have 10:59 and that is um a great thing it’s 11:02 passive it’s on your schedule e 11:03 and any depreciation you have is going 11:06 to be used that’s called a passive 11:07 deduction a passive loss is going to be 11:09 used against that if you had more 11:12 deductions than you actually have 11:13 income let’s say you do a conservation 11:15 study and you take what’s called bonus 11:17 depreciation to get that huge 11:18 front load in the first year and you get 11:21 a million dollars of depreciation 11:23 but you only made a hundred thousand 11:24 dollars from of profit right of net 11:27 operating income from your 11:28 property so what happens to that extra 11:29 900 000 11:31 of deductions does it disappear like 11:34 what do you do with it can you use it 11:35 and this is where a lot of confusion i 11:37 get i mean i see some bigger pockets 11:39 like 11:40 at least once a week this question comes 11:42 up is like well can i use depreciation 11:44 against my w-2 income and the answer 11:48 generally is 11:48 no okay there are exceptions to that and 11:51 again if your real estate professional 11:52 or your spouse is 11:54 then that is a possible way to do that 11:56 but generally speaking 11:57 passive deductions against passive 12:00 income 12:01 okay those extra losses will just carry 12:04 forward 12:04 you’ll just use them in the future years 12:06 okay and they don’t go away 12:08 until you sell the property so that’s 12:09 another time to create these extra 12:11 losses are great if you sell the 12:12 property 12:12 you can use those losses to offset the 12:15 gain 12:16 the tax but another strategy that you 12:19 can do is even to get the conservation 12:20 done but 12:21 nevertheless you do want to make sure 12:23 you’re going to talk to your cpa 12:25 to make sure this fits with your 12:26 investment strategy and with your 12:28 overall picture 12:29 so you know the the recapture is 12:32 something that 12:32 you know a lot of people don’t really 12:34 understand and we’ve had to educate a 12:35 lot of our investors on that as well 12:37 right 12:38 and i think that plays into when do you 12:40 do it 12:41 and you know is this part of your 12:43 overall exit strategy 12:45 you know i kind of look at it like if 12:46 you’re going to sell the property 12:48 correct me if i’m wrong this is just my 12:49 assumption 12:50 right you know if you’re gonna sell the 12:52 property within the first couple years 12:54 cost segregation might not be the best 12:57 strategy for you right 12:59 you know yeah you’re gonna get a little 13:00 bit year one but if you turn around and 13:02 then sell the property 13:04 you’ve got a ton of recapture that your 13:06 investors 13:07 you know now we have a different tax 13:09 strategy i’ll kind of get into mine as a 13:10 as a real estate professional and as a 13:13 you know full-time syndicator but 13:15 for my investors they’re going to get 13:16 hit they’re just going to turn around 13:17 and get hit with it 13:18 right they’ll get that deduction but 13:20 then they’ll get hit with the the tax on 13:22 yeah so i mean i look at it like okay if 13:24 it’s going to be maybe a 13:25 you know more of a longer term let’s 13:27 call it four to seven years 13:28 you know it makes more sense to do cost 13:31 segregation at that point right because 13:34 you’re going to be able to you know 13:36 actually benefit 13:37 for a little while from that 13:38 depreciation right that’s that’s less 13:40 money that you have to pay the tax guy 13:42 and um you know so i mean i kind of look 13:44 at it like that and so that’s kind of 13:45 been the misconception where people 13:47 automatically on every single deal think 13:49 that they should do it 13:50 um you know but there’s there’s strategy 13:53 for everything right 13:54 you know you know so that’s that’s 13:56 that’s but the way that we look at it 13:58 too right is 13:59 um you know we have gains from sale of 14:02 property 14:03 right and then i but i then i turn 14:05 around and i buy deals and i get 14:06 i get depreciation from that so it 14:08 offsets a lot of this right you know i’m 14:11 using it almost 14:11 as my built-in 1031 right um 14:15 you know and everybody’s tax situation 14:16 is different right but if you’re getting 14:18 a bunch of capital gains from sales but 14:19 you’re buying a bunch of deals you’re 14:20 doing cost segregation on them 14:22 then guess what it’s going to net out 14:24 and a lot of 14:25 you know but yeah no you know and some 14:27 of those losses 14:29 are so big that