January 23, 2025 • 33 mins
Unlock the secrets to optimizing your commercial real estate investments with our latest episode! Join us for an enlightening conversation with Eric Oliver from Cost Segregation Authority, as we explore how mastering the art of cost segregation can transform your financial strategy. Learn how Eric's journey from a family-owned landscape design firm to becoming a leading expert in tax optimization can inspire you to leverage accelerated depreciation for immediate tax savings and enhanced cash flow.
Dive into the nuances of commercial property management, where we unpack the complex world of depreciation, renovations, and strategic property placement. We discuss real-world scenarios, analyzing how the decision to purchase vacant versus tenanted buildings can impact your tax strategy. Discover the benefits of partial asset disposition and the financial implications of capitalizing or expensing improvements, all designed to maximize your returns and minimize tax liabilities.
Finally, we take a closer look at bonus depreciation, a powerful tool introduced by the 2017 Tax Cuts and Jobs Act, and its evolving landscape. With Eric's insights, understand the political and economic forces shaping current tax policies and how potential reforms may influence your investment decisions. Tune in to gain a comprehensive understanding of cost segregation and bonus depreciation, and arm yourself with the knowledge to navigate the ever-changing world of commercial real estate investment.
To learn more about Tony Johnson and Timeless visit us at:
https://timelessci.com/
https://timelessco.com/
https://www.linkedin.com/in/tonytimeless/
If you would like to discuss investing in Commercial Properties create a profile and schedule a call:
https://timelessci.investnext.com/
Reach out to us directly at:
info@timelessci.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Tony Johnson (00:02):
Welcome to another episode of Carolina Commercial
Real Estate Connection.
Today we have Eric Oliver withus.
Eric, thank you so much forjoining us today.
Eric Oliver (00:10):
Thanks, tony, glad to be here.
Tony Johnson (00:12):
Yes, sir, so we were just quickly talking.
Eric is in cost segregationstudies and works for Cost
Segregation Authority.
Prior to doing that, we werejust quickly discussing.
What were you doing, eric,prior to this?
Eric Oliver (00:29):
Yeah, prior to this , I was actually living in New
York at the time working for alandscape design firm family
company that my father-in-law'shad for about 30 years and was
thinking about possibly buyingthat company from my
father-in-law and running thatcompany and ended upin-law and
running that company and endedup doing it for about five years
and decided to move back towhere I was born and raised here
(00:50):
in Salt Lake City, utah.
So we ended up moving back, butit was a good ride while it
lasted, for sure.
Tony Johnson (00:58):
Nice.
Yeah, I was going to ask whatbrought you to Salt Lake.
So you grew up in Salt Lake.
So how did you end up in NewYork in the first place?
Eric Oliver (01:05):
That's a good question.
So went to school, grew up here, went to college here and then
I had a job that took me toRichmond, virginia, for about 12
years and was living inRichmond, got married, started
having kids and then fromRichmond we moved to New York,
did the landscaping thing andthen, you know, as my parents
(01:26):
started to get older and whatnot, we started having kids.
We decided to move back westand that's kind of what brought
me back to Salt Lake.
At the time I was looking forjobs came across this cost
segregation job.
Honestly, didn't know what itwas, other than it had to do
with accounting and my degreewas in accounting, and so I had
to do a little Google searchbefore the interview to find out
(01:48):
what the heck it was talkingabout.
But I've been doing it for thelast 80 years.
I've loved it ever since.
It's been a great job, lovehelping investors and tax
preparers be able to save sometax dollars.
Tony Johnson (02:00):
Fantastic.
Well, let's start off a littlebit broad.
So, cost segregation can youexplain the basics of cost
segregation, why it's soimpactful for commercial real
estate investors, especially intoday's tax environment?
Eric Oliver (02:25):
depreciation on your real estate assets.
So normally real estate getsdepreciated over either 27 and a
half years for residentialunits, including multifamily, or
39 years for commercial.
And so if you don't do costsegregation, let's just make the
math easy.
Let's say you buy a $390,000office condo.
Essentially you're going totake that $390,000, divide it by
39 years and you're going toget a $10,000 write-off every
(02:46):
year, and I've oversimplifiedthat a little bit.
You do have to back out landvalue.
Land is not depreciable, butthe idea is you get one 39th of
a deduction every year for 39years.
The problem with that, tony, isthat I'm not going to own my
property for 39 years.
In most cases I want mydeductions now.
And so how can we accelerate orget more of those deductions up
(03:08):
front?
And the way we do that isthrough an engineering-based
study where we go in and, justas our name implies, we
segregate the cost of thatbuilding.
So when you buy let's say it'sa multifamily when you buy
multifamily, you're not justbuying land and walls, you're
also buying some appliances,you're buying some flooring,
you're buying some cabinets,you're buying some ceiling fans,
garbage disposals, et cetera.
(03:29):
All those things I mentionedshould be depreciated at a much
faster rate.
The problem is that when youbuy that multifamily for, let's
say, a million dollars, you andyour tax preparer don't know how
much the carpet is worth, youdon't know how much the
refrigerators are worth, youdon't know how much the driveway
is worth, and so you just knowthat everything.
You bought everything for amillion bucks.
(03:50):
And so that's what a costsegregation company does is come
in and segregates those costsinto different asset classes,
which allows you to depreciatethem at a faster rate.
So, for example, carpet is afive-year asset.
It should be depreciated overfive years, not 39 or 27 and a
half years.
And so when we can put a valueto that carpet, you now get to
(04:10):
write it off over five years ata much faster rate, which means
you're front-loading or taking alot of your deductions up front
.
Would I want to do that?
Well, there's a number ofreasons.
There's time, value of money,there's inflation.
A dollar today is worth waymore than $1.39 years from now
or 27 and a half years from now.
So give me my deductions nowversus letting the IRS hold on
(04:34):
to these.
So it's a great way forinvestors to generate cash flow
in those early years instead ofpaying your money at the end of
the year to the government inthe form of taxes.
If we can create this deduction,this non-cash deduction, use it
to offset our income.
We now have to pay or write amuch smaller check to the
(04:56):
government, which means we'vejust freed up cash flow that we
can go pay down our debt.
We can go buy a new property Idon't know if people are still
investing in Bitcoin.
Whatever it is you want to dowith that money, right?
Go take that money and go putit to work, versus letting the
IRS hold on to it and giving itto the government.
So that's kind of.
The idea is just segregate thecost, break the components up of
(05:18):
the building.
Tony Johnson (05:19):
Okay.
So to look at it from anotherpoint, are there risks or
downsides to using thataccelerated depreciation?
How should investors balancethat short-term tax savings with
long-term planning?
Eric Oliver (05:34):
That's a great question.
So there really is no downsideto doing cost segregation.
You wouldn't want to do it ifyou don't have a tax liability.
So let's say you've already gotenough deductions.
I wouldn't suggest you payingfor a.
You don't have a tax liability,so let's say you've already got
enough deductions.
I wouldn't suggest you payingfor a study, because these
studies do cost money, so you'vegot to pay to get the study
done.
I wouldn't suggest paying for astudy if you're not going to
realize some kind of 7 to 10xtax benefit from paying for that
(05:58):
study.
So that's the.
I don't want to call it adownside, but that's a time when
you would not do costsegregation.
That's the.
I don't want to call it adownside, but that's a time when
you would not do costsegregation.
One thing you do want toconsider, though, is you are
front-loading your depreciation,which means you're going to get
less depreciation in futureyears.
Now, again, most investors areokay with that, because I want
my money now to put it to workversus letting the IRS hold on
to it.
But it does require some taxplanning, because when you go to
(06:21):
sell that asset, you will havea larger tax bill in the form of
capital gains.
Now let me clarify what I meanwhen I say a larger tax bill A
larger tax bill than you wouldhave had you not done the cost
seg.
But you're still going to netsavings.
