WEBVTT NOTE This file was generated by Descript 00:00:08.209 --> 00:00:11.840 Speaker: Welcome to Real Estate is Taxing, where we talk about all things real estate 00:00:11.870 --> 00:00:16.869 tax and break down complex concepts into understandable, entertaining tax topics. 00:00:17.440 --> 00:00:21.259 My name is Natalie Kalady, I'm your host, and I am so excited 00:00:21.259 --> 00:00:22.670 that you've decided to join me. 00:00:23.748 --> 00:00:24.168 Microphone (Shure MV7): Hello. 00:00:24.168 --> 00:00:25.098 Hello everyone. 00:00:25.098 --> 00:00:27.708 And welcome to today's episode. 00:00:28.278 --> 00:00:32.508 I wanted to start off today by poisoning a question for you guys. 00:00:33.108 --> 00:00:38.598 So, whether you are listening as a real estate investor or a tax professional. 00:00:38.988 --> 00:00:42.438 There is a good chance that you have attended one or more 00:00:42.438 --> 00:00:44.238 conferences in your time. 00:00:44.808 --> 00:00:47.658 I feel like right now it is conference season. 00:00:47.988 --> 00:00:49.398 Especially in the tax world. 00:00:49.428 --> 00:00:53.508 Summertime is when we've got a little bit of downtime and we can go to all of these 00:00:53.778 --> 00:00:56.058 large conferences and small local events. 00:00:56.508 --> 00:00:59.058 And get our CE hours and for the year. 00:00:59.538 --> 00:01:01.368 So my question for you. 00:01:01.878 --> 00:01:04.578 Is, why do you go to conferences? 00:01:04.788 --> 00:01:08.988 Are you someone who does, do you attend live conferences or do you tend to just 00:01:09.288 --> 00:01:11.568 learn things through online offerings? 00:01:12.258 --> 00:01:15.438 And when you go to a conference, what is your main intention? 00:01:15.438 --> 00:01:16.188 When you go. 00:01:16.188 --> 00:01:19.278 I know that some people will go to a conference. 00:01:19.608 --> 00:01:21.438 Solely with the purpose of learning. 00:01:21.708 --> 00:01:26.508 Their head down very focused and they're only there to listen to the speakers. 00:01:27.048 --> 00:01:31.938 And I know that there are other people who will attend a conference largely for the 00:01:31.938 --> 00:01:35.238 purpose of networking, making connections. 00:01:35.568 --> 00:01:40.008 Or seeing people who they've known in the industry for years, seeing friends. 00:01:40.338 --> 00:01:41.328 And things like that. 00:01:41.808 --> 00:01:46.038 So I am very curious why you attend conferences. 00:01:46.608 --> 00:01:49.398 And second part to this question. 00:01:49.878 --> 00:01:51.618 When you go to a conference. 00:01:52.008 --> 00:01:55.908 What are some of your best tips or what are some things. 00:01:56.268 --> 00:02:00.678 And that you put in place so that you can easily remember everyone 00:02:00.678 --> 00:02:05.988 you meet and make sure that you are actually like making the best of it, 00:02:05.988 --> 00:02:07.338 making the most out of that time. 00:02:07.338 --> 00:02:10.488 You have with all of these other people in your field. 00:02:10.988 --> 00:02:11.498 The reason I. 00:02:11.498 --> 00:02:15.788 I ask is I am going to a lot of conferences this time of year. 00:02:16.478 --> 00:02:20.018 And a few things that I have put into place. 00:02:20.588 --> 00:02:22.838 That have been super helpful for me. 00:02:22.868 --> 00:02:28.268 And I think some of you might get value from the first thing. 00:02:28.688 --> 00:02:30.668 Is even though I hate them. 00:02:30.848 --> 00:02:32.168 I bring business cards. 00:02:32.228 --> 00:02:35.558 A lot of people still do use them or ask for them. 00:02:35.558 --> 00:02:37.988 And I try to have these handy whenever I can. 00:02:38.798 --> 00:02:42.038 Another thing that I prefer to do as well. 00:02:42.038 --> 00:02:43.868 I will give someone my business card. 00:02:44.318 --> 00:02:46.898 I would always rather receive someone else's. 00:02:47.558 --> 00:02:52.898 At the end of a conference, if someone has spoken to 500 people and you're 00:02:52.898 --> 00:02:55.478 just one of a stack of business cards. 00:02:55.988 --> 00:02:57.308 There's a pretty slim chance. 00:02:57.308 --> 00:03:02.948 They're even going to remember who you are, let alone ever reach out to you or 00:03:03.218 --> 00:03:09.398 move past that conference point of sharing something useful for you or with you or. 00:03:09.768 --> 00:03:13.248 Asking about collaborating on something or whatever it might be. 00:03:13.788 --> 00:03:17.628 When you're just one person in a stack of cards, it's really 00:03:17.628 --> 00:03:19.428 hard to set yourself apart. 00:03:19.908 --> 00:03:23.898 So I would always rather be the person receiving the cards. 00:03:24.378 --> 00:03:26.298 I will take people's information. 00:03:26.598 --> 00:03:30.258 And then after the event, I will follow up with them in some 00:03:30.258 --> 00:03:32.148 way, just so that we have that. 00:03:32.658 --> 00:03:34.398 Secondary point of contact. 00:03:34.848 --> 00:03:38.868 I'll send them an email and reference something we had talked about, or I'll 00:03:38.868 --> 00:03:44.268 add them on social media and follow their business page or whatever it is. 00:03:44.628 --> 00:03:47.538 I always want to be the person doing that followup to make 00:03:47.538 --> 00:03:48.948 sure it doesn't just get lost. 00:03:49.338 --> 00:03:50.838 I think that happens a lot. 00:03:51.528 --> 00:03:54.048 We go to these conferences and a lot of the time they're a fair 00:03:54.078 --> 00:03:55.638 amount of money to go to these. 00:03:56.178 --> 00:03:59.628 And then we meet all of these incredible people and then 00:03:59.628 --> 00:04:00.858 we just lose the connection. 