Making Money in Multifamily Real Estate Show

88 | What You Need To Know About Cost Segregation with Yonah Weiss

June 29, 2020 Dave Morgia Season 1
Making Money in Multifamily Real Estate Show
88 | What You Need To Know About Cost Segregation with Yonah Weiss
Chapters
00:04:09
What is cost segragation?
00:07:44
Different amortization schedules on types of assets
00:09:18
The cost segregation study process and who has to be involved
00:11:22
What size property does this begin to make sense?
00:19:44
Cutting corners and stories of cost seg gone wrong
00:23:18
A few things that you wouldn't think qualify for cost seg
Making Money in Multifamily Real Estate Show
88 | What You Need To Know About Cost Segregation with Yonah Weiss
Jun 29, 2020 Season 1
Dave Morgia

Yonah's Background:

  • Business director for Madison Specs which is a Cost Segregation firm focusing on saving businesses tax dollars through cost seg studies.

In this episode we cover:

  • 00:04:09 What is cost segregation?
  • 00:07:44 Different amortization schedules on types of assets
  • 00:09:18 The cost segregation study process and who has to be involved
  • 00:11:22What size property does this begin to make sense?
  • 00:19:44 Cutting corners and stories of cost seg gone wrong
  • 00:23:18 A few things that you wouldn't think qualify for cost seg

Connect with Yonah:

Connect with Dave:

Other ways to listen/watch:

Follow or Subscribe:

If you enjoyed this episode or like the show, please subscribe and leave a review! It is a huge help for just a little effort


Show Notes Transcript Chapter Markers

Yonah's Background:

  • Business director for Madison Specs which is a Cost Segregation firm focusing on saving businesses tax dollars through cost seg studies.

In this episode we cover:

  • 00:04:09 What is cost segregation?
  • 00:07:44 Different amortization schedules on types of assets
  • 00:09:18 The cost segregation study process and who has to be involved
  • 00:11:22What size property does this begin to make sense?
  • 00:19:44 Cutting corners and stories of cost seg gone wrong
  • 00:23:18 A few things that you wouldn't think qualify for cost seg

Connect with Yonah:

Connect with Dave:

Other ways to listen/watch:

Follow or Subscribe:

If you enjoyed this episode or like the show, please subscribe and leave a review! It is a huge help for just a little effort


Intro:

Welcome to the Making Money in Multifamily Show, where we discuss everything to do with multifamily real estate investing. We believe it's the best way to gain financial freedom and build lasting wealth. This is where you'll find the best information and practices to help you succeed in your real estate business, whether you're already experienced or just starting out. Here's your host, Dave Morgia.

Dave:

Hello listener and welcome to the show. I am your host, Dave Marja and today's guest is Yona Weiss Yona. Welcome.

Yonah:

thanks so much, Dave. It's a pleasure to be on with you today.

yonah my local:

Yeah, it should be a great one today. Yana, really looking forward to our talk and for the listener, here's a little bit more about Yona him and his company. Madison specks are one of the industry leaders in cost segregation studies. They save millions of dollars across all of their clients on their tax bills. And I'm going to let him get in a little bit more into that. And then just a little anecdote. Me and him met through LinkedIn. He just ran a 10 days, CRE a little. 10 day sprint, where you just basically try to boost your, your LinkedIn presence and kind of learn the ins and outs of how to leverage LinkedIn, um, nothing to do with today's episode, particularly, but it was a really interesting challenge and a lot of us partaked in, and I just wanted to thank him for that on the show. So yeah, with that, you and I appreciate it once again, would you mind telling the listener a little bit more about who you are and what you focus on?

