Reduce Your Taxes with Cost Segregation, with Yonah Weiss
Yonah Weiss from Madison SPECS joins us to teach us about Cost Segregation! Cost Segregation is a powerful tool to reduce your tax bill and increase the rate at which you depreciate your real estate investments. Today we’ll dig into how it works and how it can help your real estate business. This is a powerful tool for real estate syndicators and passive investors in real estate syndications to grow their wealth. Listen today!
"We're getting more tax deductions for property owners. The way that we do that is an engineering based study"
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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 tens of millions of dollars on taxes through cost segregation. He has a background in teaching and a passion for real estate and helping others.
Yonah Weiss 0:00
When improvements do now you want a mobile home park. The majority of what you're buying is land improvements, believe it or not have havens like his land has a certain value wherever you are the land values land.
What's going on guys? This is passive wealth strategies for busy professionals. Thank you for tuning in. thrilled to be talking with you today. Today we have a great interview with Jojo Weiss from Madison specs. Today you're going to learn about cost segregation and depreciation for real estate investors. Specifically, we talk about multifamily. But this concept of cost segregation applies to all types of real estate.
So you're going to learn all about that today. It's a great way to reduce your tax bill and increase your return. If you knew this show a little bit about me. My name is Taylor. I'm a real estate investor. I buy multifamily real estate with investors. I'm a busy professional, just like You have a day job, love what I do. And I also love working on building my wealth. In my spare time. I'm here to help you grow your wealth by bringing you interviews with the best people in the real estate industry. today. Yoda is a prominent cost segregation, thought leader. So this is a great topic to learn and a great guy to learn from. Once again, thank you for tuning in. Here's the interview with your wife, your wife, thank you for joining us today.
Yonah Weiss 1:32
You're welcome. Thank you for having me.
happy to talk with you. We're going to talk about cost segregation studies, especially in multifamily real estate. So really, really big topic. And even though I've been involved with cost segregation studies, I don't really know if I fully understand what it means. So can you teach us at least that we'll start with the basics of what is a cost segregation study?
Yonah Weiss 2:00
So yeah, the basics are, it is a way to get more tax deduction. A little more a little more complex than that. So again, we're getting more tax deductions for property owners the way that we do that is an engineering based study, which means an engineer who is well versed in the tax laws, how this actually works, and may explain a little bit how it works.
An engineer comes in assesses the property and is able to tell what depreciates on what type of life span. So let's back up for a second. A second is depreciation. Sounds like a negative thing, right? Yeah. But but it's really a really positive thing. It's actually just a borrowed term when we're talking about taxes. depreciation means like something's going down in value right devalued for taxes. Roses. And what we're going to talk about tonight is that depreciation actually means you're getting a tax write off of the entire value of your property based on the principle that things go down in value as time goes on.
But your property is actually appreciating, it's actually going up in value. So this is something really important to keep in mind. That's what depreciation is. It's probably one of the greatest gifts that the IRS gave to real estate owners and what comes even more out of that is what conservation is like really, like, is the best way to say it's like I like this it's like depreciation on steroids.
But I think that jokes getting older AO it's it's just a you know, really beefed up we've taken depreciation. What we're doing is building a commercial building depreciates or the life span the iris game. for commercial buildings, 39 years and for residential, which includes multifamily is 27 and a half years, which translates to layman's terms, if you buy a building for a million dollars, you can now write off the entire million dollars over the span of 27 and a half years.
Right off means that you take a deduction from your income tax, you have income, right hundred thousand dollars of income, you deduct from that, you know, let's say $20,000 at depreciation deduction, and then you're only taxed on the remaining 80. That's in simple terms what the depreciation tax deduction looks like, cost segregation, you know, the word means we're segregating the costs of the building meaning and I don't know why they gave this weird word. It used to be called component depreciation, which means a lot more Yeah, yeah, it's I think I want to start like retro, you know, going retro with the component appreciation here.
Like was some new sort of thing we're doing now. I'm a component depreciation expert now, but what it means is that we look at the building and engineer comes and looks at the building and assesses every time detail what's in there. So you may have, you know, the structure of the building actually is written off has depreciation life of 27 and a half years, but the personal property stuff in the building like furniture, appliances, you know, cabinets and multifamily properties, the countertops, stuff that's not structural, it all depreciates on a five year basis, which means you can write off the entire value of that if you can determine what the value is of those things.
