Cost Segregation for Real Estate

Discover how cost segregation can transform your real estate practice from transactional to transformational. In this episode, expert Gian Pazzia explains how agents can use this powerful tax strategy to help clients save thousands, unlock hidden opportunities in short-term rentals and inherited properties, and become trusted financial advisors. 

Creators and Guests

Host

Justin Stoddart

What is Think Bigger Real Estate?

The road to success for real estate agents is well-marked. The road to significance is not. Here, we help you to Think Bigger than just your business. We inspire you to seek success AND significance, income AND impact. We do that by interviewing the biggest thinkers and highest achievers in the real estate industry, extracting the secrets to having it all.

Steve, welcome back everybody to the Think bigger real estate podcast on today's episode, we're talking about cost segregation and a way specifically that's going to help you to sell more properties. I have with me an absolute expert today, one of the utmost experts in the country on this particular topic. You're not going to want to miss today's episode. It's going to be a good one. So let's go and introduce Gian pazia, out of Los Angeles, probably the best name we've ever had on this episode. Just for the record, Gian pazia, it's a pleasure to have you here. Thanks for joining us today. Excited to dig into this, a topic that I think few recognize the power of right, once you really start to dig into

it. Yeah, excited to be here. Justin, yeah, my, you know, it's funny, I googled my name several times online, and there is no other person in the world with that name. So, yeah, it's unique, for sure.

Yeah, you probably don't have any competition for Gmail accounts and social media handles. It's like it's all yours, man. I love it so cool. So it's again, a pleasure to have you here again for our audience, who are primarily residential real estate agents andor service professionals in neighboring industries, who are really curious about how to be more professional, more sophisticated, how to know things, how to be really an advisor that's superior to everything else out there, right? There's a lot of technology being brought forward that's minimizing the role that a real estate agent does, and therefore what they get paid. They're looking for ways to add value that others can't. And I feel like today's topic is going to be all about that. So talk to us just at a high level cost segregation. What is it, for those that are just learning about it

for the first time? Yeah, yeah, no, it's, there's, it's definitely a value add service, for sure. Let me step back and just talk about cost segregation is, is for investment properties, okay? And so for investment properties, right? You're going to make income off those. Well, when you buy the property, you actually get to write off a portion of that property every year. In the tax law says you get to do that for 27 and a half years on residential rental property. And so Cost Segregation is a way for real estate investors to pay less in taxes by speeding up how fast they're going to write off parts of their building. And so, like I said, normally, your the tax law says you got to write that off over 27 and a half years. But not everything in the building lasts that long. And so there's things like vinyl flooring in your rental property, the Cabinetry, appliances, even the wiring and piping that's connected to the dishwasher, the asphalt in your in your driveway, all this stuff can be written off in a lot of cases in year one, right? And so a cost seg study is a report that breaks the property into all these different pieces so you can write them off quickly. And so when you write them off quickly, you're getting these bigger tax deductions. So let me, let me, kind of put some numbers to this. Okay, let's say you have a client that wants to buy a rental property, rental home, right? They want to rent it out. The price is $270,000 so normally, you're supposed to rent it off over 27 years, right? That means at $270,000 you get to write off $10,000 each year for 27 years. So if, if you do a cost seg study, you can write off as much as 25% of that number in year one. And so now we're talking about $54,000 of deductions in year one compared to the 10. That's a big $44,000 increase in tax deductions for that real estate investor. And so Cost Segregation is super, super popular these days. You know, a lot of the smaller investors that we're talking about that are buying rental homes. Maybe don't know about it, but like, when we're talking about, you know, sophisticated real estate investors buying, you know, 5 million, $10 million properties, it's like, it's kind of like a no brainer. In fact, the most famous person that has been using cost seg for years is Donald Trump, and it's also the reason why he doesn't want to show his tax returns, because he uses these depreciation deductions to essentially avoid paying tax but, but there are ways that, you know, these smaller investors can use these same print. Possible?