Yonah:

absolutely sure. Dave, I appreciate you joining us for that challenge. There's a lot of fun. It's kind of, one of my hobbies is actually just spending time on LinkedIn and helping people realize the. The benefits of that platform? Um, a little bit about me. I've actually been in education as a teacher for about 15 years and spent a lot of time just doing that. I have six kids, and so I am an educator all the time, you know, on and off the court, so to speak. Um, but I really got into real estate about five years ago and kind of sprung around from different things to different things. Learning the ropes real estate, you know, brokering residential a little and I three years ago found my place with this company, Madison, which were real estate commercial. Excuse me, commercial servicing companies. So a bunch of niche services for real estate and conservation was one of them. And it really piqued my interest because I love helping people. That's really what I've done. I started a charity organization and it was up to me like, well, he can be in real estate, totally involved in the industry. And like, same time, what you're doing all day is just like helping people, you know, save on taxes. And that's like, and that's incredible to me. And I've learned over the time that I've been doing this for the past few years. It's just more and more people learn about this that didn't know about it. And I'm able to help spread the word and teach you. Educate people want something that they had no idea was even available for them, saving people, millions and millions, tens of millions. Our firm, our firm is saying, you know, we're $3 billion in taxes for people in the past 15 years. So that's a little bit about me. It's what I love to do. LinkedIn, like I said, is just kind of like a hobby where I spent a lot of time there because I see the power of the networking and the branding and the, you know, just meeting people and developing relationships. And, you know, we met, we didn't meet, but we were at the same conference together, back in January at a rock leaves event in Los Angeles. And over there I met in person, you know, probably a couple of dozen. People that I quote unquote knew, um, and spend time with them on the phone. They're from LinkedIn primarily. And so that's, you know, that's an incredible power of social media and that kind of social networking. So a little bit about me. Um, love to get into conservation if that's what you want to talk about. Cause I happen to know a thing or two. So that's you lead the show?

yonah my local:

Yeah, I appreciate it. Yana and yeah, I can just tell from your demeanor on LinkedIn and you know, my, my small interactions with you so far that, you know, it's very authentic and you enjoy that. Interaction with people. It sounds like, you know, when you can take it to a conference and to be able to, you know, finally shake hands as well. Now that Corona is setting, maybe not shakes and maybe elbow bump or something, you know, but you enjoy that aspect of the business and networking. So I can appreciate that. And yeah, I guess back to the cost sag, um, like you said, it's not a. Saying that a lot of people are necessarily educated on. They might've heard the term. They might not know what the implications are or what it means or how it can benefit you. Um, so can we just kind of get a high level of what it is, you know, who may benefit and how you can apply or something like that?

Yonah:

sure. Absolutely. So conservation is something that anyone who owns a. Real estate property, excluding your personal residence. So I need to have investment or business property. You can take advantage of what it is is depreciation. Okay. And it's an advanced form of depreciation and that's really all it is. It's just, people don't understand how it works. Um, part of the reason why that is because it's not just an accounting method, it's something that involves engineers, uh, which as well as, um, explaining shortly a commercial building or an investment property. Depreciates. It doesn't really depreciate something really going down in value. Bud, the IRS gives you a tax write off based on the fact principle, really that things go down in value as time goes on. So they allow you to literally take a tax write off. Okay. Deduct for your taxes, the entire. Purchase price of the property that you buy. So you buy a million dollar property. You can subtract a little bit for land. Land is not depreciate, but the rest of it, you literally take a tax write off. Okay. That's incredible. However, it's not that cool because you can't do it all at once. Okay. You have to actually spread it out over a long period of time, about 27 and a half years and, or for commercial properties is 39 years. So you're taking about a two to 3% deduction. Per year on that purchase price, which is not too bad. Okay. Buy a million dollar property, take a $20,000 $30,000 deduction every single year from your income tax. That's pretty cool. So you make $50,000 subtract 30 from that, and you're only left paying taxes on the remaining 20, uh, that that's pretty much how depreciation works. Because segregation is a really weird way of saying that you can actually break down the property into different components and those components in the building, um, actually depreciate on different rates, not just that big 39 year, a 27 year. Span of life, actually, with things like personal property, um, furniture, equipment, furnishing, you know, fixtures, cabinets, all kinds of things in the property. That's not part of the structure. Okay. Those things depreciate on a five year schedule. So structure structural components, 27 year. Anything else in the property that's movable or potentially movable like carpeting, even though it's not movable, it's potentially moving five years. What does that mean? How does that translate? You literally get to. Allocate, whatever value is in all of those components and take those at a tax, write off at a much faster rate over a five year period as opposed to 27 years. Okay. So simple example, your million dollar building that you've just bought. 20% of that might need those furniture and fixtures and personal property. Okay. That means $200,000 instead of lumping it together and getting a little bit every year, 20,000, $30,000 of tax deductions every year. And those first five years, you're getting an extra two. $200,000 of tax rate off. Okay. So instead of a $20,000 after your percentage, you're getting a 50 or $60,000 tax deduction. So that's a simple example to understand how you can literally wipe out your income tax liability and then some in those early years of ownership.

