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Episode #089 - Save Money On Your Taxes NOW! The Benefits of Cost Segregation With Guest Erik Oliver

by Criterion, Braden Cheek, Brian Duck
December 12th 2022

Today hosts Braden Cheek, Brian Duck and Joel Thompson discuss cost segregation & its benefits with special guest Erik Oliver from Cost Segregation Authority.

Time Stamps: 0:00 - Introdu... More

what is up and welcome back to how to invest in commercial real estate. Today is a super exciting day because we have a guest on the podcast and we talk about taxes and and tax savings we utilized in real estate all the time, but today we wanted to bring on um somebody who is, you know an authority in this matter um eric Oliver is going to be joining us and he's with cost segregation authority. Um and he's gonna go in depth on just some of the tax benefits, but specifically cost segregation that we utilize in real estate all the time and that are a massive benefit, just the whole asset class. So eric why don't you introduce yourself and tell us a little bit about what Eric. Yeah, no thanks guys for having me. Um yeah my name is Eric Oliver, I'm with cost segregation authority. We've been doing cost segregation for a little over a decade now. Um done close to 15,000 studies, we do studies in all 50 states, so wherever the building is will do the study. Um Partner mainly with C. P. A. S. And real estate investors on just reducing their tax liability through cost segregation.

So um like I said, we do a lot of training for Cps. Cps, it's kind of a specialty service that we offer. Cps are kind of your general practitioners per se. And so they have to know a little bit about, you know, thousands and thousands of pages of tax code but they don't necessarily have the time or bandwidth to dive deep into depreciation. And so that's really where we partner with the C. P. A. S to help them and specialize in this service. So um that's kind of a little bit about who we are and what we do. So uh people listening, they purchased a commercial asset, a real estate, commercial real estate building and they say what is a cost segregation study and how is it going to help me after I purchased it? Yeah. So that's a great question. So cost segregation really is just accelerated depreciation. So one of the benefits of owning real estate is being able to take these deductions against your income. So typically real estate is depreciated over either 39 years or 27 a half years. So that's 39 commercial property, 27 a half years for residential.

And um again so if you buy just to make the math just to make the Matthews, if you have a $270,000 asset and just appreciated over 27 a half years, you're getting a $10,000 right off every year um towards your taxes. So that comes off your taxable income. So that's in addition to the expenses that you're already writing off. Yeah. Yeah exactly depreciation is just a non cash expense. And so you just add that as an expense. And so that comes off your taxable income. But what if we could instead of taking one 27th or one 39th of a deduction every year, I may not even own my building in 39 years. So I want my deductions now. And so if we can front load those deductions into the early years by doing sorry, serious, thought I was talking to her, let me, I wasn't talking to you syria, hold on. So um if we can front load those deductions and take advantage of those deductions in the early year, it's more beneficial. The reason you do that, obviously there's a time value of money element there, inflation, you know, a dollar today is worth more than a dollar in the future.

Um And the way that's done is like I said through an engineering based study where we will go in and when you buy an asset, you're not just buying the land in the walls, you're also buying everything inside the building, plus all the land improvements on the outside. So for example, carpet should be depreciated over 15. Excuse me? Five years versus 39 years. Um Your parking lot should be depreciated over 15 years versus 39 years, but you don't know the value of those components. When you buy a building, you buy a building, you pay a million dollars for it, you don't know that the parking lot is worth 80,000, or the carpet is worth 10,000, or the cabinets are worth 18,000. And so that's really where cost segregation study comes in to segregate those into different buckets so that you can accelerate your deductions. So a normal commercial uh, depreciation schedule is about 2.5% a year roughly. Uh So do you have an average of what those first few years would be using a cost segregation study approximately? I know every building is going to be different. That's a good question.