Yeah, I think you know, the only difference between people who pay the the legal minimum right and people who overpay because they don't know is knowledge right? And I'm excited to have you here today to really open up what's really a legal path for billionaires to pay less taxes. Now, bringing it down to the to the rest of us, right, to help us to really see that, that, you know, these laws have oftentimes been written in such a way that the common person doesn't know what's available to them, and so they just overpay. And the IRS is not going to come correct. You not going to say, Hey, I see you don't know about cost segregation. You should probably, you know, apply that, because you'd be paying us a lot less money that. Like, that's not what's going to happen, folks. And so if you can learn these strategies, right, that the wealthiest people in the world understand, in fact, I've heard it said that many people, many investors, who own hotels, it's not a profitable business. They do it for cost segregation, because there's tremendous tax write offs, right? They'll purchase a hotel, not because they're going to make money off of it, like maybe we think when we play the, you know, the the game Monopoly, right? But they do it in large part because of the tax write offs that they can oftentimes capture in the early years, because of expertise that you're now sharing with us.

Yeah, you're getting into some next level tax planning Justin. And, yeah, you know, I've been doing this for 25 years and and I absolutely have clients that they're so in tune with their tax taxable income projections that as it gets closer to the end of the year, they literally if, if they have no there's going to be a big tax bill. They will buy a building, you know, less to do with the merits of whether it's a good investment, and in the fact that it's going to provide such huge tax deductions. Makes it, makes it, the reason why they invest in that building. It's a tax planning kind of game.

Yeah, that's super interesting. And for those that are wanting a little more, I guess, not credibility, but an additional insight into your world. Not only have you been doing this for 25 years, right, but you're only one of the few experts that's provided expert witness testimony on cost segregation issues before the IRS, right? So you've actually got almost head to head with the IRS, but you've, you've been a key witness, right? And not only that, but you've been published in major journals such as aicpas. I think I got that right tax advisor being a Bloomberg anyway, so your expertise is deep, right? And I think it's really fun again to have you pouring into those of us down here on Main Street versus just those up you know that own much of Wall Street, knowing these strategies. Let's, let's dive into because, again, the purpose of Think bigger real estate right is to help professionals that have successful businesses and significant lives, and oftentimes the successful business people could have more successful businesses if they knew some of these things. So I believe that inside of your database right now as a residential real estate agent, that you have people who would be purchasing rental properties versus buying some of the other things that they're buying right now, if they knew the strategies discussed like, you could actually go to people and say, you know, you have a home free and clear, you have a bunch of equity. That equity is not earning you any money. You could actually repurpose some of that purchase other rental properties, utilize a Cost Segregation strategy to offset some of the taxes you're paying from your well paid day job and actually begin building wealth through real estate at a much faster clip. Is there anything else you'd add to that gin?

No, you know, I agree with everything you said. There's a so there in the tax world, it can get a little complicated. I'm going to try to break this down. I'm break this down if, if you're a passive tax investor, right? Which is what maybe most, most people that have day jobs right there, maybe, maybe they're a doctor or a lawyer or whatever, they have a day job, and they buy a piece of real estate as an investment property. They rent it out. That's considered a passive investment, right? And so normally, in order to use the deductions from real estate, right, you can, because you can create paper losses, right, based off of what we just talked about. In order to use those as a passive investor, you're not allowed to use those deductions against your other income from like your Okay, your day job as a lawyer, right? Unless you meet this qualification of a real estate professional in the tax code. Okay? It's in order to meet that definition of a real. Estate professional in the tax code, you have to work 750 hours in the business of real estate. And there's some other rules in there. Here's where it gets interesting for your

for your listeners now, is that per year, that 750 750

hours per year, okay, as a real estate agents. Okay, you might be able to qualify as a real estate professional, right? So your listeners, real estate professionals, right? And maybe they're married to that doctor or attorney, right, who's making half a million dollars from their from their job over here, if they as a couple, go buy a property, right? They, if the investments that they make as a couple, now you can buy that property. You can do a cost seg study. You can create paper losses that you can then offset against your spouse's income. That's kind of a unique strategy, and it's only available, right, if you're a passive investor, if you're married to a real estate professional, which a lot of your listeners may be able to qualify for. So that's an interesting strategy there.