And the reason for that is I'llkind of back into this example,
tony, because I think it makesa little more sense.
But let's say you buy a buildingfor a million dollars, you sell
(06:44):
it five years later for twomillion.
When you don't do costsegregation, you're telling the
IRS that everything is doubledin value.
I bought this office with allthis stuff in it for a million.
Five years later I'm sellingthis office with all this stuff
in it for two million.
So everything is doubled invalue and the government's going
to charge you tax on that.
Well, my land has gone up invalue, my walls have probably
(07:08):
gone up in value, but certainlymy dirty, nasty, stained carpet
that's five years old has notdoubled in value.
So why are you selling yourdirty, stained carpet for double
what you paid for it and thenpaying tax on it?
And the reason you're doingthat is because everything is
lumped in this one asset on yourdepreciation schedule called
building and nothing has beenbroken out.
(07:29):
And so the idea with costsegregation is you're going to
take your deduction todayagainst your ordinary income
rate of let's call it 37%, payback some of it at a future date
at a lower rate and save thespread.
And if you think about it, tony,in that example I gave you
where I owned the building forfive years and if you remember
(07:50):
me saying, carpet is a five-yearasset.
What is the book value of mycarpet after owning it for five
years?
It's zero, zero.
It's zero book value.
So I should be selling thatcarpet for zero, not double what
I paid for it.
And then what you're doing isyou're shifting that gain over
into the capital gains bucketand you're paying that back at
20%.
So you're taking your deductionat 37, paying some of it back
(08:14):
at 20% and saving the spread.
And that's kind of at a highlevel, without getting too far
into the weeds.
The idea of what happens whenyou sell this asset Because
that's a question we get oftenis hey, if I'm front-loading all
this, that means I'm foregoingsome depreciation in future
years?
The answer is yes, you are, butyou're front-loading it,
getting it at a 37% deduction,paying some of it back at a 20%
(08:37):
deduction and saving that 17%spread in that example.
So hopefully we didn't get toofar in the weeds there but
that's the idea.
Tony Johnson (08:52):
That's one thing to consider.
Okay, so in other words, whatyou're saying is you're
capitalizing on an inflationaryenvironment because you're
getting the money, as opposed towhen we're continuing on this
inflation track, you're getting.
If you're not doing a costsegregation and not being able
to take that money and put itback to use, you're actually
losing money by extending it out.
Now one thing is, if you areaccelerating the depreciation
(09:14):
and then you're selling it,you're saying that you're not
increasing your tax liability.
So if I'm accelerating thedepreciation and then I'm
selling this in four years andI've depreciated and accelerated
all that, don't I increase mycapital gains tax when I sell?
Eric Oliver (09:36):
You do correct.
So you will pay more capitalgains, but that increase in
capital gains is going to beless than your tax savings when
you took the deduction, becauseyou're getting the deduction
against your ordinary incomethis year.
So let's say we're creating a$100,000 deduction, you're going
to take that against yourordinary income and let's say
(09:57):
you're in a 35% tax bracket.
So that $100,000 deduction thatcreates a $35,000 tax savings
for you this year.
When you sell it in four years,let's say you pay it all back
the whole $35,000 tax savingsfor you this year.
When you sell it in four years,let's say you pay it all back
the whole 100,000.
You're paying it back at a 20%capital gains rate, so you're
paying back 20,000 and you justsaved the spread, which in that
case is 15,000.
(10:18):
So it's actually still asavings.
Still a savings, yes.
So when I say you increase yourtax bill upon sell, you
increase it above what you wouldhave had to pay had you not
done cost seg.
But you're still decreasingyour overall tax implications by
doing cost segregation becauseyou're getting the deduction up
front and paying some of it backlater at a lower rate.
Tony Johnson (10:40):
So, in other words , that's not even a negative,
then that's still not a negative.
Eric Oliver (10:45):
People think it's a negative because they're like,
hey, my CPA told me if I do this, I'm going to have a big tax
bill when I sell it.
I'm like, yeah, you will, butyou're going to have a bigger
tax savings today when you do it.
So if I save you $100 and youpay back $50, you're still
netting $50 in tax savings,betting 50 in tax savings.
Tony Johnson (11:02):
And you're getting the positive of being able to
cash, take that money and getthat cash that you can redeploy
right now.
So that is fantastic.
And so let's see, here I'mgoing through, here You're
handling a bunch of my questionshere.
So now, what about when you'rebuying distressed properties and
(11:25):
doing a fix and flip, let's sayso.
Let's say you buy a vacantproperty and then you're
investing a bunch of money anddoing a huge renovation and then
maybe selling that commercial.
So if I bought, you know, ajunky little building, right and
I go, put all this money in itand upgrade it.
So if I bought an industrialbuilding for, let's say, a
(11:49):
million, did a renovation on it,how is that work?
So we're talking about thingsthat are already existing right.
So if I went in and I did a fix, bought it for a million, put
$500,000 in it, now it's worth$2 million.
Is that a different or is itall still the same function as
far as you're concerned?
Eric Oliver (12:07):
Yeah, that's a good question and the answer is it
depends.
There's some variables therethat it would depend.
So in order to takedepreciation on any asset, it
has to go into service.
So in the example you gave,where you buy an old,
dilapidated building, let's sayit's vacant, it's boarded up you
buy it for a million, you go,put $500,000 into it and then
(12:28):
you turn around and sell it for$2 million.
In that case you don't get anydepreciation because it never
went into service.
However, go ahead.
Tony Johnson (12:37):
I was going to say yeah, I understand that.
I'm sorry.
Let's say you fixed it andflipping it, but then filled it
and you're holding it.
So I'm sorry.
I understand exactly whatyou're saying.
So we bought it for a million,put $500,000 in it, then we've
stabilized it and now we'reholding it and it's valued at $2
million.
So we've got 1.5 and it'svalued at $2 million.
(12:59):
Walk us through that example.
Eric Oliver (13:01):
In that example, the 1.5, your 1 million of
purchase price plus your 500,000of improvements.
That's going to be yourstarting depreciable basis.
So we're going to startdepreciating based on that 1.5.
Now, unfortunately, even thoughit's valued at two, the IRS
only allows us to depreciatewhat our basis is into the
property and in that case yourbasis would be 1.5 million, the
(13:23):
million purchase plus the500,000 of improvements.
Tony Johnson (13:27):
Now let's look at that a little bit differently,
because there's a big Let meinterrupt you I'm sorry because
I wanted to interrupt you onetime because I want to add just
another variable to this.
So let's say we're doing thisfix and flip and of the 500, 300
is fixed renovations, carpetupdates and then 200 is in,
(13:49):
let's say fixtures and finishes.
Maybe you've put in built-indesks or mobile desks that could
be removed.
Does that equate as well intothis amount?
Eric Oliver (14:00):
It does.
So some of those improvementsanytime you have improvements,
some of them are going to be.
There's two different ways.
I've seen it handled multipledifferent ways by multiple CPAs.
But typically you have yourrepairs and maintenance and then
you have items that need to becapitalized.
Sometimes you could justimmediately write those off.
So if you buy a desk for yournew office, that's going to get
(14:23):
written off as an expense, nevergets capitalized.
But if you put in a newbathroom in your office building
that needs to get capitalizedand that will be depreciated
over 39 years, and so yeah, soyou're going to give that
$500,000 of improvement cost toyour tax preparer.
A good tax preparer will tryand pull out some of that stuff
(14:46):
to immediately expense it andthen whatever they can't gets
amortized over the useful lifeof that asset.
Now, in saying that, there's acaveat there that's important to
know.
Let's take that same example.
But let's say when you boughtthe building there was a tenant
in there.
So you bought an old building.
It was beat up.
There was somebody in there.
(15:07):
They had six months left ontheir lease.
When you buy that officebuilding, it's in service, it's
being used for its intended useor purpose.
