August 15, 2025 • 23 mins
In Part 2 of our conversation wtih Sean Graham, Founder of Maven Cost Segregation Tax Advisors, we dive deeper into powerful tax strategies, focusing on cost segregation and accelerated depreciation. Sean explains the Look Back Strategy and how it can help amend past tax returns, shares insights on renovations and CAPEX opportunities, and outlines how cost segregation applies to new construction. We also discuss the importance of working with trusted professionals and reveal the biggest red flags to watch for in tax advice.
Sean is an entrepreneur, investor, and registered CPA with a background in public accounting and private equity. He manages a portfolio of residential rentals and invests in self-storage developments. Sean is also the founder of Maven Cost Segregation Tax Advisors, a national leader in cost segregation services for commercial real estate. His expertise in real estate taxation helps investors accelerate depreciation and maximize after-tax returns.
In this episode:
- Cost Segregation & Depreciation Strategies: How investors can accelerate depreciation to maximize after-tax returns.
- Look Back Strategy: Understanding how this approach works and its impact when amending prior tax returns.
- Identifying value-add improvements that can boost property performance and tax benefits.
- Cost Segregation in New Construction
- Why experienced tax and cost segregation experts are essential for accuracy and compliance.
- Biggest Red Flags in Tax Advice : Common pitfalls to watch for when receiving tax guidance.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
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Narrator (00:01):
Welcome to The Norris Group real estate podcast, a
show committed to bringing youinsights from thought leaders
shaping the real estateindustry. In each episode, we'll
dive into conversations withindustry experts and local
insiders, all aimed at helpingyou thrive in an ever-changing
real estate market. continuingthe legacy that Bruce Norris
(00:24):
created, sharing valuableknowledge, and empowering you on
your real estate journey.
Whether you're a seasoned pro ora newcomer, this is your go-to
source for insider tips, markettrends and success strategies.
Here's your host, Craig Evans.
Joey Romero (00:43):
The Norris Group is proud to present our 18th annual
gala. I Survived Real Estate atThe Nixon Presidential Library
on Friday, September 12. Since2008, our event has raised well
over a million dollars. Thisyear, we'll be raising funds
again from Make-A-Wish OC andIE. Individual Tickets are
available now. To get yourtickets, go to
(01:04):
isurviverealestate.com click thelink here in the card. We would
like to thank the followingplatinum sponsors, uDirectIRA
Services, The San Diego CreativeInvestors Association,
DouglasBrooke Homes, MVTProductions, Realty411, and DBL
Capital.
Craig Evans (01:25):
Hey guys, welcome back part two of cost
segregations with Sean Graham.
Let's get started. I've had thisasked a few times. I'd love for
people to hear it. So what kindare, so you've got somebody that
does a cost seg, and they, sevenyears later, five years later,
five years later, decide, hey,we're gonna go and sell this
property, you know, so, ifyou're gonna invest in the cost
segregation, what is kind of atimeframe that you typically
(01:48):
see, and is it, maybe that'sbased on the size of the
project, you know? But, what'sthe timeframe that you believe
they should hold before theystart saying, hey, well, you
know, we, we did all this work.
We've saved you all this indepreciation, and now you got to
pay a catch up, because you'vesold it.
Sean Graham (02:08):
Yeah.
Craig Evans (02:09):
You've got to catch that up. So, what do you
recommend to your clients inthat process?
Sean Graham (02:14):
Yeah, so I think just to for the your listeners,
just so they're on the same pageas well. What happens is, you
know, depreciation is reallyit's a tax deferral. It's a tax
deferral strategy, meaning it'snot a permanent expense. So if
you take $100,000 indepreciation, let lowers your
taxable, lowers your lowers yourbasis in the property by
(02:35):
$100,000 and when you go sellthe property, that comes back as
a gain, and so there's differentways to offset that gain and to
keep kicking the can down theroad, down the road. But if you
just sell the property outright,like you know, you're gonna have
(02:56):
to pay depreciation recapture onthat. Now, I think, like, what I
always say to clients is, youknow, it's less about the time
and it's more about what yourstrategy is. Are you in real
estate for the long run? Do youcontinue? Are you going to plan
(03:21):
to continue invest in realestate? Are you going to hold
this property for multipleyears? Like, what is your
overall strategy, because ifyour property, if you're plan
simply to buy rental propertyand then fix it up or something,
and, you know, have it for like,a year or two years, and then
you sell it and, like, that'sit, well, that recapture is
going to come back, and you'regoing to have to pay taxes on
it. And there you go. So just beprepared to do that. Now, if
(03:44):
you're going to reinvest in realestate through 1031 exchange buy
another property, you just rollthe funds forward into another
property. Or let's just say youhave multiple properties that
you're buying, and so if yousell one, well, that's okay,
because you have so muchdepreciation on the others that
you can use that to offset therecapture and the gains on the
other right? So that's a greatstrategy as well. Or you just
(04:05):
hold on to these things untilyou die and they pass on, and
then, you know, everything getsreset anyway. So it's a great,
great strategy for mitigatingyour taxes. But ideally, you
hold this, you would hold theproperties for a couple of
years, I would say that's kindof my default answer, but it
(04:26):
comes down to a situationalbasis.