yonah my local:

No, that's perfectly put, and you basically mentioned how this is. If you're doing, you know, the, the umbrella depreciation you're looking at roughly 3% or less, even if you're doing commercial property. Um, but something with, uh, in your example, you know, a five year depreciation. Now you're looking at 20% per year deduction, which is, you know, very effective. And, you know, like you said, it can really accelerate the tax, uh, Lessening the burden basically. So what are some, what are some more, uh, you know, timelines and examples of this outside of the five-year? Cause I know there's a, you know, a couple in between there. So can we go over those quickly?

Yonah:

Absolutely. Yeah. There's a couple of other things like seven year property in this kind of unique to certain types of cable wiring and, and intercoms systems, um, office, certain office properties. If it's, um, someone who is, um, the owner occupier is more than a seven year schedule, but 15 years schedule is another big one, which includes land improvements. So that's anything outside the property. Like landscaping or pavements. We have a parking lot or sidewalk on the property. All of that has value to it. Anything like retaining walls or sewage drains and, you know, playground equipment, anything really on your property. That's outside the building, all of that has a 15 year depreciation schedule, which means find the value of those things. And you can write those off at that faster rate. So that's really where the engineering component comes in because you need an engineer to actually come to the property and. Do that come in, identify what all those things are. And then you can take that as a tax write off in those early years.

yonah my local:

Okay. Yeah. In that process, you mentioned that you have to have that expert, the engineer. Is that just because they're the ones that have the license or the skills or knowledge to be able to do that. And is there any liability tied to that? That kind of ensures that you're, you're safe, you know, once you get it, let it go to their hands. How does that work out? Exactly.

Yonah:

absolutely. Yeah. The IRS requires that someone with expertise in building engineering, construction perform the conservation study. So this isn't some like weird kind of loophole. All the rules for conservation are written in the tax code. It's all there, black and white, and there's a lot of, um, kind of. Requirements that go into how the study is, is approached, how it's done. There's a whole numbering system and a nomenclature, and there's a whole, you have to. Do a lot of work, you know, preparing this, this study, it's not just punching numbers like an accountant would do, and not just kind of estimating like, like someone might, might try to do so once you do that, there is liability, obviously, because you know, we're taking our firm work. We're the biggest when doing this in the country. So we've done 15, 60,000 of these studies across the country that comes a lot of expertise, but it comes more than anything with. You know, a backing up that we stand behind our work and we have, you know, audit protection, which means that if in the event, anywhere to ever get audited, we stand behind our work and we have no problem showing how everything is exactly according to the tax code. So that's one of the things it's not something you can just do on your own. It's not something that your accountant can even do on their own. Um, there are. There are large accounting firms that employ engineers in house, on staff, because they have enough of these, their clients doing them. That it makes sense for them to do it in house. Otherwise you don't have accountants that have the ability to come up with these numbers.

yonah my local:

Yeah, that makes sense. So long story short, you need the expert in there because there's the tried and true method and they know exactly the rules and regulations to be able to, you know, appropriately do that. And like you said, there's also the insurance that comes with it too, that a firm like yourself will kind of. Back back what they write down and put on the table for you as far as the tax loss goes. So that's really important. And then I guess if, if we, you know, assume that this sounds appealing to someone today to the listener, um, you know, where do you start and where might it apply and where might it make sense for someone who owns a property, where do those numbers kind of break even? And, and how do we, you know, really start to see this as a viable solution.

