Business owners, particularly real estate owners, pay a staggering amount of taxes.
In this episode, cost segregation specialist Erik Oliver will explain how the method can improve cash flow, enable realtors to take advantage of accelerated depreciation discounts, and more. You’ll be able to save millions of dollars in taxes.
Watch the episode here:
Listen to the podcast here:
Erik Oliver: How Cost Segregation Can Reduce Taxes
Hey, everybody, welcome back to another episode of The Real Estate rundown. You know, our goal on the show is to help you guys get the most out of your real estate investing experience. And to do that today, I brought on a special guest, a guy that just right down the road from us is helping people get their tax bills to zero, a gentleman by the name of Erik Oliver. Erik, welcome to the show, man.
Hey, thanks, man. I appreciate it. Glad to be here.
You know, Erik, you are a “Cost Segregation” Specialist. Everybody hears about this zero tax game, right. We have a lot of investors that invest with us. Their number one concern, like we talked about before the show, is just getting to that zero tax mark. They don’t want to pay taxes. Nobody wants to pay taxes, right?
I mean, if we want to help somebody we’ll give to a charity. Right. But when you see what the government does with our money, nobody wants to pay the tax bill. So everybody hears about this thing, these? How do you get to a zero tax game and Cost Segregation is something that gets tossed around?
I think that there’s really two schools of thought with cost segregation in the market right now. One is it’s too hard to mess with. And the other one is, we do it all the time. Right. And we really want to help our listeners today.
Getting from that seems difficult to… “Oh, my gosh, I can’t believe we haven’t been doing this before”. And “Maybe we should look at amending last year’s taxes to make sure that we can take advantage of it for this year.” Right.
So tell us a little bit. I mean, you’ve got a background in Applied Science. I mean, you’ve got a Bachelor’s degree in Accounting. Tell us a little bit about your journey about how you came to be a Cost Segregation expert. Then let’s jump into a couple of things about what Cost Segregation does and how it works for the average person.
Sure, that’s a great question. So how I became a Cost Segregation Expert. So I gotta be honest with you, when I started this career, six years ago, I did not know what cost segregation was. So my background is that there were a lot of people, though.
Well, that, but that’s how most experts are found, right? They fall into a hole, they learn their way out.
So yeah, I don’t know if that’s the right answer. But let me explain. So my degrees in accounting, as you’d mentioned, so numbers have always come easy. I growing up in school, and in college, I said, How am I going to get through this college thing as quickly as I can?” And I was either science or math, and I’m horrible at science. It takes me forever to write a research paper. So I’m like, math comes easy. I’m going to do finance for Accounting. So math has always come fairly easy.
I got my Accounting degree and didn’t really have any interest in becoming a CPA, I actually ended up in Sales, Business Development for a number of years, and had moved out to the East Coast, and wanted to move back here to Salt Lake.
[I] was looking for jobs, was always interested in real estate, read a lot of books, was always fascinated with the real estate market and how you can create long term wealth with real estate. Then with my accounting background, I came across this job and I’m like, “Hey, this is kind of a niche accounting firm, where they focus on real estate”. And that’s kind of how I got into it.
I’ve learned a ton about real estate over the last six years about cost segregation. The business, the company that I work for, we’ve been around for 15 years. And so we’ve got a lot of experts here who understand real estate, who are all real estate investors themselves. And so Cost Segregation is really just an underutilized tax planning tool.
That, like you said, until recently, there’s been some tax changes, tax law changes that have made it more accessible for all types of investors, it used to just be cost segregation was for your real large investors who are buying, you know, hospitals or large apartment complexes, casinos. But with some of the tax law changes, it’s now more impactful for almost all investors. And so it’s just something that we like to get out and educate people should be aware of.
Well, and, you know, I don’t know why more people don’t read the tax code. It’s only 70,000 pages. And the tax code changes. I mean, those only happen, you know, every 20 years, right. I mean, they don’t change anything. So, but you know, one of the things that I want to stop and highlight and this is, I think the biggest miscommunication that people have when they think about accounting, right?
People think my accountant’s job is to save me tax money, you know, but accountants, they, they put stuff in boxes, right? They take the numbers… Most people’s problem is they go to meet with their accountant in February or March and there’s nothing to do to change last year. Right? Correct. And, so they’re sitting there going to save me for myself. “I did zero planning”, right.