00:04:01.308 --> 00:04:05.028 So my tip is to be the person collecting the information. 00:04:05.418 --> 00:04:09.948 And take the action to follow up, even if it's something small, even if 00:04:09.948 --> 00:04:14.868 it's just a quick email or a message online, just, it was great meeting. 00:04:15.218 --> 00:04:18.128 Hope you found that information you were looking for on this code section. 00:04:18.128 --> 00:04:20.438 If you do end up finding that case, you were talking about. 00:04:20.738 --> 00:04:24.428 Would love if you'd send me an email, is there anything else I can do for you? 00:04:24.968 --> 00:04:26.288 Just some kind of follow-up. 00:04:27.098 --> 00:04:30.668 I had heard a podcast recently talking about this and they were saying that 00:04:30.668 --> 00:04:35.438 when they attend a conference, Every time they collect someone's business card. 00:04:35.918 --> 00:04:42.128 What they do is that they write a little note on the card specifically 00:04:42.128 --> 00:04:46.238 about something that they talked about with this person or related to this 00:04:46.238 --> 00:04:48.038 person, something to help them remember. 00:04:49.028 --> 00:04:50.828 So I think this is a good idea. 00:04:51.698 --> 00:04:55.388 But my first thoughts were most business cards have a lot of text on them. 00:04:55.478 --> 00:04:58.958 Some people don't even have business cards anymore, early up digital ones. 00:04:59.468 --> 00:05:02.288 So I'm trying to think of a better way of doing that. 00:05:02.678 --> 00:05:07.058 Because I would love a good way to keep track and kind of remember those 00:05:07.058 --> 00:05:10.928 little tidbits that I've talked to everyone about, whether it is their 00:05:10.928 --> 00:05:14.828 dog's name, where they're from, what they're doing that summer, what kind 00:05:14.828 --> 00:05:18.998 of tax they specialize in, what kind of investments they buy, what kind of 00:05:18.998 --> 00:05:20.948 properties they invest in, what states. 00:05:21.488 --> 00:05:24.458 Any of those little notes, I would love a quick, easy way. 00:05:24.968 --> 00:05:27.898 To save with that person's information. 00:05:27.958 --> 00:05:30.058 As I'm talking to people at a conference. 00:05:30.418 --> 00:05:33.148 Now, I know I can do a notes app or scan in their information 00:05:33.148 --> 00:05:34.678 as a contact and add notes. 00:05:35.128 --> 00:05:39.298 But if anyone else has a creative way, they've been doing this or an 00:05:39.298 --> 00:05:41.128 app that works really well for this. 00:05:41.488 --> 00:05:45.628 I thought about maybe doing like a quick video clip with each person 00:05:45.678 --> 00:05:48.798 or a selfie or doing a voice record. 00:05:48.798 --> 00:05:50.958 So it transcribes it, something like that. 00:05:50.958 --> 00:05:54.318 But if there is a good solution out there that you've already found. 00:05:55.008 --> 00:05:56.628 I would love to hear about this. 00:05:56.988 --> 00:06:02.898 So I want to hear all of your information about conferences, why you go. 00:06:03.318 --> 00:06:07.938 What you get out of them, what your current process is, and if you have a 00:06:07.938 --> 00:06:13.158 stellar solution, For keeping track of who you've met and kind of just remembering 00:06:13.158 --> 00:06:14.838 all those little details about people. 00:06:15.258 --> 00:06:16.098 Let me know. 00:06:16.548 --> 00:06:19.068 And so you can either shoot me an email. 00:06:19.158 --> 00:06:23.118 That's just contact at C R E tax, strategist.com. 00:06:23.658 --> 00:06:25.728 Or join us in the Facebook group. 00:06:25.728 --> 00:06:28.938 I will have links to both groups down in the show notes. 00:06:28.968 --> 00:06:32.868 There's a group for tax professionals and a group for real estate investors. 00:06:33.408 --> 00:06:37.848 Happened to the Facebook group, make a post in there, or send me a message 00:06:37.848 --> 00:06:40.038 on Facebook, Instagram, wherever. 00:06:40.408 --> 00:06:41.158 And let me know. 00:06:41.968 --> 00:06:46.558 Because I am trying to up my conference game this year and really make the 00:06:46.558 --> 00:06:50.248 most of all those connections with all of the fabulous people I meet. 00:06:50.248 --> 00:06:50.818 Microphone (Shure MV7)-1: All right. 00:06:50.848 --> 00:06:52.528 All conference talk aside. 00:06:52.918 --> 00:06:57.358 Today, we are going to cover a topic that I've sort of touched on and it 00:06:57.358 --> 00:07:02.278 comes up a lot because it is incredibly popular in the real estate tax world. 00:07:02.668 --> 00:07:04.768 And that is cost segregation studies. 00:07:05.338 --> 00:07:10.468 So today we are going to cover what a cost segregation study is. 00:07:11.338 --> 00:07:13.738 Why someone would want to have one. 00:07:14.218 --> 00:07:18.058 Kind of the expectations from one ballparks on what they would cost 00:07:18.058 --> 00:07:21.178 or what you can expect the outcomes to be different types of studies. 00:07:21.988 --> 00:07:26.908 And a few of the red flags or things to just be cautious 00:07:26.908 --> 00:07:28.438 about as you're doing these. 00:07:28.798 --> 00:07:31.618 I will have a follow-up episode on this soon with a little 00:07:31.618 --> 00:07:33.928 more on the cautionary tales. 00:07:34.288 --> 00:07:38.398 But today's episode, we're really just going to focus on the meat and potatoes 00:07:38.428 --> 00:07:41.008 of what makes up a cost segregation study. 00:07:41.508 --> 00:07:46.698 So in a nutshell, A cost segregation study is something that you can 00:07:46.698 --> 00:07:52.008 have done on a piece of real estate that is going to go through. 00:07:52.488 --> 00:07:56.778 And separate out all of the various components of that property. 