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We are back with episode 183 of the Teaching Tax Flow Podcast, revisiting cost segregation studies with Heidi Henderson of Engineered Tax Services. This discussion incorporates new regulations from the One Big Beautiful Bill Act, offering crucial insights into tax strategy and how accelerated depreciation can benefit taxpayers. We explore the nuances of depreciation and bonus depreciation to help you with your overall tax planning.
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- (00:02) - Exploring Cost Segregation Studies and New Tax Regulations
- (02:41) - Understanding Cost Segregation and Its Impact on Tax Deductions
- (09:45) - Understanding Cost Segregation and Its Tax Benefits
- (14:51) - Leveraging Cost Segregation for Active Short-Term Rentals
- (17:59) - Understanding Bonus Depreciation Rules for Property Investments
- (20:52) - Understanding Cost Segregation Studies and Tax Implications
- (23:36) - Understanding Financial Advice and Investment Services
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Hey, everybody Welcome back to the Teaching Tax Flow Podcast here. We're on episode 183, a topic you've heard numerous times throughout the years. We're going back. We're revisiting something, but under some new regulations that have been introduced.
John Tripolsky:So the one big beautiful bill act, but we're looking specifically at cost segregation studies. So as always, Chris Picciurro, welcome back to your own show, sir. And I'm gonna let you go ahead and introduce our guest as well.
Chris Picciurro, CPA:Well, thanks, Johnny T. I am so excited to have a return guest, one of our just favorite people in the Teaching Tax Flow community, Heidi Henderson from Engineered Tax Service. Welcome back to the Teaching Tax Flow Podcast.
Heidi Henderson:Hi, Chris. Thank you. Hey, John. Hey, Chris. I'm always happy to be here with you guys and talk about this kind of fun stuff.
Heidi Henderson:We've had some really great clients and projects together, and it's always fun to, to to update the information for your listeners.
Chris Picciurro, CPA:Well, we gotta update the cost segregation resume here. It is truly a blessing when I get to bring someone from our private CPA practice into talk to the masses to help educate to legally and ethically reduce tax. People paying their lifetime. We had, you know, with the one big beautiful bill act come out, and now we know that bonus depreciation is, at this point, permanently a 100%. You know, a lot of taxpayers, you know, they they don't realize that the Tax Cuts and Jobs Act was really reducing that bonus depreciation deduction, and it was on and that not yes.
Chris Picciurro, CPA:There are some new provisions out there. There's some new deductions. However, there's some bringing back of the old, which is could be just as powerful. And Yeah. The lowest hanging fruit, the best ROI that I've seen, and we work in 89 different tax planning implementations right now is a cost segregation study for the right taxpayer.
Chris Picciurro, CPA:Yep. Now you are a returning guest. You're a great part of our community and our private Facebook group, but this might be the first time someone's met you and the team at ETS. Can you tell someone what is a cost segregation study and who should consider it?
Heidi Henderson:Yeah. Oh, man. You know, I I could talk on that for a long time, Chris. We we could I could go on and on, so I'll try to make it brief. But, you know, we we are very unique engineered tax services.
Heidi Henderson:We're a licensed engineering firm. One thing I want to caveat before we dive into cost seg is that not all cost segregation is created equal. And that is one of the biggest, I think, misunderstandings of of our industry in the specialty tax world right now, and that relates to, you know, the term cost segregation is not one concrete deliverable. It has many definitions, and it is interpreted in multiple different ways. So, therefore, when you're working with a provider, what you get may be vastly different from one offer to the next.
Heidi Henderson:And so I want to caveat this whole discussion with the fact that it is vitally important as a taxpayer and working with teaching tax flow in this group. You know you're in good hands because they really understand all of the technicalities of this. But cost segregation, to make it in its simpler definition, it is the difference between taking a standard deduction and itemizing your deductions. A standard deduction would just be like, you know, my kids when they were young and they had to first file their tax returns, you know, they're 18, 19, they're like, oh my gosh. I have to do a tax return.
