August 5, 2023 • 45 mins
Andy welcomes the Cost Seg King himself, Yonah Weiss in the very first interview special of The TCO Method ® podcast.
Yonah covers all the details on cost segregation, how it works and who it's best for, and answers all the random questions Andy can toss at him.
Watch the video, read the transcript, show notes & highlights HERE
Highlights:
0:00:00 - The Importance of Planning Ahead 0:03:35 - Understanding Depreciation in Real Estate 0:07:11 - Bonus Depreciation Changes in Tax Code 0:14:07 - Analysis and Tax Savings for Property 0:21:02 - Depreciation Tax and Capital Gain Rates 0:26:23 - Maximizing Tax Benefits With Cost Segregation 0:33:25 - Effective Networking on Social Media 0:37:27 - Active Investing and Resilient Assets
About Yonah Weiss:
Yonah is a powerhouse with property owners’ tax savings.
As Business Director at Madison SPECS, a national Cost Segregation leader, he has assisted clients in saving hundreds of millions of dollars on taxes through cost segregation.
He has a background in teaching and a passion for real estate and helping others.
He’s also an active real estate investor and hosts the top real estate podcast Weiss Advice.
Learn more and connect with Yonah: His website – https://yonahweiss.com His podcast – Apple | Spotify | Google | Podchaser His day job – Madison Specs Stalk his social media – LinkedIn | Twitter | Instagram |
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This podcast is for informational purposes only and should not be considered legal or financial advice. You should always consult with licensed and qualified professionals about your specific, individual situation. Read the Full Disclaimer
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
You can write into your operating agreement.
(00:03):
And you can allocate depreciation to some members versus other members, you know, based on certain capital contributions or otherwise.
And so once the operator is being drafted, there's really nothing you can do at that point.
You know, if someone says, well, I don't need depreciation, someone says, I really do.
There's not really much you can do at that point, but if you plan ahead and do that beforehand, you can actually make it make sense for every all parties involved.
(00:29):
Welcome to the TCO Method, the only show focused on helping you massively increase your
(00:58):
net operating income. And in this particular episode, we are going to be talking about keeping
more of your money after you've maxed out your net operating income. I am Andy McQuade. Thank you
so much for joining us for this episode. I am honored to welcome our very first guest interview,
(01:20):
Yonah Weiss. He is a powerhouse with property owners tax savings. He's business directors at Madison
Specks, a national cost segregation leader. He has assisted his clients in saving hundreds of millions
of dollars. I'm going to throw that out there on taxes through cost seg. And he has a background
(01:40):
in teaching, a passion for real estate, and helping others, which he's done for me personally,
sort of following his lead and getting involved. I think through Jaime Cain, originally, was
who brought me into your circle a long time ago. And he's an active real estate investor, and he
hosts a top real estate podcast Weiss advice, which I was listening to yesterday in the car on my
(02:02):
way home. And if you want to check him out, link up with them on LinkedIn, check out his website,
Yona Weiss.com. Check out his day job at Madison Specs. And hopefully this episode will be coming
out on a Saturday. We're calling this the Saturday specials. So with that, Yonah, thank you so much
for joining me. Welcome. I appreciate your patience and dealing with this new setup that I've never
(02:25):
used before on Riverside. It's so far so good. Thank you so much, Andy. What an honor to be the first
guest on the podcast. It's really a pleasure. And you're absolutely right. It's so much to learn,
especially when you are wanting to keep more money. It's not about how much you make. It's
really about how much you keep. Absolutely. Absolutely. So a lot of the listeners of this show are either
(02:52):
new to real estate or maybe new to commercial real estate so they don't really understand necessarily
all the ins and outs of what happens in their income taxes. Once they start dealing with larger
properties that are eligible or maybe where it's worth doing a cost seg. So let's, I guess, start with
(03:13):
what is cost segregation? What are the advantages? And who should be using it?
So cost segregation is a really weird name that the IRS gave to a tax deduction. It's a strategy that
allows property owners to get accelerated depreciation deduction. So taking a step back
(03:35):
to understand depreciation anytime you buy a property whether it's residential commercial. It's
not your primary residence. You're able to take a tax write off of the entire value of that property.
Okay, that's called depreciation. And it's based on the principle that things go down in value as
time goes on like the name sounds, but it's just a borrowed term because the value is not really
(03:58):
going down of your property. You're just able to take a tax write off as if it were going down in
value. But it's over a long period of time. So depreciation generally for commercial properties
it's over a 39 year period or a 27 and a half year period from the time you bought the property.
So again, it's not intrinsic to the properties it would depreciation as it were because this 39
(04:23):
or 27 and a half year schedule starts over every time the property changes hands. So it's very
subjective to the property owner. Now, like I said, that's a very long time to wait to take all of those
tax write offs or those tax deductions. That's where cost segregation comes in that we're able to
break down the property through an engineering report or study of the building or the property
(04:49):
that allows you to pull from that pool of potential deductions and by allocating certain components
to faster depreciation schedules like a five year or 15 year schedule, you're able to take the
deductions of the value of those components over a faster period of time. So basically to sum it up,
it's a cash flow mechanism that allows you to pull from this pool of potential deductions that you
(05:13):
may never see or may never take and then get them like in the earlier years of ownership.
That's awesome. And it's extremely powerful. And then something that we've
seen over the last several years since Trump was in office, the bonus depreciation availability
and how that's changing right now or maybe changing back to what it was. I don't really know where
(05:38):
we stand on that particular part of it, but can you bring everybody up the speed on that please?
Yeah, so bonus depreciation as you mentioned was a change in the tax code in the law and the
tax cuts and jobs act back in 2017 that once you've done a cost segregation study and have allocated
certain components, sometimes 20 or 30% of the property into these faster depreciation lives
(06:00):
that you can take over a five year or 15 year period. Bonus depreciation says that you're allowed to
take 100% of those deductions in the first year. So think about it like this. Let's say you have a
million dollar property and if you take off a land, land doesn't depreciate, but you're able to
essentially take whatever was left, let's say you take off 15% for land, which is pretty national
(06:25):
average. And then the remaining 850,000, you're able to depreciate over a 27 half year period.
That would give you a 30,000 year deduction every single year. Okay, which is great helps to reduce
your taxable income, but what cost segregation does is accelerate some of those deductions. Let's say
again, 20% of that just be very conservative and you're able to take 160,000, 170,000 of the
(06:49):
deductions in the earlier years. Okay, but that's spread over a five year period like I mentioned.
Bonus depreciation comes in and says now you can take that 170,000 in the first year as a tax
right off. So instead of a 30,000 dollar deduction, you're boosting it up in the first year to 170,000
in that example. So that's what 100% bonus depreciation did. It was in the tax code to be in effect
(07:13):
through the year 2022. If you bought a property between 2018 and 2022, you can claim this 100% bonus
depreciation method. However, this year 2023 at the time of this recording, it's gone down to 80%,
and then it will continue to phase out by 20% each year. Unless, of course, as you alluded to, there
(07:34):
are some changes. It gets reverted. We may need a change of administration in order for that to
happen, but it has yet to be seen. Got it. Thank you. I wasn't sure if there was any updates on that
particular change or not yet. I figured it would probably die on the fine the way things are
currently, but it's worth at least discussing that it is being folded down there. Somebody's paying
(07:58):
that. It's actually been passed in the house in a bill that was proposed, but again, it need in
order to come to law. It needs to be passed in the Senate and as well as signed off by the president.
So that may or may not happen. Right. So for cost segregation, who is the right person,
(08:19):
what size properties and how does that look process wise for those people once they start
really digging into it and wanting to make that a reality? The first thing you always look at is
the person. Who is the right person for this? Now, cost irrigation is a great tax tool, but is not
(08:40):
able to be used equally by everyone because there's something called real estate professional status,
which is a term that the IRS came up with for someone who is full time in the real estate business,
whether you're managing, owning, operating, buying, renovating, or brokering even properties. Now,
the one exception there, the brokering, is doesn't have to be your own properties. All the other things
(09:04):
has to be materially participating in running your own your own properties. So if you have rental
properties and that's your full time job, as long as you don't have another W2, you are automatically
a real estate professional. Why this is so important is because as we're going to see in a second,
the deductions from cost segregation and depreciation in general are limited to just offset any
(09:27):
passive income. So passive income, the IRS defines as real estate or rental income. There are some other
options like royalties or if you have a passive business interest, for example, but generally speaking,
if you have another full time job, you're not able to benefit from the depreciation or the cost
creation again, which is just like depreciation on steroids, you're not able to benefit from it much
(09:48):
outside of your rental property income. Whereas if you're a real estate professional, that's the best
person because not only are you able to use these deductions, remember that huge,
$170,000 deduction, well, if your rental property income is only $30,000, well, you've just gotten
this huge tax right off that just is a passive loss and you can't actually use in the current year.
