We're sunsetting PodQuest on 2025-07-28. Thank you for your support!
Export Podcast Subscriptions
cover of episode Avoid Paying Taxes (Legally) with THIS Rental Tax Loophole

Avoid Paying Taxes (Legally) with THIS Rental Tax Loophole

2025/2/10
logo of podcast Real Estate Rookie

Real Estate Rookie

AI Deep Dive AI Chapters Transcript
People
A
Ashley Kerr
S
Sean Graham
T
Tony J. Robinson
无发言人
Topics
Sean Graham: 作为一名房地产投资者和注册会计师,我发现很多人不了解成本分摊这个税务漏洞,导致他们多交了很多税。成本分摊研究的本质是加速房产的折旧,虽然总的折旧额在30-40年内不变,但通过成本分摊,我们可以把大部分折旧额提前到前期,从而实现税收优惠的最大化。国税局之所以允许房地产折旧,是为了鼓励大家持续投资房地产,购买更多的房产。折旧是一种“虚幻”的费用,它可以降低你的应税收入,但实际上并没有现金流出。通过成本分摊,我们可以将折旧额提前,从而更快地获得税收优惠。例如,我购买了一栋三单元的建筑,通过成本分摊,我不仅可以抵消当年的利润,还可以抵消未来几年的利润。总而言之,成本分摊研究对于房地产投资者来说是一个非常重要的税务工具。 Tony J. Robinson: 我认为成本分摊研究非常重要,它可以像手机的滚动分钟一样,将税收优惠延续到下一年。国税局通过允许我们创造这些虚幻的费用来激励我们购买房地产。折旧没有实际的现金支出,但我们可以将其作为费用在纳税申报单上申报,从而降低我们的应税收入,减少我们需要缴纳的税款。成本分摊研究的应用方式因资产类别而异,例如短期租赁、长期租赁和商业地产。我们需要了解不同资产类别的成本分摊研究的应用方式。 Ashley Kerr: 欢迎大家收听房地产新手播客,今天我们请来了Sean Graham作为我们的嘉宾专家,来讲解成本分摊研究。

Deep Dive

Shownotes Transcript

Translations:
中文

There's a number one tax loophole out there that if you don't know about it, then you're leaving money on the table. I've personally been able to legally avoid paying taxes using this one strategy, and we'll go over what a cost segregation is, who qualifies, and how to complete one to keep more money in your pocket.

This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson, and welcome to the Real Estate Rookie Podcast. Today, we have Sean Graham as our guest expert on cost segregation studies. Sean, welcome to the show. Thank you. Thanks, Tony. Thanks, Ashley, for having me. Yeah, Sean, let's get started with what a cost segregation is. A cost segregation study really is a way to accelerate the depreciation on your real estate.

So the IRS, they require you to depreciate rental, like investment properties that you have, right? Typically, you do this over straight line depreciation. You do it over 30 or 40 years. To get a cost seg study, that helps you accelerate this depreciation. So if you take a step back, like you look at it, overall cost segregation, like you're going to get the same amount of depreciation over the 30 or 40 years. But instead of waiting, like time value of money, instead of waiting for that money to

down the road, you're getting the majority of the benefits upfront. Does that make sense? Yeah. And I guess let me ask, Sean, for some of our rookie rookies in the audience, we talk about depreciation of real estate, but it's somewhat confusing because we know that properties appreciate over time. So can you just even all the way down to the basics, break down what do we mean when we say depreciation of an asset? Yeah. So the IRS really likes real estate, right? It's kind of the backbone of the economy of small businesses. And so they want you to keep

reinvesting in real estate. They want to buy real estate, buy more real estate. This is where people live. This is where small businesses are. So they allow special tax breaks for real estate investors, right? And that could be somebody who's in real estate full-time or somebody who just, maybe you're a doctor, you just have your practice there, right? But you're buying real estate. So

The IRS gives depreciation benefits, meaning depreciation expenses. So it's kind of this phantom expense. You take this expense, which lowers your taxable income. Now, it's not actually a cash flow expense, right? So like, let's just say you have a $275,000 depreciable basis on a rental property. So you depreciate this $10,000 every single year without a cost segregation study, right? Just straight line.