Yeah, no, that is a great question. So yeah, different asset classes will, will yield different results, but typically we we segregate around 30%. What that means is land is non depressed people, so you have to back out your land values. So if you buy a building for a million, two and the land is worth 200,000, that gives you $1 million 30% of that, or 300,000 of that into those shorter asset lives. And under the current tax law, There's something called bonus depreciation, which allows you to take 100% of those deductions in the first year. So if you're getting 100% of 30%, you're gonna get a $300,000 write off in the first year on that million dollar building. Yeah. And then the other, the other 70% gets divided up over the next 38 years. Um, and you'll take a small portion, you don't use all of it in the first year, but you take a small portion of the years going forward.

So that's a, that's a massive advantage. Um, I mean, when it, when it comes to selling these reports, I'm, I'm assuming there's some sort of costs associated with this and, and some sort of lead time. I mean, what is the timeframe and cost to be expected by an average person or an average building, I guess, I would say for something like this. So the cost is kind of a tough one. It's, it's based on the size and scope of each project, but we do everything from single family rentals for, you know, 2500 to 3000 all the way up to ski resorts in large shopping centers, That might be 50,000 because there's multiple buildings. So I know that's a wide range typically on a, you know, a million dollar commercial building, you're probably somewhere around $9000 for a study. But if you're getting a $300,000 deduction, you take that time, you're 35% tax bracket, You know, you're at over $100,000 in tax savings just in the first year, assuming you can absorb those those deductions.

Um, And, and so do you have to do this cost segregation analysis the first year that you own the building, obviously that's to your advantage. But what if you own one right now and you know, you're in your second or third year, could it be done now can? And that's one of the great advantages. One of the cost segregation is one of the few tools that has this type of flexibility where you can kind of pick and choose when you play that card. So let's say you own the building since 2015. You've never done a cost segregation study. The I. R. S. Allows us to go back, do a cost segregation study today, take those, those deductions on your current tax return, your 2022 tax return without having to amend any prior years. And so there's just a form that you have to fill out that says, hey, I. R. S. I've been taking my standard deduction. I'm now going to accelerate those deductions into my current year. And here's the difference in those numbers, and it's actually, oh, sorry, I'm just gonna add, it's actually kind of interesting. You're actually checking a box on that form that says, you are depreciating your carpet incorrectly.

You're now going to fix it and appreciate it correctly because carpet is a five year asset. It should be depreciated over five years. And here's the difference in those numbers. So you're going from an impermissible method of depreciation to a permissible. Now, the I. R. S. Isn't gonna come tell you, hey guys, you're depreciating your carpet slower than you should be, because that's just more money in their coffers, So allow it to happen? But you're actually going from an impermissible method to a permissible method. Sorry, I didn't mean to interrupt you. Get a question. No, it wasn't a question. It's just interesting because I think our accountant, when we once they had already entered it in the appreciation, they didn't they didn't think we could go back and change it. So it's just an interesting point that I have to bring up with them that you can actually redo it once you've got it set in motion. Yeah, that's a misconception. A lot of cps and again, it's no fault of your C. P. A. C. P. A. S. You know, they don't have the bandwidth to dive deep into this depreciation. But yes, you can absolutely go back. Even if you've already established your depreciation method um Using that 31 15 change in accounting method form, you can go back and take those deductions on your current year. So eric another question I have.

Could an individual try to do a cost segregation analysis on their own or is the I. R. S gonna come to you and say you have no basis because you have no experience. And so therefore people need to use someone like you or maybe an experienced C. P. A. That you've trained, what's what what happens there. Yeah, that's a good question. So the I. R. S actually just released their updated audit guide on how to audit these types of reports. So this is a guide that they give their agents and say hey if you come across these reports this is how you need to look at them. And in that audit guide it does say it doesn't there's no governing body for cost segregation. And um so you could do your own cost study you probably wouldn't know what to look for and if you were ever to get audited it would probably get thrown out. And the reason for that is in the audit guide. It does state that you need to have somebody with both construction or engineering background as well as tax knowledge and they need to be experienced in both those fields. It doesn't say that you it says you should it doesn't say you have to now the reason you want to and the reason it's it is worth paying the fee to get a study done.