00:07:57.618 --> 00:07:58.668 As a starting point. 00:07:58.668 --> 00:08:02.598 When you buy a piece of real estate, you are often paying one price. 00:08:02.958 --> 00:08:04.128 For everything. 00:08:04.728 --> 00:08:07.158 So that is your building and your land. 00:08:07.658 --> 00:08:08.978 But it goes farther. 00:08:09.848 --> 00:08:10.538 On that land. 00:08:10.538 --> 00:08:13.598 There's likely some land improvements, some fencing, 00:08:13.838 --> 00:08:16.328 some driveways and sidewalks. 00:08:16.748 --> 00:08:21.188 And in that building, there are all kinds of other components, there's 00:08:21.188 --> 00:08:26.318 flooring and electrical fixtures and appliances, and the different run 00:08:26.318 --> 00:08:28.778 into connect appliances and things. 00:08:29.468 --> 00:08:32.258 All of these different components have a value. 00:08:33.098 --> 00:08:34.868 And some of these components. 00:08:35.468 --> 00:08:39.128 Are considered not structurally adhered to the property. 00:08:39.628 --> 00:08:41.398 And they can actually be listed. 00:08:42.208 --> 00:08:44.068 At a correct shorter life. 00:08:44.698 --> 00:08:46.348 So what we mean when we say that? 00:08:47.218 --> 00:08:50.878 Is for any kind of asset you use in a trade or business? 00:08:50.908 --> 00:08:51.898 That's a rental. 00:08:52.738 --> 00:08:55.438 You are able to depreciate that asset. 00:08:55.948 --> 00:08:58.858 Meaning since it will give value over countless years. 00:08:59.308 --> 00:09:05.728 The tax code says you need to match up the cost with that amount of years. 00:09:06.238 --> 00:09:08.848 So for different asset types, there's different preset 00:09:08.848 --> 00:09:10.828 lives that you need to follow. 00:09:11.218 --> 00:09:15.208 So for residential real estate, that's 27 and a half year for 00:09:15.208 --> 00:09:17.368 non-residential that's 39 year. 00:09:17.788 --> 00:09:20.938 And then within that, there's also, like I was saying several 00:09:20.938 --> 00:09:22.528 shorter life categories. 00:09:23.068 --> 00:09:27.598 So five, seven and 15 years are the most common breakouts. 00:09:28.228 --> 00:09:33.118 Five-year assets are going to be things like non-permanent flooring and 00:09:33.118 --> 00:09:36.358 appliances and furnishings in a property. 00:09:36.898 --> 00:09:37.828 Seven year assets. 00:09:37.828 --> 00:09:40.078 We don't see too much on rentals. 00:09:40.078 --> 00:09:42.918 I believe a shed would be seven years but there's not much else. 00:09:42.918 --> 00:09:43.818 I typically see. 00:09:44.388 --> 00:09:46.848 15 year is going to be your land improvements. 00:09:47.238 --> 00:09:51.768 So those, again, fencing, some landscaping, driveways, 00:09:51.798 --> 00:09:53.538 parking, lots, things like that. 00:09:53.568 --> 00:09:54.318 Walkways. 00:09:55.278 --> 00:09:56.148 Land improvements. 00:09:56.608 --> 00:10:00.178 Another option for 15 year in some real estate is going to be your 00:10:00.178 --> 00:10:01.798 qualified improvement property. 00:10:02.248 --> 00:10:07.198 So that is improvements done to the internal part of a property that has 00:10:07.228 --> 00:10:11.188 already been in service and it does have to be non-residential property. 00:10:11.548 --> 00:10:14.818 So that's another category that is also under 15 years. 00:10:15.598 --> 00:10:19.378 The reason we like separating out these various components 00:10:19.378 --> 00:10:21.118 with a cost segregation study. 00:10:21.808 --> 00:10:27.898 Is that they take the depreciable life of these assets from 39 years. 00:10:28.348 --> 00:10:32.068 And can bring them down to as low as five years. 00:10:32.548 --> 00:10:37.558 So, if you are going to write off the same $10,000 across 39 years 00:10:37.588 --> 00:10:42.118 or five years, The amount you get to write off per year will be much 00:10:42.148 --> 00:10:45.268 higher if it's only across five years. 00:10:46.018 --> 00:10:49.558 Now I'll get pushed back on this and I've had tax professionals tell 00:10:49.558 --> 00:10:52.348 me, Natalie, this isn't actually creating any more deductions. 00:10:52.378 --> 00:10:53.908 You're just, front-loading them. 00:10:54.208 --> 00:10:58.258 You're taking more upfront instead of spreading it out more across the 39 years. 00:10:58.618 --> 00:11:00.148 And you are absolutely correct. 00:11:00.238 --> 00:11:01.288 That is what we are doing. 00:11:01.288 --> 00:11:03.808 You have the same amount of asset value, either way. 00:11:04.108 --> 00:11:06.088 We're not creating more or creating more. 00:11:06.088 --> 00:11:10.648 Write-offs we're just choosing to take a bigger chunk of them in those first years. 00:11:11.148 --> 00:11:12.708 There's a few reasons for this. 00:11:13.318 --> 00:11:16.738 For me, one of the biggest ones is most real estate investors. 00:11:17.038 --> 00:11:20.068 Don't hold property for its entire life. 00:11:20.668 --> 00:11:24.088 Very often real estate is not held for 39 years. 00:11:24.268 --> 00:11:27.358 I think on average the whole time is closer to seven years. 00:11:27.808 --> 00:11:32.548 So if you're going to own a piece of real estate and you have a purchase 00:11:32.548 --> 00:11:36.508 price of X amount of dollars, and you are allowed to depreciate and write 00:11:36.508 --> 00:11:40.738 off all of that across reasonable lives, as, you know, set out. 00:11:41.548 --> 00:11:45.388 Would you rather get three quarters of that purchase price 00:11:45.388 --> 00:11:46.588 during the time you own it? 00:11:47.128 --> 00:11:48.688 Or would you only rather get. 00:11:49.258 --> 00:11:49.948 A third. 00:11:50.368 --> 00:11:54.988 So basically the trade-off is you're not going to own it for those later years. 