Craig Evans (04:28):
Tell me about the Lookback Strategy. It really
doesn't require amending taxreturns. If I'm understanding
Sean Graham (04:35):
It's a beautiful thing. Yeah. So what you're
all that correctly?
referring to is called, we useform 3115, which is a change in
accounting method. So this meansthat rather than redoing the tax
returns, let's just say, like,you've been doing straight line
depreciation for the past fiveyears, and then you're like,
(04:56):
'Oh, I just learned about costsegregation. I want to do a cost
segregation study.' Well you cando it in the current year
without going back and amendingthe prior five years returns.
You can do all this in capturethat missed depreciation. We
help you calculate thedifference of what you actually
took on your depreciationschedule versus what you could
have taken. And that differenceis called the 481, adjustment,
(05:17):
and it goes on form 3115, it's avery complex form, I'd highly
recommend either working with usor, you know, a CPA firm who
really knows how to fill thatout correctly, because you want
to do it the correct way, but itallows you, it's an automatic
change, and this is switchingfrom straight line depreciation
(05:38):
to accelerated depreciation isan automatic change, and the IRS
allows you to take thisdifference on the current year
and capture all that. So that'sreally cool, because, you know,
I said there's multiple ways totake advantage of these
depreciation losses, but like,if you didn't need them in prior
years, then now you need it thisyear, so you can catch up on it
(06:00):
now and take all those losses inthe current year. Or if you were
a real estate professional inthe past, but you're a real
estate professional now, well,okay, you can take those losses
now and they count as activelosses, and you can use them to
offset all kinds of things inthe current year through real
estate professional status. Sothere's some interesting,
interesting things there.
Craig Evans (06:20):
How are, how are renovations and CAPEX
opportunities often overlookedthrough this scenario?
Sean Graham (06:26):
I explain it like, like this, when you are
depreciating a property,everything, it's based on a
depreciation schedule, which isyour based on your in service
state. And so let's say you buya property and then you fix it
up, you put all these capitalexpenditures into it, and then
you rent it out. Well, we caninclude all of that capex in the
(06:52):
cost segregation study, becauseit's all getting placed into
service on the same date. So youbuy a property in January, you
fix it up, you rehab it, andthen you're ready to rent it
out. You place it all in servicein April. Well, we can include
what you bought in January, plusall the rehab from January
through April. Include it all inone basis, and put it into the
(07:15):
cost segregation study, right?
And then you start depreciatingit on your in service date,
which is really when you eitherstart renting it out, or it's
basically available for rent,and you're trying to rent it
out, and so all that getsincluded, anything that's done
afterwards would typically needit's either it's going to be
minimal enough where your CPAcan just depreciate it, right,
(07:36):
you know, him or herself, andyou don't need a full cost
segregation study done, right?
And it's pretty straightforward,or, let's just say it's six
figures of rehab. You spendanother couple $100,000 on the
property afterwards, we can doanother study, like an ancillary
cost segregation study for thatwork too.
Craig Evans (07:57):
How would you guys envision using cost segregation,
let's say in new construction.
Somebody's investing in newconstruction to, you know,
they're, they're buying land,because we do that quite a bit.
You know, we've got investorsthat we deal with quite a bit,
whether it's our own equity fundor whether it's other investors
directly that will come in.
We'll help them find land. We'llbuild for them. How would a cost
(08:19):
seg be beneficial to them inthat aspect? Again,SFR, so
you're talking about maybe apurchase price of, you know, 250
to 400 depending on the product.
So how does that benefit them ina new construction?
Sean Graham (08:34):
Yeah, absolutely so if we, I think there's a couple,
couple different ways to to lookat cost segregation. One is,
hey, we have all of the thedetails in the records, in the
prices of the components goinginto the property right, like
that's tracked diligently, andso we're basically on the
(08:56):
actuals, detailed engineeringbased on the actuals. Other way
is to look at it in hindsight,like you have this property,
like if I buy a single familyhome and I get a costing study
on it, well I don't have all thedetails of expenses took to
build that home that was built along time ago. I just bought the
property, right? And so you'redoing an estimate, which is
(09:19):
still detailed engineering, butyou're backing into those prices
and those components. So we cando it either way, but I would
encourage you, if you arebuilding a home, to just have
everything tracked diligently,right, and then we can, you can
submit all that to us, and thenwe can go through those things
and help categorize it correctlyand break down those components
(09:40):
and accelerate as much aspossible. I think the more
details that we have, the morewe're going to be able to
accurately define what can andcannot be accelerated.
Craig Evans (09:53):
Can you share an instance where an investor has
saved, say, more than 100k offof cost segs?
