October 24, 2025 • 36 mins
Join host Dave Miller on this episode of "Inside the Vault" as he welcomes Vanessa Wallace Clunies from Tangible Property Tax Methods (TPTM).
Vanessa brings a wealth of experience in accounting and real estate tax strategies to help businesses and real estate investors optimize their tax planning through effective cost segregation. In our discussion, we dive into the core principles of cost segregation, an IRS-approved method that allows property owners to accelerate depreciation on their real estate investments. Vanessa explains the importance of engineering-based studies in accurately classifying property components and highlights the types of properties that can benefit most from this approach. Vanessa shares actionable insights on conducting a cost segregation analysis, including the required documentation and the potential tax savings.
To learn more about Tangible Property Tax Methods (TPTM), visit their website at www.taxmethodexperts.com
Thank you for listening to this episode of "Inside the Vault". Subscribe today and follow us for updates, and if you have any questions or topics you would like to hear about, please email us at insidethevault@enterprisebankpgh.com!
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Episode Transcript
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(00:05):
Welcome to Inside the Vault, Enterprise Bank's podcast series, where we
talk about items of interest to the small business community. Today,
we're going to focus on some good information for
those clients and friends of the bank that are involved in
real estate, either own real estate for their particular
small business or invest in real estate. With me today
(00:27):
is Vanessa Wallace Clunies with
tangible property tax methods, and I'm going to shorten that
for the rest of the episode to TPTM. Welcome
So before we start talking about your area of
expertise in terms of how
(00:49):
to help businesses and real estate investors with their tax
planning around their real estate holdings, give us a little background on
Oh, a background on myself. I am a 30 something
year old soon to be mother of three. I lived in Pittsburgh my
(01:09):
entire life, started working with my father, who is a CPA of
over 45 years, about 10 years ago, started
a CPA firm with my dad, worked in specializing
in real estate and method changes, and
decided to start our own cost segregation firm back in 2021. So
(01:30):
we started tangible property tax methods in 2021. After
noticing a consistent trend with cost say companies, not
fully understanding the right way
to qualify or classify different components of a building. We
use the tax code for this. And we noticed a lot of errors and
other cost segregation companies. And so my father and I decided why
(01:53):
not start our own. And so we've been doing that since July of
Nice. And you're based locally here in
We are. I am based here in Pittsburgh. We have an office in Naples,
Florida, and our engineers are actually located in Louisiana.
We have sales reps all around the country that sell for us. So
we are nationwide. We do studies outside of the
(02:15):
United States in Mexico. We have actually
Yes. Anything as long as it's a taxpayer, US
Okay. So let's, um, let's talk about kind
of the topic that I think a lot of folks in the, in the real
estate world have, have heard about, which is cost segregation. Um,
(02:39):
so, you know, at its, its very core, what
are the basic principles of cost segregation and
Well, cost segregation is an IRS approved way
to help accelerate depreciation. The IRS states that you
can take a building, you depreciate it over 27 and
(03:00):
a half or 39 years depending on the use of
the property. 27 and a half is residential, 39 is
commercial, and you're allowed to break it down further into five
and 15 year components to help provide a tax benefit in
the current year of implementation of cost segregation. Now
the IRS states it must be an engineering based, engineering
(03:22):
and factual based study The CPA can't
just determine, hey, I think you have $20,000 of
five-year property, and your landscaping looks to be about $80,000. So
Not that simple at all. It must be engineering and factual based.
So what's kind of
(03:44):
the history, the tax code, or the laws around cost
Well, back in the 80s, the IRS stated that you can go ahead and
separate it. There is a court case that allowed, that
stated that you can go ahead and separate it out. Forgive
me, I don't have the direct IRS code off the top of my head. If
(04:09):
So this applies to,
you mentioned, you know, two of the different standard depreciation periods.
So can cost segregation studies and analysis
be done on both commercial and residential property?
It can be done on any kind of property, commercial, residential, a
warehouse, industrial. Different buildings yield
(04:32):
different percentages for the five and 15 year based off
of their components. If you have a multi unit
apartment building, generally, you're going to be looking at a higher 55 and
15%. Because of the components, you have a lot more kitchen cabinets, a lot
of cabinetry could potentially have wood flooring that will
yield a higher five and 15%. If you have a warehouse or
(04:53):
an industrial space, that's pretty much a shell of concrete and
steel, you're not going to have a significant benefit as you
would, you know, office or commercial property or
So what are the, what are the property types
or let's say business types within those properties that are, you
have the most advantages associated with doing this
(05:18):
I typically love to say multi-unit residential properties
are going to have a higher five and 15 year, some commercial properties,
medical facilities, depending on how it is split up between
the facility and the improvements. Sometimes you
will have a medical facility or a medical office that
you have one person that owns the building and then you have a doctor who leases. And
(05:41):
a lot of those components of the building in the office itself
will be under leasehold improvements that might not have a
very big five and 15 year for the building owner. But
if a building owner owns all of the components in
the medical facility, that could also yield a very high percentage for
(06:02):
So what we're basically, coming back to the kind of
the accounting methodology or theory here, what
we're talking about is, you know, not
only what can be depreciated, but
And then there's also, which probably gets in a little more
of a more broad topic that we're going to talk about, you
(06:27):
Yes, correct. For cost segregation, different components of
a building have different class lives. The IRS is very
clear on what you can qualify as
five-year property, seven-year property, 15-year property, depending
on the class life, the use. And then there's also different components
as well. If you have a property who's focused in manufacturing, different
(06:50):
manufacturing can also qualify for accelerated depreciation because
So let's talk about kind of the
process that might give some of our viewers and listeners kind of
more insight. So how do you, how do you,
what are the steps in the process for a cost seg analysis
(07:15):
Well, for, for my company, what we do is we will, somebody
will reach out to us and ask for a cost segregation analysis. We
ask for basic bits of information to provide that analysis for
them. It's always a property address, a
cost basis, which could be a purchase price, net
minus land, or if they have a depreciation schedule, we
(07:37):
will request that. We need the date placed in service and
the use of the building. And this is important
because if you have a single home, single family home,
and it looks to be a long-term residential, but it's actually
an Airbnb, It's a 39-year class life. It's not 27 and
It falls into commercial realm based on the
(08:00):
Yes, that is correct. So we'll ask for that, those bits of
information. If any improvements were done after it was placed in
the service, we'll also ask about that. And
just like a quick little detail of the improvements done just so that we can
help provide a clear understanding or an accurate
estimate of what we're looking at. My engineers look
at every single property we get. They'll assess it and
(08:23):
provide a percentage for five and 15 year. You
put it into our little calculator, send it back to the client with details.