So the ideal way to do thatwould be do the cost sake study
on the existing stuff that's inthat building.
Your tenant's lease expires,you kick them out, you spend
(15:29):
your $500,000 renovating it andnow you get to depreciate your
$500,000 plus the originalamount.
So let's say we replace thecarpet.
In that case we're going to getdepreciation on two sets of
carpet the original carpet plusthe carpet that you put into it
with your renovations.
That's the first thing.
The second thing is you getsomething called a partial asset
(15:51):
disposition, which means whenyou dispose of that old carpet,
that carpet is a five-year.
Let's just make the math easy.
I like to make the math easybecause I can do it in my head.
Let's say that carpet determinedis worth $50,000 and you kept
it for one year You'veessentially used again this is
not exactly precise but just forvisualization purposes you've
(16:12):
used one fifth of the value ofthat carpet because it's a
five-year asset.
It's worth $50,000.
Your remaining book value let'scall it $40,000, for example
purposes that $40,000, when youpull that old carpet out it
still has $40,000 worth of value.
You get to write that off as anexpense that never gets
recaptured upon sale, and soyou're getting that expense as
(16:34):
well.
So the key is is you have tohave the building in service.
If it's vacant, not in service,you do your improvements and
then you put it in service.
That's the first scenario.
Second scenario we just talkedabout is when you buy it, it's
actually in service becauseyou're using it as an office
building.
You do your depreciation on allthose assets, kick the tenant
(16:55):
out, put in your renovations.
Now you get to do thedepreciation on all those assets
and so you're getting kind of atwo for one or double bank for
your buck there, because you'redepreciating, in my mind, two
sets of carpets or two sets ofcabinets, et cetera.
Hopefully that made sense.
I didn't.
Tony Johnson (17:12):
That does make sense.
As long as it was in serviceprior to your renovation, you
can use and go ahead and takethat what was existing and use a
cost segregation to that thatwhat was existing and use a cost
segregation to that.
If it wasn't in service and youdo the renovation, you cannot
take the cost seg on thoseprevious items because you've
renovated it prior to them beingin service makes complete sense
(17:35):
.
Yep, absolutely that isfantastic information, very
beneficial and helpful, so umhelpful.
So are there any keydifferences of how cost
segregation applies, besides theyear timeframe, with
multifamily versus normalcommercial assets like office,
(17:57):
retail and industrial?
Eric Oliver (18:00):
There is, so let's we should probably talk about.
There's something called bonusdepreciation that there is, so
let's we should probably talkabout.
There's something called bonusdepreciation that some of your
listeners may have heard of ornot.
But bonus depreciation is kindof like putting cost segregation
on steroids, so it's completelyseparate.
People oftentimes will get costsegregation and bonus
depreciation confused twoseparate ideas, but they
(18:22):
complement each other very well.
So bonus depreciation is a toolthat the government has utilized
for a number of years tostimulate the economy.
So they say, hey, if theeconomy is not doing well, we
need people to go out and buystuff, so we're going to
incentivize them to buy stuff.
And the way they incentivizethem is saying, hey, if you go
buy a new bulldozer, instead ofdepreciating that bulldozer over
(18:43):
20 years, we're going to letyou take a big depreciation
number up front and thendepreciate the rest over the
useful life.
So bonus depreciation has beenanywhere from 20%, 30% up to
100%.
So in that bulldozer example,let's say you buy a bulldozer
for a million and bonusdepreciation is at 50%, then
(19:03):
instead of taking that millionand dividing it up over 20 years
, you're taking that milliondollars.
You're taking 50% of that, or500,000 and writing it off in
year one.
So that's a huge incentive forme to go buy a bulldozer at the
end of the year because now Ican offset 500,000 of my income.
So you can see how itincentivizes people to go buy.
(19:24):
Well, let's go back a little bitto 2017.
At the time 2017, bonus was at50%, had to be on brand new
assets, meaning I couldn't gobuy a used bulldozer, I had to
go out and buy a new one becausethe government wanted to
stimulate manufacturing andwhatnot.
So they said, hey, you got togo buy a brand new bulldozer and
(19:48):
that asset whether it's abulldozer or anything else had
to have a useful life of 20years or less.
So I think when Congress firstwas looking at bonus, they
didn't think that it applied toreal estate Because, remember,
real estate is 27 and a half or39 years, so bonus doesn't apply
.
However, if you do a Cossackstudy and you break up that
39-year asset into five, sevenand 15-year chunks, all of a
sudden your five-year assets areeligible for bonus.
(20:11):
Your 15-year assets areeligible for bonus.
So, again going back to 2017,bonus was at 50% At the time.
Donald Trump with the Tax Cutsand Jobs Act.
He overhauled the tax code andwas very favorable to real
estate investors.
As you can imagine, he ownsreal estate and so he thought
(20:31):
let's be favorable to realestate investors.
So a couple of things changed.
One is they went from 50% bonusto 100% bonus.
So now if I buy a milliondollar bulldozer, I get to write
off the full million dollars inyear one and I don't have to
spread it out over 20 years orwhatever the useful life of that
bulldozer is.
That's huge.
The second thing that they didthat I think was a little more
(20:55):
subtle and I think had a biggerimpact, is they added five or
six words to the tax code.
That made all the difference.
Remember I told you thatprevious bulldozer example, tony
, that you had to buy a brandnew bulldozer.
Well, they added the words inthe tax code that say new to you
, the taxpayer.
So now I can go buy a usedbulldozer it's new to me, the
(21:18):
taxpayer and all of a sudden Iget bonus on it.
So I don't know how many ofyour listeners buy bulldozers.
So let's relate this to realestate.
What does this mean for realestate?
So if I go buy, so the 100%bonus was in effect for any
assets bought between 9-27 of 17and 12-31 of 2022.
(21:41):
So if I bought a million-dollarmultifamily and I had a cost
segregation study done and let'ssay the cost segregation study
yielded about a 30% segregation,meaning of that million dollars
I've purchased, price 300,000of that was for things like
garbage disposals, ceiling fans,flooring, concrete walls,
(22:03):
retaining walls, et cetera.
I would get 100% of that$300,000 as a deduction in year
one.
So that was huge.
So bonus depreciation isstarting to phase out.
So remember, anything boughtbetween 9-27 of 17 and 12-31 of
2022 is eligible for 100%.
(22:24):
Anything bought in 2023 iseligible for 80%.
Anything bought here in 2024 iseligible for 60% and then it
phases out slowly 20% each yearuntil 2027 when it's down to
zero.
Now, in saying that, the goodnews is I hope it's good news is
that Congress did have a billput in front of them earlier
(22:49):
this year.
The House voted almostunanimously, with bipartisan
support, to pass the bill andthat bill was to extend 100%
bonus through 2026.
However, once it passed theHouse, it got to the Senate.
The Senate decided hey, wait aminute, we're in the middle of a
presidential election year.
We don't want to pass this thisyear because that's going to
(23:11):
look good for Biden and his team.
So we're going to stall it andwe'll see what happens.
So my guess is and I've got myfingers crossed- Did you say it
passed the Senate or passed the?
House.
It passed.
The House first got to theSenate.
Tony Johnson (23:25):
The Senate said we're not passing it this year,
but the Democrats controlled theSenate, so are you sure it's
not the Senate.
Eric Oliver (23:34):
Yeah, no, there was a few senators that said we're
not passing anything this year.
It wasn't just the bonusdepreciation, there was child
tax credits, there was all kindsof stuff built, this tax
overhaul plan, but um, so anyway.
So what's what I think is goingto happen is we've got the
election here in a.
In a couple of weeks we'regoing to have a presidential
election.
Regardless of who wins,Congress will get back together
(23:56):
after this presidential electionand they will put together some
type of tax reform bill thatwill go back to the floor early
next year, and I think thatbonus depreciation will get
extended.
