MFREE 118 Full Episode with Gian Pazzia: Could Early Investing Be the One Move You’ll Regret Not Making?

In this episode, Gian discusses his personal interests, such as surfing and Brazilian jiujitsu, and shares pivotal moments in his professional journey, including founding KBKG and launching successful software. He emphasizes the importance of early investment for tax advantages and reflects on missed opportunities in real estate. Gian also offers a valuable communication tip involving AI and underscores the long-term benefits of strategic planning for future generations. Finally, he defines success in his field as achieving financial freedom that allows for a relaxed and enjoyable life.

00:00 Introduction to the Focus Round

24:15 Fun Activities and Hobbies

24:26 Game-Changing Opportunities

24:55 Communication Tips for Complex Ideas

25:40 Early Investment Insights

26:55 Legacy and Long-Term Impact

27:42 Defining Success After 25 Years

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Email me at:
hutch@hsquaredcapital.com

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Transcript

Speaker: 0:00

Wah gwan all you Multifamily enthusiast. Welcome to another episode of the Multifamily Real Estate Experiment Podcast, where we break down mindset mechanics, tax strategies, and how to help you the passive investor own more of America. Today we're gonna ask the question. How can passive investor use cost segregation to reduce taxes, increase cash flow, and build real estate wealth faster? Today's guest, is a true heavyweight in the world of tax strategy and accelerated depreciation. See, Gian Pazzia is the author, speaker, a structural engineer turned tax strategist, expert, and one of the nation's top authorities in call segregation. He's the co-founder of KBKG, which is a national leader in cost segregation study, and It has helped his clients save over$10 billion in taxes since 1999 see Gian, and he has served as a president of the American Society of Cost Segregation Professionals. He has provided expert witness. His testimony to the IRS and he's been published in over 20 times in major tax journals. Brother, this is a bio that you don't see quite often, man. Thank you for joining us on this podcast episode.

Speaker 2: 1:18

Yeah, lifetime. Really happy to be here, Hutch. Thank you for that great introduction.

Speaker: 1:22

Man, it's all you brother. So man, I like to ask my guests before we get into the vault of tax strategy, do you have a favorite quote or mantra or principle that guides how you think about real estate taxes or helping investor build wealth?

Speaker 2: 1:40

A guiding principle. if I had a guiding principle, it would be, make sure you. Look at your biggest expense every year, and that's gonna be your taxes. And, if you can get your biggest expense down, even just a little bit, it usually is going to, make a big difference, for your real estate portfolio. So if you can lower that tax bill, not pay until Sam reinvest that money into real estate. That's what the sophisticated real estate investors have been doing, in this country for years.

Speaker: 2:12

That is awesome, man. My tax lady, the first time I used this tax lady a few years ago, she was like, Hutch, maybe you need to make less money if you're paying too much taxes. I'm like, no, I just need to figure out how to cut my taxes. You know? So yeah. Great point. If we can figure out how to cut the logic expense that then it'd be great. So you earn more, keep more now. You have started your career in structural engineering, and somehow became the nation leading cross segregation. Can you walk us through the journey, how did an engineering background set to you? Yeah. Set you up to understand, building, components and depreciation and the ways that most tax professionals simply can't.

Speaker 2: 2:48

Yeah. years ago, I went to school, went to Purdue University. I studied structural engineering, thought I was gonna, work on designing high rise buildings and all types of, interesting structures. But I kind of realized that wasn't for me. Sometime when I was in college, I ended up, graduating with a structural engineering degree, worked for a company called Arthur Anderson, which. At the time was maybe one of the biggest, accounting firms in the world. Okay. And, so from there, and by the way, so they were hiring engineers outta college, to do cost segregation studies. And back then there wasn't. There wasn't a lot of smaller firms that were helping, smaller investors do these studies. So I was working on projects for casinos and that, in Las Vegas, huge pharmaceutical companies with massive, manufacturing plants and really, I was learning how to do this type of work and at the time I never realized, and, as a young professional. That there was a world outside of where I was currently working, that where people needed that service. And, shortly after, about five years after, I started there, I came out to California, started TBKG. At the time if you were to Google cost segregation, there was, a handful of companies that popped up. We were one of them. And, now you Google cost segregation. There's thousands of, of hits. and really we, we were one of the first companies to get into this space, and, we kind of rode the wave as more and more. Investors in the mid to smaller market, realized that these benefits were, were real. You know, a lot of people back then thought it was too good to be true,

Speaker: 4:33

right?

Speaker 2: 4:34

Demand grew. It's become super common now. One of the most commonly used tap strategies for people in real estate. So that's kind of how I got here.