Sean Graham (10:02):
Sure. So, okay, one, one person comes to mind,
and this is a client who highincome earner family, and he
was, he inherited a lot ofmoney. So he inherited a good
amount of money. The questionis, what do you do with this
money? He decided to go intoshort term rentals, so just for
(10:25):
your audience, so they know theIRS deems like I guess, pause on
the story real quick. The IRSdeems real estate to be a
passive activity. Depreciationis a passive loss. So passive
losses offset passive income,right? And so they can't be used
to offset W-2 income or anythinglike that. Unless you're a real
estate professional. There'ssomething called REPS, you know,
(10:46):
Real Estate Professional Status,so something that you have to
qualify for, which means youwork 750 hours in real estate,
and more than anything else,like you're not working a full
time job, you're working atleast 750 hours a year in real
estate and that's your mainfocus, typically on your rental
portfolio. Or there's anotherthing called a short term
(11:06):
rental, short term rentalloophole. So short term rentals
are very popular because itallows people with W-2 jobs or
full time jobs to go into realestate but get the losses as
active losses. The IRS says thatanything that is less than
seven, seven days or lessaverage rental period and you
(11:27):
materially participate in it,right? There's material,
material participation ruleslike one of the most common
rules is you work at least 100hours in the property in more
than anyone else. So you have100 hours that can be attributed
to this short term rental. Youjust rent it out for like, one
week at a time, or weekends orsomething like that. You're the
one managing it. Well, now thoseare active losses, and you can
(11:50):
use those active losses tooffset active income as well.
So..
Craig Evans (11:57):
So even W-2 income?
Sean Graham (11:59):
You can use to offset W-2 income.
Craig Evans (12:00):
Okay.
Sean Graham (12:02):
Yep, it's very, it's a very unique strategy,
because the IRS says, well, thisisn't passive. This is an active
business that you're managingnow. And so this client bought
two short term rentals with themoney that he inherited. Total
basis was, you know, about amillion dollars in these two
(12:23):
properties, there was a lot ofthings that we could accelerate
the depreciation on, you know,there was a pickleball court on
one of them. There's a pool inthe backyard. There was all of
these, basically, they reallymaximize the attractiveness from
a short term rental perspective,right? Like it's, you know,
furnished the whole nine yards,and he was in the top tier tax
(12:46):
bracket, 37% rate, so a milliondollar basis, you know, I think,
I don't know how much we endedup being able to accelerate, but
it was somewhere around $300,000or so, being able to accelerate
and give him a year one writeoff with 100% bonus
depreciation, and then, youknow, take that times his tax
(13:08):
write off, and, yeah, you'reright there at about $100,000.
Craig Evans (13:14):
Wow. So, so what would you say that every
investor, large or small needsto be asking their CPA to make
sure they're not missing out onstrategies like this?
Sean Graham (13:25):
I think it's, it's important to work. First of all,
you have to be around the rightpeople, right? In terms of
knowing what you're gettinginto, and understanding real
estate and do you know, makesure you're well educated,
you're well versed, and you'renot just jumping into anything.
The quality of the propertymeans everything. So I always
(13:45):
emphasize buying high qualityproperties and properties that
are going to cash flow, wherethey're going to appreciate So
educate yourself on theinvestment piece. The next piece
is surrounding yourself withprofessionals who can help you
for everything else. So youknow, you want to make sure that
you have your entity structureset up. That's not my, you know,
(14:07):
forte. I'm not an attorney, butyou want to make sure you set
that up correctly. You want towork with a good CPA who knows
and understands real estate, notjust any CPA, because there's a
lot of CPAs out there who justnothing against them but they
just don't specialize in realestate, and so they don't know
all the intricacies that you cando to utilize real estate to
(14:30):
mitigate your taxes, right? Sothose are super important.
That's a super important pieceto it. And then you can start
planning and strategizing andmaking sure that you're doing
everything to maximize theselosses, I think those pieces are
really, really key. I am a CPA,but we don't do tax prep or tax
return. I talk tax strategy, butultimately, how we generate
(14:52):
revenue as a firm is we do costsegregation studies, right? So
utilizing Cost Segregation is abig, big piece of it. And if you
have questions in terms of howmuch depreciation am I going to
get from this or what should Ido? There's a couple ways to do
it. One, you can come to ourwebsite. It's just
mavencostseg.com, and you canuse that to, there's a
(15:13):
calculator on there. You canplug in your property
information and say, 'Hey, Ibought this property. It's a
short term rental, there's along term rental. Here's the in
service date', so on and soforth. Here's the depreciable
basis, and we're going to giveyou an estimate there. If you
submit that information to us,like there's a way you can just
(15:35):
submit it from that the nextstep, then our engineer is going
to take a look and actually giveyou a more accurate estimate
based on your specific property,right? We'll take a look at
pictures and everything there.
So if you buy a property, just
Craig Evans (15:49):
someone is , well, let me rephrase it, you're not,
come get an estimate from us.
It's free. There's no charge,you know, for us to tell you
what the study would cost, howmuch depreciation you'd get, or
go use the calculator, right andjust take a look. But like, if
you're thinking about buyingsomething, we're happy to give
you a, you know, an estimateahead of time, too, before you
close on it. So you'll startgetting an idea of what you want
(16:12):
and where you need to be to getthe depreciation losses that
that you you desire.
(16:32):
you're not dealing with acompliance aspect from them.
You're advising. You're workingthrough helping stuff,
especially for cost seg. Butwhat would you say are the
biggest red flags that investorsshould look for when they're
talking to either their CPA forcompliance or for advice? From
an advisor perspective, what doyou think's one of the biggest
(16:52):
red flags people should see?