Yeah, I love that. Fascinating So,

and here's another one now, so you weren't lucky enough to marry a real estate professional, right? So you're back to you're a software engineer. You're making three or 400,000 a year. You can get around that that passive income rule that I talked about by investing in short term rental properties. Okay, there's different rules when it comes to short term rental properties, and this strategy, which anyone can go look up, it's called the short term rental loophole. Okay, that exists, and basically what it says is that you get around the passive investment rules that we talked about invest in a short term rental property. You can use those deductions from accelerated depreciation against your w2 income from your job, so you don't have to qualify as a real estate

professional. So let's, let's say that differently. I've got, let's say, you know, I live outside of Portland, Oregon. I want to have a home on the Oregon coast, and so I purchased that home when I'm not there, I'm I turn it into an Airbnb, and I rent it out to other people. Walk me through what type that would qualify me for what now,

yeah, and so look, there are some, some, some guardrails here. You can't buy a vacation property and use it, let's say, half of the time, and rent it out half of the time. And the IR, the IRS, isn't going to let you call that an investment property that you get to depreciate. Okay, if you use it, I think I want to say 10% or less, I believe is the rule of the time. But you're, you're, you're, you know, it's an Airbnb 90% of the time,

so 35 days out of the year I can use it, which is probably enough,

yeah, which is exactly, but yeah, you'd have to kind of look up the rules on, you know how many days. But yeah, you're on the right track now,

okay, and that then tell me the the I get to, this isn't cost segregation, walk me through again. What what that means for me? Does that make me a real estate professional?

No, no, it doesn't. So you buy that short term rental property, okay? You don't have to meet the 750 Hour Rule. There is another rule, but it's only 100 hours. Okay? 100 hours participating in the management of that property per year. Okay, much easier hurdle to get over. And that could be your spouse helping too, right? And if you're married filing jointly, and so, so, yeah. I mean, now you got, as a software developer, you got 300,000 of income. You go buy a $300,000 property. You do cost segregation on it. You're going to get, what did I say before I said 54,000 Well, you know, you're going to get in that neighborhood in the first year of deduction. So if you made $300,000 of income as a software engineer, now you're going to get over $50,000 of a deduction, bringing your taxable income down to 250 as a software engineer. Now,

do you have to maintain that property for a certain amount of time in order to maintain that or can you sell the property and go do it again?

You can sell it and go do it again. Now there are some, some, some more tax planning strategies that kind of go into it. You would want to do a 1031 exchange out of it, in which case you get to continue deferring taxes you saved, and as long as you, you know, keep doing a 1031, exchange. Yeah, no issue. If you were to sell that property for cash and not buy a new property, there's something, there's a rule called recapture, where, essentially, you have to basically pay that tax savings back. Yeah,

and what's the 10 year? What's the timeline by which you need to have it again. How many years

you mean? How long do you have to hold it? Yeah, there is no timeline. As long as you're doing 1031 exchange, you could literally buy it, do a cost seg study, sell it the next year, as long as you're exchanging, okay, but if you did want to sell it for cash, for some reason you didn't want a 1031 exchange, you would probably want to hold it for at least five years. Okay,

that's the number I was thinking about, which is similar to when you purchase a vehicle, right and deduct the, you know, the accelerated depreciation, similar in that regard, right? That you would Okay, that was a question. I had. Another question I have, what are some tax strategies you can tell us about cost segregation? I feel like we already covered that. Are there other incentives real estate folks that they should know about? Right? You're in the real estate business. Obviously, these things that we're applying to you as a real estate professional are also relevant to where now you should be looking at your client base differently, right? You should be looking at every one of your clients saying, who's a high paid software engineer, right? Who's a high paid attorney, right? Is there some way for me to help them, to potentially purchase that, that vacation rental right, to take advantage of some of these things? All of a sudden, you're no longer just an order taker, which I think is what most people have a beef with at the closing table. When they see a real estate agent get paid, they're like, wait, what I told you, what to do, right? Which is not true, right? That there's a lot of work that happened below the surface that they didn't see. But when you start to bring opportunities to your clients that they would not have known about, now you're a trusted advisor right now, they see you through a different lens. You're not an overpaid order taker in their eyes, you're somebody who helped them to save right 10s of 1000s of dollars in taxes that year. That's phenomenal.

