Aug 19, 2018
Yonah Weiss is a real estate investor and cost segregation expert. In his short career, he has assisted property investors in saving tens of millions of dollars on taxes through cost segregation. As Business Director at Madison SPECS, he applies tools IRS accepted rules to accelerate depreciation and maximize returns associated with your real estate investments.
When you have a property that is $500k in value or more and there is taxable income on the property, tax segregation can potentially save you tens of thousands of dollars on your tax return, putting more money in your pocket and the pockets of your investors.
Listen in and get a free analysis with Yonah today!
Direct line: 732-331477
Well, maybe you can tell the listeners a little bit about your background and how you got mixed up and the real estate game and especially as it relates to what you're doing with Madison Specs.
Absolutely. So I got how a teaching background and I spent many years studying and teaching host university, Post College, postgraduate and then a few years ago a friend of mine was working at a commercial mortgage financing from a family office for his uncle. And he asked me to, you know, if I was looking for something to do, kind of get involved and learn about real estates and I decided to take him up on the offer and just got my feet wet, jumped in, started reading about everything related to real estate. And it was totally fascinated and to just learn more. So it started out in commercial mortgages and financing and then kind of move very quickly into real estate. Residential real estate's when I got my broker's license in order to just really just to learn more and apprentice someone who was a, had been in the field for a number of years successfully.
Which I did. And then I got into, you know, doing some, seeking out how we can, you know, make money investing in real estate and partner with someone doing some single-family fix and flips. Which got me real firsthand involvement and most recently and just involved in everything that I've been doing and was hired by an amazing commercial real estate firm based out of Lakewood, New Jersey national firm. They're a title company and title agency and they have a number of other services related to real estate and cost segregation happens to be one of them. They are one of the leaders, Madison Specs, which is the branch of Madison commercial real estate, Madison title. Most people in the New York, New Jersey area have heard of them and use them. You know, Dallas, Texas is our second largest office out there and they're huge in that space. So I've been involved in the cost segregation team for about the last year, which we're going to delve into and learn about how this tax benefit helps property owners to save money on their taxes, which is exactly what we do.
Yes. Excellent. Excellent. So, now what are some of the benefits of cost segregation? Then we can go into a little bit of. Some of the benefits are increased cash flow. No, deferred taxes is always a great way to increase your cash flow. It's getting a handle of your portfolio, whether you own one property or several properties. It's a tax strategy to just allow you to use your money instead of giving it the irs to further increase your investment portfolio.
Yes. Yeah. You. What's amazing about this strategy is that there are still so many people that don't know what this is. Many multifamily guys that I've spoken to, I mentioned this to them and this had cost said what's that? Mainly because people start off in this single family home business to small multifamily and it doesn't really apply to the smaller type of a property as well, but I'll let you talk to talk to that, but maybe you could walk us through like a technical discussion around how does it work, like what is involved with all this.
So conservation is for a larger, you know, just to give the general background, it's an engineering-based study, surveyed detailed survey of the property which allows you to allocate all of the assets inside and outside of the property into different categories and different depreciation lives. So each property has a depreciation life, which the IRS kind of arbitrarily gave a number too. So we will talk about that right now, which is a residential property, whether it be single family or multifamily, has a depreciation life of 27 and a half years. Any commercial property, anything beyond that, whether it be, you know, office space, industrial hospitals, health facilities, hotels, even retail, you name it, it's shopping malls. All of that falls into commercial space where people don't actually live for a long period of time. That depreciates over 39 years. So the, in the traditional sense of its appreciation, which is a tax write off, which is a category on your tax returns that allows you to make a deduction based on the value of your property when you bought it. And constantly vision allows you to accelerate that. The appreciation. So by breaking up Lincoln said, breaking up the property into faster depreciation lives, which we'll go into more detail how they're worth. It allows you to take huge amounts of depreciation in the early years of property ownership instead of waiting 27 or 39 years to take advantage of those deductions.
Excellent. Maybe you can walk and mocks her scenario then. So how would an engineering study actually look like?
So the study is a pretty complicated, pretty terse, I'd say. You know, we ended up putting out 80, 90 pages of very detailed numbers. It allows the engineer to look at everything within the property and to allocate a value to it and then to prescribe that value to the tax code, to the Internal Revenue Code in which they have a lives depreciation lives or years to those assets. So for example, let's say you have, you know, some window shades, right? Every lot of properties have window shades or blinds, right? It's a very simple thing that you would think that you'd have on all the windows in your building, right? So the engineer will come and take note all of the window shades, all of those lengths sizes and every single window that has them and then take a value, a cash value of what they are and then say, hey, this stuff depreciates over five years instead of 27 years we're going to allocate a cash value to all of them. Window shades in the entire property. Yeah. And then say, okay, now this depreciates over five years. That will be one kind of line on this report which will allow you to then take that deduction of that cash value.