Sean Graham (16:55):
Well, yeah, so when I say I guess, just to clarify
what you were saying earlier. Imean, I talk tax strategy all
day long. I don't sell taxstrategy, meaning I'm not char I
don't, I don't have a any sortof like program or anything
where it's like, Hey, we'regonna do, we're gonna, like, do
tax strategy, and here's yourcharge, here's your annual or
(17:18):
your monthly charge. Like,that's not how we're set up, but
we do talk real estate taxstrategy all day long, because
that's what people need to knowand how they learn about cost
segregation and appreciation andall these things. So the
education part is very importantto us, and so that does advisory
does come into that as far asyour CPA, I would ask them, Are
(17:43):
they, do they know how realestate professional status
works? REPS? Do they know howshort term rental loophole
works? Okay? Do they have anyclients who invest in real
estate? What kind of realestate, right, like? Okay, so
everybody has clients who have,like, a rental property or two,
(18:04):
but that doesn't mean that theytruly understand it. So you're
just trying to get a sense oftheir familiarity with real
estate. I'm happy to introduceyou to tax CPAs, who can do the
tax prep and tax strategy foryou as well. So, that's not
really, really a problem, but wework with everybody's CPA. I'm
(18:25):
not saying that, you know, I'mhappy to work with your tax CPA,
but if you aren't comfortable,or you want to look for somebody
else, like happy to give you areferral or, you know, a
recommendation, you're justtrying to get an idea of what
they know and they understand.
Craig Evans (18:41):
Sean, listen, I'm grateful for your time, and I
appreciate you making time forus and our listeners today. But
I got one last question. So whatdo you see as the biggest myth
that you hear about costsegregation, that just that's
flat out just not true.
Sean Graham (18:56):
People oftentimes forget that you can't depreciate
the land. Any dirt is dirt. It'sgoing to be there forever, God
willing. You can't depreciateit. You can only depreciate what
is man made. So people say,Well, I bought a million dollar
(19:17):
property. Well, that doesn'tmean that you have a $1 million
dollar basis, you could be inCalifornia, and they could say,
well, the dirt is 60% of thevalue here. And that's pretty
unfortunate, and unless you haveanother way to prove that the
dirt is worth otherwise, likethat's typically what ends up
happening, right? Property taxesare super, super high. Or it
(19:41):
could be the opposite, right?
You could be in the Midwest, andthey say, 'Well, you know,
you're in a tertiary market, andthat the dirt really isn't worth
anything'. But people forgetthat you have to subtract out
the land value. Land value isnot part of your depreciable
basis. So that's reallyimportant. And the other thing
is, like, you can't, accelerate,or just bonus out 100% of the
depreciable basis, like thestructural components, the roof,
(20:05):
the walls, the foundation, theyou know, like the ceiling, all
that, that is part of thestructural basis, the structural
basis you cannot acceleratedepreciation on. So our job is
to break all these componentsinto the right categories to
(20:28):
accelerate as much as we can.
But not everything in theproperty can just be
accelerated, and I think that'ssomething that's commonly
misunderstood.
Craig Evans (20:39):
So Sean, Listen, man, it has been an honor having
you on. I want to make sure thatpeople know how to get in touch
with you. So where can ourlisteners connect with you or
learn more about Maven CostSegregation.
Sean Graham (20:50):
So go to our web.
Our website. I put a link onthere for your listeners, just
so they know. So it'smavencostseg.com/Norris,
N-O-R-R-I-S, that way, you know,any of the listeners, if they go
there, I'll put, you know, adiscount on there for them. But
(21:13):
other than that, email me.
S-E-A-N sean@mavencostseg.com,MAVEN is spelled M-A-V-E-N but
email me. I'll give you mycalendar link to connect. Or you
can just submit your propertyinformation on our website, and
yeah, we'll go from there andhappy to chat with you, or, you
(21:36):
know, help you out any way Ican.
Craig Evans (21:38):
Sean, man, I greatly appreciate it. I've
always told people, you know,two of the biggest things that
we've got in investing is timeand taxes, right? And while cost
segs are not always the mostflashy, glamorous thing to talk
about, there's a lot of moneythat people are missing if
they're not paying attention todepreciation, so.
Sean Graham (21:56):
Yep.
Craig Evans (21:56):
I really appreciate you being on and diving into the
topic of depreciation and taxes.
So everybody that's going to doit for us today, we have had a
great time with Sean again. Ifyou need information from him,
please make sure reach out MavenCost Segregation, Joey, will
make sure we've got links therefor you guys. Sean again, thank
you, my friend.
Sean Graham (22:18):
All right. Thanks, Craig. Appreciate you having me
Joey Romero (22:21):
Don't forget to visit isurvivedrealestate.com
on.
for tickets to the event onFriday, September 12. The Norris
Group would like to thank thefollowing Gold sponsors,
Keystone CPA, The Inland ValleysAssociation of Realtors,
Pasadena FIBI, The North SanDiego Real Estate Investors
Association, LA south REIA,NorCal REIA, The Wizard of the
(22:44):
Wobbly Box, Andy Teasley,Shepherd's Finance, The Thompson
Group, PropertyRadar and WhiteHouse Catering. The dinner wine
is provided with a generouscontribution by Rick and Leanne
Rossiter. Hope see you allthere.