Even if you’re going on a road trip, I mean, you’re gonna do some planning but it’s amazing how many people do zero tax planning. Then they come to the end of the year. But why is it that accountant means I’m asking because I’ve forgotten a clear cut or clear answer. Why is it that accountants don’t do more education for their clientele during the year?
Sure, that’s a great question. I actually met with a firm a few years ago, and we presented to them and talked to him about cost segregation. They sent over a few deals and it was a massive firm and I reached out to the guy and said, “Listen, I know you guys have hundreds of real estate clients like what’s going on here?”
You know, you’ve only reached out a couple times but we can help your other real estate. He said, “Listen, Erik”, he goes, “I’ve got 1400 tax returns that are due by April, and I’ve got nine IRS audit responses that are sitting on my desk”. He goes “For me to sit and educate…” and you hit it on the head, we’re motivated by what we’re compensated for. So CPAs, not all CPAs. Some CPAs are compensated to file your tax return. That’s where you know, they file your tax return, you pay them, that’s how they make their money.
So there’s a big difference between a CPA and a tax planner or tax strategist. Yeah, CPAs are kind of, and I’ll just throw this out. CPAs in general, are though your general practitioners. So they have to know a little bit about a whole wide array of subjects, and they can’t dive deep into real estate, unless they’ve made that decision early on that, “Hey, my firm is just going to be working with real estate clients, and we’re going to be the best at real estate”.
So that’s when they partner with outside companies to help provide that expertise in real estate. But you’re exactly right. You want to make sure you’ve got a tax strategist that understands real estate versus taking your return to H&R block at Walmart and having them…
Because the only “block” is yours, right? You’re gonna get it. But, you know, that’s an amazing thing, too. You know, it’s obvious that the marketing guys haven’t talked with the accounting guys, the accounting guys have already done the numbers and realize that the marketing guys don’t fit in their budget, right?
So because the reality is, if you came to any business owner or any person and said, “Hey, I can improve your bottom line by 10%, just 10%”, you’d have a line out the door, people would say I need your service. Right? Right. But they don’t.
And it is up to the consumer, or the investor to find that strategist to find that person that does the things that you hope that everybody does. But that’s just the common misconception. And so your firm really just focuses on cost segregation, right.
So that’s your full Deep Dive. Yeah, that’s exactly right. So let’s get into that. Let’s peel back the skin on what is cost segregation. I just bought a fourplex. What’s my cost segregation move here?
Sure. So cost segregation, I’ll just back it up. Just one step. So a lot of us get into real estate for some of the tax benefits. That’s not the only reason. There’s obviously appreciation. And there’s a number of reasons we get into real estate. But one of the big benefits is the tax write offs. And so when you purchase that fourplex, you’re able to depreciate that over 27 and a half years, so residential property gets depreciated over 27 and a half years.
Come on that half year is really the kicker. That’s what…
…puts it over the top. I still want to ask Congress who came up with that idea? So I don’t understand.
You know, one guy was at 28. And the other guy was at 27. And they finally said, Fine, 27 and a half.
Let’s get it signed. Yeah. So residential properties, 27 and a half commercial properties. 39 years. So just to make the math easy, let’s say you bought that fourplex for $275,000. You’d be getting $10,000. Write off every year for the next 27 and a half years, which is great. You know, you have let’s say you have 100,000 of income.
Now hold on Erik to be correct. We would need to have bought that for $350,000 with a $75,000. Lot with $275,000. Yeah, right. Yes.
Over. Over simplified. You don’t get to depreciate land. So you’re right.
You bought a lot for 350. We got a $75,000 land value with two, five left. And now we’re going to depreciate that.
Now we’re going to depreciate that, correct? So you’re gonna get a $10,000 write off every year, for the next 27 and a half years. But what if we don’t own that property for 27 and a half years? I don’t have plans on owning that property for 27 half years, how can we accelerate those deductions instead of letting the IRS hold on to it? That’s really what cost segregation does. It’s done through an engineering based study where we come in when you bought that fourplex, and you’re not just buying the walls in the land.
You also bought some carpet, some appliances, some countertops and cabinets, you just don’t know the value of those because you paid one lump sum. And so that’s what cost segregation is, is we’re coming in and segregating the cost into different buckets. Right.