This is not $10,000 that's coming out of your bank account, right? It's just an expense that the IRS lets you take on your taxes, which lowers your taxable income by $10,000 each year. So the IRS is doing this to incentivize you to invest in real estate, right? It's a cash flow benefit to you. It saves you taxes, right?

Now, with a cost segregation study, it's really the same thing, but we're accelerating that depreciation. So we're not waiting a super long time to get all the benefits. It's the time value of money. So if I said, Tony, like, if I could give you $1 today or if I could give you $1 in 30 or 40 years, what would you rather have? And you'd say, well, I'd rather have the $1 today, right, because $1 today is worth more than $1 in 30 or 40 years.

So that's what a cost segregation study is about. Depreciation has always been there. And during certain years, it benefits you more than others with bonus depreciation. But

overall, it's the IRS's way to incentivize people to keep investing in the real estate market. Sean, why is this important for a rookie investor? Maybe they are just getting their first deal or they only have one deal. Is this even applicable to them? Totally. Yes. So, uh,

But I get that question a lot, right? Because when you think of cost segregation study, you think, okay, well, this is for big time real estate investors or people buying commercial buildings. But that's not really true. You know, there's different benefits if you are in real estate full time or you're a real estate professional. But even if you're not, there's a lot of benefits to it. So, for example, I house hacked a building. So I bought a building myself, right? Just as an example.

three unit building, bought it for about half a million dollars. This building, it cash flows about $2,000 a month, and then I'm paying down principal of another $1,000 a month. So every single month, I'm profiting about $3,000, right? Over the course of the year, that's $36,000 in profit, right? The IRS doesn't look at principal as an expense, that's part of your profit.

So if I don't do a cost segregation study, right, then I just do straight line depreciation. I'm going to get depreciation of somewhere around $18,000 every single year. Well, that leaves me with $18,000 left right out of that $36,000 that's just going to be profit. It's going to be taxed at my ordinary tax rate every single year, right? So with a cost segregation study,

I can front load a lot of that depreciation to the current year. And not only will it offset like for this year,

It'll actually, whatever I have left. So let's say, you know, I'm able to front load $150,000. Well, it'll offset that, you know, $36,000 for this year, but also for the next four years and going forward. And it just kind of keeps rolling. And Sean, I just want to, I think that's a really important thing for people to understand when it comes to the cost seg, because there's this rollover, right? It's almost like,

you know, when you used to have your cell phone in the early two thousands, you have these rollover minutes, like you get all these minutes in one month, you didn't use them. They roll over to the next month. Very similar thing with the cost, like where you can create all of this tax benefit. And if you don't use it this year, it's still there for you to use in the next year. But I just want to go back to one thing you said earlier, Sean, because I really want to make sure that the rookie audience understands, but you, you said the, basically the, the IRS, the government is incentivizing us to buy real estate.

And one of the ways that they do that is by allowing us to create these phantom expenses. So there's no money out of pocket with depreciation, but it is still something that we get to claim on our tax return as an expense that then lowers our taxable income, reduce the amount of money we have to spend in taxes. That is a major, major reason for a lot of people to get into real estate investing. So it's a point that I just really want to make sure that rookies understand. Now, Sean, I know that there's a difference between

how cost segs can be applied depending on the asset class. Like, you know, I do a lot of short-term rentals, so I know there's a slightly different way that the tax benefits apply there, long-term rentals, commercial property. So can you maybe, let's just maybe start with maybe the two most basic that Ricky's are focused on, but a traditional single-family long-term rental versus a traditional single-family short-term rental. How is the cost seg maybe applied differently in those situations?

I guess, Tony, you brought up a good point too, like when you just said, like, you know, what is this depreciation? So this is just the IRS's way for you to let you write off the wear and tear every single year, right? Even though that wear and tear might not actually have a real cash flow expense, but that's what depreciation is.