Yeah. Now here's another good one, and it does involve cost seg, but it's one of these situations that your listeners definitely want to keep an eye out for if you have a client, maybe they're, you know, look, when someone passes away that owns property, right? They've owned it for a while. Maybe one of your clients, their parents passed away, and they had a few rental homes that they owned in the tax world, the the the estate gets revalued at the current fair market value of the property. So let's say they owned a rental home for 40 years. Okay? They bought it, you know, 20 grand so long ago. Now they pass away. That property is worth three or $400,000 saves worth $400,000 the beneficiaries, whoever's inheriting that property, basically gets a step up back to the fair market value, 400,000 and they get to start depreciation all over again on that property. So now, you know my you know when my dad passed away, I had this situation. We had a step up. The property was worth 600,000 I got to start depreciating it from the date of death. This unlocks an opportunity to do a cost segregation study, because now you have a bunch of tax basis that you can accelerate. There's, you know, without getting too into the weeds here, if you have a situation where somebody passed away that held real estate, you absolutely want to bring up cost segregation to the beneficiaries, whoever's inheriting that property. And you want to look up online the Cost Segregation estate tax planning strategy and and it can save them, you know, hundreds of 1000s of dollars if you if you can, if you can, really, you want to call me to help walk you through it, because it's fairly in depth, but you can essentially. Unlock a situation where you either use these tax savings or lose it, and it has to be done on that final tax return for the decedent. So if they passed away in 2024 they have all the way until October 15 of 2025 to file that final tax return, and, and, yeah, you'll want to kind of bring that up. I've had real estate agents that have have told their clients about this, and it saved the clients millions. And yeah, they were able to help sell those properties, right because now that the person who inherited it didn't want them anymore and help them get the listings to to sell those properties.

The amount of wealth that is changing hands from Baby Boomers to the next generations is in the trillions, trillions of dollars. And for those that understand these strategies, you're going to have a very fruitful next decade and two decades, because these types of strategies set you apart again. You're not just showing up to say, I can list your home right? But it's like, here's how we should do this. Let me connect you to My Tax segregation expert, who will help us to actually do this in a way that saves the estate a tremendous amount of money, right? I think when you start to collaborate with other professionals, which, by the way, for those that know me, I run a technology company called Pro insight, and the whole premise of that is that we are stronger together. We're better together when professionals who serve a similar client and are complementary in what they do with regards to each having their own level of expertise, the client gets such a better experience, and you become the go to because you've got this network around you that solves additional problems than just your industry can solve. Your value proposition literally becomes exponentially enhanced because you find people like Gian in who come into your world and allow you to strengthen your proposition to those families and those estates that are moving. And look at that unsolicited promo right there,

right no great book. Justin. I actually read it over the weekend. And I couldn't agree with you more, I'm actually thinking about getting your book, by the way, if for those listening the upstream model, Justin wrote this book about a really key strategy on on how to kind of be more efficient in your sales activity. And I'm actually thinking of having my whole executive team read this, and my sales leader, I

love it. I love it. Well, I would love to to meet them, happy to come in and do a little individual training for you all. You know, I'm, I'm really pleased that we've had you come on the show, right? And I think for everybody out there that is feeling the pressure of a 30 year low in transfers, right of real estate changing hands, I just want you to know that it's still changing hands, right? In fact, I just a friend of mine reached out to me over the weekend and said, Hey, I have a client who wants to roll four income properties, residential properties into a commercial property. Can you help us to sell this? So my business partner and I are meeting with her to help her take care of like, these are these things are happening, regardless of what's happening in the market, right in the economy, there's, there's plenty of opportunity out there for us to again, if we're sophisticated enough to have these conversations, to go find those people who need our help, and we will stand out because we've surrounded ourselves with the knowledge and people like gene that can help us to do that. I'd love to have us wrap up with maybe an experience that you've had in which you've shared, you know, these these strategies, with somebody, and it turned out really well for them. That way, our guests today can actually leave with a story, because it's really helpful to spit facts at people, as my kid likes, as my kids like to say, spitting facts, but more important is a story. Let me tell you an example of somebody who applied cost segregation, and this is what happened with them, right if everybody listening today can really tune in right now, you can take this story, and you can say, you know, one of my affiliates, partners in the tax planning space, did this for their clients. I'd like to make an introduction. All of a sudden, you're the hero now, right? And the story that Gian is going to share with us, and I'm assuming you have dozens, so pick just one of your favorites that will allow you to come with some credibility if let me tell you what my business partner gin has done for other people, right? So, Jen, would you mind sharing something with us that the people can take away as a memorable story? Yeah,