So we’ve got five year assets, seven year assets and 15 year assets that you can depreciate much sooner, which allows you to front load those depreciation expenses versus taking your standard 127 over the next, you know, 27 and a half years.
That’s where, you know, the logic behind it, which I know the IRS and logic and Congress all that mix it together very, very rarely. But, you know, in apartments, I mean, you’re replacing carpet every five to seven years, you’re repainting every five to seven years, you’re, you’re renewing the parking lot. There’s at least some sort of parking lot maintenance every year, or every sorry, every five years, you know.
So there’s real expenses that are there. While you get to write off the expense, you have an asset that is devaluing every year, because you’re using it, right. You’re using up the useful life of the carpet that you bought at the beginning, right. So in five years, when you replace it, you’ve taken that depreciation when and where it should have been taken. That’s one thing that I think [with] Cost Segregation [that] Congress got right was because your roof will last 27 and a half years, but your carpet, your wall…
Right, exactly. And that’s really what it came down to. There’s a depreciation book that has a depreciable, or useful life for just about everything you can think of in business, and carpet is in there. And it says carpet lasts five years.
The problem is, when I buy an existing building, I don’t know the value of the carpet that’s in there. And so I can’t depreciate that carpet. So what ends up happening is that the whole building gets depreciated over 27 and a half years when in fact, it should have all these different components to it that get depreciated over the right schedule. Yeah.
So what we do, it’s kind of interesting, when we do cost segregation, there’s a form we fill out on some of our projects. It’s a 3115, that tells the IRS, I’ve been doing it wrong, I’m now going to fix it and do it right and depreciate it over five years, I’m going from an impermissible method of depreciation, to a permissible method. And here’s the difference in those numbers. And you get huge write offs by doing so.
Guys, I just want to highlight a couple of things that Erik just said. You’re admitting to the IRS that you did something wrong, I would make sure that you have a professional make that admission for you. It’s kind of like going into the police department when you know you’ve got to say something. You want somebody like Erik, telling the IRS the right way to say this. So that you’ve made that admission properly. And now you’re going to correct that. Right? So here you see an error because I bought this fourplex five years ago, and I’ve been taking it 27 and a half years, I’ve been dividing it up. But I could do that. Now. I don’t think it doesn’t have to be on something I bought this year. Correct?
Yeah, that’s called a look back study. And that’s when that form gets filled out. When you buy something this year, and you do cost egg, you don’t have to go back and tell the IRS that you were doing it wrong. I don’t want to say you’re doing it wrong, you just you’re not doing it by their method that they prefer. They’re not going to come tell you you’re doing it wrong. Because if they tell you you’re doing it wrong, that means you’re saving more money, they want to hold on to that money, so they’re okay with you doing it wrong.
So don’t, I don’t want to scare people and say, Hey, we’re going to tell the IRS you’ve been, you know, cheating on your taxes, they’re not going to tell you about it, right? They don’t want to give you those deductions up front, they want to hold on to it because they do what they want with that money. So they’re gonna make it up to you to come and say, Hey, we want to accelerate these deductions. Now, here’s our new deductions and you get to take those on your current tax return. And in that case, Shannon, you don’t even have to amend if you’ve been doing it. Let’s say you bought the property five years ago, that form that we fill out, makes it so you don’t have to amend any prior year’s tax returns, which is great.
So now I’ve come in, and I’ve taken that I was gonna do it, you know, $10,000 a year what? What’s the average savings when I do it all at once? And I did it up front, I got a $275,000 asset. What percentage of that? Can I write off in the very first year? Typically?
Sure. So under the current tax law, I’ll touch on this here in just a second. But there’s something called bonus depreciation, which allows you to take those five, seven and 15 year assets all in the first year. Okay, before bonus depreciation, yes, yeah, before bonus depreciation, you would have to take your five year assets over five years. So you get, you know, basically 20% each year seven over 715, over 15.
But with bonus depreciation, which is the current tax law, you get to take all of that, so you can on a $275,000 depreciable basis, you’re gonna get about 30% of that in the first year. So you’re gonna get about a $78,000 write off in the first year. So 10,000 versus 78,000. So you can see, you know, if again, if I’m 100, if I have 100,000 of income, instead of paying tax on 90,000. In Scenario A, I’m now paying tax on, you know, 20,000 or $18,000 of income. So huge difference there in terms of being able to accelerate those deductions.