Now, the reason I say that is95% of the folks in Washington,
regardless of what side of theaisle they're on, they own real
estate and that bonusdepreciation bill is tied into
(24:21):
the child tax credit bill.
So the Democrats want the childtax credits, the Republicans
want the bonus depreciation ofthese business incentives, and
it's actually working out forall of us that these are tied
together because in order forthem to get one thing done, they
got to agree on the other thing, and so my guess is we'll
extend the child tax credits andextend the bonus, but we'll
(24:41):
have to wait until early nextyear to see.
Tony Johnson (24:42):
Well, let me ask you this, since you're bringing
that up so if right now, how isthat incentivizing someone to
proceed with a cost segregationstudy right now?
Let's say if you went ahead,moved forward, proceed with a
cost segregation study right now.
Let's say, if you went ahead,moved forward and did a cost
segregation study before the endof the year, you're capped at
(25:04):
60% on the bonus depreciation.
Would you be making a mistakeif that was passed?
Let's say they pass the billearly 2025 and go back to 100
and you just did it at 60, howwould that be altered?
Eric Oliver (25:20):
Yeah, that's a good question.
So they usually will retrodatethese bills and so what would
happen is anything bought thisyear in 2024, because we don't
file our 2024 taxes until nextApril if they pass this bill in
January or February, then theywill retrodate it so that
anything you bought this yearwill receive 100%.
So it's interesting how itworks that there's all these tax
(25:45):
software companies out there.
They need to know the tax lawbefore they push out their
software and so if anything doeshappen, it'll probably be in
January or February.
That gives them time to updatetheir software.
So when people start using thesoftware come the middle of
February to file their taxes,it's got the right bonus
depreciation amount.
(26:08):
But the ones who are going tomiss out and I don't want to say
miss out, because they stillgot 80% is the 2023.
I don't think they'll retro itfor 2023 because, remember,
those taxes were due justyesterday I think, as we
reported a few days ago.
So those taxes are said anddone.
So it'd be very difficult forthem to retro this back to the
beginning of 2023 because thenpeople are gonna have to amend.
(26:29):
It's gonna be a bit of anightmare, but they still have
time to and it could be veryeasy for them to retro it to
2024 because again we don't filethose taxes until April of next
year, or even October if weextend.
Tony Johnson (26:42):
Now, is there a time limit for someone?
Let's say you bought theproperty in 2023, you haven't
done a cost segregation.
They're hearing about this andit's very interesting to them
and maybe they want to captureit at 60 before their time runs
out.
Does it matter when theypurchased it?
(27:03):
If I purchased it in 2023, do Ineed to do it that year, or am
I still eligible for this costsegregation?
Good, question.
Eric Oliver (27:11):
So cost segregation you can do on your asset at any
time.
So if I bought a property in2010 and I have a tax problem
this year, I can actually goback and do a cost seg study on
that property.
Now, it doesn't always makesense, you wouldn't.
You know, if you've owned aproperty for 26 years and it's a
27 and a half year asset,you've already taken almost all
(27:32):
your depreciation.
There's not a lot left, but Ialways recommend anything that's
within the last 15 years.
You should probably have somenumbers ran to see if it makes
sense.
As far as the bonusdepreciation goes, bonus
depreciation is based on thetime the building goes into
service.
So if I bought a building in2020 when bonus was at 100%, I
(27:55):
never did a cost seg study andall of a sudden I do it this
year for my 2024 taxes, I stillget the 100% bonus because
that's the law that was in placewhen I put my building into
service.
Even though I'm doing my costseg study in 2024, when bonus is
at 60% because I put thatbuilding into service back in
(28:15):
2020, I get to take the 100%bonus on those assets.
Tony Johnson (28:20):
Oh, that is good information.
So, as long as you purchasedthe building before 12-31-2022,
as long as it's, let's say,after September 27th 2017, and
prior to 12-31-2022, if youpurchased your property within
that window and you did the costsegregation study even now, you
(28:43):
can still capture that 100%.
Eric Oliver (28:46):
Correct Yep.
And even if you bought it after, even 80% is still Remember we
were doing cost seg when therewas no bonus.
But 100%, 80%, 60%.
This is just the cherry on top.
This is just the like I saidearlier.
This bonus depreciation justputs what we do on steroids and
makes it even more powerful.
But yeah, 100% is really good,80% is great.
Tony Johnson (29:07):
So this is something that new investors
need to think and consider whenyou're analyzing a property.
Sometimes people look atproperties in multiple fashions.
This is one way that smartinvestors look and underwrite
properties to make sure thatthey have upside.
(29:31):
So this is an additional way tocapture upside for someone that
is newer to investing.
So when people are underwritingand you'll look at it and not
understand how this person whyare they making?
Why does this deal seem to workfor them?
I can't figure out when I'munderwriting it, this deal
because when you're utilizingmultiple strategies when you're
(29:53):
investing in real estate, thisis one of the strategies that
you have to understand.
When you're underwriting aproperty where you can make that
money, and if you have a bigtax bill coming, this is a great
way to hedge that tax bill andbe able to keep money and keep
moving and keep investing, asopposed to just leaving money
(30:14):
tied up in your real estate.
Eric Oliver (30:16):
Yeah, no, you hit on the head.
There was, during those bonusyears of 100% bonus, there was
people who were buyingproperties just for the tax
break.
You know, they may not havebeen cash flowing, they may not
have been in a great market, butit was an opportunity for them
to save 100 $200,000 in taxes.
That was all the reason theyneeded to buy that property and
(30:38):
then they were going to renovateit, knock it down, build
something else or whatever otherreason.
But yeah, you don't ever wantthe.
I don't always suggest buyingit just for the taxes.
All of those other factors thatyou mentioned cashflow, equity
appreciation, all that otherstuff that goes along to when
you're underwriting a property.
But you definitely don't wantto forget to look at the tax
(30:58):
benefits because that could be adeciding factor in whether or
not a deal makes sense to moveforward on.
Tony Johnson (31:04):
And just so we're clear again, I want to reiterate
and, eric, you've done a greatjob explaining this for
everybody listening when you'relooking at cost segregation
studies, you have to remove theland value from the cost
segregation state.
So that is not part of this.
It's just the building and thefinishes inside of the building
(31:26):
that they are doing the costsegregation and you're saving
and getting the depreciationvalue.
So whenever you're looking atthis, make sure you're looking
at the building value so youknow when you're purchasing,
that's what we need to break outthe building from the land and
that's what you're going to beable to depreciate.
Correct, yep, eric, thank youso much.
(31:46):
I really appreciate you comingon today Been a wealth of
knowledge.
If people want to reach out toyou and they want to learn more
about cost segregation and maybework with you on a cost
segregation, what's the best wayto get in touch with you?
Eric Oliver (31:59):
Yeah, so the best way is just through our website.
So it's justwwwcostsegauthoritycom.
My contact information's upthere.
Please use it as a resource.
You guys, we're kind of a nicheaccounting firm.
We don't do tax returns at ourfirm.
So if you've got child taxcredits or earned business
(32:20):
income, I can't help you there.
But if you've got depreciationquestions, I'm happy to help you
.
We also do a free benefitanalysis.
If you've got properties thatyou think might benefit from
doing cost seg, we'll look atthem for free, give you an idea
of the expected tax savings aswell as what our fee would be,
(32:40):
and then you guys can decide ifit makes sense with your CPA or
your tax preparer to proceedfrom there.
But please use us as a resource, guys.
We're happy to help any way wecan.
Tony Johnson (32:46):
Fantastic Harry.
Thank you so much.
Yeah, and listen, the costsegregation has an expense to it
.
It is minimal to nothing, tothe amount of what the value is.
Now you don't want to wasteyour time doing a cost
segregation and call Eric.
If we're talking about like$150,000 or a $200,000 purchase,
probably doesn't make sense,starts to make sense.
$300,000, $400,000, $500,000and above right.