Hey, this is what you're looking at for additional depreciation. This
is going to be your net tax benefit or assumed tax benefit,
depending on the tax rate that we will
either do 37% or we will ask the CPA or client what
(08:49):
So, um, This, available
for all property types, you said. Yes. But to get the tax benefits, obviously
it has to be a building that you're depreciating. So
But they're going to use it for investment real estate, whether that be residential or
(09:09):
commercial, or if they're owner occupants in a commercial property, they're
That is correct, yes. So if you, obviously you cannot use it for your
personal or residential home. If you have a second home
that you also vacate to or you use leisurely and
don't rent it out, that's also not eligible. It
has to be something that you're using for a business or for a rental purpose.
(09:32):
So short term residential or short term rental for an Airbnb,
Which I imagine that whole emerging genre
of, you know, vacation homes for,
I mean, Airbnbs, VRBOs, all that has opened up
a whole new market for using this
(09:57):
Absolutely. Because what the IRS considers a
commercial property, an Airbnb, is anything that is rented out
two weeks, as long as it is under that month threshold. You
technically qualify as a hotel or you can qualify as a
hotel in the eyes of the IRS. We like to recommend that
(10:19):
if you do have an Airbnb, always offer substantial services,
amenities, extra cleaning. I had
somebody call me and ask me if their MOOC, which is I
In their Florida house would qualify as a substantial amenity. I
said, yes, definitely. But instances like
(10:39):
that, and that qualifies them for this property to
go on a Schedule C, which would be a business rather
than a Schedule E. And that's important because, you know,
if an individual has a W-2 job, and they're not technically a real estate
professional, they can still take the benefit of doing a cost segregation
So Vanessa, you mentioned the term real estate professional. Yes.
(11:02):
So how does the IRS define what a real estate professional is?
There is a whole bunch of qualifications that the IRS states,
but the main one is that you meet the hour requirements and
the process to be a real estate professional. That includes how much
you are involved in being a real estate professional. This
can deal with invoicing, managing the properties, scheduling,
(11:26):
doing the leases, it depends on the type of property. You know,
if you have a commercial property with office tenants, it could be related to those
invoices, any kind of maintenance, scheduling the maintenance for that. As long
as you meet an hourly requirement from the IRS, you should be
okay. Unless you're a doctor with a W-2 and can't
(11:46):
Right. So if I'm a, let's say a hobbyist that I have one rental
property on the other side of town, but I have a full-time day
job and It's a minimal amount of work. I'm not going to qualify
You might not qualify if you have a spouse that qualifies or
participates in the rental properties, managing
the properties. That could be an avenue you
(12:09):
could research and see if it would be possible for your spouse
And then what are the advantages of being a
real estate professional vis-a-vis the tax
If you're not a real estate professional, have a W-2 job, it's gonna be
passive. So there are limitations on what you can take with passive
income and passive offsets. If you're a real estate professional,
(12:32):
there is no limitation. You can go ahead and apply to your taxable
income. But like I said, definitely wanna
qualify. And if you have the hours or your
spouse has the hours, I always recommend that you have documented in
Well, the bank has a lot of clients that that's their business is
(12:58):
So what are some getting back to cost segregation? So,
I mean, what are some examples of type of savings
that, you know, a client can experience if they do
That's a great question. We have done thousands, tens
of thousands of studies, but a couple of ones that stick stick
(13:20):
up out of the top of my head. We have an individual that owned
property in Las Vegas, Nevada, and Utah,
about 10 properties in total. The net negative
adjustment since they're all on the depreciation schedule was
$1.5 million. So depending on the type
of building it is depending on the type of property you have,
(13:43):
it can range from a little bit of benefit to
a really significant number. You know, if you have a
higher end property house, that's probably
going to yield a little bit higher because you have nicer fixtures,
nicer components in the property. If you have
a small single family home, you might not have that
(14:06):
So I'm assuming one of the advantages of what TPTM does
is kind of look at the arbitrage between the
cost of going through the process and the analysis versus the
Yes, yes. And we have software as well, too, that kind of analyzes every
single component of the building that you know, appliances, for
instance, if you have Wolf appliances in a
(14:27):
property, it's going to have a higher value, obviously, than
something maybe just a general general electric stove.
So we make sure that we apply the right amount
to the appliances as well. So our studies are incredibly accurate
Yeah. So one of the challenges on my side of the table being a small business
(14:50):
lender is getting, you know, having a, in my case,
a borrower with good record keeping. So I think probably
in your world, the property owner needs to
have good record keeping, particularly to determine
what their initial cost basis is or was
for these different components. So what are some, you
(15:11):
know, for a real estate owner that's interested in
looking at this from a tax advantage perspective, what
types of record keeping should they make sure that they're, you know, obtaining
Well, if they have a lot of properties, if they are recent
purchases, always a settlement statement appraisal. If
(15:34):
they are have owned these properties for a long period of
time, and it's on their depreciation schedule. That's
all we need in order to give an initial assessment. If
they decide to engage with us, we will ask for appraisal. If
they have blueprints, if it's a new build, or they've done
significant improvements, we'll ask for those improvement details, as
(15:56):
well as an AIA document. that kind of breaks down the costs. Okay,
so there's a bunch of different things depending on the the
length of ownership, what they did to the property that
the property owner should keep track of, but always have a depreciation
schedule. And I'm not talking about the form 4562 talking
(16:17):
about a detailed federal depreciation schedule that lists
out the asset, the date placement service, the cost basis,
So let's kind of fast forward towards
the end of the process. So you do your analysis and
you determine, you know, reset the depreciation schedule
(16:38):
based on, you know, what types of allocations
you make for different types of improvements or components
of the property. Then how does that work
So the IRS states you're not allowed to change a depreciation schedule
without filing a Form 3115. And that is a
(17:00):
change in accounting method. For all of our work,
it is an automatic method change. So you submit
it to the IRS, they kind of say, yeah, well, it works. We
see a lot of these. But it's a DCN 7. They
have to file and we do this as part of our service. We
prepare the calculations for the CPA, we
(17:22):
prepare This is what the asset used to
be with our cost segregation. This is what the split should be
between this 27 and a half or 39 year, five
and 15 year. And this is going to be your deduction on your tax return.