So for residential properties, the standard depreciation amount is 27 and a half years, right? Just straight line depreciation. Now with a cost seg study, we reallocate part of that, part of the, you know, we do an engineering study and we say, hey, IRS, like,

Not everything takes 27 and a half years to depreciate. Some of it can be five years. Some of it can be 15 years, right? Some of it, a big portion of it, we're going to do in year one. It's going to be through bonus depreciation. We'll write it off in year one. And so that's the benefit of it. Now, there are a couple different ways that a person who's not in real estate can

can also use this depreciation not only to offset the passive income from the real estate, but also offset the active income as well. Meaning, Tony, if you're in real estate just part-time, right, or actually like you're working a full-time W-2, but you have this rental property, well, you can use the depreciation to offset other passive income, but you can't use it to offset your W-2 income.

Now, the exceptions to that are if you or your spouse qualify for real estate professional status, meaning like you're in real estate basically full time, you're doing it more than anybody, anything, any other job is 750 hours. But then it says, then the IRS says, well, you're a real estate professional. This isn't just a passive activity for you. This is active. And so you actually get to use these losses to offset your W-2.

So sometimes high income earners will have a spouse who maybe manages real estate full time, manages their real estate portfolio, and they'll take that depreciation. They'll be able to take that depreciation and use it to offset the other spouse's W-2 income. Right. So huge benefits really lowers that income. Now, back to your question, you said, what's the difference between like long term and short term? Right. So let's just talk residential. So we're just talking rental properties or small multifamily. And again,

That's generally, as the IRS looks at it, they look at long-term rentals as a passive activity. So, hey, IRS is just deemed to be passive from a tax standpoint. There's an exception where you don't have to qualify for real estate professional status, and that's sometimes referred to as the short-term rental loophole. So short-term rental loophole, short-term rental strategy, however you want to term it. But the point is,

If you meet certain requirements with a short-term rental, like you have an average rental period of seven days or less, you materially participate it, meaning you're putting in

It's at least 100 hours more than or more than in more than anybody else or at least 500 hours. There's different material participation rules. It's not a personal residence like you're not using it as your personal residence for more than two weeks. Right. Then you can qualify for short term rental loophole where the IRS is.

This is actually an active business. You're managing it. And so you get to use the depreciation losses and the losses in general, right? From, from the property and used to offset your active income. So it's a really big strategy, especially with high income earners, such as doctors or attorneys, which helps them offset that type of income. Yeah. And Sean, like a great explanation. I just want to, I want to recap all that for the rookies to make sure that they're tracking. So, um,

Basically, if you buy a single family home, whether you intend to short-term rent it or long-term rent it, you can still perform a cost segregation study, which then allows you to accelerate that depreciation from 27 and a half years down to some shorter timeframe, depending on what's inside of that report that's generated.

But the only way to then take those losses generated by the cost seg and apply them against your actual W-2 income, not just the rental income from the property, but your W-2 income or any other active income is either A, you have to qualify as a real estate professional, or B, you have to materially participate in a short-term rental. Am I understanding that process correctly there? Generally, yes, that is correct. Generally speaking, you want real estate professional status

or short-term rental loophole in order to use those depreciation losses to offset other active incomes such as W-2 income. Well, Sean, we're going to take a quick break. But when we come back, we're going to find out more about doing a cost segregation study. Before we go into the break, though, I want everyone to check out biggerpockets.com slash costsegregation.

conference. It's time for BP Con, which is going to be in Las Vegas. Build your network and unlock the next level of your investing journey. When we come back, we are going through the actual process of how to do a cost seg with Sean. We'll be right back.

This show is sponsored by Airbnb. We love hitting the road for conferences, events, and live appearances. But while we're out there making connections, we still want to make the most of our investments back home. Why let your place sit empty when it could be earning you extra cash? With Airbnb's co-host network, you can. Hire a trusted local co-host to handle everything from creating your listing and managing reservations to messaging guests and providing on-site support.

Make hosting easy. Go to Airbnb.com slash host and let a co-host do the hosting for you. The Toyota Tundra and Tacoma are designed to outlast and outlive, combining raw power with precision engineering, all backed by Toyota's legendary reputation for reliability. Climb inside a Tundra and experience the uncompromising strength. With its available i-Force Max engine, the Tundra delivers exceptional power, torque, and towing capacity. Plus, the spacious and high-tech cabin keeps you connected on the run.

or check out a Tacoma. Agile, dependable, and unstoppable. The Tacoma's designed for those who go beyond the trails. Stay ahead of the pack with available off-road features like crawl control, or break out your tunes with the available portable JBL speaker. Toyota trucks are built to last, year after year, mile after mile.

