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Welcome to Episode Seven of Season 10 of the Growing Empire Show. I am back with my special guest, Joe Viery from the Tax Advisers Group, and we are going to continue our conversation from last week regarding Cost Segregation studies and tax strategies. So please stay tuned.

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Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

0:40

For investors that own their properties currently, is it ever too late to start a cost segregation study?

0:46

Jen, that’s a great question. I’m full of the misconceptions because I grew up on the misconceptions, the number one misconception or not misconception, but the comment I had back in 2007, and 8, 9, 10 was like, Oh, this is a scam. It can’t be for real, this must be a scam. Well, those days are gone. Everybody out there, if they don’t, if you have an investor that does not know or an accountant in real estate that does not know about cost segregation, then you need to find a new accountant. Because everybody knows that it’s the real deal. There’s no question about legitimacy in cost segregation. And going back to your question, which I forgot.

1:29

That’s quite alright. I said, you said it was a great question. And you forgot, what do we owe here? I said, is it ever too late ever?

1:37

This is a great question. Because a lot of people don’t understand this. They think it’s for new construction. I don’t know where you heard that. But no, I can go back 15 years. Now, keep in mind that this is very important, from when you acquired the building. And what does that mean? You took money out of your your your you know, you took somebody’s money doesn’t have to be your money, you took your your mortgage, you bought a building, that I can go back 15 years, and I can look at the building that you bought 15 years ago, and we do this at no cost. We will do an analysis to determine Okay, how much is my fee? How much benefit are you getting? And then of course, we have to deduct how much depreciation straight line you’ve already taken over those 15 years? And we have to determine is it worth it? So is it worth it to give me $1,000 To make 15,000, or let’s say 10,000? Well, that’s between the client and their accountant, whether that’s worth it or not. So I can start looking about 15 years. And one thing that’s important is we are not looking at market value. Market value is an absolute moot point with me, or the IRS. All they care about is what did you pay for the building? So unfortunately, if you go back 15 years, yeah, probably the acquisition, the building basis, it’s probably not going to be robust, right. But at the same time, I’ve done tons of look back studies. That’s what that’s called a look back study. So I would say the sweet spot is, you know, 2017, for sure. And Ford would be a no brainer. But you go back to 15,14, 13, and still make the numbers work really well.

3:20

Okay, good to know. So what does an investor have to think about in regards to selling a property? So let’s say they have you do cost segregation studies for a building that they’ve owned for a couple of years, but they’re looking to sell their building in the near future in a couple of years? Does anything change with being able to do the Cost Segregation studies, or anything that an investor would need to know if they decide to sell their building in the near future?

3:44

Okay, so most clients do not sell for cash. Do they? Of course, there’s always the circumstances, but most of the time, what do they do? They do a 1031 exchange, right and reinvest it, absolutely reinvest it. And that’s what they should be if they’re smart, that’s what they should do anyway. And then of course, the other way, which is, you know, not happy talk, but but they may not make it any longer, and they may have to give the property to their heirs. When that happens, if you do a 1031 exchange, or if the property goes on to the heirs then then depreciation recapture that any negative issues or evaporate, they’re not even. Because they’ll just roll over into the new a new basis. So when somebody passes away, then you have to calculate the step up. And so when you calculate the step up, you’re going to owe more taxes on a step up. So cost segregation, if you haven’t done is a really big for those of you who inherit properties and you want to hold on to them. But bottom line is the tricky one is with 1031 exchanges. And I don’t want to get into it too much because it’s more of an accounting person’s question. But what happens with the 1031 exchange is when they did the tax JOBS Act, they made a mistake. If you remember, right, they are brilliant politicians will were making this all up in a matter of days. And they messed a lot of things up, one of the ones they messed up, but they just don’t feel it’s important enough to rectify is the 1031 exchange. So one of the issues with 1031 Exchange, but it’s not really a major issue is that the the personal property of the building cannot be included in the exchange. So that 25%, you’re gonna have to pay tax on it. It’s not going to be exchange free. However, but I’m telling somebody, okay, I’m going to give you, you know, a tax break of $100,000. And when you exchange, you’re going to have to include the year and have to pay the tax on the exchange, I’m going to say, Okay, what would you rather do? And, of course, hands down, the answer is, okay, I get it. But it’s, it’s more advantageous for me to do the 1031 exchange, and pay that then not do cost seg. Because of all the benefits you get with concept. So that’s why it’s not a big deal in my world at all. So when you’re selling a building, there’s really no, there’s no issue when you when you do a 1031 exchange, there is a small issue here, which can come about is that if you exchange into another building, as we mentioned, the basis of the building, however, you’re depreciating, it has to stay in that same method. So if you exchange into a $2 million, building with a million dollars in exchange money, I can’t look at that million dollars that you brought in from from the relinquished property. That’s off the table, I can only look at the new basis, the million dollars, so you’re going to still get a lot of value, but you’re not going to get the $2 million, because that’s frozen, because you did not do cost segregation before you did the exchange. However, if you’re smart, just for that one reason alone, do the cost segregation, do the cost segregation before you exchange the building. So you can preserve the acceleration without giving it up, even if you don’t need it.