(10:12):
However, if you are a real estate professional, that deduction will carry over not only forward,
but in the current year to be able to offset or reduce any other taxable income you have. So that's
the best person to get it done. I would say there are scenarios where even someone who's a not
real estate professional, it does make sense. There's always going to be scenarios. So it's important to
(10:33):
discuss this with your tax advisor, discuss this with someone who understands this and the type of
property really doesn't matter the type because this can be done in a single family, multi family,
commercial retail office, industrial storage, you name it any type of property, but it starts
making sense in terms of dollar value. If the purchase price is over, let's say, $200,000,
(10:56):
anything below that, it just the cost of getting one of these things done versus the actual
after-tax savings is going to be minimal. And so if, because I know this question will come up for
some of the newer people because everybody seems to want to start on the ground level with doing
their own flip or doing their own rental property and it's usually like a single or a duplex or maybe
(11:19):
a quad, but those are usually a little more expensive. So let's say, single family rental, they buy the
thing for 30 grand, they dump 100 grand into it fixing it up. It's now worth, let's say 200, they want
to rent that out. How does that work for them? Is it worth it for them at that point or can they pool
multiple properties like if they have three or four separate properties in one LLC that are
(11:45):
worth more than 200,000 can they pool that together or what is that?
A few really great questions there trying to tackle them one by one. It's important to understand
we're going to segregate the questions. It's important to understand when it comes to renovations.
Two, best case scenario is to do a cost in a property before you've done renovations. Now,
(12:09):
we're going to look at the purchase price and that's the sole basically determining factor is the
purchase price because once you've done renovations, you've essentially disallowed yourself from use
doing cost creation on the purchase itself and then we're only going to be looking at the
renovation component. So if you buy in your example, buy property for $30,000 and then put $200,000
(12:32):
into it, so it can be beneficial to do a cost on the renovations, but on the purchase, there's not
going to be any benefit there. Now, lumping properties together, that can be done only when
the properties are number one, were purchased together. So they're on the same depreciation
schedule. And number two, that they are very extremely similar in nature, meaning that they're either
(12:56):
in close proximity, you know, have the same year and type of build. So it's very common to do
away if you're buying and I've had many people who buy properties like in it in a development.
You know, so you're buying the same properties on the same block or something like that. You know,
they're all built at the same time, the same layout, etc. Otherwise, each property is really going to
(13:19):
need its own engineering study because the differences involved can be huge for one property to the next.
Awesome. Okay. That's helped a lot because I didn't know that. So I was kind of thinking,
everybody else is probably going to know. So I guess my next question is, what do you advise people do
(13:43):
when they're looking to start, I guess, the process? What's that look like? So you already mentioned
sort of that they're not going to start by doing renovations immediately. It's going to benefit them
to buy the property, do the cost seg, and then worry about doing catbacks down the road. So
how does that benefit them and why and what's their process look like? The first step we always
(14:07):
like to do is run a free upfront analysis of any property. So we're going to collect some information
you reach out to, you know, a cost to your company like osmatic inspects or any other company usually
provides this service where you'll provide them with certain information about the property that
you address the purchase price, you know, if there were renovations done, that's, you know, a separate
(14:28):
thing, but square footage, etc. And we're able to run the numbers and show what the potential
tax savings would be, breakdown the deductions versus, you know, the regular straight line deduction
method that we said over 27.5 year or alternatively showing you the bonus depreciation or the cost
segregation depreciation. So that's the first step is really just the education understanding
(14:50):
what this is actually going to look like if I do it on my property, how much it's going to cost
and what the potential tax savings are going to be. It's pretty simple, you know, straightforward
process, like I said, it takes about a day or two just to run those numbers. And then once you have
that, you have a much more educated decision to see if it's going to be worthwhile for your property.
Perfect. And then I've heard through the grapevine and a little bit through personal experience,
(15:16):
there are some let's say, nervous CPAs or accountants or bookkeepers out there who are not fans of
doing cost segregation. And I've heard the word scam come up. I've heard the phrase, it's not actually
worth doing because you just have to pay it back if you sell the property. So I guess let's tackle all
(15:41):
the craziness that the listeners are going to get from their teams if they have a team and kind of
go from there. So it's very common. Unfortunately, as as you mentioned, where you'll have CPA,
they just may not be so familiar with this. I mean, there are really two categories of CPAs, the ones
that really have no idea. And like someone calls it a scam, just they have no idea. This is directly
(16:04):
in the tax code and the IRS considers it the correct way to depreciate your property, not spreading
it out over the straight line, but actually categorizing each component to its proper depreciation life.
Now, they don't require it because it would require you to pay an extra, you know, a third-party firm
to get this done so they don't require a cost variation. However, there's another category of CPAs
(16:26):
who are just against it, meaning they know what it is, they just don't recommend it. And that can very
well be for a lot of good reasons. For example, if you're planning and holding a property for short
period of time, there is going to be what's called depreciation recapture tax, which we'll talk about
in a second. It doesn't mean you're going to pay back that depreciation, but it means you're going
to be subject to attacks on the sale. So CPA who understands a person, hopefully a good CPA who
(16:49):
understands a person's full tax situation can hopefully push them in the right direction.
Now, that being said, there are certainly situations where it's not going to be beneficial. Like I said,
if it was not a real estate professional, getting these extra losses or deductions that may not be
able to be used is really exercise and futility at best. And there are many cases where if you are
(17:16):
continuing to buy property, it is certainly a good situation. So if you have a CPA that's not
recommending it in that situation, if you are a real estate professional or you do continue to buy
properties, your plan is to continue to use this to scale, I think that's probably the best case
scenario to use cost irrigation. But yeah, again, there are situations where it will work, where it
won't work. If your CPA thinks it's a scam or doesn't know what it is, the best thing you can do is
(17:42):
either educate them, try to educate them if they're willing to, if not, just find someone else. If
you're a real estate investor and that's something that you want to be doing, you want to make sure
that you have a CPA who is familiar, not just familiar, who is an expert in real estate because
just like if you were a manufacturer or if you were a doctor or a dentist, you want to make sure
(18:02):
there are certain specific deductions for each industry that you want to make sure you're
capturing and you need a CPA who specializes in that field in order to maximize that.
I agree completely. I actually had an entire episode about
making sure your team is going to help you because they will make or break you. And if you have
(18:24):
somebody who doesn't work full time in real estate and understand the business and they're advising
you on any part of what you're trying to do, you're going to have a real rough time.
So that's awesome. The, I guess the next question is when it comes to actually
(18:45):
filing a cost segregation with your CPA, with your attorney, with your business partners, whatever.
How does that break down between like a Joe homeowner who's got a few properties and they want to do
cost-seg because maybe they bought four or five this year versus how an LLC would do it that's a
(19:07):
partnership versus like a C-Corp or another entity. Let's say that. Is there differences in the process
or is it really just get the paperwork done and file it and take the money? Yeah, take the money run.
There's not really a difference from the cost segregation perspective. What we're doing is on
the property level. We're going to do one cost segregation and that's going to create,
(19:30):
you know, it's a detailed study report, it can be 80, 90 pages long and then that creates a new
depreciation schedule and that one page essentially your accountant, you're going to hand off to them
and they'll apply it. You know, if it is an LLC, obviously each member will receive their
proportion of depreciation based on their proportion of ownership in that LLC. That's typically how
(19:52):
it flows through. The one main or a couple main differences is if there is a structure called the
Tenencing Common Tick Structure, which is fairly common in real estate when you're having not as
common as the having an LLC, but when you have multiple partners, especially if there's a 1031
involved or you have different tax basis is going into that property, they'll actually need to be
(20:15):
two separate cost variation reports filed for each respective basis of that and then that's going
to be applied accordingly. The other thing that is necessary when doing a cost variation
on a property that you've owned for, you know, and you've already filed taxes on it a previous year,
but you didn't do a cost tag is there's a special form called a 3115, it's a 3115 form, which
(20:39):
changes your depreciation method and it's something you need to adjust your, you know, adjust the
calculations and adjust the methodology of depreciation. That's something that is in addition to
the cost variation that needs to be done, but otherwise, like I said, it's pretty straightforward,
get it done, hand it off to your CPA and hopefully they'll be competent enough to apply it.
(21:00):
Yes, hopefully. So you mentioned the depreciation tax if you sell the property before you hit
those lengthy milestones of ownership. So what is that in tail and what does that really look like
from a, I guess, a planning standpoint and, you know, most people are going to be business owners
(21:24):
if they're rep status, they're going to have some sort of right off every single year to offset earnings,
but what does that tax look like? So anytime you sell a property, you're going to be subject to what's
called depreciation recapture tax and it's similar to a capital gain tax, which everyone is familiar with,
your, you know, taxed on the difference between the purchase price and the sale price that's
(21:46):
called capital gain. Similarly, you've had what's called an unrealized gain by taking these depreciation
deductions over the course of ownership. That's going to be taxed similar to capital gain on a few
different rates, actually. One rate is going to be certain components of the property, the structural
components to depreciate line depreciation on the capital gain, you know, maxed 25% tax rate.