Now, is there any look back to what
how it's been depreciated prior to you all doing the study?
(17:45):
Not always. No, not necessarily. All 3115s
must be filed in the current year on a not
on a late filing or an amended return. So it has
to be current filing. If you provided an extension, say
it's September 3, and you
have your own extension, you can still file a
(18:07):
3115 as long as it's ahead of the 915 or 1015 deadline. Gotcha. There
is no, you know, look back or risk for audit because the IRS receives
a lot of 31 15s as long as it is prepared and filed properly,
Okay. So, um, let's
kind of jump into kind of the more general topic. Um,
(18:30):
there's not just, you know, cost segregation as
a way to reduce taxes, but there's rules around, how
property is supposed to be classified in the first place.
Exactly. And I think your industry terminology is tangible
(18:52):
So I know when we were talking offline, you
said, you know, this get people get this wrong all
People they don't get it. Yeah, they don't. Well, first
off, they don't usually know about it. And so they it
They just kind of go into it blindly or a CPA just assumes that
they know key components of the TPRs and
(19:15):
they just brush it off. Or they don't have the time to
spend to actually research and understand the tangible property
regulations in order to implement it properly on
And we're talking about probably the primary issue there
Correct. So cost segregation is on the building and
(19:36):
its components separating out in itself to
provide additional or accelerated depreciation. Potential property
regulations are focused on every work effort
done on a property after it was placed into service. And this
can include change of flooring, Tenant
improvements you had you have a commercial property and
(19:58):
a tenant excuse me a tenant moved out You need to refurbish the
space for a new tenant that can also be considered an expenditure HVAC
unit that you need to replace Anything that was done
after the building was placed in the service and that is on that depreciation schedule
(20:20):
And my understanding is that, you know, there are
basically buckets of types
of expenditures where they fit and there are certain tests that
The IRS states that there are 16 Rabi rules, restoration,
(20:46):
I think my father coined the term Rabi rules. But
general, if you have an expenditure and it
meets one of those requirements or matches anything
under the restoration, adaptation, betterment, improvement, it
can be considered a repair maintenance and does not need to be capitalized. So
there's a lot of wiggle room there, but there's also a lot of detailed rules on
(21:10):
what qualifies. There's a percentage of the overall
unit of property that needs to be taken into consideration
whenever you have an expenditure. And if it meets one
of those requirements, then repair maintenance. So
what I mean by that is if you have an asset on your depreciation schedule, and
we look at it and say, Hey, this should have been qualified as repair
(21:32):
maintenance. That's something that we would take a look at and we
would eliminate from that from that depreciation schedule. So you
would have what is remaining on that depreciable life
But you're going to be able to take expense, essentially,
and I'm assuming in the period that the current
(21:56):
And it's not just for you pick and choose assets. It is you have
to analyze everything that's on that depreciation schedule for
anything that was improperly classified as a
capitalizable event and something that needs to be considered as repair and
maintenance. Now you do this one time on a
depreciation schedule to clean the depreciation schedule up. You
still file a 3115, different designated change
(22:21):
The IRS has about, gosh, hundreds of
different designated change numbers for the 3115. They all
serve a different purpose. For the TPRs, it's called 184, capitalization
of repairs and maintenance. And we will go and file it, clean
up that depreciation schedule. And then the next year you start with
a very brief depreciation schedule, only the assets that
(22:43):
need to remain on that schedule, that need to remain capitalized for
the IRS. Anything
moving forward. So you go into 2026 and you
have a list of items that you did on a building or
that you have to do for a building. Then you analyze those in
the current year and determine if it should be repairs and maintenance or
(23:08):
Okay. So, um, you know,
one of the biggest challenges we do a lot of investment real estate financing.
One of the biggest challenges is we'll see wild swings and
expense repairs and maintenance expense, uh,
particularly before the accountant gets ahold of it at the end of the year
to do the tax return. And then typically what happens is a portion of
(23:30):
that gets capitalized and then a portion actually stays in repairs
and maintenance. It's kind of hard to really kind of normalize
a normal, you know, repairs and maintenance expense load
for, for a particular real estate investor or
business that owns real property. So I'm
assuming, you know, this help these
(23:53):
regulations, you know, if you follow them, you're
pretty much following the tax
That's correct. And if but there's also an instance where if
a client has different book and tax, this
only applies to federal taxes. So this does not apply to
(24:16):
book. So again, exactly if they need to, you
know, we've have a lot of senior living facilities, individuals that
have nursing homes, some states have different
requirements on showing what they put into the property.
And they give them Benefit for what they spend on that property that
doesn't affect the tangible property regulations does not affect what
(24:39):
they do on the book just on the the taxes and
So that could be consignificant for different owners for you know banking purposes
state purpose state reporting purposes It
So let's talk about the current legislative political
climate with the big, beautiful bill. How's
(25:02):
that going to impact either positively or
negatively the benefits of whether
it's cost, say, or expense versus capitalization? What's
I'll be calling it the OBBB, the BBB,
whichever one that is. it significantly applies to
(25:25):
assets placed into service, and when they're placed into
service for bonus. So if you purchased
a property, and you placed it into service January
21 2025. Any components of that building that
you do a cost segregation for the five and 15 year components
qualify for 100% bonus. You know, prior years,
(25:48):
you know, he purchased the building January 6 and he put into service
I didn't even think about that, but thank you for calling me out. That would only
You're down to 40% for those first few weeks of 2025. You
(26:16):
place that building into service between January 1, 2025 and January
19, 2025, you have 60% bonus on those five and 15 year assets. So
it depends on as long as you purchase a property after
January 20th and put it into service after that date, you're eligible
for 100% bonus. If you have a
(26:37):
property that you have owned since 2023, and it's been
Your building was placed into service in 23. The tax laws for
the tax year 23 apply to that building. You are only
allowed to take 80% bonus. Gotcha. The tangible property
regulations, it doesn't affect it. These are removing assets
(26:58):
that were improperly classified. Yeah. So
So the tangible property regulations, I mean,
you know, how dangerous is it for
Huge. So this is an IRS mandatory regulation.