7:05

So it’s and it’s never too late, as long as you haven’t owned it for more than 15 years. So if I have somebody that’s talking to me now about selling all their assets and exchanging it into something larger, that’s kind of the common theme. Now, I say, Hold on a second, you haven’t done any cost segregation, you should do that before we exchange these buildings.

7:23

Now, here’s another little trick, I can actually do the cost seg after you sell the building, but before you file your taxes on the sale. So let’s use let’s use 2021. And you sold the building in January, in an exchange. You exchange the building in January, and you haven’t filed your taxes yet, because the tax deadline is not until March 15 or September 15, you haven’t filed your taxes yet. As long as I can have access to that building. I can do the cost segregation on the old building. However, sometimes the buyer and the seller on good terms. And the buyer says yeah, I’m never gonna let you step foot in my property ever again. Well, then I can’t do it. But if you have a good relationship, and you call the buyer up and say, hey, look, and you can make a deal with the buyer and say, Look, I’m going to get a cost seg. But I’ll tell you what, I’ll give you the cost seg. So you know, you can use it to, so maybe you can give me a little money, or at least be nice enough to let me in my building. My old building.

8:22

Right? So how long does it take to actually do this study?

8:26

What we tell people is we’re very flexible, but we are our mantra is 30 days after we get all the information, and we do the site inspection. And so and that can be a little bit of a problem, because we’re not one of these drive by companies. Drive by means that they don’t even send anybody to measure the building components. They just take somebody who’s an appraiser with a camera, and they go by and they take pictures of the building. No, no, we will not do that. We have to go in the building and measure everything in the building. So sometimes it takes a lot of time just to get in the building, number one, and then get all the documents. I can do my work without any documents. But, God willing, if I can get as much of information as I can get my hands on. What is that information? I want to get building plans if possible, and that’s kind of tough on multifamily. But if I can get them, I want them. I want to get an appraisal. I want to get a property inspection report. I want to get the closing statements. I want to get the depreciation schedule if it’s a look back study, and you filed already filed a tax return. So sometimes it takes a little bit of time to get all the documents, but once I get everything that I’ve done the building inspection, you’ll get your report within 30 days.

9:43

Okay, good to know.

9:46

Now, you know what I’m going to segue back though. Real quick. Let’s talk about passive investors.

9:49

Mm hmm. Sure.

9:50

I have a lot of passive investors who are clients, but I will tell you, this, again is another accounting question and here’s what I tell my clients. I say okay, I’m going to give you the estimate at no charge, get the estimate, go back to your accountant and say, Hey, Joe’s gonna give me x $50,000 in accelerated depreciation for tax year 2021. Mr. Accountant, I’m a passive investor, can I use the $50,000. And let him let you know if you can use it or not? There’s a lot of variables, I don’t know the answers, because I don’t I’m not privy to your financial situation. I can tell you one thing, which is very important, and a lot of accounts don’t understand. What I find as a passive loss can be used in all of your passive investments. So it doesn’t have to be used at one building. If that one building is not taxable income, I you can apply to another building that is throwing off huge amounts of taxable income. So that’s why I even though passive income has its limitations. And another limitation is per building, you’re only allowed a set amount, it’s not like unlimited. So for example, if I give you 50,000, but you can only use a max of 25,000 this year. The good news is it carries over until you use it all up. So the following year, you can use the the balance which is left over which in simple math was $25,000. So so all my losses carry forward until your bank account of losses are expired. One thing though, you can’t time your losses, you’ve got to use your losses until you wipe out your taxable income. You can’t use half and then tell the IRS I’m going to use No you got to use all my losses, zero income taxes, whatever leftover in that bank account, and the other $25,000 goes to the next year.