Narrator (22:58):
For more information on hard money loans, trust deed
investing, and upcoming eventswith The Norris group. Check out
thenorrisgroup.com. For moreinformation on passive investing
through the DBL Capital RealEstate Investment Fund, please
visit dblapital.com.
Joey Romero (23:17):
The Norris Group originates and services loans in
California and Florida underCalifornia DRE license 01219911.
Florida mortgage lender license1577 and NMLS license 1623669.
For more information on hardmoney lending go to
thenorrisgroup.com and click thehard money tab.
Welcome to The Norris Group real estate podcast, a
show committed to bringing youinsights from thought leaders
shaping the real estateindustry. In each episode, we'll
dive into conversations withindustry experts and local
insiders, all aimed at helpingyou thrive in an ever-changing
real estate market. continuingthe legacy that Bruce Norris
(00:24):
created, sharing valuableknowledge, and empowering you on
your real estate journey.
Whether you're a seasoned pro ora newcomer, this is your go-to
source for insider tips, markettrends and success strategies.
Here's your host, Craig Evans.
Joey Romero (00:43):
The Norris Group is proud to present our 18th annual
gala. I Survived Real Estate atThe Nixon Presidential Library
on Friday, September 12. Since2008, our event has raised well
over a million dollars. Thisyear, we'll be raising funds
again from Make-A-Wish OC andIE. Individual Tickets are
available now. To get yourtickets, go to
(01:04):
isurviverealestate.com click thelink here in the card. We would
like to thank the followingplatinum sponsors, uDirectIRA
Services, The San Diego CreativeInvestors Association,
DouglasBrooke Homes, MVTProductions, Realty411, and DBL
Capital.
Craig Evans (01:25):
Hey guys, welcome back part two of cost
segregations with Sean Graham.
Let's get started. I've had thisasked a few times. I'd love for
people to hear it. So what kindare, so you've got somebody that
does a cost seg, and they, sevenyears later, five years later,
five years later, decide, hey,we're gonna go and sell this
property, you know, so, ifyou're gonna invest in the cost
segregation, what is kind of atimeframe that you typically
(01:48):
see, and is it, maybe that'sbased on the size of the
project, you know? But, what'sthe timeframe that you believe
they should hold before theystart saying, hey, well, you
know, we, we did all this work.
We've saved you all this indepreciation, and now you got to
pay a catch up, because you'vesold it.
Sean Graham (02:08):
Yeah.
Craig Evans (02:09):
You've got to catch that up. So, what do you
recommend to your clients inthat process?
Sean Graham (02:14):
Yeah, so I think just to for the your listeners,
just so they're on the same pageas well. What happens is, you
know, depreciation is reallyit's a tax deferral. It's a tax
deferral strategy, meaning it'snot a permanent expense. So if
you take $100,000 indepreciation, let lowers your
taxable, lowers your lowers yourbasis in the property by
(02:35):
$100,000 and when you go sellthe property, that comes back as
a gain, and so there's differentways to offset that gain and to
keep kicking the can down theroad, down the road. But if you
just sell the property outright,like you know, you're gonna have
(02:56):
to pay depreciation recapture onthat. Now, I think, like, what I
always say to clients is, youknow, it's less about the time
and it's more about what yourstrategy is. Are you in real
estate for the long run? Do youcontinue? Are you going to plan
(03:21):
to continue invest in realestate? Are you going to hold
this property for multipleyears? Like, what is your
overall strategy, because ifyour property, if you're plan
simply to buy rental propertyand then fix it up or something,
and, you know, have it for like,a year or two years, and then
you sell it and, like, that'sit, well, that recapture is
going to come back, and you'regoing to have to pay taxes on
it. And there you go. So just beprepared to do that. Now, if
(03:44):
you're going to reinvest in realestate through 1031 exchange buy
another property, you just rollthe funds forward into another
property. Or let's just say youhave multiple properties that
you're buying, and so if yousell one, well, that's okay,
because you have so muchdepreciation on the others that
you can use that to offset therecapture and the gains on the
other right? So that's a greatstrategy as well. Or you just
(04:05):
hold on to these things untilyou die and they pass on, and
then, you know, everything getsreset anyway. So it's a great,
great strategy for mitigatingyour taxes. But ideally, you
hold this, you would hold theproperties for a couple of
years, I would say that's kindof my default answer, but it
(04:26):
comes down to a situationalbasis.
Craig Evans (04:28):
Tell me about the Lookback Strategy. It really
doesn't require amending taxreturns. If I'm understanding
Sean Graham (04:35):
It's a beautiful thing. Yeah. So what you're
all that correctly?
referring to is called, we useform 3115, which is a change in
accounting method. So this meansthat rather than redoing the tax
returns, let's just say, like,you've been doing straight line
depreciation for the past fiveyears, and then you're like,
(04:56):
'Oh, I just learned about costsegregation. I want to do a cost
segregation study.' Well you cando it in the current year
without going back and amendingthe prior five years returns.