Yonah:

yeah, a hundred percent. It's something that, because it's a percentage based, right? Every type of property is different. Um, you know, you have multi-family, you'll have office building, you have retail, self storage. And all properties are beneficial, you know, beneficiaries of this process because you can get tax benefit. However, like you said, there is kind of like a price point because it is proportional to the percentage. So you have my kind of rule of thumb is any property purchase for over a half a million dollars. Because again, the depreciation you're taking is totally based on the purchase price. Okay. And your depreciation starts over day one when you buy that property. So not necessarily when it was built, but when you bought it. So I always say anything purchased for over half a million dollars. It's definitely worthwhile to check it out, to look into it. We always provide a free estimate. So we will even run the numbers for you and you'll know exactly what the minimal tax benefit you will have by doing a full conservation study. And so it's basically a no brainer once you see what those numbers are and you see, okay, this is what I would do. If I just took straight line, regular depreciation, you know, lumping everything together on that long schedule. This is what my deduction would be every year. If I did it on this advanced form. And, you know, quite frankly, according to the IRS, the accurate way of appreciating your property, it's actually. The way you're supposed to do it, conservation is you don't get to be this and my tax benefits and the tax dollars are going to be, you know, this it's so much more. So obviously it really makes sense. In a lot of cases, there are some people that benefit much more. Right. Like all P right. The, uh, you know, and this time is little and I'll skip the quote, but there's a famous quote from, uh, George rolls animal farm rate that all people are, all animals are created equal, but some are more equal than others. Right. And unfortunately, you know, it just, it kind of. Before I said that just what's going on right now in the turmoil or in your country is just kinda sad to think about how that can apply or how people interpret that. But the same goes true with taxes and, you know, all tax payers are equal, but some are more equal than others. So, so people want real estate. The real estate tax rule gives huge advantages for people who are in real estate. And one of those is that someone who. Is defined as a real estate professional. And this is someone who, according to the tax law, anyone who spends more than 50% of their time materially participating in a real estate trader business. Okay. So if you are managing properties, you know, you're brokering, you're acquiring, you're doing renovations, you're involved in managing and overseeing the operations. Anything like that, you're you can be a real estate professional. Once you have that status, you can literally take it. Tax deductions to offset your active income, not just passive income. So let me explain what that means to depreciate real estate. Okay. When you make money from properties, that's considered passive income. Okay. Even though you may be involved, but it's passive income because the income producer properties, whatever, that's the tax law. So depreciation deductions and you know, huge depreciations is the cost segregation does. Is used only against your passive income. Okay. So if you have another job and you're making, you know, a hundred thousand dollars from your other job, and you're making a hundred thousand dollars from your real estate, the depreciation deductions, you have can only be used to offset the income from the real estate and you could potentially pay no tax on the real estate income, but the regular income is still going to get taxed at a high rate. Okay. Comes along real estate professional status and says. You are a real estate professional. Guess what? You can use those deductions, not just offset your income, but any other income that you or your spouse has. Okay. So if you have $200,000 of deductions from constant radiation, a hundred thousand dollars of income from your property, so you've knocked off your tax liability. All of that money you're making is in your pocket. Full cash flow, no taxes, and you're get a hundred thousand dollars of extra deductions that creates a passive loss that loss can be used if you're a real estate professional against your other income. Okay, so now you can be making $200,000 and make paying zero taxes. Okay. As opposed to the non-realistic professional use paying. Making $200,000 paying taxes on only a hundred, in our example, right? If you don't have any income and you're making 200 out of your tax on all 200,000, so the tax code is beneficial benefits, real estate and real estate owners. And so it's no wonder why, you know, our president, you know, is a real estate investor, you know, pays no taxes or maybe we don't know, but you're right. Like, it's pretty likely because he's. In this business and the, all of every single one of the wealthy families. In this country invest in real estate. And there's obviously a reason for that. So that's, that's who this can benefit. Um, how, what's the process you asked, right? How does this, how do you do this? So like I said, we always run a estimates, so that's the first step you always can see right ahead. And I'm all about education. You know, I'm always about the union trying to walk through people through it, show them exactly what the steps are, you know, how they need to do it. We'll send an engineer to the property. Okay. During this time, we're actually kind of pivoting to create a virtual tour where, because, you know, obviously the, you know, stay in place orders and et cetera, that it's going to be hard for people to travel. Certain States are still locked down. So we've kind of created a virtual version of that, where an engineer will we'll get on like a FaceTime and kind of walk through the property with the property manager, you know, and take a video of, of everything in there, like as if they were there. Um, but yeah, they need to go in there and they see take pictures and measurements of everything in the property and outside of the property. And they come back and create this. Beautiful report. That's about a hundred pages long and shows you

yonah my local:

want to read.