And just a quick little background on the TPRs. It
(27:20):
took them about 60 years for them to put
it into regulation. There are different changes,
there are different edits, there are different, oh, hey, what about this? Oh,
wait, no, we're not done yet. We're not going to actually release anything
until 2013, 2014. And then since then, the IRS states you must implement
(27:41):
the TPRs on your property in all expenditures. If
you were to get audited, and the IRS agent comes in
and says, Hey, you know, looking at your 20 page
depreciation schedule, you are essentially
forging your depreciation schedule by having
these assets improperly on your depreciation schedule and
(28:03):
taking this benefit that should never have been a benefit. These
are repairs and maintenance. The IRS can determine that
you are no longer allowed to use the net remaining depreciable
basis of those improperly classified assets. It's
called the use it or lose it rule. So you use the TPRs
and you take that benefit and you apply it properly to your return. or
(28:27):
you lose all potential benefit. And
I have an example, actually. Do tell. We
had a client who was under IRS audit, you
know, maybe didn't always make the best decisions with
stuff, but he was definitely under a microscope with the IRS. He
(28:48):
owned some significant bits of property throughout
the United States. And his CPA came up
to us and said, Hey, he's under audit. Can you take a look
at his depreciation schedule? Our immediate question was,
have they asked for the real estate or the depreciation schedule? They
said, no. We said, okay, give us what we can and
(29:08):
let's see what we can do. We went in and we
filed 3115s with zeros just as a
safekeeping for this individual, provided it
to the agent. She went back and was like, I have no idea what this
is. Went back three weeks later, went to classes on
the TPRs. at seminars, Dr. Her
superiors came back and sat
(29:31):
us down and said, I had no idea what these were. And
I did all of this stuff. And now that I know, you
are protected from audit on your real estate portion and
the depreciation. And if you did not provide me with this,
and I had gone back and taking classes on the on the
TPRs, you would have lost anything
(29:53):
all depreciable basis on these assets. We
save this individual $280 million. He
would have lost $280 million of benefit.
It's hard to comprehend sometimes those numbers, right?
(30:13):
But there are individuals out there with significant real estate hotels, large
multi unit residential properties, large commercial properties,
So at what
property, let's say, I don't know what your metrics
are, at what scale should a real estate
(30:36):
owner or investor really start paying attention?
If they've owned this property for a long period of time and
they have a depreciation schedule with multiple line items, particularly
27 and a half or 39 year property, They need to start paying
attention to what is on that depreciation schedule and what needs to be
(30:58):
And with
regard to the cost segregation, is there kind of a kind
of a point there where, you know, is a property value
We like to say that, you know, typically anything under half
a million dollars won't yield a significant benefit. But
(31:19):
we'll analyze anything that we have in front of us and we'll advise a
client or property owner. Hey, you
have a small cost basis, you're not going to get much five and 15 year
benefit, right? Compared to our cost, it's not going to be worth it
How long, Vanessa, does the process typically
(31:41):
That's a great question. We're actually pretty efficient for
what we do. You know, in tax season, it will
take a little bit longer, maybe about four to six weeks to
turn around a study. But as long as we have all of the data
in no more than three to four weeks, and that
includes like a site visit, we do have an inspection company that that
(32:03):
takes a look at every single property we study. takes pictures
of every component of the building. We always ask for
appraisal blueprints if available, you know, confirmation of
cost basis. But as soon as we have that information, three
to four weeks max, but we've turned stuff around in less
(32:23):
So how does a real estate owner or a real estate investor learn
more about CPTM and and
or just these regulations and or
the benefits of cost segregation? What are some good resources? Plus,
how how can they take advantage of the services your
Well, our website has some good blogs on cost
(32:46):
segregation, tangible property regulations. They
can always go to tax method experts dot com. and learn
a little bit more about TPTM, our services, read some blogs. But
they can also do some other research on cost segregation in
the IRS. It is a kind
of a commodity. There's a lot of CPA firms that offer it. There
(33:07):
are cost segregation firms that offer it. So there's a lot of education on
cost segregation. That's all on the internet. The
tangible property regulations. We
are the experts on this. I'm not out to my own horn.
But it's definitely worth it to reach out to us
to get a little bit more information. If they Google my father,
(33:29):
Eric P. Wallace, you'll see a whole bunch of details on
him as well as the tangible property regulations. There's
not that much information on there unless they want to read the IRS section.
And I don't recommend. Don't recommend reading
That would be about 500 to 1000 hours
(33:53):
So to wrap up, so
what is your advice for for real estate owners in both
If you have a property and you have not implemented cost segregation, this
is definitely something you need to look into, especially if
you're going to be holding on to the property long term. You
know, you are always subject to recapture if you sell a building after
(34:15):
implementing cost segregation for that five and 15 year. But
if you're going to hold on to a property long term, there's no reason why
you shouldn't take the benefit up front and get that additional depreciation
or that accelerated depreciation to help offset any kind of income you have.
And you all, I'm assuming, you know, just do a consultation
(34:37):
All of our analyses are free. So anything that they need, if
they want to cost segregation analysis, we turn that around within
48 hours. Our engineers take a look at it. We send it back to them. with
a detailed, hey, this is what we project. And also here's
our quote for services. If you want to sign up with us, just let me know. For
tangible property regulations, it's also a fairly simple
(34:59):
process. If they want us to analyze their depreciation schedule for
any kind of TPR benefit, depreciation schedule, and
They get that over to us either for a benefit
Like, Hey, this is what we're projecting or Hey, good job,
buddy. Your CPA knows what they're doing. And you know, that's usually
(35:20):
10% of the time, maybe less, but
we'll take a look at it and set up a meeting. I have no problem getting
on a call with somebody for 30 minutes, explaining them
Excellent information, Vanessa. For our
viewers and listeners, this could
(35:42):
make a significant impact on your business in a
positive way from a tax savings and cash flow perspective.