You can do all this in capturethat missed depreciation. We
help you calculate thedifference of what you actually
took on your depreciationschedule versus what you could
have taken. And that differenceis called the 481, adjustment,
(05:17):
and it goes on form 3115, it's avery complex form, I'd highly
recommend either working with usor, you know, a CPA firm who
really knows how to fill thatout correctly, because you want
to do it the correct way, but itallows you, it's an automatic
change, and this is switchingfrom straight line depreciation
(05:38):
to accelerated depreciation isan automatic change, and the IRS
allows you to take thisdifference on the current year
and capture all that. So that'sreally cool, because, you know,
I said there's multiple ways totake advantage of these
depreciation losses, but like,if you didn't need them in prior
years, then now you need it thisyear, so you can catch up on it
(06:00):
now and take all those losses inthe current year. Or if you were
a real estate professional inthe past, but you're a real
estate professional now, well,okay, you can take those losses
now and they count as activelosses, and you can use them to
offset all kinds of things inthe current year through real
estate professional status. Sothere's some interesting,
interesting things there.
Craig Evans (06:20):
How are, how are renovations and CAPEX
opportunities often overlookedthrough this scenario?
Sean Graham (06:26):
I explain it like, like this, when you are
depreciating a property,everything, it's based on a
depreciation schedule, which isyour based on your in service
state. And so let's say you buya property and then you fix it
up, you put all these capitalexpenditures into it, and then
you rent it out. Well, we caninclude all of that capex in the
(06:52):
cost segregation study, becauseit's all getting placed into
service on the same date. So youbuy a property in January, you
fix it up, you rehab it, andthen you're ready to rent it
out. You place it all in servicein April. Well, we can include
what you bought in January, plusall the rehab from January
through April. Include it all inone basis, and put it into the
(07:15):
cost segregation study, right?
And then you start depreciatingit on your in service date,
which is really when you eitherstart renting it out, or it's
basically available for rent,and you're trying to rent it
out, and so all that getsincluded, anything that's done
afterwards would typically needit's either it's going to be
minimal enough where your CPAcan just depreciate it, right,
(07:36):
you know, him or herself, andyou don't need a full cost
segregation study done, right?
And it's pretty straightforward,or, let's just say it's six
figures of rehab. You spendanother couple $100,000 on the
property afterwards, we can doanother study, like an ancillary
cost segregation study for thatwork too.
Craig Evans (07:57):
How would you guys envision using cost segregation,
let's say in new construction.
Somebody's investing in newconstruction to, you know,
they're, they're buying land,because we do that quite a bit.
You know, we've got investorsthat we deal with quite a bit,
whether it's our own equity fundor whether it's other investors
directly that will come in.
We'll help them find land. We'llbuild for them. How would a cost
(08:19):
seg be beneficial to them inthat aspect? Again,SFR, so
you're talking about maybe apurchase price of, you know, 250
to 400 depending on the product.
So how does that benefit them ina new construction?
Sean Graham (08:34):
Yeah, absolutely so if we, I think there's a couple,
couple different ways to to lookat cost segregation. One is,
hey, we have all of the thedetails in the records, in the
prices of the components goinginto the property right, like
that's tracked diligently, andso we're basically on the
(08:56):
actuals, detailed engineeringbased on the actuals. Other way
is to look at it in hindsight,like you have this property,
like if I buy a single familyhome and I get a costing study
on it, well I don't have all thedetails of expenses took to
build that home that was built along time ago. I just bought the
property, right? And so you'redoing an estimate, which is
(09:19):
still detailed engineering, butyou're backing into those prices
and those components. So we cando it either way, but I would
encourage you, if you arebuilding a home, to just have
everything tracked diligently,right, and then we can, you can
submit all that to us, and thenwe can go through those things
and help categorize it correctlyand break down those components
(09:40):
and accelerate as much aspossible. I think the more
details that we have, the morewe're going to be able to
accurately define what can andcannot be accelerated.
Craig Evans (09:53):
Can you share an instance where an investor has
saved, say, more than 100k offof cost segs?
Sean Graham (10:02):
Sure. So, okay, one, one person comes to mind,
and this is a client who highincome earner family, and he
was, he inherited a lot ofmoney. So he inherited a good
amount of money. The questionis, what do you do with this
money? He decided to go intoshort term rentals, so just for
(10:25):
your audience, so they know theIRS deems like I guess, pause on
the story real quick. The IRSdeems real estate to be a
passive activity. Depreciationis a passive loss. So passive
losses offset passive income,right? And so they can't be used
to offset W-2 income or anythinglike that. Unless you're a real
estate professional. There'ssomething called REPS, you know,
(10:46):
Real Estate Professional Status,so something that you have to
qualify for, which means youwork 750 hours in real estate,
and more than anything else,like you're not working a full
time job, you're working atleast 750 hours a year in real
estate and that's your mainfocus, typically on your rental
portfolio. Or there's anotherthing called a short term
(11:06):
rental, short term rentalloophole. So short term rentals
are very popular because itallows people with W-2 jobs or
full time jobs to go into realestate but get the losses as
active losses. The IRS says thatanything that is less than
seven, seven days or lessaverage rental period and you
(11:27):
materially participate in it,right? There's material,
material participation ruleslike one of the most common
rules is you work at least 100hours in the property in more
than anyone else. So you have100 hours that can be attributed
to this short term rental. Youjust rent it out for like, one
week at a time, or weekends orsomething like that. You're the
one managing it. Well, now thoseare active losses, and you can
(11:50):
use those active losses tooffset active income as well.