Speaker: 4:43

Yeah. One of the things that I've been seeing, man, and maybe it's just my exposure as well, and my circle has been changing or modifying a little bit, but I see that there are a lot of Americans that they do understand. I mean, they do feel a patriotic duty to pay taxes, and there's some value to that, right? You should pay the taxes that you're obligated to. To pay. However, in some cases we pay way too much. You know, so a situation like these, and I would like for you to break down, especially for a passive real estate investor, right? Mostly our limited partners. what is cost segregation and why is it one of the most powerful tax tools for real estate investors? Can you break it down simple to where they can understand it?

Speaker 2: 5:24

Yeah. So cost Segs a way for real estate investors to pay less in tax by speeding up how fast they're gonna write off parts of their building. Okay. Right. So normally a building is written off over 27 and or 39 years, depending on the type of real estate, but not everything inside the building. Depreciates that fast. And so there's things like. Cabinetry, vinyl flooring, asphalt paving outside of the building. These things can be written off much quicker, and so a cost segregation study. Breaks the property into all its different pieces and you get to write off a lot of those pieces in year one, right? Because the, OBB tax bill brought back what's called a hundred percent bonus depreciation. And so a lot of these things inside the, inside the properties are written off right away instead of that 39 years. And so you get a really big. Tax deduction right away instead of over decades. And, and just to give you some context, let's say you bought it in an office building for$3.9 million, okay? Right. Let's assume that there's no land value that's associated with that because step one, when you buy a piece of real estate is you have to separate the land value from the building value. Okay? The land value you cannot appreciate, okay? But whatever, the value is of the building that you purchase, is written off, depreciated over 39 years for an office building. So in that case normally you would get to write off$100,000 each year for 39 years, right? To get to that 3.9 million. But with the costing study, we might find up to 25%. Of that building value can be written off in year one. So now we're talking about$975,000 that can be written off all in the first year. And so that delta, that difference between if you don't do cost seg you get a$100,000 reduction if you do cost Seg$975,000 deduction. When you're a passive real estate investor with a lot of investments that eventually are starting to spit off, taxable income,

Speaker: 7:56

right?

Speaker 2: 7:56

Here's a strategy to essentially wipe out any of that taxable income. So you can still get the cash flow, but you don't have to pay the tax.

Speaker: 8:07

Yeah, that's a great breakdown, man. Now, look, a lot of our investors, they love doing what they do, meaning they have their own W2 job. They're running their own business, all the good stuff, right? And I see a lot of my fellow partners, they, driving, we're gonna do this great cost segregation studies, gonna save you a bunch of their, a bunch of taxes on your income, all that good stuff, right? I wanna ask you this question a minute, directly relate to those W2 jobs. Does cost segregation really benefit passive investor who have a full-time job? or is it only for real estate professionals?

Speaker 2: 8:39

Yeah, no, great question. Now, the answer of course is, it depends, right? Depends. But in, in general, if you're a passive investor and maybe you're buying your first property, you're making your first passive investment. It may not benefit you that much if the sponsor does a cost segregation study. Okay? And the way the tax rules work is that normally, in most cases, if you have a W2 job where you're working 2000 hours a year, maybe you're a software engineer, and maybe you're making half a million dollars, okay? If you go out and buy a piece of real estate and you do a tic study, you're creating all these losses, these depreciation losses. Well, in that scenario, you're not allowed to use those real estate losses against the income that you make from your normal day job. Okay? You gotta keep it separate. And if you're an active real estate professional, right? Let's say that you're, you don't have a day job, and all you do is you invest in real estate and maybe you have 10 investments. Okay? Some of those investments, are, you've held them for a long time. either the rents have gone up, you're making a lot of money, there's cash flow. You have to pay tax on that cash flow, okay? if you go out and buy a new building this year and you create all these depreciation losses, like we talked about earlier, you can offset. any of that income, that taxable income. So as a real estate professional in the tax code, cost segregation's a huge tax strategy that, allows you to manage income tax. As a passive investor, it's a lot more limited because of what I talked about. You can't use those deduction again against your, the income you're making from your day job. but where it does help is if you're. making several investments, right? So, like I said, that first investment, probably you're gonna have enough depreciation without the cost segregation study, to wipe out income or maybe you do a cost segregation study and it's gonna wipe out the income. That the, that investment is providing. Yeah, to answer your question, the cost seg study is going to at least make the income you're getting, the cashflow you're getting from that, from the investment, tax free, and any other investments that you have that are spitting off cash flow, that are real estate related can be offset by that depreciation as well.