Heidi Henderson:You know, standard deduction, easy peasy. But you start to have your own business, and maybe itemizing can generate additional expenses so that you have a larger deduction. That is what happens with a building. The typical CPA is going to take your standard deduction, which is straight line. After land, commercial properties are thirty nine years.
Heidi Henderson:Residential are twenty seven and a half years. When we itemize the deductions, we just simply appraise everything that you bought, and we say, we know that you did not simply buy a building. You bought refrigerators and cabinets and carpeting and landscaping and some sprinklers and all of the things. So it is a report, an inventory of everything you purchased and what you paid for that specific item, which then subsequently allows you to apply those into different categories, which then qualify for bonus depreciation, and you get a significantly larger deduction.
Chris Picciurro, CPA:So that's kind of the the simplified explanation. Well, I appreciate that explanation. I love the analogy as usual, and I wanna say this. I say this to people all the time. You can go to 10 CPAs or enrolled agents and have your tax term prepared and get 10 different results, and they might have 10 different ways of doing it.
Chris Picciurro, CPA:You're in so a cost segregation study, I think it's super important to understand. It is not a commodity. It is a project, and whoever you have leading that project's responsible for getting you the best result possible within the rules. It you know, sometimes people think that, well, I yeah. Again, it's your the the cost seg is not a commodity.
Chris Picciurro, CPA:Commodity. It's a project. And there's a big difference. And that's why we will have you on because I love you guys, and you guys do such a wonderful job for our community. So Thank you.
Chris Picciurro, CPA:When you buy real estate, inherently, there's personal property within that real estate, and this is the process of pulling that out Okay. And giving you giving you a better result. So, what type of properties are typically great candidates? And and I know I'm I'm asking you a loaded question because No. It's not just the property, but it's the activity or taxpayer that makes it a good candidate for a for a cost side.
Heidi Henderson:You're you're exactly right. There's two sides to the coin when we look at cost seg. I have people ask me all the time, does my property qualify? Well, any investment property qualifies. You can apply cost segregation to any type of investment property, a residential property, a rental, a short term, a long term, a commercial building, office, self storage, mobile home parks, you name it.
Heidi Henderson:Cost segregation is an accounting method. It is allowable. It is drafted and outlined in the IRS tax code as an accounting method we use for how we depreciate real estate. So totally applicable and applies to all. The the highest producing properties are things that have more personal property, more fixtures than others.
Heidi Henderson:So a warehouse, a distribution facility is going to have less immediate depreciation than, let's say, a mobile home park, which has very little infrastructure. Actually, it's all land improvements and, you know, asphalt and and landscaping and fencing, and that's all actually personal property. So we look at that. Residential properties, short term, long term, multifamily, those typically have pretty good results. After land with just the building cost, we're typically able to shift about, you know, 30%, 35, sometimes as much as 40% depending on the finishes inside, but it's a pretty compelling number when we look at that.
Heidi Henderson:Once we understand that cost segregation itself is applicable to any property, then the secondary analysis and this is why I love working with you guys. The secondary analysis is you as a taxpayer. What is your activity or involvement in the investment, in the real estate itself? Because then it determines whether it is considered active or passive. That means active offsets any active income, including a w two wage, which is what most people are after, and passive only offsets other passive income, like rental income or other investment income.
Heidi Henderson:And so there are limitations. Someone's ability to use it as active or passive depends on activity. So your CPA needs to evaluate activity. I, as a cost segregation professional, evaluate the building. So, that is a a a designation sort of a line in the sand sometimes that our clients really struggle with because they want us to, to consult with them on material participation and the short term rental loophole.
Heidi Henderson:That's where you guys come into play. We deal with the building itself.
Chris Picciurro, CPA:Absolutely. They're complimentary analysis, and the cool thing with cost segregation study is, I you know, I love monopoly. No one will play monopoly with me anymore. I'm I'm pretty nice guy, but I'm vicious when it comes to monopoly. However, one thing in monopoly, the reason I'm mentioning it is monopoly gives you remember, they literally got chance and you got community chest, and you got the get out of jail free card.