00:11:55.378 --> 00:12:00.268 So why are we saving deductions for a time that you likely will never get to. 00:12:00.868 --> 00:12:05.668 So that's my first reasoning for looking at cost segregation studies. 00:12:06.298 --> 00:12:07.018 Past that. 00:12:07.498 --> 00:12:09.838 They're actually more accurate. 00:12:10.708 --> 00:12:11.968 In many cases. 00:12:12.518 --> 00:12:14.108 Building is not just a building. 00:12:14.108 --> 00:12:18.218 So breaking things out is a more appropriate way to depreciate them. 00:12:19.028 --> 00:12:22.838 And then we have values for when we replace assets. 00:12:23.408 --> 00:12:24.038 So. 00:12:24.538 --> 00:12:25.318 Normally. 00:12:26.128 --> 00:12:33.448 If you replace the floors or offense, or if you swap out any of these worn 00:12:33.448 --> 00:12:35.578 out items in a piece of real estate. 00:12:36.078 --> 00:12:39.408 If you listed the property for just building and land. 00:12:40.038 --> 00:12:42.318 When you dispose of the fence. 00:12:42.828 --> 00:12:46.818 You don't know what the value of the fence was as part of that building. 00:12:46.818 --> 00:12:50.658 Like you don't know what its portion of the cost was that you're now 00:12:50.718 --> 00:12:53.088 taking off your assets schedule. 00:12:53.148 --> 00:12:54.348 You don't have that amount. 00:12:54.978 --> 00:12:55.728 So it. 00:12:56.328 --> 00:13:00.168 Ends up with these skewed values because we're adding a new fence. 00:13:00.738 --> 00:13:04.128 But we didn't remove the deep portion of the cost of the old fence where 00:13:04.128 --> 00:13:07.308 we're adding new floors, but we didn't remove the cost of the old floors. 00:13:07.788 --> 00:13:10.968 So we end up just adding and adding and adding to this original building cost. 00:13:10.998 --> 00:13:12.828 But the building had most of these things. 00:13:13.218 --> 00:13:14.778 As part of that original cost. 00:13:15.138 --> 00:13:18.318 So it creates some inaccuracies when we don't separate them out. 00:13:19.248 --> 00:13:24.888 Additionally, not only do we get to front-load a lot of these 00:13:25.008 --> 00:13:28.098 depreciation write-offs that we would normally not ever get to. 00:13:28.878 --> 00:13:33.318 But anything with an asset life of 20 years or less qualifies 00:13:33.318 --> 00:13:34.848 for bonus depreciation. 00:13:35.418 --> 00:13:37.998 Which is just a fancy way of saying you can write off a big 00:13:38.028 --> 00:13:39.768 chunk of it in that first year. 00:13:40.278 --> 00:13:44.268 So for 2017, through 2022, this was a hundred percent. 00:13:44.718 --> 00:13:48.258 For 2023, it's 80 for 2024 at 60. 00:13:48.528 --> 00:13:50.028 It's currently phasing out. 00:13:50.448 --> 00:13:53.478 I don't think it'll disappear fully, but only time will tell. 00:13:54.438 --> 00:13:58.638 So in addition to getting to push all of those expenses from years, you're likely 00:13:58.638 --> 00:13:59.898 not even going to own the property. 00:14:00.408 --> 00:14:03.198 Into those initial years, when you do own the property. 00:14:03.698 --> 00:14:08.228 Past that we then get to take a big chunk of that front-loaded 00:14:08.228 --> 00:14:10.268 expense in the very first year. 00:14:10.748 --> 00:14:14.378 So this can be an incredibly helpful tax planning tool. 00:14:14.888 --> 00:14:17.768 To anyone who is able to use those losses. 00:14:18.338 --> 00:14:21.128 If you are a real estate professional and you can use them. 00:14:21.698 --> 00:14:25.628 If your income is under a hundred thousand dollars, so you can use 00:14:25.628 --> 00:14:30.008 up to $25,000 a year of passive losses against your other income. 00:14:30.518 --> 00:14:35.588 Or if you have a large gain from real estate during a specific year, if you're 00:14:35.588 --> 00:14:39.908 selling a property for a large amount of gain, Doing a cost segregation and 00:14:39.908 --> 00:14:43.808 creating a large amount of loss on a different property can offset that gain. 00:14:44.258 --> 00:14:47.708 So there's a lot of planning opportunity with cost segregation studies. 00:14:48.158 --> 00:14:52.118 Because what we're doing is separating out components into shorter lives. 00:14:52.358 --> 00:14:55.778 And then we can take a big chunk of that shorter life asset all at once. 00:14:56.168 --> 00:14:58.568 So really cool planning opportunity. 00:14:59.288 --> 00:15:02.618 Now more on the side of the actual. 00:15:03.278 --> 00:15:05.678 What is a cost segregation study? 00:15:06.178 --> 00:15:11.098 So there's a few different types of studies and there are multiple ways. 00:15:11.308 --> 00:15:14.188 There's six different ways that a study can be conducted. 00:15:14.468 --> 00:15:18.518 That are listed out in the cost segregation audit technique guide. 00:15:18.938 --> 00:15:23.468 Highly recommend you guys go and download this and read through it. 00:15:24.068 --> 00:15:26.858 Whether you are an investor or a tax professional. 00:15:27.218 --> 00:15:29.978 There is so much good information in this. 00:15:30.428 --> 00:15:33.578 The IRS literally puts out the guide to audit you. 00:15:34.058 --> 00:15:35.888 Why would you not want to know that? 00:15:36.608 --> 00:15:40.538 So in that guide, it lists out six different ways for conducting a study. 00:15:41.168 --> 00:15:44.828 And typically who does this study will be a cost segregation 00:15:44.828 --> 00:15:46.358 from some accounting firms. 00:15:46.358 --> 00:15:47.678 Also do them in house. 00:15:48.098 --> 00:15:50.648 But most common it's a third party firm. 00:15:51.148 --> 00:15:53.008 So of those six ways. 00:15:53.458 --> 00:15:58.138 The most common ways land around having an engineer based study completed. 