(22:08):
Other components when you're doing a constriation and taking more deductions upfront, those are
actually going to be taxed ordinary income tax rate. And so being subject to that tax, some of you
definitely have to plan ahead of time, especially if you plan on selling in a shorter period of time,
because the main benefit of cost-seg is the time value of money. Like I said earlier,
using those deductions to reinvest to help you scale, especially if you continue to buy properties
(22:33):
year after year is a great method to do that. It's important to note also, a lot of people think
here, like you mentioned, see if you will say, well, don't do the cost-seg, because you're just going
to have to pay it back and recapture. It just means I'm recapturing. And so it's a misnomer to think
on paying back the depreciation. That's not what it means at all. It means you're subject to a tax
on the amount of depreciation taken. So whatever the case is, you're always going to benefit from
(22:59):
doing a cost-seg because two reasons. Number one, the arbitrage, the difference of tax rate between
had you just paid the taxes on your ordinary income tax rate this year versus paying or paying
that tax even down the road whenever you sell is that the arbitrage is always you're going to
be benefiting from that. But the other reason is, I mean, inflation, I mean, think about it. The time
(23:22):
value of money is going up. Another really important thing is being subject to a tax doesn't mean you
have to pay that tax. There are other deferral methods or strategies that can be done in the year
of the sale that can actually help you to either further defer that tax, so you're not going to pay it,
or even reduce that or offset that with other deductions or other losses that you can actually
(23:47):
just wipe out that tax value whatsoever. I'm a big fan of the opportunity cost side where if you
have more cash in your pocket, you can deploy. You're in a better position period. Of course.
So my, I guess my question is, is there is there an impact on long-term capital gains versus short-term
(24:07):
capital gains from a taxation level involving cost-segren now? Is it just it's a wash?
No, short-term capital gains is only if you're going to be selling in less than a year. So,
obviously there is an impact when it comes to that. So don't usually, very rarely I'll recommend
getting a cost duration done if you're planning on selling in less than a year. In fact, it may be
(24:29):
questionable if you can even claim depreciation if the intention is just kind of to flip a property
because it's more, it's not being held as a rental property. It's really just being flipped. So that's
that in of itself is questionable, but it is still possible in certain scenarios, but definitely
that's why we run the feasibility analysis upfront. You can weigh the options and you can see what
(24:50):
the benefits are versus paying the taxes. That makes a lot of sense. And yeah, I didn't really think
about it on the flipping side, but yeah, it does seem to line up. I saw a couple people
rates and purchase offers recently with a rider in there. We'll pay you a million bucks for this
if you want to buy it back in 12 months, you can buy it back at 1.1, something like that. And
(25:16):
great on you if you can, but most people aren't going to execute that particular clause. I just
thought it was weird. I'm like, how is this going to even affect all of your planning and tax strategies
and stuff if you think you're going to hold this and then you're giving it back to the owner in a
year? I mean, yeah, you make a hundred grand, great on you, but I just didn't know what that was
going to look like on the cost side. And that's an outlier. It's a weird one. So what else do people
(25:42):
need to know about cost segregation? Because I'm a new, but I haven't used it. I do hard money lending.
I'm in storage. I help people with my consulting business, which is still my full-time job,
even though I work for myself. So what does that look like for the average person? What do they need
to look out for pitfalls wise? What do they need to do to plan ahead? Is there any benefit to
(26:06):
structuring out ahead of time when they're looking to do a rehab? Is there a period of time after
a cost tag is done that they should hold off on doing the rehab? What are the impacts? I just...
Yeah, I mean, really, really great questions. A lot of interesting points when it comes to
the cost. I think one of the most important things, what you mentioned about the renovation,
gets overlooked by a lot of people. And they think that, oh, I could just do a cost segregation.
(26:31):
No matter what. And that's not the case. So really important when you're planning a renovation.
If you really want to benefit maximum from the cost variation, now I'll take a step back and say
cost segregation and tax planning in general shouldn't be the reason why you're buying a property.
The business plan, I fully believe that the business plan and the actual property itself
(26:56):
should be in itself, make sense enough on its own, volition to warrant buying the property and
executing the business plan of the property. So the tax benefits are secondary and maybe even
further down the line. But if you're planning a renovation, the best case scenario to maximize
the benefit of a cost tag, as I mentioned, is to do the cost tag first before renovations and then
(27:20):
wait off at least six months or so if not a full at least tax year, meaning within the same tax year,
in order to maximize the benefits. So you can do the cost tag on the acquisition as well as
after the renovations are completed. So in that case, you can actually double dip and claim,
double benefit from the tax write offs when it comes to the depreciation of the components in
(27:47):
the property at the time of purchase, as well as the renovations, any money being spent and put
into the property on the back end. That's huge. Okay. I kind of was hoping that was going to be the answer,
but I wanted to, you know, just clarify because again, I'm not an expert in any of this stuff. You
want to talk about building materials out there, but for, you know, in construction and renovations,
(28:11):
awesome. But this tax stuff, it's all, you know, that's why we have people on our team to handle that
same thing with a lawyer. So how do people approach the, I guess the planning with you guys at
Madison Specks or any cost ag firm when it comes to, you know, multiple, I guess multiple hands in
(28:36):
a cookie jar, some want to do it, some don't want to do it, they're confused. Are there resources
for them to access where they can sort of get a warm fuzzy feeling and not necessarily have to
understand at all, but understand enough of it to know, yes, this is in our best interest. No,
this is not. I mean, education is key. So the first thing, like I said, we always like to do is run a
(29:00):
free analysis so you can see for yourself. And then, you know, we're open for discussion. You
know, I'm happy to jump in a call with anyone happy to, you know, discuss. We have people on our team
that can walk you through the process to make you more comfortable with it or discuss the pros and
cons, you know, like I said, in many cases, it just doesn't make sense for people to do costs. I give
I'm going to tell you, I'm going to be the first one to tell you this is not something you should do.
(29:24):
But there are scenarios where you'll have partners, you know, partnerships where, you know,
it's not something that some everyone wants to do. In that case, it's best to really think about
that in the planning stays before the partnership you've been having. So, for example, you can
write into your operating agreement and you can allocate depreciation to some members versus other
(29:50):
members, you know, based on certain capital contributions or otherwise. And so, once the
opportunity has been drafted, there's really nothing you can do at that point. You know, if someone says,
well, I don't need depreciation, someone says, I really do. There's not really much you can do at
that point. But if you plan ahead and do that beforehand, you can actually make it make sense for
everybody all parties involved, which is huge. And I had no idea, like I knew that's how it worked when
(30:15):
you structured dividends and stuff at the beginning. The capital doesn't necessarily have to matter.
It's it could be the amount of work that's put into it or whatever, but knowing you can allocate
depreciation at the beginning is huge. And I don't know that I've ever heard that from anyone ever.
So that's that's really cool. What else? What else? I mean, this is like, I'm a new. I've asked all
(30:36):
the questions to come to my mind. So what else do people need to know about it? And if nothing else,
how do they get in touch with you and where do they find you and what's your availability like?
How does the fee structure work? All that. Okay. I'm just trying to remember all those questions
as I go through, but I can read. I can read. Okay. This is gonna be my challenge. I like to think I
(30:58):
remember have a good memory. So, okay, now I forgot everything. No, it's just,
okay. A couple of things. That's really important to know. We'll start with that.
One thing is we mentioned the real estate professional status is huge. If you are that,
that's going to be beneficial. If you're not a real estate professional,
cost variation usually doesn't make sense. There are a couple exceptions. One major exception is
(31:21):
something we like to call the short term rental loophole, which says that if you own and self-manage
a short term rental, Airbnb, average stay is less than seven days, and you materially participate,
meaning again, you self-manage, you're spending more time than anyone else, and a minimum of 100 hours,
which is a pretty easy threshold to cross, especially even if you're a W2, even if you have another
(31:45):
full-time job, the cost variation or the depreciation that becomes active, the business becomes active,
you're able to use those deductions against your active income, which is not the case with any
other type of real estate investment. There are a couple of other types of businesses similar to that,
like car washes, laundromats, things like that that are operated as businesses as opposed to
(32:07):
just real estate in and of itself, where you can use those deductions to offset active
business income as well. Those are a couple really important things to know. A lot of people aren't
aware of that in the thinking, well, how can I benefit from cost? Well, here's a great way to do it,
even if you're not a real estate professional, short term rentals. Now, it may not be the best.