Chris Picciurro, CPA:And what I why that's important is that a lot of taxpayers don't understand that the cost segregation study now sometimes it's a no brainer, and we're gonna get it done right after acquisition. Especially if you have a building, let's say, that there's an acquisition and then a build or but, you know, but doesn't have to be done before the end of the year. There's a lot of times that it that the cost segregation study could be done, as long as it's done before the tax return's prepared, it could be counted for that previous year, or it could be done for previous years, like 2021, 2022, 2019, and that's part of looking at someone's depreciation schedule as a tax professional in determining if they're a good candidate. And that that's one thing I, you mentioned as far as a cost segregation is an is an approved method of accounting. I'm gonna reinforce that because in the situation where we look back and and we look back and we say, hey.
Chris Picciurro, CPA:This person put this property into service in 2021. They went straight line. They can take the deduction, and and and it'll be beneficial for them in '25 to take it. We go back to get technical, work with the ETS or another cost segregation study company. But, again, I love you guys.
Chris Picciurro, CPA:And and you say, if you would have done this before, get out of jail free card. This would have been your deduction. You only took this amount of deduction. So we're gonna give you the difference on your 25 return. That's called a 41 a adjustment.
Chris Picciurro, CPA:We file what's called a thirty one fifteen with IRS. Why am I getting technical? Because my point is we are alerting the IRS that we changed our method of accounting. The IRS automatically approves that. It's on the automatic approved list, meaning they understand it.
Chris Picciurro, CPA:This is not a doing the cost segregation study alone is not increasing your auto risk at all, in my opinion. So
Heidi Henderson:Yeah. That that's a huge comment. Yeah. Because I get asked that question all the time, especially when people look at the number. Because if you have a property that's got any significant tax basis, you know, $500,000 or more by the way, we're doing cost savings on $100,000 buildings.
Heidi Henderson:But when you get into something that's 500,000, the the amount of depreciation and tax savings is surprisingly
John Tripolsky:large.
Heidi Henderson:And so most people then are like, number one, this is too good to be true. Number two, how did I not know about this? This is crazy. And number three, surely I'm going to get audited. This is super scary.
Heidi Henderson:Because it's so much benefit. It's like a little bit you know, if you're not familiar with it, it's kind of shocking. But, you know, there are reasons behind it. We do a lot of education on that as well to explain. There's a reason why this is in the tax code.
Heidi Henderson:It actually when you understand that personal property does have a reasonable useful life, When you really think about it as one simple example, if you buy a short term rental property that has a stove, a dishwasher, a refrigerator, and a washer and dryer in it, and they're included, and the property is ten years old and the appliances are ten years old, there's a probable reasonable assumption you're gonna have to replace those appliances. But you bought that property. If you don't do a cost seg study, you will depreciate those appliances for twenty seven and a half years. And there is no there I'm sorry. There's no way they're gonna last that long.
Chris Picciurro, CPA:Not even my parents' fridge lasted that long.
Heidi Henderson:Yeah. So so that's what's amazing is the cost segregation, it isn't it's not a it's not a, you know, a tactic. It is there the IRS says it's actually a preferable method of depreciation because it's actually more accurate. You get a massive tax deduction, but it is because you should take a very fast deduction for those appliances because you will likely need to replace them with new ones, which then also now are new fast depreciation. So I'd like to kinda help people wrap their heads around that concept because it does sometimes feel like it's some type of a, you know, a a loophole or a strategy that they're going after that's really aggressive.
Heidi Henderson:But when you understand the methodology behind it, it makes all the sense in the world.