00:15:58.708 --> 00:16:02.308 Where an actual engineer who is an expert. 00:16:02.638 --> 00:16:05.998 On these topics on these assets and their class lives. 00:16:06.478 --> 00:16:10.558 They will either do a site inspection where they come to the property or 00:16:10.558 --> 00:16:11.878 they'll do a video walk through. 00:16:11.878 --> 00:16:14.608 They're going to do an actual hands-on analysis. 00:16:15.148 --> 00:16:19.468 Of the asset of the, everything it has as parts of it, what 00:16:19.468 --> 00:16:21.268 their reasonable values would be. 00:16:22.258 --> 00:16:26.038 It is a full in-depth study and these tend to be a few thousand 00:16:26.038 --> 00:16:28.768 dollars for residential real estate. 00:16:28.768 --> 00:16:31.198 If you have a one to four unit, I see these on average. 00:16:31.498 --> 00:16:33.898 Between 1500 and $4,000. 00:16:34.828 --> 00:16:37.468 On average, when you do one of these engineered studies. 00:16:38.188 --> 00:16:40.168 Of that initial building value. 00:16:40.558 --> 00:16:45.328 I tend to see about 20 to 30% of that can get pushed into those shorter lives. 00:16:46.198 --> 00:16:50.638 So the engineered studies, these full studies are the recommended. 00:16:50.848 --> 00:16:51.898 That is what I recommend to. 00:16:52.498 --> 00:16:53.578 Pretty much everyone. 00:16:53.848 --> 00:16:56.398 They're going to be your most reliable option. 00:16:56.398 --> 00:16:59.068 They're the most in-depth they're the most appropriate. 00:16:59.568 --> 00:17:00.948 The next option. 00:17:01.728 --> 00:17:03.228 Is a DIY study. 00:17:03.588 --> 00:17:04.938 So there are websites. 00:17:05.268 --> 00:17:09.108 That will allow you to just type in the property is address. 00:17:09.468 --> 00:17:11.568 The year it was purchased the square footage. 00:17:11.568 --> 00:17:17.538 If it has carpet or tile, like a pew, just broad defining factors about the property. 00:17:18.038 --> 00:17:19.268 And then they use. 00:17:20.018 --> 00:17:23.228 An algorithm they're pretty much using a software of data. 00:17:23.618 --> 00:17:27.908 To assign reasonable values to each of those components. 00:17:28.808 --> 00:17:30.278 In that audit technique guide. 00:17:30.758 --> 00:17:34.538 The very bottom of the list, do list that there can be. 00:17:35.198 --> 00:17:38.738 An allocation defined by a sampling or modeling approach, 00:17:38.738 --> 00:17:40.088 which is somewhat what this is. 00:17:40.718 --> 00:17:44.498 The very last option is sort of a rule of thumb approach, which is just looking 00:17:44.498 --> 00:17:49.328 at I'm looking at other similar, like properties in this industry, similar fast 00:17:49.328 --> 00:17:51.908 food restaurants or similar hotel chains. 00:17:52.268 --> 00:17:54.098 We tend to land at about these amounts. 00:17:54.428 --> 00:17:55.298 So very vague. 00:17:55.718 --> 00:17:59.198 Sampling is a little more detailed where there's sort of a large sample 00:17:59.198 --> 00:18:05.588 taken and then brought down into a reasonable allocation based on the D. 00:18:05.708 --> 00:18:07.958 The defining facts of that sample. 00:18:08.708 --> 00:18:11.678 Either of these though, isn't specific to your property. 00:18:11.708 --> 00:18:12.938 It's generalizing. 00:18:12.968 --> 00:18:15.488 So that's what these DIY studies do. 00:18:15.888 --> 00:18:19.728 In reading kind of how they do this on one of the websites for this. 00:18:20.238 --> 00:18:25.028 What it says is that what they are doing is that it uses 00:18:25.028 --> 00:18:26.708 many of these same concepts. 00:18:27.158 --> 00:18:31.958 But instead, the information is processed using their proprietary algorithm. 00:18:32.288 --> 00:18:34.478 And use to generate a logical breakdown. 00:18:34.978 --> 00:18:36.298 So at DIY study. 00:18:36.748 --> 00:18:39.688 Does not look at your specific property. 00:18:39.748 --> 00:18:42.658 It does to a certain extent, but very high level. 00:18:43.228 --> 00:18:46.228 And to me, these are not, not reliable. 00:18:46.228 --> 00:18:47.728 They're very bottom of the list. 00:18:48.118 --> 00:18:52.618 They'll give you some amount of breakout, but it, it could be 00:18:52.648 --> 00:18:54.298 very, very, very hard to defend. 00:18:54.868 --> 00:18:59.188 And many of these firms do have an audit protection where if it is looked at, 00:18:59.188 --> 00:19:01.528 they will back it with a full study. 00:19:01.948 --> 00:19:05.878 At that point, but even then be really cautious of these. 00:19:06.378 --> 00:19:08.208 So there's a few methods. 00:19:08.568 --> 00:19:10.428 To do a cost segregation study. 00:19:10.578 --> 00:19:13.848 Like I said, what I recommend is going to affirm and having an actual 00:19:13.848 --> 00:19:15.618 full engineered study completed. 00:19:16.118 --> 00:19:18.128 At the very start of this. 00:19:18.638 --> 00:19:22.808 My recommendation is before the information goes to that cost segregation 00:19:22.808 --> 00:19:26.918 from you and your accountant, or if you're the tax professional, you 00:19:26.918 --> 00:19:28.808 should set up that starting basis. 00:19:29.048 --> 00:19:32.468 Looking at closing costs, any additional fees that went into it, all of that 00:19:32.468 --> 00:19:37.328 create your initial starting basis and you figure out the land and building value. 00:19:38.318 --> 00:19:39.368 Some firms. 00:19:39.968 --> 00:19:43.238 We'll use a standard split for land versus building. 00:19:43.718 --> 00:19:48.158 Like 85, 15, 80, 20, whatever it is, they're going to use a standard. 00:19:48.728 --> 00:19:50.558 And that's not a reasonable method. 