Yeah. So, now I’ve taken those and I can pull all those into one year. What’s that normal percentage look like?
So typically it’s around 30%. And that’s 30% of a kind of quick back of the napkin math, take your purchase price, like you mentioned, minus land value, times 30%. And that’s going to give you your year one deduction.
So 27 times three. We’re going to be somewhere around 100 grand that we’re going to be able to deploy associate with the average investor, the average real estate investor that I deal with is usually in that 30% tax category. So that $100,000 in depreciation, I’m going to get a check back from the IRS for 30,000 bucks, correct?
Yep, let’s do the math on this, Erik, when I bought this place, $350,000, I put 20% down because I didn’t want to have mortgage insurance, I’m smart enough to know that. So I put what $70,000 down, I’m gonna get half of that back. Right, my first year’s tax return is in funds that I was going to pay to the IRS, I’m gonna now get that back, which doubles the velocity that I can then go buy another four Plex. Right? Yeah, and make those things reality.
So the thing that is beautiful about this is… This is what a lot of people fail to see: a tax benefit is really the IRS writing you a check. You know, a lot of people do well, it’s just less taxes, I have to pay, but I stopped paying. But if you did what the IRS told you to do, you put it away and quarterly, just quarterly payments. So it’s sitting here and account, it’s actually looking at its check back to you, you’re getting a check back on that three and a $350,000 purchase of $30,000. Plus, in year one.
In year one, it seems that you’re gonna you’re paying the show, you hit it on the head, you’re paying it out either way, right? When you pay it to the IRS, or you take that money and go buy a new fourplex, I mean, which one makes the most sense. If we’re trying to build long term wealth and stuff, obviously, we want to take those funds, pay down existing debt or go buy and reinvest it into new properties. So either way, you’re coming out of pocket for that money at the end of the year. I just want to put my money into a new fourplex, versus some people who want to give it to the IRS. So that’s an accurate result.
I haven’t met that person. Erik. There’s people out there. I’m telling you, they’re out there. I mean, that just comes back to being fearful of the IRS, right? Because the logic is truly there. It’s written in the tax code. That is the only tax credit I can do on my new purchase, I take the cost segregation, and I do the bonus depreciation, and then I’m done. And then that’s it. There’s no more taxes I can get on that particular purchase.
You know, there may be. So there’s a couple other tax credits that I think real estate investors should be aware of. For residential properties, there’s one called the “45 L” energy credit. So that’s typically on new construction. So if you were to buy or build a new fourplex… actually, you would have to build it if you bought it from the developer. The developers [they are] the one that’s eligible for the credit. But if you were to, if you were to develop…
Talking my language here, yes!
So if I were to build a new fourplex, I may be eligible for a $2,000 credit per door. So that would be $8,000. Now, this is another deduction. This is $1 for dollar tax credit, meaning if my tax bill is $10,000, I build a fourplex it qualifies, I get an $8,000 credit. My tax bill now is $2000.
Okay, so let’s back that up. One more step. I made 40 grand. Sure. My tax bill is 10. Grand. Okay, I owe them $10,000. My “45 L” credit makes that a $2,000 payment because it’s dollar for dollar against my taxes. Correct. So, we just did this a couple years ago in a 90 unit apartment complex that we just finished. We were able to take almost 400 grand in or, yeah, $360,000? No $180,000 [that] we were able to take against our tax bills.
Not against your income. Against your tax bill.
That went toward taxes on almost a million bucks. Right? I mean, that’s massive. That’s incredibly huge. And the reality is, and this is why I tell people all the time, stop looking at the at the tax code as a penal code, right. It’s something that is your friend, if you’re looking at it going, “I can buy a fourplex I can build a fourplex. There’s a reason why you might want to build one, right? There’s a reason why development is there.”