Chris Picciurro, CPA:When we talk so we talked about, yeah, when it might make sense, you know, from a tax perspective, when we have someone that can benefit from the deduction immediately as a nonpassive activity or that's a pass You know, it's funny because I would argue for many people, especially higher higher income people, maybe they're in a high marginal tax rate, that a cost segregation study isn't a terrible idea to create passive activity losses. Right? Because maybe they have a gain on another property that they can offset. I mean, you imagine someone that's in a, you know, 45, 40% marginal tax rate, including, you know, maybe they're in New York or California or something like that. And you say, well, look.
Chris Picciurro, CPA:You could you could buy this property. It's gonna cash flow positive, and you could segregate the cost. And for the next twelve years, you're not gonna pay tax on this income because you have this carry forward. Not all tax planning has to be this year. It's legally not gonna be reduced in the period in your lifetime.
Chris Picciurro, CPA:Yep. That being said, there is something cool that we that is available and that you've seen in in the in practice also where some timing's important. So sometimes someone we had a client in our in our private CPA, practice, and I want you to touch on this, is that someone might have had a home that was a, you know, a long term rental property, and they wanna start getting more involved with it, and they actually converted it to a short term rental. And they, and they were operating it and doing the the listings and communicating with guests. At that point, they might want to do the cost segregation study in the year they have that what we call material participation.
Chris Picciurro, CPA:So is that possible for someone to, you know, kind of expanding on, you don't have to do in the year you acquired the property?
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Heidi Henderson:Yeah. I mean, you bring up a couple of amazing points, because you're right. We can apply a cost seg study retroactively. I appreciate you bringing up the fact that even if it's passive, it doesn't necessarily mean that's a bad thing. A lot of people say, well, I don't qualify because it's passive.
Heidi Henderson:Well, I mean, I am not technically a real estate professional, but I have real estate. I do cost seg on every one of my properties. Those are carryforward suspended losses that I carry on my tax return. It offsets any other investment income. And at the point that I sell a property, it would be deployed at that stage as well.
Heidi Henderson:So the suspended losses are like, hey. I got this, you know, little golden nugget here sitting here that I can deploy when it's needed. In a perfect world, it offsets active income. And in that case, you're exactly right that if a taxpayer has a change of activity and maybe it was passive, so they've never done COSEG, they didn't need the additional deductions. Now something's happened.
Heidi Henderson:Maybe they're retiring or they're reducing work or they're they're going to part time and they're getting more active in the real estate side. Or one year over the next, they decide to try short term rentals and they're managing it where they weren't before. They're like, hey. I wanna try this out for a year. All of a sudden, it's active, and that is a perfect opportunity to deploy a cost segregation study on that for that year for that tax return, and then it would actually trigger as active.
Chris Picciurro, CPA:We have clients in the private CPA practice that liked like projects. So they'll buy a short term rental property. They'll they'll meet that what's called the material participation test. They're basically putting their time into it, get it up and running. Maybe they bought it in, you know, September, really put their heart and soul into it, got it going, have some bookings, kinda get it moving.
Chris Picciurro, CPA:And then in March of the next year, they move it over to a property management company, and then they do it again. So the point is to meet some of these thresholds, you only have to meet it. It's a year to year test. And what Heidi is saying is pair the cost segregation study if you're looking for that immediate deduction with the year that you meet the test, which you see, that's that's plain. You have that flexibility.
Chris Picciurro, CPA:Yeah. So You Yeah. We appreciate it. Yeah. That's that's cool.
Chris Picciurro, CPA:So yeah. So the the with one big beautiful bill act, let's remember we are in that 100% bonus era. As a wrap, though, I want do want people to be aware, and maybe you could touch on this, is the year you placed a property into service is really the most important factor when it comes to the the deduction.
Heidi Henderson:Yes. Yes. So that that it gets okay. This is where we get technical. Tricky.
Chris Picciurro, CPA:You're right.
Heidi Henderson:The the one big beautiful bill threw a little bit of a wrench our way. Now we're getting past it, but we're still running into it a little bit right now because we're in the middle of the 2025 tax season right now. But, ultimately, what the one big beautiful bill did extended a 100% bonus depreciation. However, it threw a little wrench and it said, it only applies to a property that was both purchased and placed in service after 01/19/2025. So we had many investors who bought properties in 2024, can got it set up, got everything going, or they were building something, and then it actually got placed into service after January.