(33:08):
Anything below that.
It's not worth the time, energyfor anyone involved.
Eric Oliver (33:15):
Yep, you got it.
Yeah, usually if it's underabout 250, our fee is going to
eat up most of your tax savings,and so I always suggest
anything over 250 is worthlooking at.
Anything less than that isprobably not a great candidate
for cost seg.
Tony Johnson (33:29):
Fantastic, eric.
Thank you so much again forjoining us.
It's been a great time.
Everybody.
This was Eric Oliver, againwith Cost Segregation Authority,
and it's erik atcostsegauthoritycom is his
direct email and, of course, youcan also go to that website and
reach him.
Eric, thanks so much sir.
Eric Oliver (33:47):
I appreciate it.
Thanks for having me, tony,it's been great.
Have a great day you too.
Welcome to another episode of Carolina Commercial
Real Estate Connection.
Today we have Eric Oliver withus.
Eric, thank you so much forjoining us today.
Eric Oliver (00:10):
Thanks, tony, glad to be here.
Tony Johnson (00:12):
Yes, sir, so we were just quickly talking.
Eric is in cost segregationstudies and works for Cost
Segregation Authority.
Prior to doing that, we werejust quickly discussing.
What were you doing, eric,prior to this?
Eric Oliver (00:29):
Yeah, prior to this , I was actually living in New
York at the time working for alandscape design firm family
company that my father-in-law'shad for about 30 years and was
thinking about possibly buyingthat company from my
father-in-law and running thatcompany and ended upin-law and
running that company and endedup doing it for about five years
and decided to move back towhere I was born and raised here
(00:50):
in Salt Lake City, utah.
So we ended up moving back, butit was a good ride while it
lasted, for sure.
Tony Johnson (00:58):
Nice.
Yeah, I was going to ask whatbrought you to Salt Lake.
So you grew up in Salt Lake.
So how did you end up in NewYork in the first place?
Eric Oliver (01:05):
That's a good question.
So went to school, grew up here, went to college here and then
I had a job that took me toRichmond, virginia, for about 12
years and was living inRichmond, got married, started
having kids and then fromRichmond we moved to New York,
did the landscaping thing andthen, you know, as my parents
(01:26):
started to get older and whatnot, we started having kids.
We decided to move back westand that's kind of what brought
me back to Salt Lake.
At the time I was looking forjobs came across this cost
segregation job.
Honestly, didn't know what itwas, other than it had to do
with accounting and my degreewas in accounting, and so I had
to do a little Google searchbefore the interview to find out
(01:48):
what the heck it was talkingabout.
But I've been doing it for thelast 80 years.
I've loved it ever since.
It's been a great job, lovehelping investors and tax
preparers be able to save sometax dollars.
Tony Johnson (02:00):
Fantastic.
Well, let's start off a littlebit broad.
So, cost segregation can youexplain the basics of cost
segregation, why it's soimpactful for commercial real
estate investors, especially intoday's tax environment?
Eric Oliver (02:25):
depreciation on your real estate assets.
So normally real estate getsdepreciated over either 27 and a
half years for residentialunits, including multifamily, or
39 years for commercial.
And so if you don't do costsegregation, let's just make the
math easy.
Let's say you buy a $390,000office condo.
Essentially you're going totake that $390,000, divide it by
39 years and you're going toget a $10,000 write-off every
(02:46):
year, and I've oversimplifiedthat a little bit.
You do have to back out landvalue.
Land is not depreciable, butthe idea is you get one 39th of
a deduction every year for 39years.
The problem with that, tony, isthat I'm not going to own my
property for 39 years.
In most cases I want mydeductions now.
And so how can we accelerate orget more of those deductions up
(03:08):
front?
And the way we do that isthrough an engineering-based
study where we go in and, justas our name implies, we
segregate the cost of thatbuilding.
So when you buy let's say it'sa multifamily when you buy
multifamily, you're not justbuying land and walls, you're
also buying some appliances,you're buying some flooring,
you're buying some cabinets,you're buying some ceiling fans,
garbage disposals, et cetera.
(03:29):
All those things I mentionedshould be depreciated at a much
faster rate.
The problem is that when youbuy that multifamily for, let's
say, a million dollars, you andyour tax preparer don't know how
much the carpet is worth, youdon't know how much the
refrigerators are worth, youdon't know how much the driveway
is worth, and so you just knowthat everything.
You bought everything for amillion bucks.
(03:50):
And so that's what a costsegregation company does is come
in and segregates those costsinto different asset classes,
which allows you to depreciatethem at a faster rate.
So, for example, carpet is afive-year asset.
It should be depreciated overfive years, not 39 or 27 and a
half years.
And so when we can put a valueto that carpet, you now get to
(04:10):
write it off over five years ata much faster rate, which means
you're front-loading or taking alot of your deductions up front
.
Would I want to do that?
Well, there's a number ofreasons.
There's time, value of money,there's inflation.
A dollar today is worth waymore than $1.39 years from now
or 27 and a half years from now.
So give me my deductions nowversus letting the IRS hold on
(04:34):
to these.
So it's a great way forinvestors to generate cash flow
in those early years instead ofpaying your money at the end of
the year to the government inthe form of taxes.
If we can create this deduction,this non-cash deduction, use it
to offset our income.
We now have to pay or write amuch smaller check to the
(04:56):
government, which means we'vejust freed up cash flow that we
can go pay down our debt.
We can go buy a new property Idon't know if people are still
investing in Bitcoin.
Whatever it is you want to dowith that money, right?
Go take that money and go putit to work, versus letting the
IRS hold on to it and giving itto the government.
So that's kind of.
The idea is just segregate thecost, break the components up of
(05:18):
the building.
Tony Johnson (05:19):
Okay.
So to look at it from anotherpoint, are there risks or
downsides to using thataccelerated depreciation?
How should investors balancethat short-term tax savings with
long-term planning?
Eric Oliver (05:34):
That's a great question.
So there really is no downsideto doing cost segregation.
You wouldn't want to do it ifyou don't have a tax liability.
So let's say you've already gotenough deductions.
I wouldn't suggest you payingfor a.
You don't have a tax liability,so let's say you've already got
enough deductions.
I wouldn't suggest you payingfor a study, because these
studies do cost money, so you'vegot to pay to get the study
done.
I wouldn't suggest paying for astudy if you're not going to
realize some kind of 7 to 10xtax benefit from paying for that
(05:58):
study.
So that's the.
I don't want to call it adownside, but that's a time when
you would not do costsegregation.
That's the.
I don't want to call it adownside, but that's a time when
you would not do costsegregation.
One thing you do want toconsider, though, is you are
front-loading your depreciation,which means you're going to get
less depreciation in futureyears.
Now, again, most investors areokay with that, because I want
my money now to put it to workversus letting the IRS hold on
to it.
But it does require some taxplanning, because when you go to
(06:21):
sell that asset, you will havea larger tax bill in the form of
capital gains.
Now let me clarify what I meanwhen I say a larger tax bill A
larger tax bill than you wouldhave had you not done the cost
seg.
But you're still going to netsavings.
And the reason for that is I'llkind of back into this example,
tony, because I think it makesa little more sense.
But let's say you buy a buildingfor a million dollars, you sell
(06:44):
it five years later for twomillion.
When you don't do costsegregation, you're telling the
IRS that everything is doubledin value.
I bought this office with allthis stuff in it for a million.
Five years later I'm sellingthis office with all this stuff
in it for two million.
So everything is doubled invalue and the government's going
to charge you tax on that.
Well, my land has gone up invalue, my walls have probably
(07:08):
gone up in value, but certainlymy dirty, nasty, stained carpet
that's five years old has notdoubled in value.
So why are you selling yourdirty, stained carpet for double
what you paid for it and thenpaying tax on it?
And the reason you're doingthat is because everything is
lumped in this one asset on yourdepreciation schedule called
building and nothing has beenbroken out.