That development is the IRS trying to stimulate houses. We’re trying to stimulate people to build houses. Because as we know, as we’ve experienced for the last five years, there’s a massive housing shortage, right? They’ve done this so that you will look at how to do that and how to make that work, and how to get that done so that at the end of the day, you can participate in helping the IRS reach their goal. Instead of looking at it going, “Ah, they’re killing me, man. You know, that’s why they keep piling on gas tax. They don’t want you to use your vehicle. They want you to go electric, right. That’s why they give the incentive.” There’s all these different reasons why but the 45 L is a powerful one. Now, let me ask you this question. While we’re on the 45 L.
When I do a cost segregation study, I’ve taken depreciation and when I sell the asset we all know I have to repay that depreciation. Correct? Do I have to repay the 45 L?
No, no recapture on that.
That’s why it’s a credit. Right? Because there is no recapture. So the developer gets it. It’s a one shot deal. We are ready for it. We make great money on it. Now we have taken the bonus depreciation year one, we’ve taken the 45 L tax credit year one, what else? Is there? Is there anything else we can do?
Yeah, so on that particular property from what I’m involved in, no. There is a commercial credit for any of your listeners who build commercial properties. And it’s similar to the 45 L, it’s called a 179 D. And let me just kind of back up because I know I mentioned 45. So quickly that 45 L is an energy credit, so you have to have your property certified, a third party comes in and identifies whether or not that’s more energy efficient than a similar model from a prior year. And if it is, you’re eligible for that credit.
So the 45 L is really for your residential property, then you’ve got the 179 D deduction, it’s not $1 for dollar tax credit, like the 45 L, it’s a deduction for large commercial buildings, anything over… Excuse me, let me backup for all commercial buildings versus residential. And so on the commercial side, it’s the 179, D is $1.80 per square foot, they actually raised it to $1.88 and 2022. They adjusted it for inflation. So it’s $1.88 per square foot. So if you have a 100,000 square foot building, you know, you’re gonna get a $180,000 deduction, so that comes off of your income. The nice thing about the 179 D is you can actually qualify for a portion of it. So there’s three different portions, there’s lighting, mechanical, and building envelope, and each of them is approximately 60 cents. So you may not have the best heating and air conditioner, but if your envelope and your lighting is good, you might get $1.20 per square foot.
Here’s the thing that I’ve found, Erik, in my experience is that the 2018 IBC, which is usually what most people are building under right now. 2018. Or maybe we’re adopting the 2019 right now that the energy code that’s in the 2019, IBC is enough, they will give you a permit in most areas, most jurisdictions will not allow a permit to be issued. Unless you’re meeting standards that are below what you need to get the 179 or the 45 L right. So, one of those absolutely fantastic things that you can use.
Obviously, you’re getting more bang for your buck on the residential side. But then again, we need more residential housing out there than we do need commercial space. We need both. Yeah, but you know… So that’s fantastic. And those are, those are. So those are complicated things.
Those are not something where I can just sit there and go, Well, you know, carpet replacement, it’d be 12,000 bucks. So I’m gonna call it 12,000. I mean, what’s the science that goes into the cost segregation study? I mean, how do you [make it] cost segregated? actually come up with those? I mean, you’re not just going well, typically, it’s this or it’s that I mean, what is your real formula there?
Sure. So what we do if someone were to engage us, we always will provide them a benefit analysis beforehand to say, hey, we’re going to, we’re going to look at your property before you ever sign anything with us, we’re going to save you X amount of dollars at a minimum. Once we are engaged to do the study, we will actually go out and look at the buildings. So will we go out and look at what type of assets are in the building? Does it have carpet? Or does it have hardwood floors, because those are two different types of assets.
Hardwood flooring gets depreciated over 27 and a half years, carpet or LVP gets depreciated over five. So we need to go out and identify all the different components. When we’re doing new construction, we obviously have the breakout from the contractor, those are a little bit easier for us to do.
But we’re not just what gets misunderstood, I think it’s well… I can look at a general contractor’s pay app and say, Okay, well, I see flooring on here for 10 grand. So I’m going to just take 10 grand and depreciate it over five years. What gets missed is, I’ll give you an example, if you have, let’s look, let’s look at a warehouse.
Well actually, let’s look at an apartment building. So if you have an apartment building, you don’t just get to depreciate the appliances over five years because appliances are five year assets. You also get to take parts of the plumbing that go to your laundry room, and portions of the electrical that go to your laundry room. The only reason you have electrical and plumbing into a laundry room is specific for that five year washer and dryer.