You can write that off in five years, which is a much faster life. And so it's a much greater tax deductions earlier on. And this is essentially what conservation is and
You don't need a simple simplified version of how it works.
Nice. Okay, perfect. So the next step that I have in my cloudy competence in this area, I guess, maybe I should be less self deprecating about this, but the actual tax implications for your average passive investor in a real estate syndication, so your average passive investor, probably not a real estate professional, which a concept we've covered on the show, filing for tax purposes, filing status for tax purposes. So like who can benefit from the depreciation cost segregation, depreciation deduction, like what does that really mean? For the passive investor in a syndication?
Yonah Weiss 6:50
So the first thing we're always going to do is looking at the the income that's produced from the property and Generally speaking, if you're not a real estate professional, so you don't get to benefit very much from the income the deductions created with depreciation or concert outside of the income from the property, because the iris looks at income from your property is considered passive income.
And it's treated differently than your active w two income or other types of active income, which means that depreciation and the cost segregation, which again is just creating more depreciation earlier on, is can only be used to offset the income from the properties or from passive income.
Now, if you have a bunch of properties, or you have other passive income, which could be a business, passive business interests, if you have a certain amount of, you know, shares and business, stocks and bonds do not qualify as passive income. That's a different category is taxed on a different, you know, different level entirely. But So generally speaking, we're looking at the income from the property. So the first thing we look at is depreciation offsets that and so the greatest thing that a passive investor may be looking at is saying, Okay, I'm getting returns from the property, investing in them getting whatever it is 8% return. But you're going to be taxed on it. Right?
Because it's income, it's passive income. So what we're trying to do is decreasing, you know, depreciation deduction getting as much as possible to make sure that at least that income that you're creating real estate investments is tax free. And so I think that's the biggest
part of the picture for the passive investing.
Okay, so it's creating paper losses, said correct, again against the passive income from rental activities. syndication from a passive investor standpoint. Okay, so that makes sense. So when we go to them sell the property, there's going to be, there's going to be depreciation recapture and things like that. How does the How does this all what happens when we go to sell the property if we've if we've taken this, I guess accelerated depreciation, whatever you want to call it. And so what does that mean for us when we go to sell
Yonah Weiss 9:25
when you sell any property, right, like you touched on, you have something called depreciation recapture tax, which means you're taxed on the mountains appreciation that you took over the course of ownership of the property. Now, you know, if you're taking depreciation every single year, which you're required to, and when you sell the property, you have to pay a tax at 25% rates based on that amount that you that you took.
Now if you didn't take depreciation. Let's just take that example. This is some a question that comes up and he says can have bigger pockets all the time shooting this question, right? I didn't take depreciation of on this property Do I still have to pay a recession recapture tax, and it's crazy, but you do IRS considers it and if you took that initiation, even if you didn't actually take the deductions over the course of ownership, so you can't get around it, I'm actually I think that you can get around it. And there's two ways to get around it.
Number one way to get around depreciation capital tax is doing a 1031 exchange out of the property. Now, if you're a syndicate or your passive investor to syndication, it's pretty unlikely that you're going to do that it can be done. It's a little more complicated and requires, you know, some interns do a little extra work and so the syndicators may not want to do that. It is done. I've seen it done. I work with people that do that all the time.
You create a different type of entity that buys the property that sells it and it can be done you have to speak to an expert in order to do it. However, if you want to regular the property, okay, you should know that that We capture taxes just like capital gains tax gets deferred, if you 1031 exchange, okay, that's the first way to get around it. The second way, which is probably more likely and occasional syndication, we are passive investors because again, not likely was going to do a 1031 exchange.
The second more likely event is a tax strategy that many property owners use. And many accountants use this strategy and it's called partial acid disposition. Which means in layman's terms, if you were taking the personal property again, all that furniture, the fixture and all that stuff and we're saying it depreciate over five years now what happens? Five years from now I go and sell the property
after five year old,
you know, in all intensive purposes, the value at least from a tax perspective, the value of that furniture in the five years personal property has no more value, right? Because it's already been depreciated meaning have already taken right off that it's already doesn't have value. And so there's an actual tax form that you can fill out upon the sale of a property, which you can allocate a lower value, much, much, much, much lower value to all your personal property in the property.