Heidi Henderson:The other scenario we see a lot, we have a lot of people who have a their primary home, and they convert that to a rental. So they decide to move out. They're gonna convert their primary home now into a rental property, and they'll start using that. The same triggers because you actually purchased it before that cutoff date and placed it into service later. So it actually does not qualify for a 100% bonus under that new subset rule that we see.
Heidi Henderson:So just be aware that's a little bit of a little catching point. We have a lot of people who have that situation. You know, their primary home converted to rental, and they're sad when they realize that they qualify for 40% bonus instead of a 100. So that will continue to carry if you purchase property prior to 2025. But other than that, anything now after that January 2025 date purchased and placed in service, depreciation does start on the placed in service date.
Heidi Henderson:So that does also ring true and is very important for investors to understand if they're looking for a particular year. So let's call it 2025. They wanna make sure they have the property placed into service before 12/31/2025 or, in this case, 2020 so that they can apply it to that particular tax return. So that gets into, you know, what is considered placed in service? You know, was it ready for rent?
Heidi Henderson:Did they actually have rental activity, and what has triggered that? So that's always something, again, to make sure is is well understood when we're utilizing the depreciation.
Chris Picciurro, CPA:Well, guess what? If you are watching this on YouTube or if you're listening on any of our platforms, you're in good hands. First of all, you could be part of the teaching tax law community in our defeating taxes private Facebook group. If you're not sure if if this if you have some questions about cost segs, just post in there. You could even post anonymously.
Chris Picciurro, CPA:Talk to your tax professional, figure out is is the activity passive or nonpassive that year? Then we could talk to a cost segregation study company, like ETS. They're gonna do an analysis for you to determine is does this make sense, before committing to to the study? And and, so so you have those tools in place. Don't go about this yourself.
Chris Picciurro, CPA:We talk about building your, personal board of directors. And and, again, Heidi, we so appreciate you joining us here. And and now we're refreshed with cost seg studies and ready to rock and roll moving forward.
Heidi Henderson:Absolutely. Let's get to work.
John Tripolsky:Oh, yeah. And and, you know, now that I'm back in at the end of your guys' discussion, I've been over here writing stuff down again. Heidi, I know we've talked about this. I think in a couple podcasts and multiple discussions, and every time we do talk about it, I'm sitting here writing things down, and I'm glad that you ended with that, the caveats. Right?
John Tripolsky:So not everything is dropped a 100% into the 100% bonus bucket. Because I'm sure a lot of people are out there thinking like, oh, well, of course, I got it because x happened. I'm good. So that was a great ending.
Heidi Henderson:Good. I'm I'm glad. And you know what? I I would be perfectly honest. We've had a little we've had a couple, like, head to head butt discussions with some of our CPA partners as well because this was not something that got caught.
Heidi Henderson:This little tie it is literally one word that was added in as a change. So this is really important for CPAs and tax advisers to understand as well as investors.
John Tripolsky:Excellent. Awesome. Well, we'll definitely have you back here again, and then we'll we'll always ping you with some questions. Yeah.
Heidi Henderson:We appreciate
John Tripolsky:mentioned too. Is everybody that's listening to us or watching this, there's, we're gonna drop some resource links here in the show notes as well as go back and listen to some of these other podcasts. I think there's a lot of especially this topic, there's a lot of things that lead up to it. Now, obviously, this is not the entire story. We can't tell you every single thing about the process with cost segregation studies.
John Tripolsky:Go listen to it. We're here with more information coming up next week as always here on the Teaching Tax Flow podcast every week.
Disclosure:The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Are offered and supervised through Cabin Securities Inc member, F I N R A S I P C.
Disclosure:Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment adviser. Chris Picciurro is a registered representative of Cabin Securities and an investment adviser representative with Cabin Advisors LLC. Teaching Tax Flow is an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.