So we look at and we actually get to allocate portions of the plumbing and portions of the electrical costs back to that five year asset. Not only that, so you have that portion, but then you also have all the indirect costs that go into building a building. So when you build a building, you have construction interest, you got architectural fees, you got permitting, we get to take portions of all those indirect costs and apply that back to that washer and dryer.
So it’s not just as easy as going and saying, “Hey, I bought a washer for 500 bucks, I’m gonna put it on the books, it’s 500 bucks”. No, it’s when you buy a building, there’s all these different components that you need to look at.
And so we’ve got software that we use costing software, kind of like construction software, that estimates the cost of these different things. And we do some modeling on our end, once we’ve seen the building or seen the cost to be able to provide a new breakout of those costs and what it costs you into. So…
Really, what you’re saying is, there’s more science to it than just just looking at what it costs to put that particular thing in it. So you guys really, honestly need a professional to do this. I mean, you can’t really get the benefit of it. Nor is this the other thing, too. I mean, the IRS understands and knows what you’re doing and what you’re trained to do. They also know that I don’t know that. And so when I turned in mine, complete in crayon, I filled out…
A question that I want to just touch on because it is a science. So you would think it’s, you would think that if you went to two different costs eight companies, you would get the same results? And the answer is no, it’s very different. And the reason is, it is just the same reason you would go to two different CPAs with your tax return, and you’re going to owe two different amounts.
Now, the IRS is on to cost segregation, cost segregation has been around, they just updated the IRS audit guide. So they give their agents a guide that says here’s how you need to review these studies. And it just updated it for the first time in seven years with any major changes for the first time in 15 years. And in that audit guide. It points to people like you who file in cran. And it says you need to scrutinize the hell out of these reports. So there’s a…
There’s another tip guys don’t do your taxes in Korea, okay.
It actually says there’s a methodology of rule or they call it rule of thumb. And doing these costs takes days which is basically just taking averages and says… On average, a residential property, you know, we can segregate 30%. There’s companies out there called Do It Yourself cost say I think their website actually might be DIY cost egg or something to that effect, where you actually as an investor, go in and put your own information into that the IRS has determined that those are very, they need to be scrutinized, for obvious reasons.
Right. And so, like you wouldn’t do your own kidney transplant, guys. I mean, there’s certain things you want a specialist for. I mean, you could write or you can save some other money, and you could go to the vet and get it done. But let’s talk about costs for a minute. Because that’s really what it boils down to.
Right now we understand that you’re going to be able to save some coins, but it’s always baffling to me, Erik, how often people then get cheap on who they use to save money. Right? Right, this coupon is only good for 35% off. But you got to buy two types of things. It’s like, Wait a minute. So I know that every deal is different.
I know that things have different levels of complexity, but I’m sure that by and large when you guys do a four Plex or a small 350 for under $500,000 investment, you know, what if something like that typically costs? If we know we already did the numbers that we’re gonna save about $10,000. Right, we said we were gonna save about $30,000 on the $350,000 fourplex. We’re gonna save that. What’s our cost for something like that?
Sure. So that’s a great question. So the cost range, and I’ll give you kind of a wide range because it is based on size and scope of each project. So a four Plex is a little easier for us to do than a retail strip mall. We got to get into nine different tenant spaces, but usually on a $300,000.04 Plex, you’re probably in the two to $3,000 range for the study. And then we’ve done everything from single family homes up to ski resorts that are $40,000 for a study because there’s, you know, 15 buildings with the ski resort…
We got to ski here all season, we got to check out all the lifts, how much deforesting needs to happen on this? Well, so in March…
So I know that’s a wide range, our average study at our firm is between six and $8,000. But for your smaller residential stuff, you’re between 2002 and 3000. And you’re gonna save at least with this bonus depreciation right now at least 10x on that.
So that’s what I was getting ready to kind of drill into so it’s probably going to cost you 10% of your savings. Yes, right. So if you’re gonna save 30 You’re gonna pay three. That seems like a pretty good deal. It’s not one of those things that we’re gonna save you $30,000 for a nice nominal fee of 2795. Right.
And so that’s something you want to look at though because you hit it on the head, you don’t want to go cheap and this I’ve seen people step over. Let me get this right. Step over $1 to save a penny. Well, they said they look My proposal versus a competitor’s proposal says, “Erik, you’re $2,000 More than than this person over here”.