Speaker: 11:27

Man, I appreciate you breaking that down. Now, yeah, there are some confusion out there about how that those, passive loss can be used. Now I wanna go into some advanced tax strategy, man. You've testified before the IRS and you've seen the good, the bad, and the ugly, what would you say are three, advanced strategy that most real estate investor never hear about, but should absolutely know?

Speaker 2: 11:55

There's one, strategy, couple strategies. Okay. Let me talk about one that I think, is my favorite. Okay? And that is if, let's say you are somebody that's a software engineer, go back to my example. Okay? And, you're making half a million dollars. And you go buy a piece of real estate. Like I said before, you can't use those deductions, because you're not a real estate professional, right? However, now, if your spouse, let's say, is a real estate professional for tax purposes, and you file a joint tax return, now all of a sudden you are allowed to use the deductions from that real estate that you purchased against. The income you're making at your W2 job. Okay? So that opens up a whole other world of possibilities in terms of being able to manage and shelter your taxable income. Now, there are some caveats to that strategy, okay? Okay. One. Your spouse, in order to meet the definition of a real estate professional for tax purposes, they have to spend 750 hours, doing real estate activities. And there's okay. Kind of a list of activities that qualify and, those activities generally include, managing your properties. Okay. If you buy a few, let's say single family home rentals, right? I have clients that have bought single family homes. They buy enough of'em, the wife or the husband, whoever the spouse is that has the time to be a real estate professional, manages those properties. They meet the hours requirements. Okay? And then at that point, they can. Go out and buy, be an LP in a lot of deals, right? Once they meet that criteria. They can start netting all their real estate activities together. So they could be an LP in deals once the spouse meets that definition. they don't have to deal with the stress of owning more properties and managing more properties. And, at that point then, it's, tax planning becomes, there's a lot more options at that point.

Speaker: 14:09

Yeah. that is awesome. Any

Speaker 2: 14:10

questions on that one?

Speaker: 14:11

No, those are pretty solid, man. And nothing changed with the most recent, upgrade to bonus depreciation. I know it was fading out and, it's now back up to 100%.

Speaker 2: 14:23

Yeah, that's right. Bonus depreciation. it's come and gone, a handful of times over the last 25 years, right? And, this time it, they actually made it permanent. And so if you're buying a building after January 20th of this year, 2025, you, yeah, you get to claim, a year one write off on anything that meets that bonus depreciation criteria, which is all those things in the SIG study we identified.

Speaker: 14:51

Yeah, that made too much sense, man. I like that. can you touch a little bit on, on tax saving as it applies to maybe energy, energy tax incentive, or maybe a multifamily developer or both?

Speaker 2: 15:02

Yeah, sure. So there's a handful of energy tax incentives in the code. One of'em. it's under code section 1 79, capital D. Okay. it's worth up to$5 per square foot in a deduction for the building if the building is energy efficient. And, and yeah, if you meet that criteria, let's say you have a hundred thousand square foot building. There's a half a million dollar deduction that's available. And so there's a certification process that the owners have to go through. There's also an incentive out there under code section 45 L and that one is an energy credit for multifamily developers. It has to be typically has to be a new, newly built. The ground up construction, but it's worth up to$5,000 per unit. So let's say you have a 20 unit building, you're building, times five, that could be a hundred thousand dollars of tax credits, that maybe you didn't know was available. And again, that has to be, energy efficient as well.

Speaker: 16:10

Okay. What really cons constitutes energy efficient?'cause for the average mine, we're thinking about just maybe just solar panels on the property. Right. What constitutes energy efficient to rate? 45 L and 175. Yeah. 1 79 D

Speaker 2: 16:25

Right. And they of course. Nothing simple in our tax code. So both the criteria for both of those incentives are different, but it really comes down to the energy efficiency of how it was constructed. And we're not talking about solar panels. We're talking about, the type of insulation that's in the. type of windows that were installed and how efficient they are. Roofing, HVAC, efficiency, et cetera. So it's things like that, go into the criteria for those programs.

Speaker: 17:00

Okay. Gotcha, man. Most of our investors that are listening to this podcast, some of them are passive investor in large deal, while some of them they're managing their own, portfolio, right? Of maybe small and multi-family properties, so res I wanna talk a little bit about residential cost segregation. Your, residential cost segregation software, for property six units and less. Who's it for? Who's the tool for? how does it work and how does it help small investors, unlock tax savings without. Paying thousands of dollars.