you know, this is one that has just happened recently because we work with a lot of it's. EPA, that's where most of our business comes from. Is, is those kind of referrals. And I was having lunch with somebody I've done a lot of business with, and and we lost. We launched a software product Justin back in 2016 that allows real estate investors to start doing these studies themselves on smaller residential properties, right? And you can do it very quickly. Normally, you know, normally, a caustic study done by a professional, it can take like 30 days to get done, because we got to visit the property and everything. So let me that just wanted to set the stage for that. So I was having lunch with the CPA, and he was, he was saying, hey, you know, I just used your online Cost Segregation software. It was April 14, and I was talking to my client. I had, I told him that he had $100,000 tax bill, and in his client said, You know what? What can we do? You know? And he said, Well, you you have eight rental properties on your depreciation schedule that you've owned for a while, and you've never done these cost seg studies. I can do these cost seg reports online and and we can see what you can save. And because they were smaller properties, they were eligible to use this software, so they were able to do all nine of these reports and a few hours, and literally wiped out his entire tax bill, over $100,000 on April 14 with his CPA. And normally, you know, and it's April 14, and you got that kind of tax problem, there's not much you could do, but there's a situation where they were able to, he was able to have a very happy client there.

That's an amazing story. 100k talking about deathbed repentance, like, how do I fix this? It's like Gary to stroke a check. Oh, wait, there's this thing called Cost Segregation that's going to step in and save the day. I love it, man. Such a such a great story. And I know that you deal with people all the time on that, and I'm, I'm going to actually extend an invitation to you to join, actually, one of our masterminds on the technology platform that I serve, because I think this knowledge will be really, really helpful for a lot of the professionals that are there. So if you're not already a pro insight member, you'll probably you you could have the opportunity to see Gian again. So so reach out to me on that and gn, it'll be really fun to introduce you to that audience, because they're very elite level real estate agents, on average, they close 38 deals per year, even in this market, and they have an uncanny desire to follow the upstream model and and be very sophisticated, really, a world class advisor is what they strive to be, and our technology helps them to do that. So it'll be fun to introduce you to that world as well, if you're open to it. So anyway, that's I'm so grateful again. I appreciate everything that you've shared, and I'm grateful to the audience for listening today, if you've, if you've been with us, I think you've taken away some nuggets. One of the things I want you to take away is actually contact with G and G. And how do people reach out to

you? How do they stay in contact with you? Yeah, you know two ways. One, you can go to our website, cost segregation.com, okay, also find me on LinkedIn. Only Gian pazia on LinkedIn. That's Gian with A, G, G, I, A, N, Z, F, T, a, z, z, I, a, and Justin. I also have a special promo for your listeners regarding that online Cost Segregation software, if you they can go ahead and try it online at cost segregation.com they can use this promo code. It's Think bigger 2025 that's in all caps. So think bigger 2025 all caps, and they'll get a 10% discount For first time users at that website.

Cool. I just added it into the show notes for anybody that's watching live or watching live stream, you'll see that Think bigger 2025 awesome. That was not expected. That was super nice of you and thoughtful of you to think in advance of giving people a chance to try that out. So appreciate it. Gian, I look forward to staying in contact. Thank you again for doing an unsolicited promo of the upstream model, and it sounds like we think alike. The fact that you like it, want your team to read it. So appreciate that very much. And all the expertise here, I have a feeling that we're gonna be doing more stuff together, and I'm excited about that. So appreciate you being on the show today, and for everybody listening here today, I've got three simple words that you know what they are and they ought to frame the way in which you go forward today. And those three words are, go, think bigger Jim, thanks for helping us be bigger thinkers today. Thanks, Justin, you.