And I said, Okay, that’s fine. I said, I don’t want to be the cheapest in our industry, we do better work. Let me look at that proposal. And when I looked at the proposal, the competitor was saying that they were going to save you 20,000. I’m saying that I’m gonna save you 30,000. That’s a $10,000 difference. My fee is $2,000 more, you do the math, you’re still coming out eight grand ahead. And so I don’t want to…
I don’t want to… how’s it you can’t leave me hanging? How’s the story end? Did they get it? Or did they do their math ago with the other guy?
Oh, they came with. They did their study with us. But…
Thank God, because I have known people that did the math and went with the other guy.
There are people I’ve had, in that example, that example, they did come with us, I have had people do go with the other people because they’re like, You know what, I’m gonna save my money up front, I don’t know that you’re gonna get those amounts. And so I just don’t say that to self promote our company or anything.
But when I say this, it’s very… there’s no two proposals that are the same, and you need to look at not just the cost, but look at what the return is going to be. And then from there, it is a simple math equation, okay? They’re saving me 30. They’re charging three, this guy’s saving me 20, charging me to do the math and go with whoever it is, whether it’s us or somebody else doesn’t matter.
I totally get it. And that’s, that’s always, you know, something that some people look at or don’t look at. But then again, that’s why the dollar stores are here. That’s why, you know, there’s Hyundai and Mercedes, right? Some people devalue, and some people don’t. Right. So there’s nothing wrong with that. Except when it boils down to black and white numbers, then there really is something wrong with that. That’s common core math.
Right. So, but you know, Erik, I mean, you’ve told us about the ways that we can save money and how we can get these costs down? What are some of the other things that that? You know, do my listeners want to know? I mean, you know, what’s something else that they can learn here from the Cost Segregation world?
Sure. So I always like to just touch on when you sell an asset, and you kind of mentioned it in one of your questions about recapture. And so I always like to just point this out, because I think this is probably the biggest area where I see CPAs and building owners where their hesitation is on cost segregation.
So when you sell an asset, and you pay two types of tax, you pay capital gains tax, and you pay a recapture tax, your recapture tax is calculated based on the amount of depreciation you’ve taken.
So we’ll even meet with CPAs and they say I don’t advise cost segregation. Because if my client takes all that depreciation today, when they sell their building in five years, they have a huge tax bill to pay in five years, right, Erik? And I say, Well, not exactly right.
So let me just walk through a quick scenario. I’ll try and clear this up as clearly as I can, without getting too far in the weeds. But I’ll kind of back into it, Shannon, if you don’t do cost segregation, and you buy a building for a million dollars today, and you sell it for 2 million in five years.
When you go to settle up with the IRS on that transaction, you’re telling them that everything doubled in value, my land is worth double, my walls are worth double, double. And guess what so is my dirty old carpet that’s now five years old, it just went double, it’s double the value when I sold it, carpet doesn’t go up in value, carpet goes down in value.
But if you don’t do a cost segregation study, you don’t have that carpet broken out. So you’re just taking one big lump sum of assets and saying this asset doubled in value. When you do cost segregation, you can pull out bits and pieces. So what is your five year carpet worth after owning the building for five years? Nothing, nothing. It’s got zero book value, you pay no recapture on that, if you do a caustic study.
So the whole idea behind Cost Segregation is take your deduction today at the highest rate at my ordinary income rate, I’m gonna take my deduction against my 37% tax rate, I’m going to pay back a portion of it, that portion is dependent upon how long I own it, I’m going to pay back a portion of it at a 20% capital gain rate and save the spread, right?
Even if I pay it all back, I’m saving a 17% spread. But guess what, I’m not paying it all back, because my five year carpet after five years is worth zero. Right? And so that’s where I just want to make that point. And if, if that doesn’t, if that doesn’t make sense, just let me simplify that don’t sell your carpet for more than you bought it for. And if you’re not doing cost segregation, that’s what you’re unintentionally doing if you’re selling your carpet for more than you bought it for.
Yeah. No, and that’s really true. Because, you know, people aren’t realizing that the profits are one thing and costs of operation or another. And then you have the depreciation that goes with that. You know, and one of the things to Erik, that, that people, if they didn’t pick up on it, I want to reiterate it now and we’re going to offer this to all of our listeners.