you can’t even take them 14:30 in one year you’re just you’re just bow 14:32 waving them 14:33 you know into the future they’ll just 14:35 keep you know adding up and adding up 14:37 no there’s it’s it’s a tremendous amount 14:39 right you know and i think the other 14:41 thing too to kind of bring up 14:43 you know is and this has been a debate 14:45 amongst 14:46 amongst syndicators too right you know 14:49 do they get or should they get 14:52 the benefit of the depreciation or 14:54 should that flow a hundred percent 14:57 to um you know and i’d like to have both 14:59 you guys opinions on this 15:01 you know should that flow 100 to the lps 15:03 or the investors 15:05 i’ll start with you you know i mean what 15:06 do you what do you think about that 15:07 what’s your what’s your stance on that 15:09 sure i mean there are two definitely 15:11 different opinions and it really does 15:13 have 15:13 a lot to do with uh two things number 15:16 one 15:16 how you structure the operating 15:18 agreement okay and however you do 15:20 structure that that’s going to determine 15:22 you know how that depreciation is going 15:23 to be allocated is it going to be 15:25 equally you know among the 15:27 equity ownership or is it going to be 15:29 solely to 15:30 where the money is right some people say 15:32 follow the money uh wherever the money 15:34 goes like that’s who’s going to get it 15:35 so there’s really two those are two 15:37 different uh opinions there but either 15:38 way i think 15:39 is um for lack of a better word kosher 15:42 right they’re both 15:43 um considered appropriate and you know 15:45 can be backed up 15:46 by different things whether or not i’m 15:48 not sure if your question is what 15:50 what is the uh you know appropriate like 15:55 yeah what’s your stance right you know 15:57 yeah i mean i think 15:58 if if i’ll just you know interject my 16:00 opinion here 16:02 i think the uh the syndicators are doing 16:04 a lot of work and the ones that are 16:06 really 16:06 what’s called materially participating 16:08 in the real estate i mean they’re 16:09 running the property that’s exactly 16:11 what’s called 16:12 real estate investing they should be 16:15 getting 16:15 the tax benefits that come along with it 16:17 so it should be 16:19 as far as i see it according to the 16:20 equity um 16:22 ownership all right so my colleagues 16:24 usually a little bit more conservative 16:26 anton yeah so so suddenly 16:29 obviously from a syndicator perspective 16:32 that’s what you want to hear 16:33 right right so from uh 16:36 the question is what ultimately and i’m 16:39 not sure whether it really has been 16:41 tested in court 16:42 right uh whether whether that argument 16:45 will 16:46 will stand or not right uh the 16:49 safer approach definitely is is as as 16:52 you mentioned jonah 16:53 follow the money right so what what was 16:56 the original 16:57 cash equity contribution and do it along 17:00 those 17:00 percentages uh but naturally i 17:03 understand that from a syndicated 17:05 perspective and 17:06 you do not just have that in real estate 17:08 you have that in other businesses too 17:10 right so all the hedge funds have very 17:13 similar issues 17:14 with the investments that that they are 17:16 doing and naturally they want their 17:19 portion 17:20 their override that they are getting 17:22 that that is that they have 17:24 the benefit of of depreciation whatever 17:27 or or 17:27 other tax benefits whatever whatever the 17:30 type of business is not just 17:32 real estate but always too uh so 17:35 i would say the conservative side 17:38 definitely is the money but 17:39 uh the cash contribution but if your 17:43 tax consultant is comfortable with it 17:46 uh then i would say go with uh 17:50 with with the first version where the 17:52 where the sponsors have the benefit 17:54 as per their uh 17:58 80 20 split or 70 30 or whatever it 18:01 might be 18:01 right and i think the the bigger point 18:03 that i’m trying to make is right it’s 18:04 it’s 18:05 it’s dependent on the sponsor depending 18:08 on the operating agreement 18:10 um you know investors that are listening 18:11 to this podcast they should they 18:13 they need to they need to review that 18:14 right with not only their lawyer but 18:16 their 18:16 their cpa and understand how that’s 18:18 going to work for them right 18:19 because i think you also brought up a 18:21 good point too you know that i want to 18:22 kind of drive home 18:23 right you know if you’re not a real 18:25 estate professional 18:27 