Which mean when you do that, what happens is, you're saying, Yeah, this, you know, air conditioning unit, right that, you know, a cost $5,000. So I wrote it off, we're five years $20,000 production every year, five years. Now, five years later, I'm going to sell it. I am applying a much lower value. I'm saying this thing is really only worth $100. Because it's you know, from a tax perspective, it has no value anymore. It has to have some value because it's still there. Yeah, Iris allows you to do that, which means you're only going to be there. We capture tax on the hundred dollar value, not on the $5,000 value. So instead of paying 25%, on the 5000, which is you know, 1250, you're going to end up paying, you know, $25, on or on the hundred dollar value. So that's
a very, that's the probably the most important thing in here to my mind is be if they're going to recapture all the depreciation anyway, and you don't have any way to adjust your, your basis, if you will, then well, you know, this at the end of the day, this is really gaining me much. But if our say basis and our sale goes down, because the personal property is valued differently at the sale, compared to when we purchased, then that really impacts our our taxes at the end of the year.
Yonah Weiss 13:51
Exactly. Now, this is, you know, obviously this is something that needs to be done through the main entity through the seller that they're doing this and this isn't the I should just clarify, this does not mean that you have to put that value on actual sales meaning, okay, there's something totally different for putting your personal property on a sales agreement. You may have seen on a proven sales agreement you may have seen on the closing statement where, you know, let's say personal property is given a value to it, that you don't need to do that. It's just a tax form, which means that the guy who's buying it and this really the crazy part of conservation is that like I said before, it's really theoretical.
It's like this borrowed term theoretical because when you buy a property, that's when depreciation starts, it's going to start with the property was built. Now it does start with Barbary was built in the first place. But if you buy an already existing property that was built in 1917, right, you start depreciating it from day one the day that you buy it. And so if you buy a property for a million dollars, you know today in 2019, and then sell that property five years from now for $10 million. So when you bought it you're taking their tax write off and you can accelerate the depreciation we take all that five year all the furniture, everything break it off in the first five years.
The guy five years from now buys it at $10 million. And now he can start his depreciation over from scratch for $10 million and the same exact furniture that not only YouTube the depreciation on but then upon sale you allocate you know 2% value to it. The guy can go and claim hundred percent value on that on his tax returns because he's starting over depreciation fresh from day one when you purchase it, which is crazy.
That is crazy. I think this you know, your average investor or your maybe your average like a W two employee doesn't have a lot of tax advantages available to them. But once we get into real estate investing, this is really what separates say the 1% from everybody. Else is that there are a lot of tax advantages to investing in real estate and investing in other cash flowing businesses.
Yonah Weiss 16:06
Exactly. difference. Yeah, there's a lot, a lot A lot here. And again, this is, is a bit complicated stuff, and it's going to affect the passive investor to a certain extent, however, it's, you know, maybe I should just go down this road because what happens if you don't, you know, you don't do the 1031 exchange, and you don't do the partial ass position and you're just, you know, faced with, you know, the income tax savings and benefit upfront or you're on and then later on you to sell, you have your hit with a tax bill, you know, coming out of nowhere on the depreciation recapture.
Now, it's obviously not fun, right?
To get taxes when you weren't expecting it, however, I mean, on the other flip side of things, you're getting a huge amount of traffic. tax deductions up front, which means that the money that you're making is taxed for money. And therefore you can use that money to create, you know, to reinvest and to create more wealth from that and the actual difference between, you know, the amount of money you're making on that money compounded tax free, is actually a lot more, you know, then what you're going to have to pay in taxes later on.
It's that it's that snowball effect really, when you have more to reinvest at the beginning, then you know, you grow a lot more later. Now. I'm curious, we talked about multifamily here.
How does this apply to other real estate asset classes, like Self Storage, or mobile home parks are the other two big ones? I mean, I invest in self storage. I don't invest mobile home parks at this point, but do they have different abilities to use this personal power? Property difference in the depreciation time table or what does that look like?