Yonah:

exactly. And, and in that produces this depreciation schedule that, and that's what you need. That new depreciation schedule that is updated in advanced form. That's all you and your accountant need and plug in those numbers to your tax return.

yonah my local:

Yeah, so long story short, uh, if you aren't taking advantage of. Tax advantages in real estate. You're probably not doing it. Right. Um, like you wanna set, especially, we talked about the, the active real estate participant, um, and that's a whole different conversation. We could probably talk about that for, you know, another half an hour, but, uh, but we'll, we'll keep it at the cost deck, I guess, today. Uh, but yeah, there's so many ways, especially like cost segregation, like we're talking about to, to make sure that you're staying on top of the advantages that you can have against your real estate. Um, so getting into basically. That scale of a property. You said the number was for you, I guess, particularly over 500,000. Um, is that just based on, you know, the, the flat expenses that come with the study and everything that that's kind of where the break even occurs is that, is that kinda how you derive that number?

Yonah:

Yeah. It's not really the break. I don't say it as a break, even because, you know, the study will cost a few thousand dollars minimally, but you're, you know, for every hundred thousand dollars of investments, You the property you're probably gonna have about 10 to $20,000 of tax benefit. Okay. So if it's a, if a half a million dollar property you're looking at, you know, potentially a 50 to a hundred thousand dollars tax benefit and paying a few thousand dollars, that's in no way breaking even nevertheless, it's still minimal. And that's why I say I don't really. I don't over that amount. I always recommend looking into, because you'll see the numbers and I'll make sense less than that. It's going to be kind of a minimal benefit. There's still going to be benefit there, but it's going to be minimal. And exactly. And therefore I don't, I don't really push it beyond and under that amounts, um, and the numbers speak for themselves.

yonah my local:

Yeah. Basically hard to be confident in a number lower than that, unless you're looking at the pie properties specifically. So that makes sense. And then you, you mentioned the process, you know, you get the engineer in there, they run the report, a bunch of pages, you know, they come out with the numbers, you hand it off to your accountant and, you know, great happy day, everybody kind of wins. You get paid. The investor gets, you know, the deduction on their taxes. Have you seen scenarios where maybe some people try to take shortcuts to, you know, you know, penny wise, pound foolish basically. And the Follies that can come with that where you really, you know, want to make sure you have your due diligence done the right way to make sure that you're protecting yourself.

Yonah:

sure. Absolutely. I mean, the number one thing is where people try to do it themselves. Okay. Or using kind of a fly by night, uh, from that, that doesn't employ engineers and it doesn't really know what they're doing. And you might think you might be saving a few bucks. Um, but in the end of the day, you're like you said, shooting, you're shooting yourself in the foot in the long run because not only will you not. Do you able to identify what those benefits are? And I'll just give you an example. Um, oftentimes we will have accountants that will, will come in. They'll say, you know, listen, I've been doing it kind of on my own, like off the cuff, I just kind of guesstimating the numbers and, you know, coming up with, you know, five-year properties like this much percent that I'll just go with the number, you know, it's probably like that, but they never ran like a study and a report. So doing it that way is totally like, if you do that and get audited, forget about it. Okay. Um, you're done. You paid fines, penalties. It's not worth it now, accountants that do that way and just guessing. And usually they do it very conservatively. Okay. So as not to raise any eyebrows, if you're doing a real conservation, you're not raising any eyebrows, but, um, you know, if you get looked into, then they'll want to see their report. So that's the one thing that I would say to be cautious of, make sure you're working with. Or from the employees, all those strategies and don't try to do it yourself. That's really the thing. And the other thing is that just not knowing about it in the first place, I mean, do some a favor if this is the first time you ever hearing of conservation, and that probably means that you don't use LinkedIn, uh, because if you did, then you've probably heard of it beforehand, but, um, Take a minute to talk to your accountant about this, say, Hey, I heard this guy he's talking about these tax deductions. Is this a real thing? What do you think about this? If your accountant turns back and you're like, I have no idea what was talking about. Do yourself a favor, try to find another accountant that. Understands real estate because you're leaving tremendous amount of money on the table. Like I said, this is not like some kind of weird loophole strategy. This is directly from the tax code. And in fact, according to the IRS, this is the proper way of depreciating your property to do each, each asset, according to its proper, um, useful life. So, so yeah, that's something I would be highly I'm aware of.