some of these losses are just going to 18:28 be kind of in suspense 18:30 right you can’t even use them exactly 18:32 yeah they’re just so you know 18:34 a lot of people talk about oh we’re 18:35 going to do a cost segregation study 18:37 right 18:38 but if you can’t use the and we didn’t 18:40 and for 18:41 and and nobody should ever try to bake 18:43 that into any kind of returns because 18:45 everybody’s tax situation is different 18:46 right but i love how we see some 18:48 sponsors that will say oh you’re going 18:49 to be able to write off 18:50 75 of your you know uh your initial 18:53 investment i don’t know 18:54 you know um you know what that really 18:56 means right because each person’s 18:58 situation is different 18:59 but i think the point that i’m trying to 19:02 make is that investors need to 19:03 understand that it might not 19:04 it might not work for them at all um you 19:07 know 19:07 maybe it will maybe it won’t it just 19:09 once again depends on your tax situation 19:11 and right 19:12 and what you know a designation you are 19:14 right are you a real estate professional 19:16 or are you not 19:17 yeah so so yeah so so ben you brought 19:20 really up 19:21 an excellent point right read that 19:22 operating agreement and understand it 19:25 right so whatever the decision is right 19:28 in the of the two options uh the 19:31 sponsors obviously 19:33 will have to make that decision right do 19:36 the sponsors get the benefit of that 19:39 depreciation and 19:42 you need to know that as a as a as a 19:45 passive investors 19:46 right it’s similar to that order 19:49 discussion that we 19:50 constantly hear right which is a return 19:53 on capital and we turn off capital 19:56 that’s another topic where a lot of 19:58 passive investors only get that 20:00 big wake-up call once they 20:04 once they get distributions and 20:06 particularly when the property is sold 20:08 and suddenly realized well but that’s 20:10 not what i thought that was signing up 20:12 to 20:13 right so it’s all about read that 20:16 operating agreement and actually 20:18 understand it 20:24 you know about more about the process 20:25 right sure you know 20:27 um and i’ve gone through this but i’d 20:29 like you to kind of explain it to our 20:30 listeners as to 20:32 you know when should a sponsor or an 20:35 owner reach out to you 20:37 what types of properties is this most 20:39 beneficial on 20:41 and you know how long and what does that 20:42 process look like i know there’s several 20:44 questions in that one question but 20:46 you know um maybe we’ll start off when 20:48 such 20:49 should somebody engage you yeah i mean 20:52 it 20:52 it really does depend uh the best time 20:54 and like you said a lot of people like 20:55 to get it done in the first year 20:57 immediately after taking over the 20:58 property and it is really 20:59 best in many situations to get your 21:02 taxes 21:02 set up the right way in your first year 21:04 of tax filing 21:05 so that’s why a lot of people like to 21:07 get it done there is another component 21:08 there which is that 21:09 when you’re doing a major renovation or 21:12 even capital improvements on a property 21:14 if you get the concentration done on the 21:16 acquisition there’s actually a second 21:18 component that can be applied to 21:20 renovations that have been done 21:21 subsequently 21:22 so it’s best to get the conservation 21:24 study done 21:25 you know as soon as possible so you can 21:26 capture what the property is and how you 21:29 can depreciate everything in it as is 21:31 and then when those renovations or 21:33 updates are done you can now capture the 21:34 depreciation 21:35 on that later on so that’s the first 21:37 thing the second 21:39 thing i would say is that it it like i 21:40 said it does depend 21:42 because you don’t necessarily even have 21:43 to do it there’s no rule requiring you 21:46 to do it in the first year and so for 21:48 some people 21:49 if your property is not really operating 21:51 uh at on 21:52 with in profit for example then to get 21:55 extra deductions 21:56 doesn’t necessarily make sense it may 21:58 make more sense to get it done in the 21:59 second year 22:00 and you you don’t really miss out on 22:02 anything you actually can catch up 22:04 whatever depreciation 22:05 you missed you could have taken the 22:06 previous year and all that can be done 22:09 uh without amending your tax returns so 22:11 you’re really just changing your 22:12 accounting method making an adjustment 22:14 with a special form