Business idea for you, you have to want to have the hospitality mindset and want to actually run
(32:32):
one of these, but it definitely is an option for a lot of people. Cost-wise, it's, like I mentioned,
$200,000 in up is really the lowest point where we'll even look at a cost to do. The fee structure is
not contingent on tax savings, so it's a flat fee based on the size and type of property, which means
(32:55):
if you buy a property for $200,000 or $2 million, the fee may be exactly the same to get it done,
but the actual tax benefits are going to be 10X because again, it's going to be based on your purchase
price. Feel free to reach out to me. We're available. We're the biggest national cost-reation company
out there, so last year, for example, we did over 7,000 cost-seq studies, all asset classes across
(33:20):
all 50 states, so there's no limitations there. You can find me, like you mentioned at the beginning of
the episode on YoneWice.com, or you can check me out on all the socials, especially LinkedIn, but
one condition, do not just hit the follow button, make sure to hit the connect button,
and write a little note that you heard me on the TCO method podcast, and I'll know that that's where
(33:46):
you heard me and Andy, and otherwise, I have no idea. You know, it gets tons of followers every day,
and just like, yeah, where these people, how do they find me? Why are they following me? And it's really,
it's great to start a conversation and to get to know, so take 10 seconds and just write a brief note,
it goes a long way. It really does. Unless your note is a sales pitch saying, "I want to sell you
(34:09):
this stuff, this is the first message I have with you, can you please accept my connection request?"
And then usually it's going to be hard to know. So please don't sell, don't sell whatever you want to
sell on your first contact. It's called social media, right? So you don't want to be social media
awkward, right? You don't want to be socially awkward, and do something like that on social media.
(34:30):
I almost feel bad for those people because usually I don't even respond, I usually just delete it
and move on with my day, but it takes a certain type of someone, and that's not the way.
So a lot of podcasts seem to have these questions that they ask people at the end.
So tell us a little bit about your background in teaching and where, where, how did you end up doing
(34:57):
this from education to cost segregation? I'm not seeing the connection. That's actually a good
title of the episode, you know, it's kind of catchy, education to cost segregation.
If you didn't come up with a title yet, but there's no real good segue or
(35:18):
you know, way that I went from one to the other. Like you said, I was a teacher for about 15 years,
and really has always been my passion. I love it. I still do to this day, but it really didn't pay
the bills. I was in debt was having problems getting, you know, just getting by and realizing
you to make some changes, reached out to some friends and just figured, you know, hey, what are some
(35:39):
options? I'm open to new opportunities, opening to doing something totally different, but I had really
two conditions. Number one was I was not interested in having any sort of additional formal education.
So I didn't want to go back to school in order to, you know, to have a new profession of some kind.
And second, I was looking for something that had the maximum, you know, potential in terms of income,
(36:02):
you know, scale opportunity. So I was like, hey, what's something that I can do that really,
there's no limit, like the sky's the limit. And real estate just kept coming up in conversation
between some friends when I was reaching out to people I knew who were in business and finance and
whatever. And that it's a long story, but the short story of it is I met a friend who was a mortgage
(36:24):
broker, a commercial mortgage broker actually, and taught me everything I know, basically about
commercial real estate. I sat with him in his office for about eight months and literally just
like a printus to him and we were cold calling, you know, banks and business owners and just, you know,
trying to find deals and it was a lot of fun. Fun. I don't know if I would ever consider cold calling
(36:48):
fun, but if you say so, I guess if you're with the right people, yeah, exactly. I was sitting, you
know, we're just buddies are hanging out in his office every day. It was fun. I had never really
cold called before and that wasn't the fun part of it, but I learned some strategy. That's really
where I had my first foray into social media and to seeing the power of, you know, of connecting with
(37:08):
people and, you know, incoming leads and things like that where I was using different methods and
came across bigger pockets at that time. And so that all like there's a lot that goes into that,
but in those first eight months or so, that was kind of my foray into the whole, you know, commercial
real estate world. That's awesome. I guess my next question for you is you are an active investor.
(37:30):
You do have some stuff going on. What's your favorite right now? Like everybody's, oh,
doom and gloom, you know, the housing market blah, blah, blah, I'm looking at it and I'm going whatever.
At this point, I have no idea. My crystal ball broke like six months ago as soon as the government
started doing this in the pot. And I don't even attempt to guess at where we're going at this point,
but, you know, where are you putting money? Where are you getting involved? I know that I've seen you,
(37:58):
you know, kind of dragged into some of these conversations at conferences and other things.
I know you were thinking about doing podcasts and interviews at a conference, I think. I don't know
if that actually happened, but why should tell us a little bit about where you're seeing
opportunity right now. And then yeah, there's always opportunity out there. I've been much more
(38:20):
of a passive investor, excuse me, over the years, which, you know, I'm still seeing benefits. I've
like self-storage. I think it's very resilient. I love, you know, multi-family. I think it's also very
resilient as a class, obviously. Returns are very much contingent in many cases in terms of the,
the, you know, the, the financing and the mortgage rates, et cetera. However, there's still a lot
(38:46):
of possibilities out there. Affordable housing is a huge need all across the country. And so,
you know, when you look into options, when it comes to affordable housing, I like to look at
mobile home parks, manufacturing, housing communities, I think is a great option. There's not a lot of
development of them going on. So when you can find them, you'll have invested alongside some,
(39:06):
some great operators in the RV park space and the mobile home, park space. So those are options that
I think still have a lot of room to grow, even in this inflationary kind of environment that we're in,
real estate is always going to be a good option because there's always long term wealth
you'll be in created, but at the same time, you can find good deals if you look for them. And so it's
(39:32):
just, it's just a matter of having the patience and having the time to look for deals.
Right. Yep. Offmarket is key and everybody loves it and nobody ever seems to know where to find it
unless your network is actually working for you and with you and looking out for you because
offmarket deals don't land on your desk if you're not out there giving to. So that's, that's a big
(39:53):
part of it. So anybody who wants to get started on social media since this will be my last question
since you are not just the cost that king there, but in reality also as your full time job,
where, where should they start on social media? I've, there's a million different gurus out there,
selling courses and offering services and we'll do this and this and this and I don't know that
(40:17):
you've actually followed any of those pieces of advice you've just kind of created your own little
niche and have crushed it. So where do you, where do you think people should start or where do you see
kind of the, the opportunity for somebody who wants to build a following and really, you know,
become become a player or even just to, to give just to help inform people and, and be kind of
(40:42):
build your brand as an expert or a thought leader. There's a lot of options like you said. I haven't
followed any gurus. I haven't done any of that method, but the first thing to do for anyone
wants to like grow their social media presence. The first thing to do is figure out what are your goals?
Like why? What do you want to do it for? Okay. Now, the, the, the answer to that question may
(41:06):
totally determine which direction you take. So I'm not going to, you know, go, go into every one of those.
But I'll offer a couple pieces of advice that hopefully will be able to translate, you know, in a lot
of different ways. The first thing is you talk about niche, right? Finding a niche, finding a niche is
probably the best thing to do. In general, in real estate in order to be successful is finding a niche
(41:28):
and just go all in on that. And then social media is a great way to be known and to build a brand
around that niche. The people when they think about that thing, they think about you. And the way
that you do that is by being, just, just being there showing up as a social media means posting and
engaging on a daily basis. And so one thing you really need to focus on more than anything. I think
(41:56):
the one, if I was to just do one thing, okay, is to focus on commenting on other people's posts
and engaging. I mean, giving very, you know, high quality, not just like just putting your name
there and just saying, hey, great, you know, congrats or whatever it is. I mean, LinkedIn is amazing for
for that, but Twitter as I ventured into over the past half a year or so has been amazing.
(42:20):
Instagram can be good. Not so much in that regard, but the, yeah, I mean, yeah, exactly. The commenting
on other people's and really engaging is where you're going to find the benefit and where people
are going to get to know you and get to know, you know, who you are, what you do and build that brand.
And so even more than posting, you know, coming up with content on your own, the main difference
(42:46):
you're going to see is by just engaging and putting out comment comments that are adding value.
Awesome. That's great. Well, I, uh, I got work to do, but anyway,
I definitely comment more than I post everywhere, but I don't know if that's a good thing or not.
I guess my last question is threads is threads dead because I, I don't really like, I log in now and I
(43:11):
do get some real estate content from like three people. And then it's just the spammy crap that I spent
hours and hours blocking. So is it just toast smoked done? Like, I don't see a lot of, a lot of
re-twit people going on there. I didn't really see the benefit of the whole idea of it to begin with.
(43:31):
You know, I created an account and kind of logged into, to it just to see what it was all about,
but similarly to what you're saying, I found the same. I posted a couple things, got in a couple
kind of interactions, but there's really, I don't know, I haven't found any benefit in it.