00:19:50.918 --> 00:19:52.478 To separate land and building. 00:19:52.868 --> 00:19:57.158 So you want to give them that starting point of the building is this much, the 00:19:57.158 --> 00:20:01.598 first step in any segregation for any rental is you start with the land value. 00:20:01.598 --> 00:20:03.698 That's the first thing you're supposed to separate out. 00:20:04.388 --> 00:20:07.328 And the audit technique I'd actually says to separate out 00:20:07.328 --> 00:20:09.218 its highest and best value. 00:20:09.698 --> 00:20:12.968 Meaning, if you have a few different things that are giving you this 00:20:12.968 --> 00:20:15.758 value, if you have an appraisal, but also a county assessor value. 00:20:16.028 --> 00:20:19.958 You're supposed to use, whatever one gives the highest value to land, which is the 00:20:19.958 --> 00:20:22.418 leaf least preferential to the taxpayer. 00:20:22.838 --> 00:20:25.868 So if you are audited and they find there's a higher land 00:20:25.868 --> 00:20:27.128 value, that was reasonable. 00:20:27.638 --> 00:20:28.778 That could be adjusted. 00:20:29.558 --> 00:20:34.148 So as a starting point, you should create the land and building value, 00:20:34.358 --> 00:20:37.898 including closing costs and provide this to the cost segregation firm. 00:20:38.348 --> 00:20:40.898 Without this, they might use a standard allocation. 00:20:41.228 --> 00:20:45.308 And also most don't loop in closing costs because different accountants 00:20:45.608 --> 00:20:46.778 will treat them differently. 00:20:47.018 --> 00:20:50.108 So then you have to be mindful of that and you have to separately 00:20:50.108 --> 00:20:51.878 account for those on their own. 00:20:52.378 --> 00:20:53.458 The next thing. 00:20:53.758 --> 00:20:57.028 That I would say to be incredibly cautious of. 00:20:58.018 --> 00:21:03.088 Is, if you are doing a cost segregation study and you are doing this 00:21:03.088 --> 00:21:09.478 intentionally to create large losses using bonus depreciation, and you 00:21:09.478 --> 00:21:11.368 have a way to use the loss that year. 00:21:11.368 --> 00:21:12.808 This is all very intentional. 00:21:13.468 --> 00:21:14.638 Make sure. 00:21:15.058 --> 00:21:18.028 That there is not an election on the tax return. 00:21:18.418 --> 00:21:23.518 To elect out of special depreciation or to elect out of bonus depreciation. 00:21:24.058 --> 00:21:27.478 There is an election that can be made under code 1 68. 00:21:27.478 --> 00:21:31.558 K that says that for specific asset class, the taxpayer is 00:21:31.558 --> 00:21:33.508 not taking a special allowance. 00:21:33.508 --> 00:21:34.768 They're not using bonus. 00:21:35.458 --> 00:21:37.468 And I have seen this on returns before. 00:21:38.008 --> 00:21:41.278 Just kind of mindlessly where they do it as default, or they were 00:21:41.278 --> 00:21:44.758 taught to do it that way, or they just didn't know what it meant. 00:21:45.448 --> 00:21:47.818 If you make this election, it is permanent. 00:21:48.298 --> 00:21:52.468 And what that now means is that even with that study separating out those 00:21:52.468 --> 00:21:54.958 five and seven and 15 year assets. 00:21:55.558 --> 00:21:57.178 They'll be on those shorter lives. 00:21:57.658 --> 00:22:01.558 But if that election is there, you cannot use bonus depreciation and 00:22:01.558 --> 00:22:03.268 you can never go back and fix it. 00:22:03.298 --> 00:22:04.738 It's a permanent election. 00:22:04.768 --> 00:22:06.208 Once you've said you're not doing it. 00:22:06.478 --> 00:22:08.158 You can never do it on that asset. 00:22:08.458 --> 00:22:09.958 So be cautious of that. 00:22:09.958 --> 00:22:13.528 If you had a tax professional, do your return double check for that. 00:22:13.948 --> 00:22:15.448 If you're a tax professional. 00:22:15.898 --> 00:22:19.648 Be leery of making this election, unless there's a very intentional reason. 00:22:20.148 --> 00:22:21.048 The next little warning. 00:22:21.048 --> 00:22:21.948 I'll give you guys. 00:22:22.638 --> 00:22:24.078 Is if you are doing. 00:22:24.588 --> 00:22:26.778 A 10 31, like kind exchange. 00:22:27.558 --> 00:22:31.578 And have plans to do a cost segregation on that replacement asset. 00:22:32.058 --> 00:22:34.488 There's another election you're going to want to look at. 00:22:35.388 --> 00:22:38.658 When you do a 10 31 exchange as a default. 00:22:39.288 --> 00:22:41.568 What happens that's when you sell a property. 00:22:42.168 --> 00:22:44.298 That is used for investment or business purposes. 00:22:44.748 --> 00:22:47.148 You defer the gain by investing in a new property. 00:22:47.688 --> 00:22:54.408 The standard treatment after that is you technically have two assets on your asset 00:22:54.408 --> 00:22:56.298 schedule or your depreciation schedule. 00:22:56.808 --> 00:22:57.678 The first one. 00:22:58.008 --> 00:23:01.548 Is the asset you got rid of that basically just stays there. 00:23:01.578 --> 00:23:05.568 That same life, that same amount, the carry over amount of basis. 00:23:06.048 --> 00:23:06.978 Stays there. 00:23:07.728 --> 00:23:09.528 So that'll be on one timeframe. 00:23:10.158 --> 00:23:13.398 And then any excess basis or new basis. 00:23:13.398 --> 00:23:15.918 So basically if you traded up. 00:23:16.338 --> 00:23:21.408 So you put in an extra $200,000 into the exchange, you bought a property 00:23:21.408 --> 00:23:26.898 $200,000 more that new $200,000, the value starts at that new acquisition 00:23:26.898 --> 00:23:31.128 date across a new life, but you would have two different assets running it. 00:23:31.158 --> 00:23:35.508 Two different schedules that carried over a mound stays on its own schedule. 