If you were to do a Cossacks that actually we've had Cps do their own Cossack studies for their clients especially on new construction a lot of times. C. P. A. Will say hey my client built a building right? I have a list of all the broken out cost. I'm gonna go ahead and just pull out the carpet and pull out the cabinets and pull out the appliances or what have you. That's great and they'll be able to capture some of those deductions. But when you have an engineering based study done we're going to look at things like the indirect costs. Um I was actually just learned this this year. I've been doing this for seven years and just learned, you know when you go to a construction site and they have the porta potties out there. Those porta potties for those construction workers go into the basis of your building. That's an indirect cost, the fencing around the work site. Those are indirect costs. Your C. P. A. Won't know to break those out and to allocate those over the useful life. So we'll pick up the indirect costs. And then the second thing which is most important where we see the biggest difference is allocating the electrical and the plumbing. So again, if I've got, if I'm a C. P. A. And I got a list of costs and it says $200,000 for electrical work.

I don't know what of that 200,000 was for my sockets on the walls versus the plumbing or the electrical work for my appliances. Because if it's for the appliances, I get to depreciate that electrical work over five years. But if it's for my light switches or my sockets on the walls that gets depreciated over 39 so they don't have that engineering background or the construction knowledge to be able to pull it out. So again we usually get around 30 to 35% segregation. If you guys were to do it yourself or your C. P. A. Was to do it themselves. You'd probably get somewhere between 10 and 15. And so that difference in that 10 or 15% difference could on a million dollar building that could be 100 and $50,000 of additional depreciation times a 30% tax break. That's a $45,000 difference. So it's worth paying us 4000. Do the study if we can generate that additional 45,000 of deduction. So. Sure. And so is that example you just gave, is that a typical return on investment for you? Kind of a 10-1? Is that what someone can see from one of your studies?

It's probably higher than that. So on that million dollar building, if we're segregating 30%, we're gonna reclassify about $300,000 worth of assets And conservatively let's say you're in a 30% combined state and federal, you know, 300,000 times 30%. That's a $90,000 tax savings on that building. It's probably gonna cost you four or 5000 for the study, you know, significant returns, especially with this bonus depreciation that's available right now. Right. I remember there's a couple other areas that you had some expertise in that we may want to talk about. Do you remember what those are the energy credits that you talked about on your website. Those are things that we're not really familiar with. I wonder if you could touch on those for just a bit. Yeah so there's really two credits or slash deductions that are extremely underutilized in our industry. Um One is the 45 L. Energie Credit. Now the 45 L. Energie Credit is specific for residential units. So if you're building single family homes, apartment buildings, student housing, senior housing and there you're building them to certain spec that is required by the I.

R. S. To be considered energy efficient. Under the current tax law for 2022 you're eligible for a $2000 credit per dwelling unit. So if you build a four plex and it's energy efficient according to the I. R. S. Standards, you do have to have a third party come out and look at it and if it's energy efficient you're gonna get $8000 tax credit that comes right off your tax bill. Which is great now to qualify for these the counties around the country and just the building codes and the building materials throughout the country. It's kind of hard not to qualify for these because the counties are gonna require you to put in certain types of material or certain amounts of material. And so they're fairly easy to qualify for. Um But they're just not that well known and I think the reason is is the I. R. S. Will allow these programs to expire and then at the end of the year they'll vote on it and say yeah that was kind of a good program. Let's go back and Backdate it. Um For example this 45 L. Expired at the end of 2021. And it wasn't until about a month ago that they reinstated it.

So for the last 10 months we didn't know if 45 L. Was even going to be around for this year. So I think cps kind of lose it on their radar. Um But the great opportunity for any developer um anybody who's building new residential units to get those credits. That's the first one. The second one is mostly for your commercial property. It's called the 1 79 D. And that's an energy deduction. Um The 1 79 D. Is a deduction. Not a credit. Similar program. You're looking at things like the the insulation in the walls, the windows, the efficiency of the windows, the efficiency of the heating and air um if your building that you're building meets the criteria you may be eligible for up to $2.50 per square foot of a deduction. And so um you know it's a great opportunity. Again needs to be certified by a third party. So you'd have somebody like us come in take a look at the blueprints, take a look at the property. We run some modeling to say yeah this building is energy efficient according to the I. R. S. Standards and we would issue a credit or excuse me a deduction in that case of $2.50 per square foot.