You heard Vanessa say with some of the new rules,
particularly for properties put into service now
and going forward under the new tax legislation, probably
even a bigger impact than it has been historically. Thank
(36:04):
you very much for the info. Thank you very much for the time. For
those of you that have any questions or
ideas for future episodes, you can email us at
InsideTheVault at EnterpriseBankPGH.com. You
can check us out on audio format and all the major podcast platforms
and in video format on YouTube. Thank you for watching or listening.
Welcome to Inside the Vault, Enterprise Bank's podcast series, where we
talk about items of interest to the small business community. Today,
we're going to focus on some good information for
those clients and friends of the bank that are involved in
real estate, either own real estate for their particular
small business or invest in real estate. With me today
(00:27):
is Vanessa Wallace Clunies with
tangible property tax methods, and I'm going to shorten that
for the rest of the episode to TPTM. Welcome
So before we start talking about your area of
expertise in terms of how
(00:49):
to help businesses and real estate investors with their tax
planning around their real estate holdings, give us a little background on
Oh, a background on myself. I am a 30 something
year old soon to be mother of three. I lived in Pittsburgh my
(01:09):
entire life, started working with my father, who is a CPA of
over 45 years, about 10 years ago, started
a CPA firm with my dad, worked in specializing
in real estate and method changes, and
decided to start our own cost segregation firm back in 2021. So
(01:30):
we started tangible property tax methods in 2021. After
noticing a consistent trend with cost say companies, not
fully understanding the right way
to qualify or classify different components of a building. We
use the tax code for this. And we noticed a lot of errors and
other cost segregation companies. And so my father and I decided why
(01:53):
not start our own. And so we've been doing that since July of
Nice. And you're based locally here in
We are. I am based here in Pittsburgh. We have an office in Naples,
Florida, and our engineers are actually located in Louisiana.
We have sales reps all around the country that sell for us. So
we are nationwide. We do studies outside of the
(02:15):
United States in Mexico. We have actually
Yes. Anything as long as it's a taxpayer, US
Okay. So let's, um, let's talk about kind
of the topic that I think a lot of folks in the, in the real
estate world have, have heard about, which is cost segregation. Um,
(02:39):
so, you know, at its, its very core, what
are the basic principles of cost segregation and
Well, cost segregation is an IRS approved way
to help accelerate depreciation. The IRS states that you
can take a building, you depreciate it over 27 and
(03:00):
a half or 39 years depending on the use of
the property. 27 and a half is residential, 39 is
commercial, and you're allowed to break it down further into five
and 15 year components to help provide a tax benefit in
the current year of implementation of cost segregation. Now
the IRS states it must be an engineering based, engineering
(03:22):
and factual based study The CPA can't
just determine, hey, I think you have $20,000 of
five-year property, and your landscaping looks to be about $80,000. So
Not that simple at all. It must be engineering and factual based.
So what's kind of
(03:44):
the history, the tax code, or the laws around cost
Well, back in the 80s, the IRS stated that you can go ahead and
separate it. There is a court case that allowed, that
stated that you can go ahead and separate it out. Forgive
me, I don't have the direct IRS code off the top of my head. If
(04:09):
So this applies to,
you mentioned, you know, two of the different standard depreciation periods.
So can cost segregation studies and analysis
be done on both commercial and residential property?
It can be done on any kind of property, commercial, residential, a
warehouse, industrial. Different buildings yield
(04:32):
different percentages for the five and 15 year based off
of their components. If you have a multi unit
apartment building, generally, you're going to be looking at a higher 55 and
15%. Because of the components, you have a lot more kitchen cabinets, a lot
of cabinetry could potentially have wood flooring that will
yield a higher five and 15%. If you have a warehouse or
(04:53):
an industrial space, that's pretty much a shell of concrete and
steel, you're not going to have a significant benefit as you
would, you know, office or commercial property or
So what are the, what are the property types
or let's say business types within those properties that are, you
have the most advantages associated with doing this
(05:18):
I typically love to say multi-unit residential properties
are going to have a higher five and 15 year, some commercial properties,
medical facilities, depending on how it is split up between
the facility and the improvements. Sometimes you
will have a medical facility or a medical office that
you have one person that owns the building and then you have a doctor who leases. And
(05:41):
a lot of those components of the building in the office itself
will be under leasehold improvements that might not have a
very big five and 15 year for the building owner. But
if a building owner owns all of the components in
the medical facility, that could also yield a very high percentage for
(06:02):
So what we're basically, coming back to the kind of
the accounting methodology or theory here, what
we're talking about is, you know, not
only what can be depreciated, but
And then there's also, which probably gets in a little more
of a more broad topic that we're going to talk about, you
(06:27):
Yes, correct. For cost segregation, different components of
a building have different class lives. The IRS is very
clear on what you can qualify as
five-year property, seven-year property, 15-year property, depending
on the class life, the use. And then there's also different components
as well. If you have a property who's focused in manufacturing, different
(06:50):
manufacturing can also qualify for accelerated depreciation because
So let's talk about kind of the
process that might give some of our viewers and listeners kind of
more insight. So how do you, how do you,
what are the steps in the process for a cost seg analysis
(07:15):
Well, for, for my company, what we do is we will, somebody
will reach out to us and ask for a cost segregation analysis. We
ask for basic bits of information to provide that analysis for
them. It's always a property address, a
cost basis, which could be a purchase price, net
minus land, or if they have a depreciation schedule, we
(07:37):
will request that. We need the date placed in service and
the use of the building. And this is important
because if you have a single home, single family home,
and it looks to be a long-term residential, but it's actually
an Airbnb, It's a 39-year class life. It's not 27 and
It falls into commercial realm based on the
(08:00):
Yes, that is correct. So we'll ask for that, those bits of
information. If any improvements were done after it was placed in
the service, we'll also ask about that. And
just like a quick little detail of the improvements done just so that we can
help provide a clear understanding or an accurate
estimate of what we're looking at. My engineers look
at every single property we get. They'll assess it and
(08:23):
provide a percentage for five and 15 year. You
put it into our little calculator, send it back to the client with details.