Speaker 2: 17:30

Yeah. Yeah. So you're referring to our online, software that allows, investors to do their own cost segregation studies without hiring a third party, and it's for smaller properties. And we actually relaunched this. Okay. It's, the tool is called cost segregation.com. Okay. That's the name of the tool and that's, that's the website as well. And it works for, all residential rental properties and as well as commercial properties. Okay? Okay. As long as the tax basis of the property, the amount you get to depreciate is less than$1.5 million million. Okay. And so you go on there. Let's say you bought a six unit. Multifamily building or a seven unit building. Let's say you paid$1.9 million for it and the land was worth half a million. So now what you get to depreciate is 1.4 million. Okay? So you start with that 1.4 million. You put the address in our software@costssegregation.com. We'll pull in all the publicly available information about it. you go ahead and you, finish the questionnaire. It takes about 15 minutes. Okay. So it's not, it's very easy to use. Yeah. And once you're done, you can invite your tax preparer to verify that the tax information is correct, so they can log in and see that the basis you used is correct. Once you're done, you, finish the report and you'll get, probably about a 25, 30 page cost segregation analysis on your property that you can provide your tax preparer, and get all the same benefits that we're talking about. Normally if you're going out and hiring a cost segregation expert to look at, a building, let's say it's a. I don't know, a hundred units. Multi-family building. Yeah. You might be paying anywhere from, seven to$10,000, for an engineer to go out, inspect that building and provide that detailed report. And now, for these smaller properties, the pricing starts at$500, so it really makes sense. For the smaller properties. And again, it's not limited to residential. You can do it on commercial properties as well.

Speaker: 19:53

Okay. That is awesome, man. I appreciate you breaking that down for us, man. so you, Gian you've reviewed thousands of properties and you've talked to thousands of CPA, What are some of those top mistake that you've seen investor make when it comes to depreciation and tax strategies? You know what I mean? in our world, we've seen a lot of folks where they're doing cost segregation too late, no planning before closing, using none specialized, CPA, missing catch up depreciation and ignoring, energy, credit, bunch of those things. Right. What are some of those things that you're seeing, at your level? Yeah.

Speaker 2: 20:26

Well, the biggest mistake,

Speaker: 20:27

And feel free to expand on some of those we just talked about as well.

Speaker 2: 20:30

Yeah, yeah. probably the biggest mistake, especially smaller real estate investors that are building their portfolio, the biggest mistake is using a tax preparer that just isn't as familiar with real estate. Okay. And, a lot of the mistakes, are happening. With the person preparing the tax return. Whether it's the tax prepared, never advised, Hey, you could do a cost segregation study here. and of course they don't do the cost study. They might be paying more tax than they should. Okay. But the other mistakes that I think I find are. Missing the bonus depreciation, whether, somebody's reporting things on the tax return, that is eligible for bonus depreciation. So maybe let's say they, put a new parking lot in, or maybe they redo the landscaping and they put it on the depreciation schedule correctly, but they forget to take the bonus depreciation. And so they're Effectively writing it off over a much longer period, and they're paying more tax than they need to when they report that. Sometimes there's mistakes when 10 31 exchanges are involved with properties, the rules get a little nuanced. Again, if your tax preparer is not super focused on real estate, they might overlook some of the issues. That kind of happened with 10 31 exchanges and, what other issues? Let me think here. I'm drawing a blank on issues that, I might see, but, something come to mind. I'll come back to that.

Speaker: 22:15

Yeah. I think one of, one of the biggest issues though is, working with, tax preparers or tax advisor who's not very savvy on real estate. And some of those opportunities that why people want to love to invest in real estate. Which, it's the tax benefit one of the biggest ones. So if a CPA does not understand that, then chancellor, we're gonna lose that on a lot of, savings on a month, on a yearly basis, so, Gian, you've co-founded, a company that has become a national leading cost segregation. I wanna talk this is your time to boast a little bit. What is KBKG, doing differently, especially for passive investor who may not know how to evaluate cost segregation providers?

Speaker 2: 22:53

Yeah, so I, I think what separates us is our talent. I mentioned that we're one of the first cost segregation companies. that was created at this level outside of the big four CPA firms. I think our. Probably the biggest differentiator amongst the talent we have is that we have more certified cost segregation professionals than any other company in the country. Okay? And so we have a really large practice, the most certified cost segregation profess. We have brick and mortar offices across the country and places like New York City, Atlanta, Dallas, Houston, Chicago, Los Angeles, and so we can really get to all the properties very easily. We work with thousands of CPA firms. And, and we own the domain cost segregation.com. That's because we've been around longer than most firms. That's where we're housing our online software tool. But, outside of our online software tool, we do, the full service cost segregation studies, and that our website is kbkg.com.

Speaker: 24:01

Okay. Thank you so much for that brother, man. I wanna dive into the focus round, which is just our acronym. Focus is pretty much like a lightning round. Short question, long answer or short questions, short answer, in short, What do you do for fun?