that’s done 22:16 and and that’s done in a lot of ways a 22:18 lot of people do that even 22:19 two three f up to five or even ten years 22:22 back you know if they’re holding a 22:23 property for a long time 22:24 they didn’t need those losses now 22:25 suddenly they come into a huge profit of 22:27 some kind 22:28 and you need those losses it’s a perfect 22:30 strategy in a situation like that 22:33 where uh you know you may not have 22:35 needed it at a certain point maybe like 22:36 you said you had like this abundance of 22:38 losses but what happens if you know you 22:40 didn’t 22:40 you didn’t sell or whatever and you held 22:42 properties you didn’t acquire anything 22:43 new for a couple years 22:44 and all of a sudden you need those 22:46 losses it’s a great strategy to get it 22:48 retroactively 22:50 what what types of assets though you 22:52 know i mean 22:53 we’re we’re mainly in the multi-family 22:55 sector right right you know 22:57 where it makes a lot of sense to do this 22:59 right 23:00 is there other asset classes where maybe 23:02 it’s your 23:03 you can still do it but you don’t get as 23:05 much benefit you’re just trying to kind 23:06 of give our listeners some perspective 23:08 as to you know if you have this asset 23:10 class you should reach out to yonah 23:12 it really can be done on anything on any 23:15 asset class whatsoever and i mean we’re 23:16 the biggest at this point the biggest 23:18 national conservation firm and so we’re 23:20 doing like 23:20 about 3 000 of these a year we’ve been 23:23 around for a long time so we do 23:24 literally everything i mean 23:26 there are certain properties that do 23:28 have more benefit than others so i’ll 23:29 give you a typical example for 23:31 multifamily as you’re probably aware 23:32 you’re going to get on average about 25 23:34 to 30 percent of that accelerated 23:36 depreciation which means the amount that 23:38 you can take as a faster depreciation 23:40 from the structure 23:41 which will remain on that 27.5 year 23:43 schedule for 23:45 certain the probably the worst type of 23:46 properties that you can do which may not 23:48 be beneficial at all are 23:50 like warehouses where there’s not a lot 23:51 of personal property in there 23:53 okay it’s usually just kind of bones 23:55 right 23:56 in that situation yeah you might be able 23:58 to get five to ten percent 24:00 um in some cases or if there’s a lot of 24:02 land improvements which you know 24:03 landscaping and pavement that 24:04 gets a 15-year schedule that can be um 24:07 deductible up front as well 24:09 that may be appropriate however 24:11 warehouses are probably like the least 24:13 on 24:13 the bottom rung of like uh most benefit 24:16 you know least beneficial properties 24:18 um single-family houses are less than 24:20 multi-family although can still be 24:21 beneficial again 24:22 it kind of have to meet that threshold 24:24 of is it expensive enough 24:25 is it worth enough to get those benefits 24:27 and then on the other end of the 24:29 spectrum 24:29 and everything in between office retail 24:32 you know self-storage 24:33 all that stuff is really really 24:35 beneficial 24:36 along the same lines of multi-family 24:40 but on the other end where’s like the 24:41 highest best possible property i mean 24:43 you have 24:44 above multi-family you have like hotels 24:47 and assisted living facilities which 24:48 have a lot more equipment 24:50 and a lot more you know furniture and 24:52 fixtures and things like that 24:53 and then even higher than that you’ll 24:55 get you know uh very 24:57 expensive manufacturing facilities that 24:59 have again lots of equipment and things 25:00 and then even above that you’ll have 25:02 mobile home parks 25:03 and golf courses and so those two asset 25:06 classes are really 25:07 really unique well let me ask you about 25:09 the mobile home parks i was actually i 25:10 was under the impression that that would 25:12 be less right because it’s mainly 25:14 you own the land but maybe you don’t own 25:15 the the the 25:17 the homes themselves right i mean you 25:20 know i guess 25:20 why would you say that that’s higher 25:22 than than those other asset classes 25:24 so typically and i’ll tell you exactly 25:26 why typically we’re seeing just to give 25:27 you a perspective and we’re 25:28 it’s been a very hot asset class 25:31 recently 25:32 i’m sure you’re aware right mobile home 25:33 parks whatever you want to call it 25:34 manufacturing communities 25:36 manufacturing housing communities 25:38 typically