Hey, this is what you're looking at for additional depreciation. This
is going to be your net tax benefit or assumed tax benefit,
depending on the tax rate that we will
either do 37% or we will ask the CPA or client what
(08:49):
So, um, This, available
for all property types, you said. Yes. But to get the tax benefits, obviously
it has to be a building that you're depreciating. So
But they're going to use it for investment real estate, whether that be residential or
(09:09):
commercial, or if they're owner occupants in a commercial property, they're
That is correct, yes. So if you, obviously you cannot use it for your
personal or residential home. If you have a second home
that you also vacate to or you use leisurely and
don't rent it out, that's also not eligible. It
has to be something that you're using for a business or for a rental purpose.
(09:32):
So short term residential or short term rental for an Airbnb,
Which I imagine that whole emerging genre
of, you know, vacation homes for,
I mean, Airbnbs, VRBOs, all that has opened up
a whole new market for using this
(09:57):
Absolutely. Because what the IRS considers a
commercial property, an Airbnb, is anything that is rented out
two weeks, as long as it is under that month threshold. You
technically qualify as a hotel or you can qualify as a
hotel in the eyes of the IRS. We like to recommend that
(10:19):
if you do have an Airbnb, always offer substantial services,
amenities, extra cleaning. I had
somebody call me and ask me if their MOOC, which is I
In their Florida house would qualify as a substantial amenity. I
said, yes, definitely. But instances like
(10:39):
that, and that qualifies them for this property to
go on a Schedule C, which would be a business rather
than a Schedule E. And that's important because, you know,
if an individual has a W-2 job, and they're not technically a real estate
professional, they can still take the benefit of doing a cost segregation
So Vanessa, you mentioned the term real estate professional. Yes.
(11:02):
So how does the IRS define what a real estate professional is?
There is a whole bunch of qualifications that the IRS states,
but the main one is that you meet the hour requirements and
the process to be a real estate professional. That includes how much
you are involved in being a real estate professional. This
can deal with invoicing, managing the properties, scheduling,
(11:26):
doing the leases, it depends on the type of property. You know,
if you have a commercial property with office tenants, it could be related to those
invoices, any kind of maintenance, scheduling the maintenance for that. As long
as you meet an hourly requirement from the IRS, you should be
okay. Unless you're a doctor with a W-2 and can't
(11:46):
Right. So if I'm a, let's say a hobbyist that I have one rental
property on the other side of town, but I have a full-time day
job and It's a minimal amount of work. I'm not going to qualify
You might not qualify if you have a spouse that qualifies or
participates in the rental properties, managing
the properties. That could be an avenue you
(12:09):
could research and see if it would be possible for your spouse
And then what are the advantages of being a
real estate professional vis-a-vis the tax
If you're not a real estate professional, have a W-2 job, it's gonna be
passive. So there are limitations on what you can take with passive
income and passive offsets. If you're a real estate professional,
(12:32):
there is no limitation. You can go ahead and apply to your taxable
income. But like I said, definitely wanna
qualify. And if you have the hours or your
spouse has the hours, I always recommend that you have documented in
Well, the bank has a lot of clients that that's their business is
(12:58):
So what are some getting back to cost segregation? So,
I mean, what are some examples of type of savings
that, you know, a client can experience if they do
That's a great question. We have done thousands, tens
of thousands of studies, but a couple of ones that stick stick
(13:20):
up out of the top of my head. We have an individual that owned
property in Las Vegas, Nevada, and Utah,
about 10 properties in total. The net negative
adjustment since they're all on the depreciation schedule was
$1.5 million. So depending on the type
of building it is depending on the type of property you have,
(13:43):
it can range from a little bit of benefit to
a really significant number. You know, if you have a
higher end property house, that's probably
going to yield a little bit higher because you have nicer fixtures,
nicer components in the property. If you have
a small single family home, you might not have that
(14:06):
So I'm assuming one of the advantages of what TPTM does
is kind of look at the arbitrage between the
cost of going through the process and the analysis versus the
Yes, yes. And we have software as well, too, that kind of analyzes every
single component of the building that you know, appliances, for
instance, if you have Wolf appliances in a
(14:27):
property, it's going to have a higher value, obviously, than
something maybe just a general general electric stove.
So we make sure that we apply the right amount
to the appliances as well. So our studies are incredibly accurate
Yeah. So one of the challenges on my side of the table being a small business
(14:50):
lender is getting, you know, having a, in my case,
a borrower with good record keeping. So I think probably
in your world, the property owner needs to
have good record keeping, particularly to determine
what their initial cost basis is or was
for these different components. So what are some, you
(15:11):
know, for a real estate owner that's interested in
looking at this from a tax advantage perspective, what
types of record keeping should they make sure that they're, you know, obtaining
Well, if they have a lot of properties, if they are recent
purchases, always a settlement statement appraisal. If
(15:34):
they are have owned these properties for a long period of
time, and it's on their depreciation schedule. That's
all we need in order to give an initial assessment. If
they decide to engage with us, we will ask for appraisal. If
they have blueprints, if it's a new build, or they've done
significant improvements, we'll ask for those improvement details, as
(15:56):
well as an AIA document. that kind of breaks down the costs. Okay,
so there's a bunch of different things depending on the the
length of ownership, what they did to the property that
the property owner should keep track of, but always have a depreciation
schedule. And I'm not talking about the form 4562 talking
(16:17):
about a detailed federal depreciation schedule that lists
out the asset, the date placement service, the cost basis,
So let's kind of fast forward towards
the end of the process. So you do your analysis and
you determine, you know, reset the depreciation schedule
(16:38):
based on, you know, what types of allocations
you make for different types of improvements or components
of the property. Then how does that work
So the IRS states you're not allowed to change a depreciation schedule
without filing a Form 3115. And that is a
(17:00):
change in accounting method. For all of our work,
it is an automatic method change. So you submit
it to the IRS, they kind of say, yeah, well, it works. We
see a lot of these. But it's a DCN 7. They
have to file and we do this as part of our service. We
prepare the calculations for the CPA, we
(17:22):
prepare This is what the asset used to
be with our cost segregation. This is what the split should be
between this 27 and a half or 39 year, five
and 15 year. And this is going to be your deduction on your tax return.