So..
Craig Evans (11:57):
So even W-2 income?
Sean Graham (11:59):
You can use to offset W-2 income.
Craig Evans (12:00):
Okay.
Sean Graham (12:02):
Yep, it's very, it's a very unique strategy,
because the IRS says, well, thisisn't passive. This is an active
business that you're managingnow. And so this client bought
two short term rentals with themoney that he inherited. Total
basis was, you know, about amillion dollars in these two
(12:23):
properties, there was a lot ofthings that we could accelerate
the depreciation on, you know,there was a pickleball court on
one of them. There's a pool inthe backyard. There was all of
these, basically, they reallymaximize the attractiveness from
a short term rental perspective,right? Like it's, you know,
furnished the whole nine yards,and he was in the top tier tax
(12:46):
bracket, 37% rate, so a milliondollar basis, you know, I think,
I don't know how much we endedup being able to accelerate, but
it was somewhere around $300,000or so, being able to accelerate
and give him a year one writeoff with 100% bonus
depreciation, and then, youknow, take that times his tax
(13:08):
write off, and, yeah, you'reright there at about $100,000.
Craig Evans (13:14):
Wow. So, so what would you say that every
investor, large or small needsto be asking their CPA to make
sure they're not missing out onstrategies like this?
Sean Graham (13:25):
I think it's, it's important to work. First of all,
you have to be around the rightpeople, right? In terms of
knowing what you're gettinginto, and understanding real
estate and do you know, makesure you're well educated,
you're well versed, and you'renot just jumping into anything.
The quality of the propertymeans everything. So I always
(13:45):
emphasize buying high qualityproperties and properties that
are going to cash flow, wherethey're going to appreciate So
educate yourself on theinvestment piece. The next piece
is surrounding yourself withprofessionals who can help you
for everything else. So youknow, you want to make sure that
you have your entity structureset up. That's not my, you know,
(14:07):
forte. I'm not an attorney, butyou want to make sure you set
that up correctly. You want towork with a good CPA who knows
and understands real estate, notjust any CPA, because there's a
lot of CPAs out there who justnothing against them but they
just don't specialize in realestate, and so they don't know
all the intricacies that you cando to utilize real estate to
(14:30):
mitigate your taxes, right? Sothose are super important.
That's a super important pieceto it. And then you can start
planning and strategizing andmaking sure that you're doing
everything to maximize theselosses, I think those pieces are
really, really key. I am a CPA,but we don't do tax prep or tax
return. I talk tax strategy, butultimately, how we generate
(14:52):
revenue as a firm is we do costsegregation studies, right? So
utilizing Cost Segregation is abig, big piece of it. And if you
have questions in terms of howmuch depreciation am I going to
get from this or what should Ido? There's a couple ways to do
it. One, you can come to ourwebsite. It's just
mavencostseg.com, and you canuse that to, there's a
(15:13):
calculator on there. You canplug in your property
information and say, 'Hey, Ibought this property. It's a
short term rental, there's along term rental. Here's the in
service date', so on and soforth. Here's the depreciable
basis, and we're going to giveyou an estimate there. If you
submit that information to us,like there's a way you can just
(15:35):
submit it from that the nextstep, then our engineer is going
to take a look and actually giveyou a more accurate estimate
based on your specific property,right? We'll take a look at
pictures and everything there.
So if you buy a property, just
Craig Evans (15:49):
someone is , well, let me rephrase it, you're not,
come get an estimate from us.
It's free. There's no charge,you know, for us to tell you
what the study would cost, howmuch depreciation you'd get, or
go use the calculator, right andjust take a look. But like, if
you're thinking about buyingsomething, we're happy to give
you a, you know, an estimateahead of time, too, before you
close on it. So you'll startgetting an idea of what you want
(16:12):
and where you need to be to getthe depreciation losses that
that you you desire.
(16:32):
you're not dealing with acompliance aspect from them.
You're advising. You're workingthrough helping stuff,
especially for cost seg. Butwhat would you say are the
biggest red flags that investorsshould look for when they're
talking to either their CPA forcompliance or for advice? From
an advisor perspective, what doyou think's one of the biggest
(16:52):
red flags people should see?