Yonah Weiss 18:05
Yeah, sure there every property First of all, every type of property has depreciation as long as it's an investment property or business property, your personal residence does not get this depreciation deduction. It's only busier or or investment properties.
So Self Storage is a great example. But I'll just take it back any commercial property, besides for multifamily has a 39 year schedule which means that the whole building the structural component, which is the majority components of properties, is on a 39 year schedule will reallocated stuff to faster lives that doesn't change the categories of five your personal property.
There's tons of news or doesn't even categories of assets that would fit into the five year personal property. You have land improvements, which is a 15 year asset class, which means you can front load in a bit later. landscaping the asphalt pavements, you know, fencing, signage, stuff like that all of that eating outside the building is our 15 year schedule. So other commercial properties may have a lot more of that,
you know, retail or self storage, we have a big parking lot, etc.
But other than the actual structural component, which is, instead of 27 and a half the residential 39 years for commercial, that's the real main difference. And every type of property is going to have different assets, you know, that go fit into those categories. So for example, you know, in a multifamily property, personal property, you include stuff with carpeting, or cabinetry, you know, countertops, whereas Self Storage Unit isn't going to have any of that stuff. But it's going to have other things in that category, especially you with climate control, self storage, all that is very expensive, and actually is considered by your personal property. But you have other things like
You know, the electronics and security systems,
the doors you know, if you have certain type of doors that are movable partitions inside of movable partitions inside of the properties etc. There's a lot going on so you know in retail or office is going to have other stuff that would fit into those categories. But at the end of the day, we're looking usually between, you know, 20 and 40% of the building can be reallocated to these faster lines.
Wow. Okay, so what about
I don't know, maybe you said maybe I missed it. mobile homes, Park owned homes in a mobile home park. How do they qualify that things inside of it everything? How do they find it?
Yonah Weiss 20:47
So Park own homes are same things like multifamily. Right, when you're dealing with a real advantage of mobile home parks really over almost every other time. asset class that's out there from a tax perspective is when you're dealing with tenants, you're dealing with a park that you just don't use of the park use of the land, right? Wrong.
You don't just own the land, you won't you won't actually own, you actually own the land improvements, which I mentioned before land improvements is actually considered a totally different thing than land because land itself doesn't appreciate. Well, the land improvements do now you want a mobile home park, the majority of what you're buying is land improvements. Believe it or not, you have the pavement, because land has a certain value wherever you are, the land is land.
Somebody go up just because you don't have anything on the land. Right. When you do something on the moon, you have land previously the pads underneath every home, that's all concrete, that's all 15 year property. You have the landscaping if you have any money but won't have you know, great last game, but the ones that do Right are going to have that the pavement to asphalt driveways, whatever roads.
So mobile home parks I've seen when it's so many tenant own homes have seen literally between as opposed to where multi families in the 20 to 30% category of reclassification of assets. That's what you're going to front load mobile home parks is more than an 80% Wow, that yeah, it's crazy.
Wow. So that I guess that remaining balance really is just the land. I mean, what else is going to
Yonah Weiss 22:32
right? There is some structural components to it. You know, sewage pipes is considered structural. If you have septic tanks and stuff like that. Those are considered structural and have a value to it. It's going to depreciate on the 27 bathroom schedule. But yeah, it mobile home parks is not much more.
Wow, interesting. I I did not know that. You're, you're really opening my eyes here and to the folks out there listening is definitely Clearly this is worth spending a lot of time learning about because it's a huge opportunity to decrease your tax bill and also increase the amount of funds you have available to reinvest. Now, is there any Is there any area where, you know being that cost segregation expert or what was the what was the other term? Because depreciation and product depreciate depreciation expert. Is there any area in your opinion that this could be used, that it's not? Is there something that the real estate investing world is missing? In this? Um, on the whole
Yonah Weiss 23:43
on the whole, I mean, it's hard to know, you know, there's nothing blanket statement that, you know, the whole world is missing. Because if it's out there, you know, people are going to know about it. And the great thing about conservation is that even though it's like this really cool and it's very popular right now. You know, I'm trying to make it popular.