So outlast every adventure and outlive the moment. Buy a Tundra or Tacoma today. Visit buyatoyota.com, Toyota's official website for deals. Or stop by your local Toyota dealer to find out more. They say money doesn't grow on trees, but it does grow in your home's equity. Time to harvest that cash with Figure, the number one non-bank key lock lender. You can unlock up to $400,000 to create, update, or renovate. A home equity line of credit offers low interest rates, flexible borrowing, and repayment options.

and potential tax advantages, making it a smart, cost-effective way to fund your projects. Skip the appraisals, paperwork, and waiting. Figure's easy online application gets you approved in minutes, with funding in as few as five days. Fixed rates and flexible terms mean more power to you. Start building the home you've imagined. Visit biggerpockets.com slash figure. That's biggerpockets.com slash figure.

Okay, now let's get back into the show. And if you want to learn more information about this, Sean, you are actually creating a resource for BiggerPockets. It can be found at biggerpockets.com slash resources. And this is going to be a guide for rookie investors on how to actually do a cost seg study,

who you need to know, what you need to do, and how it actually works. Is there anything I'm missing that will be included in that? No, I'm super excited about creating that resource for Picker Pockets. I'm in the forums a lot talking to people about depreciation and cost segregation and taxes. But it's going to be, I think, Cost Segregation 101, and it'll be in the resource guide. And just kind of touch on a little bit of everything from material participation to short-term rental.

status, our short-term rental loophole, real estate professional status, and just how the difference between straight-line depreciation and accelerated depreciation and how that works. Now, Sean, we didn't talk about flipping at all. Is this something that would work with flipping a property? Short answer is no.

The reason is, is that the IRS looks at flipping as inventory. So you're not investing in real estate as a long-term asset or as a real investment. You are flipping inventory. So they do not allow depreciation on it, and it just wouldn't be beneficial for flipping. Sean, just one quick follow-up question to that. At what duration of ownership does it kind of transition from...

long-term rental to flipping, or maybe even short-term rental to flipping, right? Let's say I buy a property, I renovate it, I hold it for six months. During that six-month time frame, I'm short-term renting it, and then I sell it afterwards. Could I cost like it at that point? How do you make that distinction? Yeah, so I think...

The IRS looks at a lot of things as what's your intention when you go up front. So if your intention is to flip this property, then they're not going to want you to take the depreciation. If that's your intention, up front. But if you buy a property, you do a cost segregation study, and then you end up selling it a year later, that's fine. There's nothing wrong with doing that.

Now, it's not going to be beneficial for you if you just have it for one tax season, right? So like, okay, you bought it at the end of 2024, you file your taxes,

And then you sell it. Well, there's something called depreciation recapture. So the IRS says you have to pay your taxes, right? This is really a deferral strategy, meaning it's not a permanent tax savings, but they want you to pay your taxes eventually. Now,

if you take the proceeds and you 1031 exchange or you have other depreciation from another property to offset it, which we can dive into that more if you guys want, that could help offset that. But overall, especially if you have the

You buy it and you sell it in the same year. Well, then there's no point in doing a cost segregation study because it would just be a wash. You can't take the losses on the property that you no longer have. You're selling this property. So if you have it for a year, you're going to have to pay the depreciation recapture fee.

the following year. So it could defer it for a year. If the losses really help you offset it right now, that's good. But overall, depreciation is for...

long-term investments. That's the intention behind it. Sean, what if you don't sell the property? What if you purchase this property and your goal is within three to five years, you're going to rent it out until that time, and then you're going to make it your family vacation home as your second home. Is there some kind of limit on how long you actually have to have it as a rental before you can turn it into your second home or your vacation home? That's a good question. So

So I don't think that there's a limit as to how long you can have it again. And like, it kind of goes back to intention. Like if you're going to buy it in December just to qualify for the short-term rental loophole, right. And then you're never going to rent it out again after December, right. It's just going to be your family vacation after that. Well,