11:43

The episode will continue in just a moment.

11:47

As an investor, we know it’s important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you’re interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today’s and tomorrow’s real estate opportunities. As a member of the Empire Investment Club, you’ll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you’re an active investor, passive investor, a combination of both or just starting out, the club is where you’ll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we’ll see you in the club, where everyone’s on a journey to becoming a better investor.

12:45

Do you find that investors use these cost segregation studies as a means to kind of like level up and buy additional buildings? Because of the savings?

12:54

Oh, yes. Heck yes. Oh, yeah. I mean, that’s big. I mean, like I said, I if someone talks to me, what I tell them is I want you to use that money, and I want you to buy more buildings. Yeah, I have nothing to do with buying a building. That’s not me. I’m I work with with the other people like you and others. But no, I don’t care. But I want them to take you know, instead of writing the IRS a check for 50 or $100,000. I want them to call Jen back up and go Hey, Jen, I got an extra $100,000. What can I put it in?

13:25

Yeah, I totally agree. I think it’s, I think it’s important to you know, we talked to investors all the time about using different strategies to acquire investments and acquire wealth, right. And, you know, sometimes it’s being creative. And sometimes it’s not using your own money. And you know, there’s there’s all different strategies. But when you can take all of these strategies, and you can combine them into one, you’ve got a lot of a lot of leveling up that you can do. Right? And you could do it very quickly, if that’s what your choice is.

13:51

And here’s another side, common question, answer is, is that we do two types of studies. And we’re one of the very, very few that do it. I mentioned to you that the our bread and butter is the detailed engineering study. where we have to go out and we have to see the building and measure everything and take photographs and document the building. In case we ever get audited, we can show the IRS that their eyes on the building and we don’t make this stuff up. This is all real stuff. Here’s all of our notes. Okay. Bottom line is we do another type of study for buildings with the basis of $500,000 or less. So we don’t care what type of building it is. But obviously the most common type is a single family home. And if you have a single family home in California, that’s not as powerful because you’re probably your basis for your buildings more than 500,000. But for through a lot of states around the country, you can definitely buy single family homes that will fit the 500,000 or less. So what we do for those kinds of buildings is we do what we call a modeling study. And what we’re doing is we’re taking our experience, our 1000s 1000s and 1000s of buildings we’ve done, and we’re using all that information to tell the IRS, okay, this three bedroom two bath home, in this address in Pennsylvania, we expect to find this much in five year property this much as seven year property and this much in 15 year property. And our statistics are strong enough that the IRS will accept them. It’s called the modeling study. The disadvantage of the modeling study, though is that, again, we’re not getting granular. So we’re not measuring linear feet of countertops. So you can’t use a modeling study for a lot of the benefits of the full detailed study. So you can’t use it to calculate dispositions. That you have to figure out to do another way. I don’t know the the answer is for that. But bottom line is what are you getting? You’re getting accelerated depreciation. And that’s all

15:51

Is there any type of building that you cannot do a cost segregation study on like commercial, industrial, and you can do it on anything, any kind of real estate investment?

16:00

I probably have done just about every I’ve done ranches where the only thing on the ranch, were land improvements, fences, water towers, barns, things like that, that made the numbers work. So a lot of people will say, Well, wait a minute, I just want a warehouse for walls and a roof, I can find value in a warehouse. There’s a lot of personal property that you know you’re not thinking of that we know is in the construction of that building. Because a lot of the items don’t really make sense. I’ll give you an example. On the outside of a commercial building around the corners and even multifamily around the corners of a building or maybe their their trash disposal units. They have what’s called the bollards that’s a pipe with cement in it to protect the corners of the building, or the trash compound. And so, bottom line is, that is a 15 year land improvement. People look at me and go 15 year that’s gonna last 250 years, it’s cement steel. What’s gonna go wrong? Well, the irises and look at it that way. What happened was somebody sued the IRS for bollards. The judge decided that bollards are land improvements. And there’s good reasons why they just didn’t just make it up. There was a reason why the judge said yep, that’s that’s Atlanta improvement. So the average person will never know what goes behind the IRS and thinking all of these components, except if you get a quality, cost segregation company, they know the answers. They know what can be accelerated and what cannot.