I really haven't either. I stopped and I think most people have because you log in and it's just
(43:53):
a bunch of ads and social media influencers who want people to follow their Instagram. Like,
I don't care what you think. Like, if I wanted Instagram, I'd be looking at your pictures. I wouldn't be
like looking for what you're telling me verbally. So, okay. All right, I'm good. I'm not, I'm not
insane. I was afraid I broke something, but that's good. I just want to thank you so much. This has
been great. It's been a blast. I really appreciate you coming on the show. For everybody out in
(44:18):
listener land, please stay tuned. We're going to do a couple of these interview style episodes every
single month. The show will continue on Tuesdays and Thursdays and then we will release interviews
on Saturdays, hopefully two times a month. And it will all be involved with people who help you save
money, max out your return on investment, max out your net operating income, reduce your risk, all
(44:42):
that other fun stuff we talk about on a program. And I appreciate everybody tuning in, please hit the
bell if you're watching on YouTube. If you are listening on Apple or Spotify, subscribe, like,
leave a comment, leave a recommendation, share it with your friend, share it with your network.
I will love you forever. And I appreciate it. Yonah, thank you so much for joining me. It's been
(45:04):
up last.
[Music]
You can write into your operating agreement.
(00:03):
And you can allocate depreciation to some members versus other members, you know, based on certain capital contributions or otherwise.
And so once the operator is being drafted, there's really nothing you can do at that point.
You know, if someone says, well, I don't need depreciation, someone says, I really do.
There's not really much you can do at that point, but if you plan ahead and do that beforehand, you can actually make it make sense for every all parties involved.
(00:29):
Welcome to the TCO Method, the only show focused on helping you massively increase your
(00:58):
net operating income. And in this particular episode, we are going to be talking about keeping
more of your money after you've maxed out your net operating income. I am Andy McQuade. Thank you
so much for joining us for this episode. I am honored to welcome our very first guest interview,
(01:20):
Yonah Weiss. He is a powerhouse with property owners tax savings. He's business directors at Madison
Specks, a national cost segregation leader. He has assisted his clients in saving hundreds of millions
of dollars. I'm going to throw that out there on taxes through cost seg. And he has a background
(01:40):
in teaching, a passion for real estate, and helping others, which he's done for me personally,
sort of following his lead and getting involved. I think through Jaime Cain, originally, was
who brought me into your circle a long time ago. And he's an active real estate investor, and he
hosts a top real estate podcast Weiss advice, which I was listening to yesterday in the car on my
(02:02):
way home. And if you want to check him out, link up with them on LinkedIn, check out his website,
Yona Weiss.com. Check out his day job at Madison Specs. And hopefully this episode will be coming
out on a Saturday. We're calling this the Saturday specials. So with that, Yonah, thank you so much
for joining me. Welcome. I appreciate your patience and dealing with this new setup that I've never
(02:25):
used before on Riverside. It's so far so good. Thank you so much, Andy. What an honor to be the first
guest on the podcast. It's really a pleasure. And you're absolutely right. It's so much to learn,
especially when you are wanting to keep more money. It's not about how much you make. It's
really about how much you keep. Absolutely. Absolutely. So a lot of the listeners of this show are either
(02:52):
new to real estate or maybe new to commercial real estate so they don't really understand necessarily
all the ins and outs of what happens in their income taxes. Once they start dealing with larger
properties that are eligible or maybe where it's worth doing a cost seg. So let's, I guess, start with
(03:13):
what is cost segregation? What are the advantages? And who should be using it?
So cost segregation is a really weird name that the IRS gave to a tax deduction. It's a strategy that
allows property owners to get accelerated depreciation deduction. So taking a step back
(03:35):
to understand depreciation anytime you buy a property whether it's residential commercial. It's
not your primary residence. You're able to take a tax write off of the entire value of that property.
Okay, that's called depreciation. And it's based on the principle that things go down in value as
time goes on like the name sounds, but it's just a borrowed term because the value is not really
(03:58):
going down of your property. You're just able to take a tax write off as if it were going down in
value. But it's over a long period of time. So depreciation generally for commercial properties
it's over a 39 year period or a 27 and a half year period from the time you bought the property.
So again, it's not intrinsic to the properties it would depreciation as it were because this 39
(04:23):
or 27 and a half year schedule starts over every time the property changes hands. So it's very
subjective to the property owner. Now, like I said, that's a very long time to wait to take all of those
tax write offs or those tax deductions. That's where cost segregation comes in that we're able to
break down the property through an engineering report or study of the building or the property
(04:49):
that allows you to pull from that pool of potential deductions and by allocating certain components
to faster depreciation schedules like a five year or 15 year schedule, you're able to take the
deductions of the value of those components over a faster period of time. So basically to sum it up,
it's a cash flow mechanism that allows you to pull from this pool of potential deductions that you
(05:13):
may never see or may never take and then get them like in the earlier years of ownership.
That's awesome. And it's extremely powerful. And then something that we've
seen over the last several years since Trump was in office, the bonus depreciation availability
and how that's changing right now or maybe changing back to what it was. I don't really know where
(05:38):
we stand on that particular part of it, but can you bring everybody up the speed on that please?
Yeah, so bonus depreciation as you mentioned was a change in the tax code in the law and the
tax cuts and jobs act back in 2017 that once you've done a cost segregation study and have allocated
certain components, sometimes 20 or 30% of the property into these faster depreciation lives
(06:00):
that you can take over a five year or 15 year period. Bonus depreciation says that you're allowed to
take 100% of those deductions in the first year. So think about it like this. Let's say you have a
million dollar property and if you take off a land, land doesn't depreciate, but you're able to
essentially take whatever was left, let's say you take off 15% for land, which is pretty national
(06:25):
average. And then the remaining 850,000, you're able to depreciate over a 27 half year period.
That would give you a 30,000 year deduction every single year. Okay, which is great helps to reduce
your taxable income, but what cost segregation does is accelerate some of those deductions. Let's say
again, 20% of that just be very conservative and you're able to take 160,000, 170,000 of the
(06:49):
deductions in the earlier years. Okay, but that's spread over a five year period like I mentioned.
Bonus depreciation comes in and says now you can take that 170,000 in the first year as a tax
right off. So instead of a 30,000 dollar deduction, you're boosting it up in the first year to 170,000
in that example. So that's what 100% bonus depreciation did. It was in the tax code to be in effect
(07:13):
through the year 2022. If you bought a property between 2018 and 2022, you can claim this 100% bonus
depreciation method. However, this year 2023 at the time of this recording, it's gone down to 80%,
and then it will continue to phase out by 20% each year. Unless, of course, as you alluded to, there
(07:34):
are some changes. It gets reverted. We may need a change of administration in order for that to
happen, but it has yet to be seen. Got it. Thank you. I wasn't sure if there was any updates on that
particular change or not yet. I figured it would probably die on the fine the way things are
currently, but it's worth at least discussing that it is being folded down there. Somebody's paying
(07:58):
that. It's actually been passed in the house in a bill that was proposed, but again, it need in
order to come to law. It needs to be passed in the Senate and as well as signed off by the president.
So that may or may not happen. Right. So for cost segregation, who is the right person,
(08:19):
what size properties and how does that look process wise for those people once they start
really digging into it and wanting to make that a reality? The first thing you always look at is
the person. Who is the right person for this? Now, cost irrigation is a great tax tool, but is not
(08:40):
able to be used equally by everyone because there's something called real estate professional status,
which is a term that the IRS came up with for someone who is full time in the real estate business,
whether you're managing, owning, operating, buying, renovating, or brokering even properties. Now,
the one exception there, the brokering, is doesn't have to be your own properties. All the other things
(09:04):
has to be materially participating in running your own your own properties. So if you have rental
properties and that's your full time job, as long as you don't have another W2, you are automatically
a real estate professional. Why this is so important is because as we're going to see in a second,
the deductions from cost segregation and depreciation in general are limited to just offset any
(09:27):
passive income. So passive income, the IRS defines as real estate or rental income. There are some other
options like royalties or if you have a passive business interest, for example, but generally speaking,
if you have another full time job, you're not able to benefit from the depreciation or the cost
creation again, which is just like depreciation on steroids, you're not able to benefit from it much
(09:48):
outside of your rental property income. Whereas if you're a real estate professional, that's the best
person because not only are you able to use these deductions, remember that huge,
$170,000 deduction, well, if your rental property income is only $30,000, well, you've just gotten
this huge tax right off that just is a passive loss and you can't actually use in the current year.
(10:12):
However, if you are a real estate professional, that deduction will carry over not only forward,
but in the current year to be able to offset or reduce any other taxable income you have. So that's
the best person to get it done. I would say there are scenarios where even someone who's a not
real estate professional, it does make sense. There's always going to be scenarios. So it's important to
(10:33):
discuss this with your tax advisor, discuss this with someone who understands this and the type of
property really doesn't matter the type because this can be done in a single family, multi family,
commercial retail office, industrial storage, you name it any type of property, but it starts
making sense in terms of dollar value. If the purchase price is over, let's say, $200,000,
(10:56):
anything below that, it just the cost of getting one of these things done versus the actual
after-tax savings is going to be minimal. And so if, because I know this question will come up for
some of the newer people because everybody seems to want to start on the ground level with doing
their own flip or doing their own rental property and it's usually like a single or a duplex or maybe
(11:19):
a quad, but those are usually a little more expensive. So let's say, single family rental, they buy the
thing for 30 grand, they dump 100 grand into it fixing it up. It's now worth, let's say 200, they want
to rent that out. How does that work for them? Is it worth it for them at that point or can they pool
multiple properties like if they have three or four separate properties in one LLC that are
(11:45):
worth more than 200,000 can they pool that together or what is that?