(07:29):
And so the idea with costsegregation is you're going to
take your deduction todayagainst your ordinary income
rate of let's call it 37%, payback some of it at a future date
at a lower rate and save thespread.
And if you think about it, tony,in that example I gave you
where I owned the building forfive years and if you remember
(07:50):
me saying, carpet is a five-yearasset.
What is the book value of mycarpet after owning it for five
years?
It's zero, zero.
It's zero book value.
So I should be selling thatcarpet for zero, not double what
I paid for it.
And then what you're doing isyou're shifting that gain over
into the capital gains bucketand you're paying that back at
20%.
So you're taking your deductionat 37, paying some of it back
(08:14):
at 20% and saving the spread.
And that's kind of at a highlevel, without getting too far
into the weeds.
The idea of what happens whenyou sell this asset Because
that's a question we get oftenis hey, if I'm front-loading all
this, that means I'm foregoingsome depreciation in future
years?
The answer is yes, you are, butyou're front-loading it,
getting it at a 37% deduction,paying some of it back at a 20%
(08:37):
deduction and saving that 17%spread in that example.
So hopefully we didn't get toofar in the weeds there but
that's the idea.
Tony Johnson (08:52):
That's one thing to consider.
Okay, so in other words, whatyou're saying is you're
capitalizing on an inflationaryenvironment because you're
getting the money, as opposed towhen we're continuing on this
inflation track, you're getting.
If you're not doing a costsegregation and not being able
to take that money and put itback to use, you're actually
losing money by extending it out.
Now one thing is, if you areaccelerating the depreciation
(09:14):
and then you're selling it,you're saying that you're not
increasing your tax liability.
So if I'm accelerating thedepreciation and then I'm
selling this in four years andI've depreciated and accelerated
all that, don't I increase mycapital gains tax when I sell?
Eric Oliver (09:36):
You do correct.
So you will pay more capitalgains, but that increase in
capital gains is going to beless than your tax savings when
you took the deduction, becauseyou're getting the deduction
against your ordinary incomethis year.
So let's say we're creating a$100,000 deduction, you're going
to take that against yourordinary income and let's say
(09:57):
you're in a 35% tax bracket.
So that $100,000 deduction thatcreates a $35,000 tax savings
for you this year.
When you sell it in four years,let's say you pay it all back
the whole $35,000 tax savingsfor you this year.
When you sell it in four years,let's say you pay it all back
the whole 100,000.
You're paying it back at a 20%capital gains rate, so you're
paying back 20,000 and you justsaved the spread, which in that
case is 15,000.
(10:18):
So it's actually still asavings.
Still a savings, yes.
So when I say you increase yourtax bill upon sell, you
increase it above what you wouldhave had to pay had you not
done cost seg.
But you're still decreasingyour overall tax implications by
doing cost segregation becauseyou're getting the deduction up
front and paying some of it backlater at a lower rate.
Tony Johnson (10:40):
So, in other words , that's not even a negative,
then that's still not a negative.
Eric Oliver (10:45):
People think it's a negative because they're like,
hey, my CPA told me if I do this, I'm going to have a big tax
bill when I sell it.
I'm like, yeah, you will, butyou're going to have a bigger
tax savings today when you do it.
So if I save you $100 and youpay back $50, you're still
netting $50 in tax savings,betting 50 in tax savings.
Tony Johnson (11:02):
And you're getting the positive of being able to
cash, take that money and getthat cash that you can redeploy
right now.
So that is fantastic.
And so let's see, here I'mgoing through, here You're
handling a bunch of my questionshere.
So now, what about when you'rebuying distressed properties and
(11:25):
doing a fix and flip, let's sayso.
Let's say you buy a vacantproperty and then you're
investing a bunch of money anddoing a huge renovation and then
maybe selling that commercial.
So if I bought, you know, ajunky little building, right and
I go, put all this money in itand upgrade it.
So if I bought an industrialbuilding for, let's say, a
(11:49):
million, did a renovation on it,how is that work?
So we're talking about thingsthat are already existing right.
So if I went in and I did a fix, bought it for a million, put
$500,000 in it, now it's worth$2 million.
Is that a different or is itall still the same function as
far as you're concerned?
Eric Oliver (12:07):
Yeah, that's a good question and the answer is it
depends.
There's some variables therethat it would depend.
So in order to takedepreciation on any asset, it
has to go into service.
So in the example you gave,where you buy an old,
dilapidated building, let's sayit's vacant, it's boarded up you
buy it for a million, you go,put $500,000 into it and then
(12:28):
you turn around and sell it for$2 million.
In that case you don't get anydepreciation because it never
went into service.
However, go ahead.
Tony Johnson (12:37):
I was going to say yeah, I understand that.
I'm sorry.
Let's say you fixed it andflipping it, but then filled it
and you're holding it.
So I'm sorry.
I understand exactly whatyou're saying.
So we bought it for a million,put $500,000 in it, then we've
stabilized it and now we'reholding it and it's valued at $2
million.
So we've got 1.5 and it'svalued at $2 million.
(12:59):
Walk us through that example.
Eric Oliver (13:01):
In that example, the 1.5, your 1 million of
purchase price plus your 500,000of improvements.
That's going to be yourstarting depreciable basis.
So we're going to startdepreciating based on that 1.5.
Now, unfortunately, even thoughit's valued at two, the IRS
only allows us to depreciatewhat our basis is into the
property and in that case yourbasis would be 1.5 million, the
(13:23):
million purchase plus the500,000 of improvements.
Tony Johnson (13:27):
Now let's look at that a little bit differently,
because there's a big Let meinterrupt you I'm sorry because
I wanted to interrupt you onetime because I want to add just
another variable to this.
So let's say we're doing thisfix and flip and of the 500, 300
is fixed renovations, carpetupdates and then 200 is in,
(13:49):
let's say fixtures and finishes.
Maybe you've put in built-indesks or mobile desks that could
be removed.
Does that equate as well intothis amount?
Eric Oliver (14:00):
It does.
So some of those improvementsanytime you have improvements,
some of them are going to be.
There's two different ways.
I've seen it handled multipledifferent ways by multiple CPAs.
But typically you have yourrepairs and maintenance and then
you have items that need to becapitalized.
Sometimes you could justimmediately write those off.
So if you buy a desk for yournew office, that's going to get
(14:23):
written off as an expense, nevergets capitalized.
But if you put in a newbathroom in your office building
that needs to get capitalizedand that will be depreciated
over 39 years, and so yeah, soyou're going to give that
$500,000 of improvement cost toyour tax preparer.
A good tax preparer will tryand pull out some of that stuff
(14:46):
to immediately expense it andthen whatever they can't gets
amortized over the useful lifeof that asset.
Now, in saying that, there's acaveat there that's important to
know.
Let's take that same example.
But let's say when you boughtthe building there was a tenant
in there.
So you bought an old building.
It was beat up.
There was somebody in there.
(15:07):
They had six months left ontheir lease.
When you buy that officebuilding, it's in service, it's
being used for its intended useor purpose.
So the ideal way to do thatwould be do the cost sake study
on the existing stuff that's inthat building.
Your tenant's lease expires,you kick them out, you spend
(15:29):
your $500,000 renovating it andnow you get to depreciate your
$500,000 plus the originalamount.
So let's say we replace thecarpet.
In that case we're going to getdepreciation on two sets of
carpet the original carpet plusthe carpet that you put into it
with your renovations.
That's the first thing.
The second thing is you getsomething called a partial asset
(15:51):
disposition, which means whenyou dispose of that old carpet,
that carpet is a five-year.
Let's just make the math easy.
I like to make the math easybecause I can do it in my head.
Let's say that carpet determinedis worth $50,000 and you kept
it for one year You'veessentially used again this is
not exactly precise but just forvisualization purposes you've
(16:12):
used one fifth of the value ofthat carpet because it's a
five-year asset.