Speaker 2: 24:15

Oh geez. live here in Los Angeles. On the weekends I like to go surfing. I also do Brazilian jiujitsu, just to keep myself in shape.

Speaker: 24:25

Yeah, that is awesome, man. What opportunity was a game changer for you? Trajectory

Speaker 2: 24:30

For our company?

Speaker: 24:32

For your company, or for yourself?

Speaker 2: 24:35

I definitely, founding KBKG definitely changed, the course of my life. It's been 25 years. Wow. and we've diversified into other kind of areas of tax. Founding this software we launched in 2016 been a huge success. And, yeah. So those two are game changers for me.

Speaker: 24:55

What is your number one communication tip for exploring complex ideas? Simply,

Speaker 2: 25:02

Ooh. Can I say chat, GPT?

Speaker: 25:06

Um, I mean, it could be ai. Yeah, absolutely, man. Because when you think about a grand scheme of things, man, there's so much within our brain housing group that we want to say that we are not wise enough to figure out how to say it effectively yet. We know what that right look like, right? We can put in. Prompt based on our own intuition, our own creative thinking and our own experience that we can get the AI to say it in a way to where it's more acceptable in today's society, or, easier to understand or less complex, so on and so forth. Yeah, I would agree. So what's something you wish investors understood earlier about taxes?

Speaker 2: 25:50

I wish I kind of learned this earlier in my career, right? That it's never too early to start investing and, starting that process as early as possible. I think there's a huge advantage to that because of the tax advantages. it wasn't until. Later in my career when I built up much more in, in savings that I started investing in real estate. Yeah. and I wish I was an LP in deals a lot earlier, because, in after the great financial crisis. It was a few years after that when real estate kind of came out of that. And we know from 2011, to 2023 real estate was just on a tear. And, and I know that there were opportunities presented to me, but I didn't invest in those and I just kind of wish that I did earlier.

Speaker: 26:43

Yeah, no, I got you. yeah, you usually hear the term, it's never too late to do a thing. Right. I like how you put it. It's, it is never too early, to get it to invested, because we. What, if, what if you lived to be, 200 years old? you know what I mean? You would've wished you had started early and everything would've compounded. And the quality of living you've been created when you were 150 years old, would've been amazing. But also, the quality of living That our next generation could be benefiting from us starting earlier, Is really important because my commanding officer, one of the things you talk about, it says that if you want to leave a great legacy, you have to be a great ancestor, right? And not very often do I put myself in ancestry in the same sentence. When you think about it, the things that we do today, the things that we set in motion with the right strategy. And the right systems that our future ben generation can benefit, from it, from what we've created, especially in the financial realm. So, Gian, I wanna ask you this last question, brother. in a focus round, what does success mean to you after 25 years in your field?

Speaker 2: 27:50

Yeah, to me it means, I can relax and enjoy life. okay. That, like a lot of your listeners are striving to do, to get into investments that are kicking off income that, allow you to enjoy life without, having to sell your time.

Speaker: 28:08

Yeah. I got you. That is awesome. That's awesome. Thank you so much, Gian. Now Gian, This was a full masterclass and for the listeners, look, ton of information there, whether you are a passive investor or you are an active real estate investor now, Gian. If our listeners want to get in touch with you, how do they go about doing that? And I would love for them to, if they also want to get access to your cost segregation platform as well too. How do they go about doing that?

Speaker 2: 28:37

yeah, yeah. So, like I said. Cost segregation.com is the software platform, okay. In the website. And, and for your listeners, for first time users, they're gonna get a 10% discount if they use this code that I'm gonna say it's, and it's all in caps. It's MREE code, all in caps. That's M-R-E-E-C-O-D-E. all in caps and they'll get a 10%, discount. yeah, you can find me, on LinkedIn. Gian Pazzia, I'm the only one that exists in the entire world. That's awesome. And, yeah, feel free to reach out, connect with me, go to our website and find me.

Speaker: 29:19

That's awesome, man. Listen this episode, you should bookmark, replay, and share this episode. You know what Gian gave us today was exact blueprint that most investor ignore until it's way too late. He said it. It's never too early to start investing. You know, taxes aren't just an obligation. They can be your weapon of choice towards, or your tactics of choice to towards your, financial strategy. Now, if you use the right strategy, you get to keep your cash, you get to buy more doors, and ultimately you get to own more of America. So if this episode open your eyes, leave us an honest review and if we have earned it. I would ask that you leave a five star rating as well, you know, so until next time, I'm Hutch Marine investor. Keep exploring, keep building and keep on the journey to own more of America. I'm a Hutch Marine investor. Out.