A few really great questions there trying to tackle them one by one. It's important to understand
we're going to segregate the questions. It's important to understand when it comes to renovations.
Two, best case scenario is to do a cost in a property before you've done renovations. Now,
(12:09):
we're going to look at the purchase price and that's the sole basically determining factor is the
purchase price because once you've done renovations, you've essentially disallowed yourself from use
doing cost creation on the purchase itself and then we're only going to be looking at the
renovation component. So if you buy in your example, buy property for $30,000 and then put $200,000
(12:32):
into it, so it can be beneficial to do a cost on the renovations, but on the purchase, there's not
going to be any benefit there. Now, lumping properties together, that can be done only when
the properties are number one, were purchased together. So they're on the same depreciation
schedule. And number two, that they are very extremely similar in nature, meaning that they're either
(12:56):
in close proximity, you know, have the same year and type of build. So it's very common to do
away if you're buying and I've had many people who buy properties like in it in a development.
You know, so you're buying the same properties on the same block or something like that. You know,
they're all built at the same time, the same layout, etc. Otherwise, each property is really going to
(13:19):
need its own engineering study because the differences involved can be huge for one property to the next.
Awesome. Okay. That's helped a lot because I didn't know that. So I was kind of thinking,
everybody else is probably going to know. So I guess my next question is, what do you advise people do
(13:43):
when they're looking to start, I guess, the process? What's that look like? So you already mentioned
sort of that they're not going to start by doing renovations immediately. It's going to benefit them
to buy the property, do the cost seg, and then worry about doing catbacks down the road. So
how does that benefit them and why and what's their process look like? The first step we always
(14:07):
like to do is run a free upfront analysis of any property. So we're going to collect some information
you reach out to, you know, a cost to your company like osmatic inspects or any other company usually
provides this service where you'll provide them with certain information about the property that
you address the purchase price, you know, if there were renovations done, that's, you know, a separate
(14:28):
thing, but square footage, etc. And we're able to run the numbers and show what the potential
tax savings would be, breakdown the deductions versus, you know, the regular straight line deduction
method that we said over 27.5 year or alternatively showing you the bonus depreciation or the cost
segregation depreciation. So that's the first step is really just the education understanding
(14:50):
what this is actually going to look like if I do it on my property, how much it's going to cost
and what the potential tax savings are going to be. It's pretty simple, you know, straightforward
process, like I said, it takes about a day or two just to run those numbers. And then once you have
that, you have a much more educated decision to see if it's going to be worthwhile for your property.
Perfect. And then I've heard through the grapevine and a little bit through personal experience,
(15:16):
there are some let's say, nervous CPAs or accountants or bookkeepers out there who are not fans of
doing cost segregation. And I've heard the word scam come up. I've heard the phrase, it's not actually
worth doing because you just have to pay it back if you sell the property. So I guess let's tackle all
(15:41):
the craziness that the listeners are going to get from their teams if they have a team and kind of
go from there. So it's very common. Unfortunately, as as you mentioned, where you'll have CPA,
they just may not be so familiar with this. I mean, there are really two categories of CPAs, the ones
that really have no idea. And like someone calls it a scam, just they have no idea. This is directly
(16:04):
in the tax code and the IRS considers it the correct way to depreciate your property, not spreading
it out over the straight line, but actually categorizing each component to its proper depreciation life.
Now, they don't require it because it would require you to pay an extra, you know, a third-party firm
to get this done so they don't require a cost variation. However, there's another category of CPAs
(16:26):
who are just against it, meaning they know what it is, they just don't recommend it. And that can very
well be for a lot of good reasons. For example, if you're planning and holding a property for short
period of time, there is going to be what's called depreciation recapture tax, which we'll talk about
in a second. It doesn't mean you're going to pay back that depreciation, but it means you're going
to be subject to attacks on the sale. So CPA who understands a person, hopefully a good CPA who
(16:49):
understands a person's full tax situation can hopefully push them in the right direction.
Now, that being said, there are certainly situations where it's not going to be beneficial. Like I said,
if it was not a real estate professional, getting these extra losses or deductions that may not be
able to be used is really exercise and futility at best. And there are many cases where if you are
(17:16):
continuing to buy property, it is certainly a good situation. So if you have a CPA that's not
recommending it in that situation, if you are a real estate professional or you do continue to buy
properties, your plan is to continue to use this to scale, I think that's probably the best case
scenario to use cost irrigation. But yeah, again, there are situations where it will work, where it
won't work. If your CPA thinks it's a scam or doesn't know what it is, the best thing you can do is
(17:42):
either educate them, try to educate them if they're willing to, if not, just find someone else. If
you're a real estate investor and that's something that you want to be doing, you want to make sure
that you have a CPA who is familiar, not just familiar, who is an expert in real estate because
just like if you were a manufacturer or if you were a doctor or a dentist, you want to make sure
(18:02):
there are certain specific deductions for each industry that you want to make sure you're
capturing and you need a CPA who specializes in that field in order to maximize that.
I agree completely. I actually had an entire episode about
making sure your team is going to help you because they will make or break you. And if you have
(18:24):
somebody who doesn't work full time in real estate and understand the business and they're advising
you on any part of what you're trying to do, you're going to have a real rough time.
So that's awesome. The, I guess the next question is when it comes to actually
(18:45):
filing a cost segregation with your CPA, with your attorney, with your business partners, whatever.
How does that break down between like a Joe homeowner who's got a few properties and they want to do
cost-seg because maybe they bought four or five this year versus how an LLC would do it that's a
(19:07):
partnership versus like a C-Corp or another entity. Let's say that. Is there differences in the process
or is it really just get the paperwork done and file it and take the money? Yeah, take the money run.
There's not really a difference from the cost segregation perspective. What we're doing is on
the property level. We're going to do one cost segregation and that's going to create,
(19:30):
you know, it's a detailed study report, it can be 80, 90 pages long and then that creates a new
depreciation schedule and that one page essentially your accountant, you're going to hand off to them
and they'll apply it. You know, if it is an LLC, obviously each member will receive their
proportion of depreciation based on their proportion of ownership in that LLC. That's typically how
(19:52):
it flows through. The one main or a couple main differences is if there is a structure called the
Tenencing Common Tick Structure, which is fairly common in real estate when you're having not as
common as the having an LLC, but when you have multiple partners, especially if there's a 1031
involved or you have different tax basis is going into that property, they'll actually need to be
(20:15):
two separate cost variation reports filed for each respective basis of that and then that's going
to be applied accordingly. The other thing that is necessary when doing a cost variation
on a property that you've owned for, you know, and you've already filed taxes on it a previous year,
but you didn't do a cost tag is there's a special form called a 3115, it's a 3115 form, which
(20:39):
changes your depreciation method and it's something you need to adjust your, you know, adjust the
calculations and adjust the methodology of depreciation. That's something that is in addition to
the cost variation that needs to be done, but otherwise, like I said, it's pretty straightforward,
get it done, hand it off to your CPA and hopefully they'll be competent enough to apply it.
(21:00):
Yes, hopefully. So you mentioned the depreciation tax if you sell the property before you hit
those lengthy milestones of ownership. So what is that in tail and what does that really look like
from a, I guess, a planning standpoint and, you know, most people are going to be business owners
(21:24):
if they're rep status, they're going to have some sort of right off every single year to offset earnings,
but what does that tax look like? So anytime you sell a property, you're going to be subject to what's
called depreciation recapture tax and it's similar to a capital gain tax, which everyone is familiar with,
your, you know, taxed on the difference between the purchase price and the sale price that's
(21:46):
called capital gain. Similarly, you've had what's called an unrealized gain by taking these depreciation
deductions over the course of ownership. That's going to be taxed similar to capital gain on a few
different rates, actually. One rate is going to be certain components of the property, the structural
components to depreciate line depreciation on the capital gain, you know, maxed 25% tax rate.