between 50 and 80 percent 25:40 of accelerated depreciation on mobile 25:42 home parks as opposed to your 25 to 30 25:44 percent on on 25:45 multi-family the reason why that is is 25:48 you you typically have 25:50 two scenarios in a mobile home park you 25:52 either have what’s called park owned 25:54 homes 25:54 or tenant owned homes or a combination 25:57 of both so let’s take the most common is 25:59 usually what’s called tenant homes which 26:00 means 26:01 you buy this you know park this piece of 26:03 property and on it 26:05 are these concrete pads and on each one 26:07 of those are these little dinky little 26:09 mobile homes right and the tenants own 26:11 them 26:12 so they’re owned by the tenants you’re 26:13 really just renting out the the space 26:16 to them that’s the typical like that’s 26:18 the classic case of a mobile home park 26:20 now in that scenario if you think about 26:22 it what do you actually own 26:24 you own the land like you said but you 26:26 also own the land 26:27 improvements and the land improvements 26:30 which i mentioned before depreciated on 26:32 a 15-year schedule 26:33 that’s accelerated depreciation a lot of 26:36 that you’re talking about the roads the 26:37 landscaping 26:38 the pads under each home right concrete 26:42 gravel whatever that is fencing anything 26:44 outside 26:45 all that you own and that’s essentially 26:47 what you have of course you’re 26:48 allocating a cernan to land but what 26:50 else is there there’s just the land 26:52 improvement so that’s why 26:53 if you buy a million dollar park and all 26:55 you own is the land and land 26:57 improvements 26:57 and there is some infrastructure thing 26:59 sometimes that is on a 27.5 year 27:01 schedule like some concrete you know 27:03 things or or even the infrastructure of 27:05 the 27:06 plumbing or main electric or you know um 27:09 sewage 27:10 but the majority like i said 50 to 80 27:12 percent is in that 27:13 land improvements and so that can be 27:15 taken as first year bonus depreciation 27:17 it’s uh you know it’s absolutely i love 27:19 doing these things man see i’m learning 27:21 some new stuff too 27:22 yeah you know that’s great so there’s no 27:24 impression it was the opposite of that 27:26 right 27:26 that there was going to be very little 27:28 that you could that you could uh 27:30 use a cost segregation study on so so 27:32 you you mentioned 27:34 also golf courses so so there are you 27:36 telling us that 27:37 the greens and the fairways that they’re 27:40 also part of that 27:41 of that so-called uh land improvement 27:45 that you can depreciate over 15 years 27:47 exactly right same exact thing exactly 27:50 right 27:50 so uh so so now we know why some some 27:53 famous people 27:55 invest in golf courses that’s right no 27:57 politics man no politics 28:00 smart how can i get the most possible 28:03 you know tax deductions 28:05 accountants like buy a golf course okay 28:08 let’s learn how to play golf 28:10 there you go there you go and uh really 28:12 politics aside you would be surprised 28:14 then 28:14 how how many people uh on both sides of 28:18 the political spectrum 28:19 are invested in golf courses i i guess 28:22 yeah 28:22 once again i’m learning something new i 28:24 love it you know not quite there i can’t 28:26 buy my own golf course yet but 28:28 hopefully in the future right but uh all 28:30 right so kind of getting into a little 28:32 bit not a political question but just 28:34 more about what you see in the future 28:36 right you know i know there’s been a lot 28:38 of news about 28:39 you know the new administration might be 28:41 changing up some of the rules and you 28:44 know some of the stuff from the old 28:45 administration might be going away what 28:46 is 28:47 you know which way is the wind kind of 28:48 blowing and what are you guys hearing 28:50 now being that you guys are one of the 28:51 biggest shops in the country if not the 28:52 biggest shop doing cost segregation 28:54 obviously you guys got your ear to the 28:56 ground on on this stuff and sure 28:58 let our listeners know like is you know 29:00 is this strategy going to change in any 29:02 material way in the future 29:03 yeah absolutely and you know and we’re 29:06 in touch with accounting firms across 29:07 the country 29:08 and um and as well as you know some 29:11 policy makers as well 29:12 and we have also the madison 1031 uh 29:15 company which 29:16 with the attorneys that are on that are 29:18 also very closely involved with policy 29:20 going on with