You can give me a preliminary number, and I can tell you, “Hey, this is what I bought, this is what it is, this is the value, this is the pictures, and I can get a Cost Segregation estimate with the cost of what that is from you for free.”
Correct, I can get that.
So guys, if you go to contact, Shannon Robnett, or you go to ShannonRobnett.com/contact, you can reach out to us, we will send you that link that you can go directly to Erik and get that.
So you guys, if you just reach out and contact us, we will get you connected with Erik and you can get that for free. So then you can have the benefit of knowing what it’s going to likely save you. This is where we flash that warning.
You know, actual results may differ, but you’re going to know very closely and guys, this is somebody that’s been doing this in the industry for 16 years, the company has had a lot of results that they know what they’re talking about, and they know how to get close there. And Erik, I’m gonna guess not to put you guys on the spot. But I’m gonna guess that you guys over promise and under deliver? Or do you under promise and over deliver under promise and over deliver?
I always have to think twice. My tongue gets twisted, we under promise and over deliver. Every time we do our analysis. I’ve been like I said, six years I’ve been doing this. We haven’t not hit our numbers once because we’re super conservative on our estimates, because, you know, if I tell you I’m gonna save you 40 and charge you for it, you’re probably going to move forward with it. And so if I end up saving you 50 Kudos to us, right. I mean, so it’s…
Let’s say, we got a problem. It’s so funny how the public [does] that? I mean, I’m like that, you know, you said 40 Erik, and I got 39 997. What’s wrong with you guys? I mean, I overpaid. You said, you said, you know, so. So guys, that’s what we have for you guys today, when you’re looking for that.
And you want to know more… if you want to know more about cost segregation, and how we employ it in our business, you can call me. I can give you some real world examples.
I can give you actual deals we’ve done, which Erik can’t actually do, because he probably doesn’t have the permission from the people to give you their numbers on, you know, but you can contact me. And we can talk about actual deals we did. And then we can connect you with Erik, and you can get your free cost study estimate, and then get moving on it.
Anything else we need to [know]? I mean, I think we’ve barraged them with a massive amount of information, and especially when you’re talking about cost savings on your taxes. I mean, that’s the number one thing in the world that everybody’s trying to pay less out, right.
Yeah, no, you hit it on the head. So no, I think we’ve covered a lot. It’s been great. Thanks for some great questions. Hopefully, we’ve been able to provide some value to your…
Oh, definitely Erik. Definitely. So guys, thanks for tuning in to this episode of The Real Estate Rundown. As always, you know, subscribe, like, share with your friends. And if you’ve got other questions, connect with ShannonRobnett.com.
And we would love to connect with you and help you out on your real estate journey. Thanks again, Erik, for being on the show. We’ll talk soon.
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About Erik Oliver:
Erik Oliver is a CPA and a Cost Segregation Expert. He started his career as a Cost Segregation Expert six years ago. With his accounting background, he came across this job where he focused and learned a lot about real estate and discovered the benefit of using cost segregation.
Cost segregation services are one of the most effective ways to free up liquidity and improve cash flow. By reclassifying some assets, you have the ability to accelerate the depreciation of real estate assets. When you leverage these accelerated depreciation deductions, you can defer tax liabilities and improve cash flow.
Erik himself is also the Managing Director of the Cost Segregation Authority.
The Cost Segregation Authority was first established in 2006 at the infancy of modern cost segregation services. It was founded in large part by a father and son team who had spent their career in the construction industry and became passionate about the tax-saving strategies associated with real estate investments. This family culture has stayed with us for over a decade and we endeavor to keep it this way for generations.
A key milestone in our growth was the separation from a CPA firm in 2015. Our practice does one thing only—cost segregation.
You will find most cost segregation firms are full-time CPA firms or offer a dozen other services to maintain their margins. At the Cost Segregation Authority our focus is exactly as our name implies. Hence, if you are a CPA or other tax advisor, you don’t have to worry about losing any tax return or other consulting revenue when introducing us to your clients. Our goal is to make you look good by performing the most accurate and tax-saving study possible. We are the good news in your practice and your partnership is paramount to our success.