(22:08):
Other components when you're doing a constriation and taking more deductions upfront, those are
actually going to be taxed ordinary income tax rate. And so being subject to that tax, some of you
definitely have to plan ahead of time, especially if you plan on selling in a shorter period of time,
because the main benefit of cost-seg is the time value of money. Like I said earlier,
using those deductions to reinvest to help you scale, especially if you continue to buy properties
(22:33):
year after year is a great method to do that. It's important to note also, a lot of people think
here, like you mentioned, see if you will say, well, don't do the cost-seg, because you're just going
to have to pay it back and recapture. It just means I'm recapturing. And so it's a misnomer to think
on paying back the depreciation. That's not what it means at all. It means you're subject to a tax
on the amount of depreciation taken. So whatever the case is, you're always going to benefit from
(22:59):
doing a cost-seg because two reasons. Number one, the arbitrage, the difference of tax rate between
had you just paid the taxes on your ordinary income tax rate this year versus paying or paying
that tax even down the road whenever you sell is that the arbitrage is always you're going to
be benefiting from that. But the other reason is, I mean, inflation, I mean, think about it. The time
(23:22):
value of money is going up. Another really important thing is being subject to a tax doesn't mean you
have to pay that tax. There are other deferral methods or strategies that can be done in the year
of the sale that can actually help you to either further defer that tax, so you're not going to pay it,
or even reduce that or offset that with other deductions or other losses that you can actually
(23:47):
just wipe out that tax value whatsoever. I'm a big fan of the opportunity cost side where if you
have more cash in your pocket, you can deploy. You're in a better position period. Of course.
So my, I guess my question is, is there is there an impact on long-term capital gains versus short-term
(24:07):
capital gains from a taxation level involving cost-segren now? Is it just it's a wash?
No, short-term capital gains is only if you're going to be selling in less than a year. So,
obviously there is an impact when it comes to that. So don't usually, very rarely I'll recommend
getting a cost duration done if you're planning on selling in less than a year. In fact, it may be
(24:29):
questionable if you can even claim depreciation if the intention is just kind of to flip a property
because it's more, it's not being held as a rental property. It's really just being flipped. So that's
that in of itself is questionable, but it is still possible in certain scenarios, but definitely
that's why we run the feasibility analysis upfront. You can weigh the options and you can see what
(24:50):
the benefits are versus paying the taxes. That makes a lot of sense. And yeah, I didn't really think
about it on the flipping side, but yeah, it does seem to line up. I saw a couple people
rates and purchase offers recently with a rider in there. We'll pay you a million bucks for this
if you want to buy it back in 12 months, you can buy it back at 1.1, something like that. And
(25:16):
great on you if you can, but most people aren't going to execute that particular clause. I just
thought it was weird. I'm like, how is this going to even affect all of your planning and tax strategies
and stuff if you think you're going to hold this and then you're giving it back to the owner in a
year? I mean, yeah, you make a hundred grand, great on you, but I just didn't know what that was
going to look like on the cost side. And that's an outlier. It's a weird one. So what else do people
(25:42):
need to know about cost segregation? Because I'm a new, but I haven't used it. I do hard money lending.
I'm in storage. I help people with my consulting business, which is still my full-time job,
even though I work for myself. So what does that look like for the average person? What do they need
to look out for pitfalls wise? What do they need to do to plan ahead? Is there any benefit to
(26:06):
structuring out ahead of time when they're looking to do a rehab? Is there a period of time after
a cost tag is done that they should hold off on doing the rehab? What are the impacts? I just...
Yeah, I mean, really, really great questions. A lot of interesting points when it comes to
the cost. I think one of the most important things, what you mentioned about the renovation,
gets overlooked by a lot of people. And they think that, oh, I could just do a cost segregation.
(26:31):
No matter what. And that's not the case. So really important when you're planning a renovation.
If you really want to benefit maximum from the cost variation, now I'll take a step back and say
cost segregation and tax planning in general shouldn't be the reason why you're buying a property.
The business plan, I fully believe that the business plan and the actual property itself
(26:56):
should be in itself, make sense enough on its own, volition to warrant buying the property and
executing the business plan of the property. So the tax benefits are secondary and maybe even
further down the line. But if you're planning a renovation, the best case scenario to maximize
the benefit of a cost tag, as I mentioned, is to do the cost tag first before renovations and then
(27:20):
wait off at least six months or so if not a full at least tax year, meaning within the same tax year,
in order to maximize the benefits. So you can do the cost tag on the acquisition as well as
after the renovations are completed. So in that case, you can actually double dip and claim,
double benefit from the tax write offs when it comes to the depreciation of the components in
(27:47):
the property at the time of purchase, as well as the renovations, any money being spent and put
into the property on the back end. That's huge. Okay. I kind of was hoping that was going to be the answer,
but I wanted to, you know, just clarify because again, I'm not an expert in any of this stuff. You
want to talk about building materials out there, but for, you know, in construction and renovations,
(28:11):
awesome. But this tax stuff, it's all, you know, that's why we have people on our team to handle that
same thing with a lawyer. So how do people approach the, I guess the planning with you guys at
Madison Specks or any cost ag firm when it comes to, you know, multiple, I guess multiple hands in
(28:36):
a cookie jar, some want to do it, some don't want to do it, they're confused. Are there resources
for them to access where they can sort of get a warm fuzzy feeling and not necessarily have to
understand at all, but understand enough of it to know, yes, this is in our best interest. No,
this is not. I mean, education is key. So the first thing, like I said, we always like to do is run a
(29:00):
free analysis so you can see for yourself. And then, you know, we're open for discussion. You
know, I'm happy to jump in a call with anyone happy to, you know, discuss. We have people on our team
that can walk you through the process to make you more comfortable with it or discuss the pros and
cons, you know, like I said, in many cases, it just doesn't make sense for people to do costs. I give
I'm going to tell you, I'm going to be the first one to tell you this is not something you should do.
(29:24):
But there are scenarios where you'll have partners, you know, partnerships where, you know,
it's not something that some everyone wants to do. In that case, it's best to really think about
that in the planning stays before the partnership you've been having. So, for example, you can
write into your operating agreement and you can allocate depreciation to some members versus other
(29:50):
members, you know, based on certain capital contributions or otherwise. And so, once the
opportunity has been drafted, there's really nothing you can do at that point. You know, if someone says,
well, I don't need depreciation, someone says, I really do. There's not really much you can do at
that point. But if you plan ahead and do that beforehand, you can actually make it make sense for
everybody all parties involved, which is huge. And I had no idea, like I knew that's how it worked when
(30:15):
you structured dividends and stuff at the beginning. The capital doesn't necessarily have to matter.
It's it could be the amount of work that's put into it or whatever, but knowing you can allocate
depreciation at the beginning is huge. And I don't know that I've ever heard that from anyone ever.
So that's that's really cool. What else? What else? I mean, this is like, I'm a new. I've asked all
(30:36):
the questions to come to my mind. So what else do people need to know about it? And if nothing else,
how do they get in touch with you and where do they find you and what's your availability like?
How does the fee structure work? All that. Okay. I'm just trying to remember all those questions
as I go through, but I can read. I can read. Okay. This is gonna be my challenge. I like to think I
(30:58):
remember have a good memory. So, okay, now I forgot everything. No, it's just,
okay. A couple of things. That's really important to know. We'll start with that.
One thing is we mentioned the real estate professional status is huge. If you are that,
that's going to be beneficial. If you're not a real estate professional,
cost variation usually doesn't make sense. There are a couple exceptions. One major exception is
(31:21):
something we like to call the short term rental loophole, which says that if you own and self-manage
a short term rental, Airbnb, average stay is less than seven days, and you materially participate,
meaning again, you self-manage, you're spending more time than anyone else, and a minimum of 100 hours,
which is a pretty easy threshold to cross, especially even if you're a W2, even if you have another
(31:45):
full-time job, the cost variation or the depreciation that becomes active, the business becomes active,
you're able to use those deductions against your active income, which is not the case with any
other type of real estate investment. There are a couple of other types of businesses similar to that,
like car washes, laundromats, things like that that are operated as businesses as opposed to
(32:07):
just real estate in and of itself, where you can use those deductions to offset active
business income as well. Those are a couple really important things to know. A lot of people aren't
aware of that in the thinking, well, how can I benefit from cost? Well, here's a great way to do it,
even if you're not a real estate professional, short term rentals. Now, it may not be the best.
Business idea for you, you have to want to have the hospitality mindset and want to actually run
(32:32):
one of these, but it definitely is an option for a lot of people. Cost-wise, it's, like I mentioned,
$200,000 in up is really the lowest point where we'll even look at a cost to do. The fee structure is
not contingent on tax savings, so it's a flat fee based on the size and type of property, which means
(32:55):
if you buy a property for $200,000 or $2 million, the fee may be exactly the same to get it done,
but the actual tax benefits are going to be 10X because again, it's going to be based on your purchase
price. Feel free to reach out to me. We're available. We're the biggest national cost-reation company
out there, so last year, for example, we did over 7,000 cost-seq studies, all asset classes across
(33:20):
all 50 states, so there's no limitations there. You can find me, like you mentioned at the beginning of
the episode on YoneWice.com, or you can check me out on all the socials, especially LinkedIn, but
one condition, do not just hit the follow button, make sure to hit the connect button,
and write a little note that you heard me on the TCO method podcast, and I'll know that that's where
(33:46):
you heard me and Andy, and otherwise, I have no idea. You know, it gets tons of followers every day,
and just like, yeah, where these people, how do they find me? Why are they following me? And it's really,
it's great to start a conversation and to get to know, so take 10 seconds and just write a brief note,
it goes a long way. It really does. Unless your note is a sales pitch saying, "I want to sell you
(34:09):
this stuff, this is the first message I have with you, can you please accept my connection request?"