Well, that could raise a red flag. Like in the case that you did get audited, there'd be a lot of question marks about that. So again, it comes back to what's your intention up front. If you decide to use the short-term rental strategy or you want to buy real estate and accelerate the depreciation,

then that should be your intention of what you're doing with the property. Now, the IRS does have a personal use limit of 14 days or less. So like you could go take vacation at this property for two weeks and that's okay. And it can still be this, um,

you know, investment property for you. But if you're going to go stay there for months at a time, well, then this isn't really an investment property to them. This is a personal residence or a second home vacation home that you also happen to rent out. So what about from a, from a timing perspective, Sean, like when does it actually make sense to do the cost seg? Is it, I've got to do it immediately after purchasing. Do I have to wait a certain time after I own the property? How do you time out when to do the cost seg?

It's funny, December often seems to be like a very busy month for us. And I think because people start thinking, hey, I have to get it done before year end, which is not necessarily true, but it is very helpful.

So your tax CPA needs the cost segregation study in time to file taxes. So if you have any business taxes, right, you're on a March 15th deadline, you need the cost segregation study ahead of that. Our average timeline is about six weeks. So you don't have to do it in the year. You can do it when you're filing taxes or before then, but you need to give your tax CPA enough time to file.

That being said, you bring up an interesting point, which is there's something called a 3115, which is a look back study. It's a catch up in depreciation so that we have customers who...

They didn't know about cost segregation. They didn't know about accelerated depreciation. They've had properties for several years, you know, four or five years, whatever it may be. And we have to go back. We do a cost segregation study and we say, hey, IRS, like all this depreciation was missed because they were using technically the incorrect method of depreciation, which is just straight line. And we corrected it through a cost study. And this is the correct amount of depreciation.

And so that difference, we can actually take that difference and apply it to the current year. So we don't have to go back and refile five years of taxes, but rather we can say, hey, IRS, he missed all this depreciation. He's going to take it in the current year, and that's allowed. So that's called a change in accounting method.

Now, overall, what I'd recommend, I'd recommend getting the cost seg study pretty much done after you close the property, knowing if you have any capital expenditures or maybe you're going to buy the property, you're going to rehab it, and then you'll rent it out. You're doing the BRRRR method. Well, get the cost segregation study done after you close.

finish those capital expenditures. And Sean, what you outlined is pretty much what happened to us. So we bought several Airbnbs in 2020. We were self-managing all of them. So we qualified for material participation. We didn't do any cost segregation studies during that year because at the time I was new to this, didn't really know what was going on.

I don't even think we did any in 2021. I believe it was 2022. And at that point, we were up to 20 Airbnbs. So we had a decent portfolio. And then we just did a massive cost segregation study across almost the entire portfolio. And then we were able to apply that to that year's income, even though those properties have been put into service in 2020 and 2021. So you're absolutely right that even if you don't necessarily...

do it today, you can still get that tax benefit at some point in the future. Um, one thing we didn't talk about there, Sean, and we touched on it briefly, but it's bonus depreciation. And that was, I think a really big driver of interest in the short term rental space. In addition to, you know, rates are super low, uh, revenues are really high. Um,

but the bonus depreciation. So can you just quickly explain what bonus depreciate? Cause it was a hundred percent bonus depreciation. So what exactly does that mean? And I have one follow-up question after that as well. Sure. So I think sometimes bonus depreciation gets a little bit confused, right? And that's because it doesn't apply to everything for the entire depreciate depreciable asset or depreciable basis. It applies to anything that has less than a 20 year life.

So when we I like to break it down like this. So you have your structural components of an investment property, which is typically over 27 and a half years or 39 years. That always is just straight line depreciation. We break out site improvements like things like sidewalk, fencing, landscaping, parking lot. And that goes into 15 year life.

15 year life less than 20 years is eligible for bonus depreciation. We also get internal like non structural components, maybe kitchen cabinets, laminate flooring, maybe certain types of lighting or carpet. And we categorize that into five year life.