Now good news is with the inflation reduction act. Those deductions for next year are going up from $2 to $2.50 and as much as $5 for next year. So essentially you could get a $5 per square foot deduction next year for buildings that are placed into service. Yeah so the numbers are going up inflation is going up so they increase that and I failed to mention they also increase the 45 l. From $2000 to 2500 and up to 5000 depending on how energy efficient your residential units are. So good news is they're going up for next year. I mean I have to hold off on the service of the criterion building on this year. Yeah. I mean it's it's pretty interesting because I think most, most of these things you're talking about, most people think they can get handled by their C. P. A. And I think just like you were talking about in the beginning a lot of your education and and maybe lead generation is coming through talking to CPS to to support them. But it sounds like that just going to you directly and and saying hey here's my portfolio.

Anything you could help me with. I mean it seems like that would even be like a free phone conversation. Hey here's what I have. Can you help me either. Yes or now? Absolutely. We work with investors all the time directly and then we always want to get the C. P. A. Involved because they have a better they have the big picture of what your tax situation looks like. You know maybe you had some deductions that are carrying forward from last year that we're not aware of and so we don't want to ever engage a client if they're not gonna save significant tax dollars immediately. But. Yeah well we work within the building owners themselves. We'll take a look at their portfolio and say hey here's what we think we can do. Let's get your C. P. A. On the phone to confirm these are gonna make sense. And then you know partner with your C. P. A. To make sure we're maximizing those deductions, assume you can work with anybody all over the country. Right. Yeah. Yeah. We do studies in all 50 states. We've got clients all over the place. So um do you have to actually go to the job site or you can look at plans or how do you, depending on which program it is. Sometimes we do have to go to the job site cost segregation. The I. R. S. Does require a site visit.

Um One of the nice things that came out of covid is we were able to start doing a lot of these site visits virtually just through a video conferencing app. Um That doesn't work on large properties on some of the smaller properties. You know, we can do a site visit in a half hour and we would just have you or one of your property managers on one end of the flying. We've got our costing engineers on the other land were asking to see certain components of the building. But um yeah we do want to see each building. We want to take pictures of it document what's in there so that if we ever get audited on any of these we've got the backup documentation to substantiate our numbers. Right. Makes sense. I think it's gonna be super helpful to our investor base when they get on here and take a look and if they already own property they can bring it to you and see if you can save any money. Well eric what's the best way for people to get in touch with you? I'm assuming you have a website, a phone number. How do they how do they get in touch with you? Yeah. So the best way is just through our website. It's just W w W dot cost c O S T Seg S E G authority dot com. Um It's got our phone number, it's got our email address on there.

My direct contact information is on there and we will provide a free benefit analysis to anybody who reaches out. You can do that through the website. So if you've got a property you think might be a good candidate or you just want us to look at all your properties. We're happy to do that and say, hey, this property is not a good candidate. This one is. This one's not give you some preliminary numbers. So you know what the fee would be in relation to what your tax savings would be and then you can decide from there on how to best move forward. But um yeah, use this as a resource. We're kind of a niche accounting firm. We don't do tax returns here at our firm. We just do these cost segregation and energy credits. And so we don't bill by the hour. I mean you can call us any time and say, hey, I've got this building. Do you think it's a good candidate? We're happy to walk through it. Some advice. Yeah. So Well eric I I really appreciate you coming on. I really appreciate meeting you. Um I'll definitely be sending you a property we're bringing online here pretty soon. Just to see if you can save us any money. Love for that to happen because I didn't know about these energy credits. But anyway, thanks for joining us.

And we will see everyone else next week on how to invest in CRE. Thanks guys. Thank you. You too

Episode #089 - Save Money On Your Taxes NOW! The Benefits of Cost Segregation With Guest Erik Oliver
Episode #089 - Save Money On Your Taxes NOW! The Benefits of Cost Segregation With Guest Erik Oliver
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