And then usually it's going to be hard to know. So please don't sell, don't sell whatever you want to
sell on your first contact. It's called social media, right? So you don't want to be social media
awkward, right? You don't want to be socially awkward, and do something like that on social media.
(34:30):
I almost feel bad for those people because usually I don't even respond, I usually just delete it
and move on with my day, but it takes a certain type of someone, and that's not the way.
So a lot of podcasts seem to have these questions that they ask people at the end.
So tell us a little bit about your background in teaching and where, where, how did you end up doing
(34:57):
this from education to cost segregation? I'm not seeing the connection. That's actually a good
title of the episode, you know, it's kind of catchy, education to cost segregation.
If you didn't come up with a title yet, but there's no real good segue or
(35:18):
you know, way that I went from one to the other. Like you said, I was a teacher for about 15 years,
and really has always been my passion. I love it. I still do to this day, but it really didn't pay
the bills. I was in debt was having problems getting, you know, just getting by and realizing
you to make some changes, reached out to some friends and just figured, you know, hey, what are some
(35:39):
options? I'm open to new opportunities, opening to doing something totally different, but I had really
two conditions. Number one was I was not interested in having any sort of additional formal education.
So I didn't want to go back to school in order to, you know, to have a new profession of some kind.
And second, I was looking for something that had the maximum, you know, potential in terms of income,
(36:02):
you know, scale opportunity. So I was like, hey, what's something that I can do that really,
there's no limit, like the sky's the limit. And real estate just kept coming up in conversation
between some friends when I was reaching out to people I knew who were in business and finance and
whatever. And that it's a long story, but the short story of it is I met a friend who was a mortgage
(36:24):
broker, a commercial mortgage broker actually, and taught me everything I know, basically about
commercial real estate. I sat with him in his office for about eight months and literally just
like a printus to him and we were cold calling, you know, banks and business owners and just, you know,
trying to find deals and it was a lot of fun. Fun. I don't know if I would ever consider cold calling
(36:48):
fun, but if you say so, I guess if you're with the right people, yeah, exactly. I was sitting, you
know, we're just buddies are hanging out in his office every day. It was fun. I had never really
cold called before and that wasn't the fun part of it, but I learned some strategy. That's really
where I had my first foray into social media and to seeing the power of, you know, of connecting with
(37:08):
people and, you know, incoming leads and things like that where I was using different methods and
came across bigger pockets at that time. And so that all like there's a lot that goes into that,
but in those first eight months or so, that was kind of my foray into the whole, you know, commercial
real estate world. That's awesome. I guess my next question for you is you are an active investor.
(37:30):
You do have some stuff going on. What's your favorite right now? Like everybody's, oh,
doom and gloom, you know, the housing market blah, blah, blah, I'm looking at it and I'm going whatever.
At this point, I have no idea. My crystal ball broke like six months ago as soon as the government
started doing this in the pot. And I don't even attempt to guess at where we're going at this point,
but, you know, where are you putting money? Where are you getting involved? I know that I've seen you,
(37:58):
you know, kind of dragged into some of these conversations at conferences and other things.
I know you were thinking about doing podcasts and interviews at a conference, I think. I don't know
if that actually happened, but why should tell us a little bit about where you're seeing
opportunity right now. And then yeah, there's always opportunity out there. I've been much more
(38:20):
of a passive investor, excuse me, over the years, which, you know, I'm still seeing benefits. I've
like self-storage. I think it's very resilient. I love, you know, multi-family. I think it's also very
resilient as a class, obviously. Returns are very much contingent in many cases in terms of the,
the, you know, the, the financing and the mortgage rates, et cetera. However, there's still a lot
(38:46):
of possibilities out there. Affordable housing is a huge need all across the country. And so,
you know, when you look into options, when it comes to affordable housing, I like to look at
mobile home parks, manufacturing, housing communities, I think is a great option. There's not a lot of
development of them going on. So when you can find them, you'll have invested alongside some,
(39:06):
some great operators in the RV park space and the mobile home, park space. So those are options that
I think still have a lot of room to grow, even in this inflationary kind of environment that we're in,
real estate is always going to be a good option because there's always long term wealth
you'll be in created, but at the same time, you can find good deals if you look for them. And so it's
(39:32):
just, it's just a matter of having the patience and having the time to look for deals.
Right. Yep. Offmarket is key and everybody loves it and nobody ever seems to know where to find it
unless your network is actually working for you and with you and looking out for you because
offmarket deals don't land on your desk if you're not out there giving to. So that's, that's a big
(39:53):
part of it. So anybody who wants to get started on social media since this will be my last question
since you are not just the cost that king there, but in reality also as your full time job,
where, where should they start on social media? I've, there's a million different gurus out there,
selling courses and offering services and we'll do this and this and this and I don't know that
(40:17):
you've actually followed any of those pieces of advice you've just kind of created your own little
niche and have crushed it. So where do you, where do you think people should start or where do you see
kind of the, the opportunity for somebody who wants to build a following and really, you know,
become become a player or even just to, to give just to help inform people and, and be kind of
(40:42):
build your brand as an expert or a thought leader. There's a lot of options like you said. I haven't
followed any gurus. I haven't done any of that method, but the first thing to do for anyone
wants to like grow their social media presence. The first thing to do is figure out what are your goals?
Like why? What do you want to do it for? Okay. Now, the, the, the answer to that question may
(41:06):
totally determine which direction you take. So I'm not going to, you know, go, go into every one of those.
But I'll offer a couple pieces of advice that hopefully will be able to translate, you know, in a lot
of different ways. The first thing is you talk about niche, right? Finding a niche, finding a niche is
probably the best thing to do. In general, in real estate in order to be successful is finding a niche
(41:28):
and just go all in on that. And then social media is a great way to be known and to build a brand
around that niche. The people when they think about that thing, they think about you. And the way
that you do that is by being, just, just being there showing up as a social media means posting and
engaging on a daily basis. And so one thing you really need to focus on more than anything. I think
(41:56):
the one, if I was to just do one thing, okay, is to focus on commenting on other people's posts
and engaging. I mean, giving very, you know, high quality, not just like just putting your name
there and just saying, hey, great, you know, congrats or whatever it is. I mean, LinkedIn is amazing for
for that, but Twitter as I ventured into over the past half a year or so has been amazing.
(42:20):
Instagram can be good. Not so much in that regard, but the, yeah, I mean, yeah, exactly. The commenting
on other people's and really engaging is where you're going to find the benefit and where people
are going to get to know you and get to know, you know, who you are, what you do and build that brand.
And so even more than posting, you know, coming up with content on your own, the main difference
(42:46):
you're going to see is by just engaging and putting out comment comments that are adding value.
Awesome. That's great. Well, I, uh, I got work to do, but anyway,
I definitely comment more than I post everywhere, but I don't know if that's a good thing or not.
I guess my last question is threads is threads dead because I, I don't really like, I log in now and I
(43:11):
do get some real estate content from like three people. And then it's just the spammy crap that I spent
hours and hours blocking. So is it just toast smoked done? Like, I don't see a lot of, a lot of
re-twit people going on there. I didn't really see the benefit of the whole idea of it to begin with.
(43:31):
You know, I created an account and kind of logged into, to it just to see what it was all about,
but similarly to what you're saying, I found the same. I posted a couple things, got in a couple
kind of interactions, but there's really, I don't know, I haven't found any benefit in it.
I really haven't either. I stopped and I think most people have because you log in and it's just
(43:53):
a bunch of ads and social media influencers who want people to follow their Instagram. Like,
I don't care what you think. Like, if I wanted Instagram, I'd be looking at your pictures. I wouldn't be
like looking for what you're telling me verbally. So, okay. All right, I'm good. I'm not, I'm not
insane. I was afraid I broke something, but that's good. I just want to thank you so much. This has
been great. It's been a blast. I really appreciate you coming on the show. For everybody out in
(44:18):
listener land, please stay tuned. We're going to do a couple of these interview style episodes every
single month. The show will continue on Tuesdays and Thursdays and then we will release interviews
on Saturdays, hopefully two times a month. And it will all be involved with people who help you save
money, max out your return on investment, max out your net operating income, reduce your risk, all
(44:42):
that other fun stuff we talk about on a program. And I appreciate everybody tuning in, please hit the
bell if you're watching on YouTube. If you are listening on Apple or Spotify, subscribe, like,
leave a comment, leave a recommendation, share it with your friend, share it with your network.
I will love you forever. And I appreciate it. Yonah, thank you so much for joining me. It's been
(45:04):
up last.
[Music]
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