Also less than 20 years, so it's eligible for bonus depreciation. Short-term rentals, furniture. Furniture goes into seven-year life. So we take everything that's less than 20 years, five, seven, 15-year life, and we can apply bonus depreciation towards that. So that means instead of the stuff that we recategorize into five years, instead of straight line depreciating it over five years,

or using makers to depreciate it, we're able to take whatever the bonus rules are for that current year. And we're able to apply that percent and get that percent in year one. So from 2018, end of 2017, really, all the way through, I think it was 2022, we had 100% bonus depreciation. That means that anything that was recategorized into a shorter lifespan, we could take that and just write it completely off in year one.

2023, it went down to 80%. So, you know, again, if you have something in five-year life, let's just say $100,000 that was moved into five-year life, you could take $80,000 expense in year one, and then the remaining 20,000 would still be depreciated over five years. So that's what it is. Um,

It's going down. Bonus depreciation is going down by 20% each year. So for 2025 currently, it is 40% bonus depreciation.

However, there's a decent chance that an act will pass and 100% bonus depreciation will come back around. Hopefully. We're all hoping for that, at least as much, right? But I guess let me ask one follow-up question, Sean, because you talked about bonus depreciation going from 100% to 80% to 60%, now sitting at 40%.

But let's say that I bought a property, put it into service in 2020 when bonus depreciation was still 100%. I met the requirement for material participation. If I put that on my taxes now, I'm filing in 2025 for tax year 2024. Do I get the 100% bonus depreciation of 2020 when it was put into service? No.

and when I met material participation requirements, or do I get the 60% that was available in 2024? How does it decide which benefit you get? That's a great question. It's based on the placed in service date. So if it was placed in service in 2020, well, then you'll get 100% bonus depreciation, even if you're doing a form 3115 where you're going back and you're doing the catch up because you didn't do a cost segregation study before. Other cool thing,

is that maybe in 2020, you weren't a real estate professional, right? And so you couldn't have used it against your active income, but you are a real estate professional now. We're in 2024, you are. Well, not only do you get to go back and get that 100% bonus depreciation, get the difference between whatever you took via straight line and what you could have taken with a cost seg study, but you can also use the real estate professional status in 2024 to offset active income.

So people get strategic with this. You'll even see people who they don't do a cost study and then they wait until they have a large like they have a big capital gain. Right. And then they use all of the depreciation, accelerated depreciation through a 3115, a catch up study right from prior years. And they get the study done in the current year.

And they use that all that catch up depreciation offset the capital gains from maybe a sale of a different property. Does that make sense? Sean, my question is, okay, I'm ready. I want to do this. I'm interested in it. I think my property would apply to this.

What do I need to bring you? When you're having a cost seg study, what do you need from the investor to actually do it? It's not that like we put together estimates, right? Estimates are free of charge. It's just, hey, this is really a quote to say, we're going to tell you what we think approximately what you'll get in the depreciation every single year from a cost segregation study. And this is how much it would cost you.

Now, in order to get that estimate, we need an address. We need pictures. We need the date you started renting or an in-service date. We can estimate a land value, right, if you don't have it or if there's publicly available property tax assessment info, we could use that to get a prorated percent for land.

And if you could send us over the Zillow link or the rental link, that helps a ton. So all of that information, that basic... Oh, and if you have any capital expenditures, let us know about those. But if we get that basic information, we can put together a pretty good, accurate estimate on what the benefits would be, how much it would cost.

And from there, we would engage with you. After that, we need a little bit more information. We need the closing statement. If you took depreciation in prior years, right, like you were doing straight line, we'd want to take a look at the depreciation schedule. We want to send somebody on site to actually get photographs. We do have an option for like

you know, for small residential where we don't send somebody on site that's like a little bit less expensive, but there's just different things that we would need to do.

Really overall, not that complicated. Most of the stuff that you would have from just being a rental property investor anyways. We're going to take one more quick break and then we're going to be back with Sean for more. While we take a quick break, make sure you head over to the Real Estate Rookie YouTube. We are releasing a new Rookie Resource video on a unit information sheet. This has been our most asked for request.

of any checklist or template. So you need to have one of these for your rentals. So go to Real Estate Rookie on YouTube to be able to get that download. We will be right back after this. ♪

This show is sponsored by Airbnb. We love hitting the road for conferences, for events and live appearances, but while we're out there making connections, we still want to make the most of our investments back home. Why let your place sit empty when it could be earning you extra cash? With Airbnb's co-host network, you can.