Sean Graham (16:55):
Well, yeah, so when I say I guess, just to clarify
what you were saying earlier. Imean, I talk tax strategy all
day long. I don't sell taxstrategy, meaning I'm not char I
don't, I don't have a any sortof like program or anything
where it's like, Hey, we'regonna do, we're gonna, like, do
tax strategy, and here's yourcharge, here's your annual or
(17:18):
your monthly charge. Like,that's not how we're set up, but
we do talk real estate taxstrategy all day long, because
that's what people need to knowand how they learn about cost
segregation and appreciation andall these things. So the
education part is very importantto us, and so that does advisory
does come into that as far asyour CPA, I would ask them, Are
(17:43):
they, do they know how realestate professional status
works? REPS? Do they know howshort term rental loophole
works? Okay? Do they have anyclients who invest in real
estate? What kind of realestate, right, like? Okay, so
everybody has clients who have,like, a rental property or two,
(18:04):
but that doesn't mean that theytruly understand it. So you're
just trying to get a sense oftheir familiarity with real
estate. I'm happy to introduceyou to tax CPAs, who can do the
tax prep and tax strategy foryou as well. So, that's not
really, really a problem, but wework with everybody's CPA. I'm
(18:25):
not saying that, you know, I'mhappy to work with your tax CPA,
but if you aren't comfortable,or you want to look for somebody
else, like happy to give you areferral or, you know, a
recommendation, you're justtrying to get an idea of what
they know and they understand.
Craig Evans (18:41):
Sean, listen, I'm grateful for your time, and I
appreciate you making time forus and our listeners today. But
I got one last question. So whatdo you see as the biggest myth
that you hear about costsegregation, that just that's
flat out just not true.
Sean Graham (18:56):
People oftentimes forget that you can't depreciate
the land. Any dirt is dirt. It'sgoing to be there forever, God
willing. You can't depreciateit. You can only depreciate what
is man made. So people say,Well, I bought a million dollar
(19:17):
property. Well, that doesn'tmean that you have a $1 million
dollar basis, you could be inCalifornia, and they could say,
well, the dirt is 60% of thevalue here. And that's pretty
unfortunate, and unless you haveanother way to prove that the
dirt is worth otherwise, likethat's typically what ends up
happening, right? Property taxesare super, super high. Or it
(19:41):
could be the opposite, right?
You could be in the Midwest, andthey say, 'Well, you know,
you're in a tertiary market, andthat the dirt really isn't worth
anything'. But people forgetthat you have to subtract out
the land value. Land value isnot part of your depreciable
basis. So that's reallyimportant. And the other thing
is, like, you can't, accelerate,or just bonus out 100% of the
depreciable basis, like thestructural components, the roof,
(20:05):
the walls, the foundation, theyou know, like the ceiling, all
that, that is part of thestructural basis, the structural
basis you cannot acceleratedepreciation on. So our job is
to break all these componentsinto the right categories to
(20:28):
accelerate as much as we can.
But not everything in theproperty can just be
accelerated, and I think that'ssomething that's commonly
misunderstood.
Craig Evans (20:39):
So Sean, Listen, man, it has been an honor having
you on. I want to make sure thatpeople know how to get in touch
with you. So where can ourlisteners connect with you or
learn more about Maven CostSegregation.
Sean Graham (20:50):
So go to our web.
Our website. I put a link onthere for your listeners, just
so they know. So it'smavencostseg.com/Norris,
N-O-R-R-I-S, that way, you know,any of the listeners, if they go
there, I'll put, you know, adiscount on there for them. But
(21:13):
other than that, email me.
S-E-A-N sean@mavencostseg.com,MAVEN is spelled M-A-V-E-N but
email me. I'll give you mycalendar link to connect. Or you
can just submit your propertyinformation on our website, and
yeah, we'll go from there andhappy to chat with you, or, you
(21:36):
know, help you out any way Ican.
Craig Evans (21:38):
Sean, man, I greatly appreciate it. I've
always told people, you know,two of the biggest things that
we've got in investing is timeand taxes, right? And while cost
segs are not always the mostflashy, glamorous thing to talk
about, there's a lot of moneythat people are missing if
they're not paying attention todepreciation, so.
Sean Graham (21:56):
Yep.
Craig Evans (21:56):
I really appreciate you being on and diving into the
topic of depreciation and taxes.
So everybody that's going to doit for us today, we have had a
great time with Sean again. Ifyou need information from him,
please make sure reach out MavenCost Segregation, Joey, will
make sure we've got links therefor you guys. Sean again, thank
you, my friend.
Sean Graham (22:18):
All right. Thanks, Craig. Appreciate you having me
Joey Romero (22:21):
Don't forget to visit isurvivedrealestate.com
on.
for tickets to the event onFriday, September 12. The Norris
Group would like to thank thefollowing Gold sponsors,
Keystone CPA, The Inland ValleysAssociation of Realtors,
Pasadena FIBI, The North SanDiego Real Estate Investors
Association, LA south REIA,NorCal REIA, The Wizard of the
(22:44):
Wobbly Box, Andy Teasley,Shepherd's Finance, The Thompson
Group, PropertyRadar and WhiteHouse Catering. The dinner wine
is provided with a generouscontribution by Rick and Leanne
Rossiter. Hope see you allthere.
Narrator (22:58):
For more information on hard money loans, trust deed
investing, and upcoming eventswith The Norris group. Check out
thenorrisgroup.com. For moreinformation on passive investing
through the DBL Capital RealEstate Investment Fund, please
visit dblapital.com.
Joey Romero (23:17):
The Norris Group originates and services loans in
California and Florida underCalifornia DRE license 01219911.
Florida mortgage lender license1577 and NMLS license 1623669.
For more information on hardmoney lending go to
thenorrisgroup.com and click thehard money tab.
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