the 1031 exchange and 29:22 whether that’s going to go away 29:23 i will preface by saying that the tax 29:25 cuts and jobs act that was 29:26 under the trump administration right 29:28 that made a huge difference with that 29:30 100 29:30 bonus depreciation rule that came out 29:33 that is already in the books to start 29:35 phasing out 29:36 in 2023 which means you know we have all 29:38 this year all next year to take 29:40 advantage of that 2023 it’s in the books 29:42 are ready to start going down to 80 29:43 bonus and then after that 60 until 2028 29:47 it will no longer be 29:48 according to the current law any bonus 29:50 depreciation now 29:52 i tend to not believe anything 29:54 politicians say 29:55 during campaigning um to be honest i 29:58 don’t pay attention to anything 30:00 uh during campaigns whatsoever you know 30:03 but um but you know 30:06 they’re just notoriously liars okay and 30:09 so 30:10 everyone knows that it’s no surprise but 30:12 so to say 30:13 and to quote uh you know the president 30:16 who said on day one i’m going to repeal 30:19 the tax cuts and jobs act and everything 30:21 in it 30:21 well obviously that didn’t happen right 30:23 and and everyone knows that it 30:25 that’s well that’s a joke because to to 30:28 uh you can’t make an executive order 30:30 like that to repeal a huge tax reform it 30:32 has to pass through 30:33 congress has to pass through the house 30:35 there’s a whole process of making big 30:36 tax reforms and the fact that it was 30:38 the biggest tax reform in like 30 40 30:41 years 30:42 that’s not something that you know and 30:43 that congress in both sides of the aisle 30:44 like 30:45 agreed on to to pass those laws 30:48 it’s not something that you’re going to 30:49 just you know do away with obviously yes 30:51 there are some tweaks there are some 30:53 things that have policies they want to 30:54 change certain things 30:55 understandable right but to go ahead and 30:58 wipe out the whole thing so in that i 31:00 don’t think bonus depreciation is going 31:01 to be touched whatsoever conservation 31:03 obviously 31:04 has been around for for decades and 31:05 that’s not going to go away 31:07 whether you like it or not a large 31:09 amount of uh 31:11 politicians congress people own 31:14 real estate or invest in real estate so 31:16 they have a vested interest 31:18 to make sure that this stuff is not 31:19 going to go away whether you like that 31:21 or not 31:21 um but that’s just the reality no and 31:25 and and i think it goes back to you know 31:26 i mean you act you just you made up a 31:29 great point right you know there is a 31:31 ton of people that own commercial real 31:33 estate that are influencers 31:35 right and and so they’ll say one thing 31:37 in public but in 31:38 in in the back rooms they’re saying now 31:40 we’re not gonna do that you know why 31:42 because i own a bunch of that stuff too 31:44 right you know and so and and i think 31:47 you know 31:47 it’s it’s the tax code right you know i 31:49 mean people can get upset people got 31:51 upset about trump’s tax return but 31:53 you know we now realize the reason that 31:55 he was able to only pay 31:56 whatever it was 750 bucks or whatever it 31:58 was something crazy 32:00 and people got mad thinking that he was 32:01 somehow taking advantage of 32:03 it’s just that’s the tax code and cost 32:05 segregation like you just said 32:07 has been around i i feel like it’s been 32:09 around for like 100 years 32:10 it’s been around for a while and so this 32:13 is not anything new the bonus 32:14 depreciation like you mentioned is new 32:17 right but that’s unless maybe focus take 32:19 one minute and kind of explain that that 32:21 i kind of look at that as it’s like 32:22 turbo charging 32:24 the cost segregation right is that 32:26 correct that’s right 32:28 one they’re one in the same once you’ve 32:30 done a cost irrigation study 32:31 and you have allocated those assets to 32:34 those faster lives 32:35 anything that depreciates on a faster 32:37 schedule you can you have the option 32:39 to take it all up front in the first 32:41 year and that’s called 100 32:43 bonus depreciation okay okay 32:46 so i i wanted to ask you a kind of a 32:48 one-off question because you know being 32:49 that we’re here 32:50 i’m here in houston anton’s in dallas 32:53 right 32:54 um you know we’re we have a lot of 32:55 exposure to oil and gas 32:58 right and you know i know i’m getting a 32:59 little bit off topic here but 33:01 you know some of these people as as part 