17:32

Okay, does doing cost segregation studies make you more likely to be audited by the IRS?

17:39

That’s a good question, Jen. Those days are long gone. I would say that. I have never been my studies have never been audited, based on my studies, what I had happened where the accountant or the client was a little trickier than I would want them to be. They got audited for other reasons. That agent for the IRS said, Oh, he did cost seg. Let’s take a look at that. So look at the cost segue. And then they might have questions. Well, how did you come up with 10,000 square feet of asphalt? And you know, I’ll explain explain it to them. This is how we came up with it, because we measured it. And this is how we valued it. Because my you know, we used RS means to get the value and all that stuff. So bottom line is the day of cost seg being audited for cost seg is over. Unless you’ve got a agent who might be wet behind the years and is trying to find something they may question me on something but we have never lost a question.

18:42

Good to know. You do services all across the country. Is there any area that you do not do studies in?

18:50

Every every state? Alaska, Hawaii

18:53

Wow, that’s awesome. So is there anything in particular that I didn’t ask you that I should have?

19:01

We covered it pretty good in the short amount of time you did a good job Jen

19:06

Well, I’m sure I could spend more hours talking to you I you know, you have my wheels turning and this is all I do all day. So

19:13

I could go on and on and on in the biggest thing is, is I just tried to impart on everyone right now that the circumstances where I would tell somebody not to do cost segregation are very, very few. One of them. We mentioned if you’re a passive investor, and your accountant says, you don’t need passive losses, I will tell the client I’m not going to take your money. I’m not going to do it. Don’t do it. And so there are very very few reasons like another one might be, and this is a minor reason. But if you have a lot of partners in a building and you have 150 and somebody like doesn’t like the idea of accelerated depreciation because they don’t need it. Well, that might be an issue. But again, usually the difference enrolled partners will just say no, we’re doing cost segregation. Because it’s so valuable that I don’t care if one of my, my investors, those are the only two reasons. And of course, there’s a third big one, this is the biggest one. And I’m not making fun of anybody. But if you don’t pay income taxes, don’t call me. I don’t care, because there’s a lot of value in real estate. And one of the values of real estate is the tax benefits. And so a lot of people figure out the tax benefits and they don’t pay income taxes. I don’t care. You don’t need me.

20:36

Good point. Yeah, good point. So how does one of my listeners or any of my listeners get a hold of Joe? How do they reach you?

20:44

I think the easiest way is the website USTAGI (http://www.ustagi.com) That’s US Tax Advisers Group Incorporated. USTAGI They go online and get my cell phone number. And they can get an input form, whether they want us to do benefit estimate for that building, they can do that online. Or they can, you know, talk to me, I usually like to talk to every person first, just to make sure that you know that I cuz one thing I’m very sensitive about is I don’t want to take my time or collect anybody’s money, if I don’t believe they need to do it. And I’m the first to tell clients that if I believe they shouldn’t do it. You know, I like a 10 times ratio. So if you give me I’ll make the numbers up $1,000, I want you to save at least 10,000 in taxes. However, I have some clients who say I don’t care, I want to say 5000 in taxes, I don’t care. Well, I’ll do it if they want me to do it. But I want to get 10 times my fees. And normally to be honest with you, not only do we get 10 times, but we get so crazy high multiples of that value proposition, that that it’s like I get 200 times whatever I charge him the dollar, I charge him I get 200 times that because you know, it’s just such a powerful technique to use. So

22:02

Well, that’s good to know, I think that you are an incredible wealth of knowledge. And I am sure that there are going to be quite a few people, including myself, reaching out to you in the very near future with a bunch of information about properties so that you can take a look and see what what magic you can cook up. So Joe, I very much appreciate your time. I think that you know, my listeners will be very entertained and have some very interesting topics to look into in the very near future. So I thank you for all of that. And I will make sure that all of your information is in our show notes page so that in case they didn’t catch your website, they can certainly research it there. Make sure that you’ll be able to connect with them. But thank you so much for

22:46

Thank you Jen. You are great. I like your style. Thank you very much for having me on the podcast.

22:51

You got it. Thank you for listening to my two part segment with my special guest Joe Viery. From the US Tax Advisers Group I hope you got a lot out of both segments, and have some unique and interesting ways to think about money and cost segregation in the very near future. Additionally, I hope that this will help you save some money and be able to reinvest it in the near future. Until next time, take care.

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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com