00:23:35.838 --> 00:23:38.268 Just as exactly what it was before you sold it. 00:23:38.898 --> 00:23:42.378 And then that new, extra value, whatever you bought up into 00:23:42.648 --> 00:23:44.028 starts on a new schedule. 00:23:44.528 --> 00:23:45.908 That is the standard. 00:23:46.298 --> 00:23:49.748 That is what should be on your asset or depreciation schedule. 00:23:49.748 --> 00:23:51.068 If no election has made. 00:23:51.818 --> 00:23:52.508 However. 00:23:53.018 --> 00:23:53.648 Under. 00:23:54.078 --> 00:23:55.938 One.one 68. 00:23:55.968 --> 00:23:57.948 I in the CFR. 00:23:58.368 --> 00:24:00.858 There is another election here. 00:24:01.428 --> 00:24:05.838 To elect out of that treatment and instead to elect, to treat. 00:24:06.438 --> 00:24:07.458 Both assets. 00:24:08.028 --> 00:24:11.148 As one asset starting at that new acquisition point. 00:24:11.838 --> 00:24:15.348 So instead of having that prior assets still listed there at like 00:24:15.528 --> 00:24:21.138 year 10 out of 39, And a new asset starting brand new at year zero. 00:24:21.538 --> 00:24:25.228 For whatever your trade up value was, it's all going to combine into one amount. 00:24:25.828 --> 00:24:27.598 Starting over again at zero. 00:24:28.048 --> 00:24:31.138 So that is your other option is combined into one asset. 00:24:31.468 --> 00:24:36.508 It's always worth looking at both to see what is better in terms of a tax benefit. 00:24:37.198 --> 00:24:41.128 But the way this comes into play with a cost segregation study. 00:24:41.788 --> 00:24:44.728 Is, if you are doing a cost segregation study. 00:24:45.268 --> 00:24:50.698 On a property that has been obtained through a 10 31, like kind exchange. 00:24:51.658 --> 00:24:54.328 Only that new excess basis. 00:24:54.838 --> 00:24:55.828 Qualifies. 00:24:56.328 --> 00:25:01.368 So in that earlier example, only that 200,000 of trade up value. 00:25:01.728 --> 00:25:04.188 Would the cost segregation study apply to. 00:25:04.968 --> 00:25:09.948 Unless you make that election to treat it as one asset, then it 00:25:09.948 --> 00:25:14.388 applies to the carry over basis from the old property and the new amount. 00:25:14.958 --> 00:25:19.548 So that carry over basis was $500,000 and your trade up is only two. 00:25:19.848 --> 00:25:23.718 If you don't make that election, you're not getting to do a cost segregation 00:25:23.718 --> 00:25:26.748 study on $700,000 worth of asset. 00:25:27.048 --> 00:25:29.028 It would only be on the 200,000. 00:25:29.508 --> 00:25:31.668 So be really cautious with this. 00:25:32.058 --> 00:25:36.798 And talk to your tax professional and to make sure that if there is a chance 00:25:36.798 --> 00:25:43.098 that you are going to be doing a cost segregation after your 10 31, That you 00:25:43.098 --> 00:25:48.978 look at making this election to treat everything as rolled into one new asset. 00:25:49.478 --> 00:25:52.658 The last comment that I'll add about cost segregation studies. 00:25:53.408 --> 00:25:56.708 Is once you have separated out all of these different assets. 00:25:57.578 --> 00:25:58.568 Now what happens. 00:25:59.438 --> 00:26:03.008 So if it is the very first year asset is being listed. 00:26:03.008 --> 00:26:04.478 It is the first tax return. 00:26:04.508 --> 00:26:05.888 It hasn't been reported prior. 00:26:05.888 --> 00:26:07.328 You just obtained the property. 00:26:08.318 --> 00:26:12.668 Then you can just start off the asset listing to the depreciation 00:26:12.668 --> 00:26:14.138 listing with that breakout. 00:26:14.618 --> 00:26:16.358 With all of those different assets. 00:26:16.858 --> 00:26:20.878 If, however, this property has been reported already for 10 years. 00:26:21.298 --> 00:26:25.318 Five years, two years, whatever the case is, if it is not the first year 00:26:25.858 --> 00:26:27.958 and it has already been reported. 00:26:28.318 --> 00:26:32.308 And you now are changing from one overall value for a building to all 00:26:32.308 --> 00:26:34.018 of these different broken out values. 00:26:34.708 --> 00:26:36.538 Then most likely. 00:26:37.048 --> 00:26:39.538 You will need to file form 31 15. 00:26:40.048 --> 00:26:42.178 Which is for a change of accounting method. 00:26:42.358 --> 00:26:43.828 You're going to change the method. 00:26:44.128 --> 00:26:47.758 From that building to all of these different broken out shorter life assets. 00:26:48.628 --> 00:26:51.028 31 15 is a pretty in depth form. 00:26:51.688 --> 00:26:54.238 And it is required any time. 00:26:54.838 --> 00:26:58.948 The depreciation is being changed after more than one reporting year. 00:26:59.788 --> 00:27:04.318 So, what that means is if you put the rental in service, let's say right now 00:27:04.318 --> 00:27:06.148 you would put it in service in 2023. 00:27:06.148 --> 00:27:08.608 So it's listed on the 2023 tax return. 00:27:09.238 --> 00:27:11.308 With that full amount for a building value. 00:27:12.238 --> 00:27:15.178 And in 2024, you do a cost segregation study. 00:27:15.678 --> 00:27:18.858 Since it has only been on one return. 00:27:19.428 --> 00:27:20.958 It has not established. 00:27:21.558 --> 00:27:23.988 A depreciation method yet two or more. 00:27:24.498 --> 00:27:25.578 Define that method. 00:27:26.148 --> 00:27:28.548 So since it's only been on one year, you have the choice 00:27:28.548 --> 00:27:30.228 to either go back and change. 00:27:30.258 --> 00:27:32.208 2023 is return and amended. 00:27:32.658 --> 00:27:39.408 And change to these broken out assets or file the 31 15 with your 2024 return. 00:27:39.948 --> 00:27:42.678 And then the change and any net impact from that change, 00:27:42.708 --> 00:27:44.598 all get reported on 2024. 