Now, is there any look back to what
how it's been depreciated prior to you all doing the study?
(17:45):
Not always. No, not necessarily. All 3115s
must be filed in the current year on a not
on a late filing or an amended return. So it has
to be current filing. If you provided an extension, say
it's September 3, and you
have your own extension, you can still file a
(18:07):
3115 as long as it's ahead of the 915 or 1015 deadline. Gotcha. There
is no, you know, look back or risk for audit because the IRS receives
a lot of 31 15s as long as it is prepared and filed properly,
Okay. So, um, let's
kind of jump into kind of the more general topic. Um,
(18:30):
there's not just, you know, cost segregation as
a way to reduce taxes, but there's rules around, how
property is supposed to be classified in the first place.
Exactly. And I think your industry terminology is tangible
(18:52):
So I know when we were talking offline, you
said, you know, this get people get this wrong all
People they don't get it. Yeah, they don't. Well, first
off, they don't usually know about it. And so they it
They just kind of go into it blindly or a CPA just assumes that
they know key components of the TPRs and
(19:15):
they just brush it off. Or they don't have the time to
spend to actually research and understand the tangible property
regulations in order to implement it properly on
And we're talking about probably the primary issue there
Correct. So cost segregation is on the building and
(19:36):
its components separating out in itself to
provide additional or accelerated depreciation. Potential property
regulations are focused on every work effort
done on a property after it was placed into service. And this
can include change of flooring, Tenant
improvements you had you have a commercial property and
(19:58):
a tenant excuse me a tenant moved out You need to refurbish the
space for a new tenant that can also be considered an expenditure HVAC
unit that you need to replace Anything that was done
after the building was placed in the service and that is on that depreciation schedule
(20:20):
And my understanding is that, you know, there are
basically buckets of types
of expenditures where they fit and there are certain tests that
The IRS states that there are 16 Rabi rules, restoration,
(20:46):
I think my father coined the term Rabi rules. But
general, if you have an expenditure and it
meets one of those requirements or matches anything
under the restoration, adaptation, betterment, improvement, it
can be considered a repair maintenance and does not need to be capitalized. So
there's a lot of wiggle room there, but there's also a lot of detailed rules on
(21:10):
what qualifies. There's a percentage of the overall
unit of property that needs to be taken into consideration
whenever you have an expenditure. And if it meets one
of those requirements, then repair maintenance. So
what I mean by that is if you have an asset on your depreciation schedule, and
we look at it and say, Hey, this should have been qualified as repair
(21:32):
maintenance. That's something that we would take a look at and we
would eliminate from that from that depreciation schedule. So you
would have what is remaining on that depreciable life
But you're going to be able to take expense, essentially,
and I'm assuming in the period that the current
(21:56):
And it's not just for you pick and choose assets. It is you have
to analyze everything that's on that depreciation schedule for
anything that was improperly classified as a
capitalizable event and something that needs to be considered as repair and
maintenance. Now you do this one time on a
depreciation schedule to clean the depreciation schedule up. You
still file a 3115, different designated change
(22:21):
The IRS has about, gosh, hundreds of
different designated change numbers for the 3115. They all
serve a different purpose. For the TPRs, it's called 184, capitalization
of repairs and maintenance. And we will go and file it, clean
up that depreciation schedule. And then the next year you start with
a very brief depreciation schedule, only the assets that
(22:43):
need to remain on that schedule, that need to remain capitalized for
the IRS. Anything
moving forward. So you go into 2026 and you
have a list of items that you did on a building or
that you have to do for a building. Then you analyze those in
the current year and determine if it should be repairs and maintenance or
(23:08):
Okay. So, um, you know,
one of the biggest challenges we do a lot of investment real estate financing.
One of the biggest challenges is we'll see wild swings and
expense repairs and maintenance expense, uh,
particularly before the accountant gets ahold of it at the end of the year
to do the tax return. And then typically what happens is a portion of
(23:30):
that gets capitalized and then a portion actually stays in repairs
and maintenance. It's kind of hard to really kind of normalize
a normal, you know, repairs and maintenance expense load
for, for a particular real estate investor or
business that owns real property. So I'm
assuming, you know, this help these
(23:53):
regulations, you know, if you follow them, you're
pretty much following the tax
That's correct. And if but there's also an instance where if
a client has different book and tax, this
only applies to federal taxes. So this does not apply to
(24:16):
book. So again, exactly if they need to, you
know, we've have a lot of senior living facilities, individuals that
have nursing homes, some states have different
requirements on showing what they put into the property.
And they give them Benefit for what they spend on that property that
doesn't affect the tangible property regulations does not affect what
(24:39):
they do on the book just on the the taxes and
So that could be consignificant for different owners for you know banking purposes
state purpose state reporting purposes It
So let's talk about the current legislative political
climate with the big, beautiful bill. How's
(25:02):
that going to impact either positively or
negatively the benefits of whether
it's cost, say, or expense versus capitalization? What's
I'll be calling it the OBBB, the BBB,
whichever one that is. it significantly applies to
(25:25):
assets placed into service, and when they're placed into
service for bonus. So if you purchased
a property, and you placed it into service January
21 2025. Any components of that building that
you do a cost segregation for the five and 15 year components
qualify for 100% bonus. You know, prior years,
(25:48):
you know, he purchased the building January 6 and he put into service
I didn't even think about that, but thank you for calling me out. That would only
You're down to 40% for those first few weeks of 2025. You
(26:16):
place that building into service between January 1, 2025 and January
19, 2025, you have 60% bonus on those five and 15 year assets. So
it depends on as long as you purchase a property after
January 20th and put it into service after that date, you're eligible
for 100% bonus. If you have a
(26:37):
property that you have owned since 2023, and it's been
Your building was placed into service in 23. The tax laws for
the tax year 23 apply to that building. You are only
allowed to take 80% bonus. Gotcha. The tangible property
regulations, it doesn't affect it. These are removing assets
(26:58):
that were improperly classified. Yeah. So
So the tangible property regulations, I mean,
you know, how dangerous is it for
Huge. So this is an IRS mandatory regulation.