Right? Right. I think I'm doing a good job at it. You're the guy. But it really, it's, it's in the books meaning this is was developed by and, you know, created and and legislated by the government right it's in a textbook all these rules so it's not like some you know some strange like strategy some like you know tax evasion you know tool whatever it is literally I had a meeting with some guy yesterday like speaking with this is like okay sounds all in Philly like
on the kosher scale like how kosher is that
this is it's all this is all from in the books you know this is from the government so
um, yeah, I think I think what people are missing out one component maybe the the partial acid disposition component of it which is upon sale. Not a lot of people. I mean, I want to I know, not everyone uses a strategy. But it definitely shouldn't be considered.
Good to know. Good to know. We're going to take a quick break for our sponsor. All right, yeah, I've got three questions. I asked every guest on the show. Are you ready?
Yonah Weiss 25:19
Let's do it.
All right. First one, what is the best investment you've ever made?
Yonah Weiss 25:27
And I want to change this because I just like to be different. Go ahead.
You know, I invest time. And I think investing time is not looked at as like a real investment. You know, you're you're investing assets and, and, you know, I've done that and that can be boring, but I invest my time, which is, you know, in my children, and I think that's really important. I actually followed six children. And, you know, every, every, every one, you know, every challenge that you will have is totally unique and has so much.
So I tried to take time set aside time, you know with all of them every day. I can't necessarily all of them every single day but I tried at least once a week to take time with each one of them and invest that time because it is so important, especially when we're young.
Nice, nice. We were talking before we started recording my previous interview before you and I started talking with john Kasmin, that'll be up by now and this goes live but John's answer to that question was his wife so you know, necessarily a financial investment i think is great. On the other side of that, what is the worst
Yonah Weiss 26:43
worst investment ever made? I think was in its own It was also timing because I didn't put much money involved in this but was a fix and flip that we did. With Dr. Here. We didn't put in much money. it up front, but it was just exhausting because the contractor basically left the job in the middle. And it ended up staying on the market for over a year after, you know not being sold. So we basically lost them lost money on their
couch. All right, yeah, I'm not a I'm not a flipper myself. So I don't I don't hold that against Well, I'm not either.
learn that lesson the hard way. So my favorite question of the three is what is the most important lesson that you've learned in investing?
Yonah Weiss 27:36
The most important lesson that I've learned in investing and I'll bring this back to finances, because I think a lot of your listeners can relate to this is not listening to the advice of those who are wiser than me.
Because you know, oftentimes, my father's you know, other There are people who are more senior than me much more skill than experience. You know, and I remember even when I was a teenager, like some ideas, you know, came up and I asked my daddy, like, if it's too good to be true, it probably is, you know, I always thought it's like something. And it's so true. It's just so true.
You just have to listen. So there, you know, there are times when you have this pool, and this desire, this is great. And then you, you're pulled into the idea of investing in something, and your brain starts to convince, you know, the better part of your brain that it's really good. And so you start to ignore, you know, those people were more objective in it, and that's the advice it would have is always take counsel, and when the counsel is advised against something, you know, be cautious and you know, back away
interesting. That's, that's a good point. So unite. Thank you for everything today. If people want to learn more, if they want to have a cost segregation study done, where can they get in touch with you?
Yonah Weiss 29:09
You can find me on LinkedIn
or bigger pockets. That's a good place or drop me an email address. You can shoot me an email there, [email protected] So that's why first name, first little first name WEISS had Madison specs as PCs.
Cool. And that'll be in the show notes as well for anybody that missed it. If they want to get in touch with you, they can click that. And you are absolutely a machine at using LinkedIn. So you've, you've done a great job there for sure.
Yonah Weiss 29:43
I actually just sent you a connection request, because I saw more connected.
How is that even possible? I don't know.
Yonah Weiss 29:52
I don't know how that's possible. I don't know you're here. Alright. Well, thanks
once again, you know, and I appreciate all the knowledge you shared with us today and And all the hard work that you did on on my property in Amarillo. And I don't know. Thanks once again,
Yonah Weiss 30:07
I thank you,
everybody, thank you for tuning in. I hope you're enjoying the show. If you are a please leave us a rating and review on iTunes. Very big help. If you know anyone that could use a little bit more passive wealth in their lives, please share the show with them and bring them into the fold. Once again, I'm your host Taylor load. Thank you for tuning in. I hope you have a great rest of your day and a great week and we'll talk to you on the next episode. Bye bye