Hire a trusted local co-host to handle everything from creating your listing and managing reservations to messaging guests and providing on-site support. Make hosting easy. Go to airbnb.com slash host and let a co-host do the hosting for you. This is a message from sponsor Intuit TurboTax. Now taxes is 100% free when you file in the TurboTax app. If you're a first-time filer or didn't file with TurboTax last year,

That's right. Just do your own taxes in the TurboTax app by February 18th. Had a few jobs last year? It's free. Have a lot of forms? Yep, still free. Have a bunch of new invisible crypto coins? Heads up, it's still free. Convinced you saw Bigfoot even if your friends don't believe you? That has absolutely nothing to do with taxes, but you better believe it's still absolutely free.

The

The Toyota Tundra and Tacoma are designed to outlast and outlive, combining raw power with precision engineering. All backed by Toyota's legendary reputation for reliability. Climb inside a Tundra and experience the uncompromising strength. With its available i-Force Max engine, the Tundra delivers exceptional power, torque, and towing capacity. Plus, the spacious and high-tech cabin keeps you connected on the run. Or check out a Tacoma. Agile, dependable, and unstoppable.

The Tacoma is designed for those who go beyond the trails. Stay ahead of the pack with available off-road features like crawl control or break out your tunes with the available portable JBL speaker. Toyota trucks are built to last year after year, mile after mile. So outlast every adventure and outlive the moment.

Buy a Tundra or Tacoma today. Visit buyatoyota.com, Toyota's official website for deals. Or stop by your local Toyota dealer to find out more. Your future home is hiding right inside your current one. Let's bring it out. With Figure, you can transform your home using a powerful home equity line of credit. Unlock up to $400,000 and enjoy low interest rates, flexible borrowing, and repayment options that fit your life. Plus, take advantage of potential tax benefits that stretch your budget further. Apply 100% online. No in-person appraisals needed.

and see funding in as few as five days. As the number one non-bank HELOC lender, Figure has helped homeowners across 47 states access over $13 billion. Competitive fixed rates make this the smarter way to finance. Ready to renovate? Visit biggerpockets.com slash figure today. That's biggerpockets.com slash figure.

Welcome back from our break. We are here with Sean, who has been teaching us everything we need to know about doing a cost segregation study. So, Sean, do you have any examples for us of maybe case studies or how someone has benefited from having a cost segdom? Sure. I could name several examples, but just start with one that comes to mind recently. And this was somebody who

His household, like him and his wife, he and his wife were high W-2 income earners. They ended up inheriting some money, and the way they used that money I thought was pretty good. So they went and they bought two short-term rental properties, put a down payment on it, leveraged it, got a loan, did some rehab, and created two Airbnbs, or short-term rentals.

We did a cost segregation studies on those, right? And I think they spent about a million dollars in real estate acquisitions overall between these two properties. And we created using a cost segregation study about $300,000 of year one depreciation. So.

at a high 30 plus income, you know, percent tax rate bracket, that was over 300 or over a hundred thousand dollars in tax impact that it saves them. If they don't need it, if they don't use all $300,000 in depreciation this year, it'll just roll forward into the next year and help them offset the income for next year. So that was just a really good example. Um,

I brought up the house hacking thing earlier too because I've house hacked multiple times. I know this is a lot of the listeners, they probably house hacked themselves or have, but an example would be I house hacked a three flat, three unit, and this was in Chicago.

And I rented out two units. I lived in one unit. Well, the two units that I rented out, we're able to do a cost-ex study and start accelerating the depreciation on those two units. After I stayed in the property for a year, two years, I moved out. We're able to then place the third unit into service and start accelerating the depreciation on that. So again,

Even without the real estate professional status still helps offset all the profits that you get from your rental property and going forward. And if you are able to get the real estate professional status, well, then it can also help you offset your W-2 income. Or if you're not, right, you don't have any activate.

active income because you're a real estate professional status, but maybe your spouse does, we can help offset that income and going forward. Tony, you mentioned you did a cost seg on all of your properties at one point in time. How was your experience with this? Was it something you found was an easy process? Was it really expensive? Did it end up being a success and you saved money in your taxes? It was like,

Almost stupidly easy for me as like the person getting the segregation study done, the cost of that done, because we sent, like Sean mentioned, all the details about the property over to the cost of that company that we used. They did everything virtually with, you know, properties that we did renovations on. We gave them scope of work, you know, updated photos, things like that.