It's worth $50,000.
Your remaining book value let'scall it $40,000, for example
purposes that $40,000, when youpull that old carpet out it
still has $40,000 worth of value.
You get to write that off as anexpense that never gets
recaptured upon sale, and soyou're getting that expense as
(16:34):
well.
So the key is is you have tohave the building in service.
If it's vacant, not in service,you do your improvements and
then you put it in service.
That's the first scenario.
Second scenario we just talkedabout is when you buy it, it's
actually in service becauseyou're using it as an office
building.
You do your depreciation on allthose assets, kick the tenant
(16:55):
out, put in your renovations.
Now you get to do thedepreciation on all those assets
and so you're getting kind of atwo for one or double bank for
your buck there, because you'redepreciating, in my mind, two
sets of carpets or two sets ofcabinets, et cetera.
Hopefully that made sense.
I didn't.
Tony Johnson (17:12):
That does make sense.
As long as it was in serviceprior to your renovation, you
can use and go ahead and takethat what was existing and use a
cost segregation to that thatwhat was existing and use a cost
segregation to that.
If it wasn't in service and youdo the renovation, you cannot
take the cost seg on thoseprevious items because you've
renovated it prior to them beingin service makes complete sense
(17:35):
.
Yep, absolutely that isfantastic information, very
beneficial and helpful, so umhelpful.
So are there any keydifferences of how cost
segregation applies, besides theyear timeframe, with
multifamily versus normalcommercial assets like office,
(17:57):
retail and industrial?
Eric Oliver (18:00):
There is, so let's we should probably talk about.
There's something called bonusdepreciation that there is, so
let's we should probably talkabout.
There's something called bonusdepreciation that some of your
listeners may have heard of ornot.
But bonus depreciation is kindof like putting cost segregation
on steroids, so it's completelyseparate.
People oftentimes will get costsegregation and bonus
depreciation confused twoseparate ideas, but they
(18:22):
complement each other very well.
So bonus depreciation is a toolthat the government has utilized
for a number of years tostimulate the economy.
So they say, hey, if theeconomy is not doing well, we
need people to go out and buystuff, so we're going to
incentivize them to buy stuff.
And the way they incentivizethem is saying, hey, if you go
buy a new bulldozer, instead ofdepreciating that bulldozer over
(18:43):
20 years, we're going to letyou take a big depreciation
number up front and thendepreciate the rest over the
useful life.
So bonus depreciation has beenanywhere from 20%, 30% up to
100%.
So in that bulldozer example,let's say you buy a bulldozer
for a million and bonusdepreciation is at 50%, then
(19:03):
instead of taking that millionand dividing it up over 20 years
, you're taking that milliondollars.
You're taking 50% of that, or500,000 and writing it off in
year one.
So that's a huge incentive forme to go buy a bulldozer at the
end of the year because now Ican offset 500,000 of my income.
So you can see how itincentivizes people to go buy.
(19:24):
Well, let's go back a little bitto 2017.
At the time 2017, bonus was at50%, had to be on brand new
assets, meaning I couldn't gobuy a used bulldozer, I had to
go out and buy a new one becausethe government wanted to
stimulate manufacturing andwhatnot.
So they said, hey, you got togo buy a brand new bulldozer and
(19:48):
that asset whether it's abulldozer or anything else had
to have a useful life of 20years or less.
So I think when Congress firstwas looking at bonus, they
didn't think that it applied toreal estate Because, remember,
real estate is 27 and a half or39 years, so bonus doesn't apply
.
However, if you do a Cossackstudy and you break up that
39-year asset into five, sevenand 15-year chunks, all of a
sudden your five-year assets areeligible for bonus.
(20:11):
Your 15-year assets areeligible for bonus.
So, again going back to 2017,bonus was at 50% At the time.
Donald Trump with the Tax Cutsand Jobs Act.
He overhauled the tax code andwas very favorable to real
estate investors.
As you can imagine, he ownsreal estate and so he thought
(20:31):
let's be favorable to realestate investors.
So a couple of things changed.
One is they went from 50% bonusto 100% bonus.
So now if I buy a milliondollar bulldozer, I get to write
off the full million dollars inyear one and I don't have to
spread it out over 20 years orwhatever the useful life of that
bulldozer is.
That's huge.
The second thing that they didthat I think was a little more
(20:55):
subtle and I think had a biggerimpact, is they added five or
six words to the tax code.
That made all the difference.
Remember I told you thatprevious bulldozer example, tony
, that you had to buy a brandnew bulldozer.
Well, they added the words inthe tax code that say new to you
, the taxpayer.
So now I can go buy a usedbulldozer it's new to me, the
(21:18):
taxpayer and all of a sudden Iget bonus on it.
So I don't know how many ofyour listeners buy bulldozers.
So let's relate this to realestate.
What does this mean for realestate?
So if I go buy, so the 100%bonus was in effect for any
assets bought between 9-27 of 17and 12-31 of 2022.
(21:41):
So if I bought a million-dollarmultifamily and I had a cost
segregation study done and let'ssay the cost segregation study
yielded about a 30% segregation,meaning of that million dollars
I've purchased, price 300,000of that was for things like
garbage disposals, ceiling fans,flooring, concrete walls,
(22:03):
retaining walls, et cetera.
I would get 100% of that$300,000 as a deduction in year
one.
So that was huge.
So bonus depreciation isstarting to phase out.
So remember, anything boughtbetween 9-27 of 17 and 12-31 of
2022 is eligible for 100%.
(22:24):
Anything bought in 2023 iseligible for 80%.
Anything bought here in 2024 iseligible for 60% and then it
phases out slowly 20% each yearuntil 2027 when it's down to
zero.
Now, in saying that, the goodnews is I hope it's good news is
that Congress did have a billput in front of them earlier
(22:49):
this year.
The House voted almostunanimously, with bipartisan
support, to pass the bill andthat bill was to extend 100%
bonus through 2026.
However, once it passed theHouse, it got to the Senate.
The Senate decided hey, wait aminute, we're in the middle of a
presidential election year.
We don't want to pass this thisyear because that's going to
(23:11):
look good for Biden and his team.
So we're going to stall it andwe'll see what happens.
So my guess is and I've got myfingers crossed- Did you say it
passed the Senate or passed the?
House.
It passed.
The House first got to theSenate.
Tony Johnson (23:25):
The Senate said we're not passing it this year,
but the Democrats controlled theSenate, so are you sure it's
not the Senate.
Eric Oliver (23:34):
Yeah, no, there was a few senators that said we're
not passing anything this year.
It wasn't just the bonusdepreciation, there was child
tax credits, there was all kindsof stuff built, this tax
overhaul plan, but um, so anyway.
So what's what I think is goingto happen is we've got the
election here in a.
In a couple of weeks we'regoing to have a presidential
election.
Regardless of who wins,Congress will get back together
(23:56):
after this presidential electionand they will put together some
type of tax reform bill thatwill go back to the floor early
next year, and I think thatbonus depreciation will get
extended.
Now, the reason I say that is95% of the folks in Washington,
regardless of what side of theaisle they're on, they own real
estate and that bonusdepreciation bill is tied into
(24:21):
the child tax credit bill.
So the Democrats want the childtax credits, the Republicans
want the bonus depreciation ofthese business incentives, and
it's actually working out forall of us that these are tied
together because in order forthem to get one thing done, they
got to agree on the other thing, and so my guess is we'll
extend the child tax credits andextend the bonus, but we'll
(24:41):
have to wait until early nextyear to see.
Tony Johnson (24:42):
Well, let me ask you this, since you're bringing
that up so if right now, how isthat incentivizing someone to
proceed with a cost segregationstudy right now?
Let's say if you went ahead,moved forward, proceed with a
cost segregation study right now.