00:27:45.048 --> 00:27:46.158 So you have that choice. 00:27:46.158 --> 00:27:49.338 If it's only been one year and you can do whatever is preferential. 00:27:49.938 --> 00:27:52.938 As soon as it's been two years or more where it's been reported. 00:27:53.208 --> 00:27:55.578 Your only option is that 31 15. 00:27:56.058 --> 00:27:57.318 And you don't go backwards. 00:27:57.678 --> 00:28:01.368 So this won't go back and amend and change your tax for any of those earlier 00:28:01.368 --> 00:28:02.778 years when you owned it, the rental. 00:28:03.288 --> 00:28:08.598 The full amount of change happens in the year you file the 31 15. 00:28:10.228 --> 00:28:16.378 So in recap, That is the recount on a cost segregation study. 00:28:17.018 --> 00:28:17.918 we went through. 00:28:18.218 --> 00:28:22.088 The two types of studies, there's a full engineered study or a DIY study. 00:28:22.448 --> 00:28:25.958 We do not want the DIY studies steer clear of those. 00:28:26.618 --> 00:28:30.488 An engineered study is what we want, where someone will actually 00:28:30.488 --> 00:28:32.348 look at your specific property. 00:28:33.158 --> 00:28:36.908 The reasons we would want a cost segregation study at a high level. 00:28:37.388 --> 00:28:42.998 Are to separate out pieces of that 1 39 year or 27 and a half year asset. 00:28:43.688 --> 00:28:49.148 Into a breakout of the shorter life assets so we can deduct more. 00:28:49.418 --> 00:28:50.828 During the time we own it. 00:28:50.828 --> 00:28:52.388 Front-load those write-offs. 00:28:53.108 --> 00:28:56.348 Double down on that, by being able to apply bonus depreciation and 00:28:56.348 --> 00:28:58.358 deduct a large amount all at once. 00:28:58.868 --> 00:29:00.188 One more quick note on that. 00:29:00.218 --> 00:29:03.398 The amount of bonus depreciation is based on the year. 00:29:03.398 --> 00:29:06.488 The asset went in service, not when you do this study. 00:29:06.938 --> 00:29:10.208 So if you're listening and you had real estate, if you had rentals that you 00:29:10.208 --> 00:29:13.148 put in service between 2017 and 2022. 00:29:13.598 --> 00:29:15.698 Those can still get 100% bonus. 00:29:16.658 --> 00:29:19.418 So in addition to front-loading those expenses. 00:29:19.718 --> 00:29:23.648 Taking that large amount of write-off tax planning opportunities. 00:29:24.008 --> 00:29:24.788 The other. 00:29:25.208 --> 00:29:29.438 Really neat benefit of a cost segregation study is now we have actual values. 00:29:29.918 --> 00:29:34.058 For various components of property that we're likely to replace at some point. 00:29:34.688 --> 00:29:38.048 So if we knew a fence cost $20,000. 00:29:38.558 --> 00:29:41.018 And we have depreciated it across several years. 00:29:41.018 --> 00:29:44.048 And now the value that remaining value of that fence is 10 grand. 00:29:44.588 --> 00:29:46.628 But we have to tear it down to put up a new fence. 00:29:47.258 --> 00:29:50.468 We know that we have $10,000 of value left that we get to write 00:29:50.468 --> 00:29:52.058 off and take off the schedule. 00:29:52.448 --> 00:29:54.428 Cause we're replacing it with a whole new fence. 00:29:54.848 --> 00:29:58.028 So having that breakout allows you to have more accurate record 00:29:58.028 --> 00:30:03.638 keeping and potentially increase your expenses because you get to 00:30:03.638 --> 00:30:05.618 remove that existing carrying value. 00:30:06.118 --> 00:30:06.508 So. 00:30:07.288 --> 00:30:09.658 That is the recap and cost segregation studies. 00:30:09.838 --> 00:30:11.698 They're an incredibly useful tool. 00:30:11.848 --> 00:30:14.518 They've become much more popular in recent years. 00:30:14.818 --> 00:30:18.988 So I do want you guys to be cautious with the firm you use, what kind of 00:30:18.988 --> 00:30:23.228 study they're doing and what the impacts of this will be, be mindful of any 00:30:23.228 --> 00:30:25.208 elections that can come into play with it. 00:30:25.658 --> 00:30:28.478 And just look at the big picture before diving into one. 00:30:29.088 --> 00:30:31.398 there will be an episode coming up soon. 00:30:31.878 --> 00:30:35.538 That will go a little more into the cautionary parts of this and what to 00:30:35.538 --> 00:30:37.458 be careful of and what to check for. 00:30:37.758 --> 00:30:41.958 But for today, that was the overview on cost segregation studies. 00:30:42.678 --> 00:30:44.898 As always, I hope you guys found this helpful. 00:30:45.438 --> 00:30:50.118 Don't forget to reach out or come into a Facebook group and let me 00:30:50.118 --> 00:30:52.248 know your thoughts on conferences. 00:30:52.638 --> 00:30:58.038 I'm still looking for the ways to best maximize my time at conferences and how 00:30:58.038 --> 00:31:01.878 to keep track of all of the amazing people I meet and amazing things I learned. 00:31:02.238 --> 00:31:04.368 So I want to hear your answers. 00:31:04.398 --> 00:31:09.558 So reach out to me, links will be down in the show notes and as always. 00:31:10.008 --> 00:31:11.988 If you are finding value from the show. 00:31:11.988 --> 00:31:15.858 If you've enjoyed these episodes, please subscribe and leave a five 00:31:15.858 --> 00:31:17.868 star wherever you listen to podcasts. 00:31:18.318 --> 00:31:21.678 And if you've really found this valuable, I would love if you would 00:31:21.708 --> 00:31:25.878 just take a second to share an episode with a colleague or friend. 00:31:26.178 --> 00:31:28.158 That you think would also find value? 00:31:28.638 --> 00:31:30.468 So, thanks for listening you guys. 00:31:30.468 --> 00:31:36.678 I hope everyone has a great rest of their week and I will talk to you next week.