And just a quick little background on the TPRs. It
(27:20):
took them about 60 years for them to put
it into regulation. There are different changes,
there are different edits, there are different, oh, hey, what about this? Oh,
wait, no, we're not done yet. We're not going to actually release anything
until 2013, 2014. And then since then, the IRS states you must implement
(27:41):
the TPRs on your property in all expenditures. If
you were to get audited, and the IRS agent comes in
and says, Hey, you know, looking at your 20 page
depreciation schedule, you are essentially
forging your depreciation schedule by having
these assets improperly on your depreciation schedule and
(28:03):
taking this benefit that should never have been a benefit. These
are repairs and maintenance. The IRS can determine that
you are no longer allowed to use the net remaining depreciable
basis of those improperly classified assets. It's
called the use it or lose it rule. So you use the TPRs
and you take that benefit and you apply it properly to your return. or
(28:27):
you lose all potential benefit. And
I have an example, actually. Do tell. We
had a client who was under IRS audit, you
know, maybe didn't always make the best decisions with
stuff, but he was definitely under a microscope with the IRS. He
(28:48):
owned some significant bits of property throughout
the United States. And his CPA came up
to us and said, Hey, he's under audit. Can you take a look
at his depreciation schedule? Our immediate question was,
have they asked for the real estate or the depreciation schedule? They
said, no. We said, okay, give us what we can and
(29:08):
let's see what we can do. We went in and we
filed 3115s with zeros just as a
safekeeping for this individual, provided it
to the agent. She went back and was like, I have no idea what this
is. Went back three weeks later, went to classes on
the TPRs. at seminars, Dr. Her
superiors came back and sat
(29:31):
us down and said, I had no idea what these were. And
I did all of this stuff. And now that I know, you
are protected from audit on your real estate portion and
the depreciation. And if you did not provide me with this,
and I had gone back and taking classes on the on the
TPRs, you would have lost anything
(29:53):
all depreciable basis on these assets. We
save this individual $280 million. He
would have lost $280 million of benefit.
It's hard to comprehend sometimes those numbers, right?
(30:13):
But there are individuals out there with significant real estate hotels, large
multi unit residential properties, large commercial properties,
So at what
property, let's say, I don't know what your metrics
are, at what scale should a real estate
(30:36):
owner or investor really start paying attention?
If they've owned this property for a long period of time and
they have a depreciation schedule with multiple line items, particularly
27 and a half or 39 year property, They need to start paying
attention to what is on that depreciation schedule and what needs to be
(30:58):
And with
regard to the cost segregation, is there kind of a kind
of a point there where, you know, is a property value
We like to say that, you know, typically anything under half
a million dollars won't yield a significant benefit. But
(31:19):
we'll analyze anything that we have in front of us and we'll advise a
client or property owner. Hey, you
have a small cost basis, you're not going to get much five and 15 year
benefit, right? Compared to our cost, it's not going to be worth it
How long, Vanessa, does the process typically
(31:41):
That's a great question. We're actually pretty efficient for
what we do. You know, in tax season, it will
take a little bit longer, maybe about four to six weeks to
turn around a study. But as long as we have all of the data
in no more than three to four weeks, and that
includes like a site visit, we do have an inspection company that that
(32:03):
takes a look at every single property we study. takes pictures
of every component of the building. We always ask for
appraisal blueprints if available, you know, confirmation of
cost basis. But as soon as we have that information, three
to four weeks max, but we've turned stuff around in less
(32:23):
So how does a real estate owner or a real estate investor learn
more about CPTM and and
or just these regulations and or
the benefits of cost segregation? What are some good resources? Plus,
how how can they take advantage of the services your
Well, our website has some good blogs on cost
(32:46):
segregation, tangible property regulations. They
can always go to tax method experts dot com. and learn
a little bit more about TPTM, our services, read some blogs. But
they can also do some other research on cost segregation in
the IRS. It is a kind
of a commodity. There's a lot of CPA firms that offer it. There
(33:07):
are cost segregation firms that offer it. So there's a lot of education on
cost segregation. That's all on the internet. The
tangible property regulations. We
are the experts on this. I'm not out to my own horn.
But it's definitely worth it to reach out to us
to get a little bit more information. If they Google my father,
(33:29):
Eric P. Wallace, you'll see a whole bunch of details on
him as well as the tangible property regulations. There's
not that much information on there unless they want to read the IRS section.
And I don't recommend. Don't recommend reading
That would be about 500 to 1000 hours
(33:53):
So to wrap up, so
what is your advice for for real estate owners in both
If you have a property and you have not implemented cost segregation, this
is definitely something you need to look into, especially if
you're going to be holding on to the property long term. You
know, you are always subject to recapture if you sell a building after
(34:15):
implementing cost segregation for that five and 15 year. But
if you're going to hold on to a property long term, there's no reason why
you shouldn't take the benefit up front and get that additional depreciation
or that accelerated depreciation to help offset any kind of income you have.
And you all, I'm assuming, you know, just do a consultation
(34:37):
All of our analyses are free. So anything that they need, if
they want to cost segregation analysis, we turn that around within
48 hours. Our engineers take a look at it. We send it back to them. with
a detailed, hey, this is what we project. And also here's
our quote for services. If you want to sign up with us, just let me know. For
tangible property regulations, it's also a fairly simple
(34:59):
process. If they want us to analyze their depreciation schedule for
any kind of TPR benefit, depreciation schedule, and
They get that over to us either for a benefit
Like, Hey, this is what we're projecting or Hey, good job,
buddy. Your CPA knows what they're doing. And you know, that's usually
(35:20):
10% of the time, maybe less, but
we'll take a look at it and set up a meeting. I have no problem getting
on a call with somebody for 30 minutes, explaining them
Excellent information, Vanessa. For our
viewers and listeners, this could
(35:42):
make a significant impact on your business in a
positive way from a tax savings and cash flow perspective.
You heard Vanessa say with some of the new rules,
particularly for properties put into service now
and going forward under the new tax legislation, probably
even a bigger impact than it has been historically. Thank
(36:04):
you very much for the info. Thank you very much for the time. For
those of you that have any questions or
ideas for future episodes, you can email us at
InsideTheVault at EnterpriseBankPGH.com. You
can check us out on audio format and all the major podcast platforms
and in video format on YouTube. Thank you for watching or listening.
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