They did it all virtually. And within a couple of weeks, had all of our cost segregation studies back to us. And my CPA was coordinating with the cost seg company. So I was just kind of like on CC for all of this. And then my CPA was like, okay, cool. This year, we're going to use this one, this one, and this one. We'll save some of these other ones for next year. And we did that, I want to say, in 2023. And we haven't had a federal tax bill since then.

So, you know, I'm not a CPA. I don't know all the math that's gone into that or how it's worked, but we literally have not had a federal tax bill since we did all of our cost segregation studies. So when you do it, and obviously our portfolio is a little bit bigger. We have more expensive property. So, you know, I think that helped us a ton. But to Sean's point, when you do this the right way, there's a massive amount of tax benefit that you can generate to offset that active income. Yeah. One follow-up, which I guess can be geared towards both of you is, um,

I remember years and years ago when we went to go get our construction loan on our property and there was the farm equipment depreciation. And we went to the bank to get our construction loan. They added the depreciation back into our income so that it actually made what was on the tax return. Our income was actually higher. They added the depreciation back in because it's not a realized loss.

Does that happen too when you do the cost seg? So like Tony, if you didn't have to pay taxes and you showed not enough income,

when you've gone to get loans on properties, has that actually affected your ability to get approved for financing at all? At least the lenders that I work with, they're like well aware of cost segregation studies and they've been able to add that depreciation back in. So it hasn't negatively impacted us and our ability to purchase future properties. Right. Commercial lenders in general, they know, they understand depreciation. And so it's not, they don't count it as an actual expense. And so they add it back to your, to your income. So

It's not uncommon to have zero taxable income, but still be able to qualify for an investment property loan. The best of both worlds. Exactly. The best of both worlds. You got it. Okay, Sean, I guess real quick before we wrap up here, when someone is looking to hire someone to do a cost seg, what are some questions they should be asking or, you know, I

how should you be able to determine who's going to do a good cost seg study and what's a good resource for that? Yeah. So I think, uh, obviously this is, this is what I do. Um, my company is Maven cost seg, Maven cost segregation. So it's mavencostseg.com is my website. Uh, but I would just ask, you know, ask for an estimate, ask what kind of study they're doing. Is it detailed engineering? What, what does it look like? Get an estimate. There's a lot of people who I think, uh,

they they're just looking for the highest number i wouldn't recommend just looking for the highest number right because anybody can push anything and just say hey we're going to get you the most amount of depreciation but really build the relationship with somebody who you know like and trust because you want to get a cost segregation study done right and done by qualified engineers so that's what we try to do we focus on uh one is quality give quality reports and two is communication um

and the way i approach it you know i'm on both sides of the coin my background is a tax cpa that's where i started uh but then i became a full-time real estate investor myself and so

And so I get it from both sides. I know what the IRS is looking for and I know what people are looking for from an investment standpoint. And so I bridge those two worlds with this cost segregation firm and that's what I do. But anyways, I'm happy to talk to anybody if they have questions. I'll shoot over my calendar link if you reach out to me. My email is sean at mavencostseg.com. That's Sean spelled the correct way, S-E-A-N. And yeah,

Yeah, simple as that. Tony, is that how you spell your son's name too? My son's name is Sean. We also spell it S-E-A-N. So I thought that when we jumped down here. Oh, wow. That was dangerous. That was a dangerous joke. Okay. The correct way. There we go, Tony. Didn't even know. Well, Sean, thank you so much for joining us on the Real Estate Rookie Podcast. We really appreciate you taking the time to break down what a cost of

segregation study is and we learned some new things today. So thank you very much. Thank you for having me. I'm Ashley and he's Tony and we'll see you guys on the next episode of Real Estate Rookie.