yonah my local:

Yeah. And you mentioned, you know, you might have someone try to take the short route and just do more of a blanket estimation and maybe lower the margin. So that way they're quote unquote safer. Um, and I guess, you know, if you have someone with that varying level of expertise, we can flip it the other way and say, is there some advantages that. They would be missing out on any way, you know, regardless of the legal repercussions that could happen. If, if you know, they're, they're faulty on the numbers, but is there something they'd be leaving on the table anyways, because you know, a firm like yourselves would take that extra step and identify a couple of things that, you know, someone would miss that is still, you know, beneficial, those little tips and tricks, I guess, for the cost SEG.

Yonah:

Absolutely. Yeah, for sure. I mean, literally, you know, 10 to 20%, you know, even if someone is kind of guesstimating, they're doing it on the low end, they're not going to come up with the, with the accurate numbers, you know, we're as aggressive as possible within, you know, within the law to maximize those numbers, to make sure you can get the maximum depreciation that you can.

yonah my local:

Yeah, that makes sense. So is there, is there any kind of, uh, specific cost SEG, uh, you know, whether it's a piece of equipment or anything that people overlook that are common misconceptions that you actually can take advantage of?

Yonah:

there's tons because if you look in the tax code, the, you know, the macro is the, uh, modified, uh, accelerated recovery system, which, which delineates every type of property, every type of asset in a building anywhere and that's appreciation life is. So it was not familiar with that. We'll just overlook things. I mean, like for example, carpeting, right? Or vinyl flooring. You might think, Hey, that's attached to the building as part of the building that is usually a huge cost in a property, and that has a tremendous amount of value to it and can be, you know, you can take those appreciation upfront. Um, you know, landscaping's another huge thing because, you know, if they can landscape that's land, right, no landscaping and paving and all that, it has, you know, a lot of value to it. Sometimes in multifamily property, it can be like 10% of the value of the, of the purchase price is just in land improvements. That's huge.

yonah my local:

Yeah, that makes sense. And it's interesting you bring up the flooring because pretty much every property, you know, talking about value, add multifamily today, you're talking about, you know, probably ripping up flooring, putting gray vinyl plank is the big thing nowadays. So to be able to, you know, start that. Early and often is a huge takeaway when that could be a lot of your interior renovation costs. So yeah, it makes sense to make sure you're kind of getting into the nitty gritty on that.

Yonah:

a hundred percent.

yonah my local:

So, so I love that you want to appreciate the talk today. Casa King was able to drop some knowledge. Hopefully if the listener didn't know about cost segregation, they learned something today. Reach out to you. And if you have more questions about it, And if they want to do that, you want to, how could they reach you?

Yonah:

Okay. Um, I'll let you take a guess.

yonah my local:

Casa King?

Yonah:

Yeah, no check out LinkedIn. I'd go to LinkedIn. Find me. You can find our company, Madison specs. You can go to my website. dot com. Uh, Oh, Madison specks.com. We any resources like that. Um, and we'll happy to happen to discuss further

yonah my local:

Yeah, honestly, I said, Casa can. Cause if you just search that, you'll find him literally everywhere. I guess I probably should have said LinkedIn, but yeah. Literally just type that in you'll you'll see all the

Yonah:

King and Google you'll you'll find me. Don't worry.

yonah my local:

absolutely. You and I appreciate the talk and until next time, thanks.

Yonah:

All right. Thanks Dave.

Dave:

Thank you for listening. This has been the Making Money in Multifamily Podcast. If you have any questions, comments, or would just like to connect, please feel free to check out the show notes for how you can connect or visit longviewacquisitions.com

What is cost segragation?
Different amortization schedules on types of assets
The cost segregation study process and who has to be involved
What size property does this begin to make sense?
Cutting corners and stories of cost seg gone wrong
A few things that you wouldn't think qualify for cost seg