33:03 of their pitch to invest in these oil 33:05 and gas 33:06 you know um you know projects are saying 33:09 you know you can get a 100 year one 33:12 right you know now is that because of 33:15 all the equipment that they have 33:17 or what it you know i mean do you guys 33:19 have a lot of experience in that realm 33:21 there is i mean there are different 33:23 things so you know concentration 33:24 depreciation in general depreciation has 33:27 different forms in different industries 33:30 so real estate obviously 33:32 land you know real estate real property 33:33 depreciates and so that’s how you can 33:35 segregate the 33:36 the cost of the different components oil 33:38 and gas have other different 33:40 tax incentives as well in terms of the 33:42 equipment yes can be 33:44 taxed can be you know written off at a 33:46 faster rate um so 33:48 there are huge tax incentives i would 33:50 say it’s probably 33:51 maybe debatably the the biggest um tax 33:54 beneficiary beneficiary uh industry 33:58 out there uh however i mean the 34:01 difference is 34:02 is that the returns aren’t necessarily 34:04 always the the same so yes there is the 34:06 huge tax advantage when it comes to oil 34:07 and gas as well 34:09 yeah i think you you made a great point 34:11 right so 34:12 um i have invested in oil and gas right 34:15 so i have 34:16 had the advantage of of those 34:19 uh tax benefits but the reality is you 34:23 get these tax benefits when you actually 34:25 drill 34:26 right so and trailing by its nature 34:29 is risky so you need to provide tax 34:32 benefits so that you 34:34 essentially can balance that risk that 34:36 someone is taking it’s an it’s an 34:37 incentive right 34:38 you know absolutely yeah and i guess 34:41 really was it is cost segregation that’s 34:43 that’s a good point right you know it’s 34:44 cost segregation at 34:46 you know it’s an incentive to to invest 34:50 money into these properties and keep 34:51 them keep up with them right i mean i 34:53 think that that’s 34:54 that’s the meta point here right which 34:56 is what drives commercial real estate 34:58 multi-family it’s like 34:59 you have to incentivize entrepreneurs 35:01 and investors to put money into these 35:03 properties 35:04 then sometimes it’s not just necessarily 35:06 you incentivize them through it’s gonna 35:07 be a profitable thing right 35:08 you know just trust me there has to be 35:10 some tax 35:12 you know benefits that go along with it 35:13 too um you know and 35:15 that’s i think that’s why cost 35:16 segregation has lasted so long and 35:18 will continue to last into the future 35:20 you know because you have to have more 35:22 than just hey go buy that property 35:23 and keep up with it um so well i’ve 35:26 really enjoyed it yonah i mean this has 35:28 been i’m like i said i’ve learned 35:30 several things today that i didn’t know 35:31 about um you know but uh 35:34 anton was there any other questions that 35:35 we had uh no not really 35:37 right i think uh uh obviously we want uh 35:41 that our listeners can reach out to you 35:43 iona so 35:44 please provide your uh your contact 35:47 information but before you do that 35:49 i think it might also be helpful for the 35:53 listeners to understand that they can 35:54 reach out to you 35:56 uh early on uh 35:59 when they have a deal under contract so 36:01 they didn’t have to wait until they 36:03 they they already closed on the deal and 36:06 now think about car segregation 36:08 as a matter of fact it’s very beneficial 36:11 to reach out to you 36:12 before you actually go down that rabbit 36:15 hole of closing so that you can 36:18 strategize right from from the get-go 36:21 that’s a great point yeah i’m glad you 36:23 brought that up absolutely yeah 36:25 okay so you all know how how can our 36:27 listeners reach you 36:29 best place to find me is actually 36:31 linkedin i’m extremely active on the 36:33 platform as 36:33 uh any of our listeners if you know me 36:36 know that 36:37 so that’s the best place make sure to 36:38 put a little note that you heard us on 36:41 on on the peak market watch uh podcast 36:44 and 36:44 you can go to my website 36:47 obviously i work for madison specs you 36:48 can check out more information there at 36:50 or just reach out to me 36:52 personally 36:53 awesome right uh it was a pleasure 36:55 having you with us 36:56 and that’s been said you you shared with 36:58 us quite a quite a number of great 37:00 snippets and i really appreciate 37:03 your time thanks joanna we appreciate 37:06 buddy