Let's say, if you went ahead,moved forward and did a cost
segregation study before the endof the year, you're capped at
(25:04):
60% on the bonus depreciation.
Would you be making a mistakeif that was passed?
Let's say they pass the billearly 2025 and go back to 100
and you just did it at 60, howwould that be altered?
Eric Oliver (25:20):
Yeah, that's a good question.
So they usually will retrodatethese bills and so what would
happen is anything bought thisyear in 2024, because we don't
file our 2024 taxes until nextApril if they pass this bill in
January or February, then theywill retrodate it so that
anything you bought this yearwill receive 100%.
So it's interesting how itworks that there's all these tax
(25:45):
software companies out there.
They need to know the tax lawbefore they push out their
software and so if anything doeshappen, it'll probably be in
January or February.
That gives them time to updatetheir software.
So when people start using thesoftware come the middle of
February to file their taxes,it's got the right bonus
depreciation amount.
(26:08):
But the ones who are going tomiss out and I don't want to say
miss out, because they stillgot 80% is the 2023.
I don't think they'll retro itfor 2023 because, remember,
those taxes were due justyesterday I think, as we
reported a few days ago.
So those taxes are said anddone.
So it'd be very difficult forthem to retro this back to the
beginning of 2023 because thenpeople are gonna have to amend.
(26:29):
It's gonna be a bit of anightmare, but they still have
time to and it could be veryeasy for them to retro it to
2024 because again we don't filethose taxes until April of next
year, or even October if weextend.
Tony Johnson (26:42):
Now, is there a time limit for someone?
Let's say you bought theproperty in 2023, you haven't
done a cost segregation.
They're hearing about this andit's very interesting to them
and maybe they want to captureit at 60 before their time runs
out.
Does it matter when theypurchased it?
(27:03):
If I purchased it in 2023, do Ineed to do it that year, or am
I still eligible for this costsegregation?
Good, question.
Eric Oliver (27:11):
So cost segregation you can do on your asset at any
time.
So if I bought a property in2010 and I have a tax problem
this year, I can actually goback and do a cost seg study on
that property.
Now, it doesn't always makesense, you wouldn't.
You know, if you've owned aproperty for 26 years and it's a
27 and a half year asset,you've already taken almost all
(27:32):
your depreciation.
There's not a lot left, but Ialways recommend anything that's
within the last 15 years.
You should probably have somenumbers ran to see if it makes
sense.
As far as the bonusdepreciation goes, bonus
depreciation is based on thetime the building goes into
service.
So if I bought a building in2020 when bonus was at 100%, I
(27:55):
never did a cost seg study andall of a sudden I do it this
year for my 2024 taxes, I stillget the 100% bonus because
that's the law that was in placewhen I put my building into
service.
Even though I'm doing my costseg study in 2024, when bonus is
at 60% because I put thatbuilding into service back in
(28:15):
2020, I get to take the 100%bonus on those assets.
Tony Johnson (28:20):
Oh, that is good information.
So, as long as you purchasedthe building before 12-31-2022,
as long as it's, let's say,after September 27th 2017, and
prior to 12-31-2022, if youpurchased your property within
that window and you did the costsegregation study even now, you
(28:43):
can still capture that 100%.
Eric Oliver (28:46):
Correct Yep.
And even if you bought it after, even 80% is still Remember we
were doing cost seg when therewas no bonus.
But 100%, 80%, 60%.
This is just the cherry on top.
This is just the like I saidearlier.
This bonus depreciation justputs what we do on steroids and
makes it even more powerful.
But yeah, 100% is really good,80% is great.
Tony Johnson (29:07):
So this is something that new investors
need to think and consider whenyou're analyzing a property.
Sometimes people look atproperties in multiple fashions.
This is one way that smartinvestors look and underwrite
properties to make sure thatthey have upside.
(29:31):
So this is an additional way tocapture upside for someone that
is newer to investing.
So when people are underwritingand you'll look at it and not
understand how this person whyare they making?
Why does this deal seem to workfor them?
I can't figure out when I'munderwriting it, this deal
because when you're utilizingmultiple strategies when you're
(29:53):
investing in real estate, thisis one of the strategies that
you have to understand.
When you're underwriting aproperty where you can make that
money, and if you have a bigtax bill coming, this is a great
way to hedge that tax bill andbe able to keep money and keep
moving and keep investing, asopposed to just leaving money
(30:14):
tied up in your real estate.
Eric Oliver (30:16):
Yeah, no, you hit on the head.
There was, during those bonusyears of 100% bonus, there was
people who were buyingproperties just for the tax
break.
You know, they may not havebeen cash flowing, they may not
have been in a great market, butit was an opportunity for them
to save 100 $200,000 in taxes.
That was all the reason theyneeded to buy that property and
(30:38):
then they were going to renovateit, knock it down, build
something else or whatever otherreason.
But yeah, you don't ever wantthe.
I don't always suggest buyingit just for the taxes.
All of those other factors thatyou mentioned cashflow, equity
appreciation, all that otherstuff that goes along to when
you're underwriting a property.
But you definitely don't wantto forget to look at the tax
(30:58):
benefits because that could be adeciding factor in whether or
not a deal makes sense to moveforward on.
Tony Johnson (31:04):
And just so we're clear again, I want to reiterate
and, eric, you've done a greatjob explaining this for
everybody listening when you'relooking at cost segregation
studies, you have to remove theland value from the cost
segregation state.
So that is not part of this.
It's just the building and thefinishes inside of the building
(31:26):
that they are doing the costsegregation and you're saving
and getting the depreciationvalue.
So whenever you're looking atthis, make sure you're looking
at the building value so youknow when you're purchasing,
that's what we need to break outthe building from the land and
that's what you're going to beable to depreciate.
Correct, yep, eric, thank youso much.
(31:46):
I really appreciate you comingon today Been a wealth of
knowledge.
If people want to reach out toyou and they want to learn more
about cost segregation and maybework with you on a cost
segregation, what's the best wayto get in touch with you?
Eric Oliver (31:59):
Yeah, so the best way is just through our website.
So it's justwwwcostsegauthoritycom.
My contact information's upthere.
Please use it as a resource.
You guys, we're kind of a nicheaccounting firm.
We don't do tax returns at ourfirm.
So if you've got child taxcredits or earned business
(32:20):
income, I can't help you there.
But if you've got depreciationquestions, I'm happy to help you
.
We also do a free benefitanalysis.
If you've got properties thatyou think might benefit from
doing cost seg, we'll look atthem for free, give you an idea
of the expected tax savings aswell as what our fee would be,
(32:40):
and then you guys can decide ifit makes sense with your CPA or
your tax preparer to proceedfrom there.
But please use us as a resource, guys.
We're happy to help any way wecan.
Tony Johnson (32:46):
Fantastic Harry.
Thank you so much.
Yeah, and listen, the costsegregation has an expense to it
.
It is minimal to nothing, tothe amount of what the value is.
Now you don't want to wasteyour time doing a cost
segregation and call Eric.
If we're talking about like$150,000 or a $200,000 purchase,
probably doesn't make sense,starts to make sense.
$300,000, $400,000, $500,000and above right.
(33:08):
Anything below that.
It's not worth the time, energyfor anyone involved.
Eric Oliver (33:15):
Yep, you got it.
Yeah, usually if it's underabout 250, our fee is going to
eat up most of your tax savings,and so I always suggest
anything over 250 is worthlooking at.
Anything less than that isprobably not a great candidate
for cost seg.
Tony Johnson (33:29):
Fantastic, eric.
Thank you so much again forjoining us.
It's been a great time.
Everybody.
This was Eric Oliver, againwith Cost Segregation Authority,
and it's erik atcostsegauthoritycom is his
direct email and, of course, youcan also go to that website and
reach him.
Eric, thanks so much sir.
Eric Oliver (33:47):
I appreciate it.
Thanks for having me, tony,it's been great.
Have a great day you too.
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