Nice. So basically then in the same vein then the same thing too. So carpet will, for instance, were out to instead of over 37 years, like a tip appreciation thing as defined by the irs, you replace it every five years. Do you get to get to write it off over that time period as opposed to the entire 37?
Exactly. So the thing is the five year we couldn't. Well, I just asked ruins number your five years, but actually, the irs established these lives and it's pretty big category. Basically, it breaks down to personal property, what we're going to define as things that aren't part of the permanent structure of the building, and that can be hundreds of different details of things within the property. Then you wouldn't even have thought of and that's why the engineer is trained to know what those things are and to allocate them. All of those things depreciate over five years. You can take that depreciation to write off in the first five years, so that's going to be really super important categories called land improvements so that this is things in the property outside of the building that's appreciated over 15 years, so you're going to be able to take stuff like pavement, right asphalt, which most properties have, whether it's sidewalk, whether it's parking lots, the driveway landscaping. If you put in a lot of Nice flowers or trees planted, things like that. All of these things have value and depreciate over 15 years. Signage fencing, so that's where you're going to get a major amount of value is my engineer coming and defining what those things are, what can be depreciated or faster and then prescribe value to it based on the tax code. Excellent.
Can't appreciate the land itself, but you can't appreciate the improvements are done on a. yeah, which is pretty amazing, right? The land, right. You're always, whenever you buy a property, appreciable basis of the property is going to be, you know how much you paid for that building minus a certain percentage that you have to allocate to land and depending on where the property is located, there are different rules. Different states or counties or cities have defined rules of what kind of property land allocation and some are pretty open and ambiguous and there can be known as little as five percent Landau location and there can be as much as I've seen literally in some cities, 50 or 60 percent of land allocation, so there's a big spectrum there. Now, one thing you mentioned, I think you touched on it, is the size of the size of the property itself and sounds like that location is really suited for deals of some, some sort of size, right? Greater than half a million or something. Is that. Yeah, usually because again this is a percentage or proportion deduction. So the bigger the property, the more value spent on the property, the more depreciation you're going to take and therefore the more potential of accelerated appreciation you can have. Right? So the rule of thumb I give is a property worth over a million dollars or brought bought for over a million dollars and that's just because in our experience and from my company, Madison specs who's been in business for 12 years, specializing in this, one of the largest in the nation or you know, have done almost 13,000 properties studies and usually the larger the property obviously the more benefit there is someone who has a smaller property, they may not see the benefit and therefore not want to take advantage of the study. So that's why I give a $1,000,000 property above that. There's for sure getting any major benefits and definitely worthwhile under that amount. There probably will be benefits, you know when you get closer to half a million, it's going to get much more nitpicky to see what the benefit is depending on the individual property. So that's the kind of scale than I than I give no.
Well, what sort of other asset classes to supply to. I know obviously a multifamily, so we're talking about today, but it sounds like this can really apply to just about any other asset class.
Pretty much anything that's an investment property. Again, this is not for personal residence, it's for an investment property, but yes, any property is going to take advantage over here, whether it be and yet there are some that have more value than others because if you think about it, properties that have more stuff in the building, more personal property, you mean? Example, skilled healthcare facilities, skilled nursing facilities, they have tons of what's called five-year property, so you have stuff like know equipment beds, specialized plumbing, specialized electric in each room of this facility. All of that stuff has major tax deductions and so, therefore, you're going to be able to get a lot more bang for your buck when you're talking about skilled nursing facilities. One of our biggest customers, another great example, which is on the other end of the spectrum is golf courses because golf courses, even though you think about it, is just land, but it's really just land improvements. If you look at it, it's all the grass and a lot of these places that professional golf course, they will replace the grass, you know, every year or every six months or every two years, so that stuff is going to be depreciated that much faster life. A lot of landscaping going on there, so much so that up to 80 percent of the value of a golf course can actually be written off over a 15 year period. Wow.
That's huge. what would you say it's less suited for? Like what would it be a scenario where you would tell like a multifamily, even a big multifamily owner that this print out a good idea for them to do?
Multifamily is almost always a good idea to do when you're telling about city properties. For example, you know, we just did a big building couple weeks ago in the Bronx in New York. There's almost no land improvement whatsoever. There's almost no 15-year property. There's a little bit of sidewalk, but that's about it. So the major amount of deductions are only going to be within the first five years for the personal property in the building. So city properties are going to have less 15-year deductions, but garden style apartments which are much more common in, you know, in the south and the Midwest and every basically everywhere else besides for big cities, they're going to have much more 15-year property. So that's gonna add up to the, to the total amount of deductions. But smaller properties, let's say single family or a small multifamily to flex fourplex are going to have less benefit.
Just going to be. Think about it, it's just a numbers game, right? In a multifamily, you have 200 units, you're going to have 200, you know, dishwashers or whatever, you know, 200, you know, light, light fixture systems. Right now, single family, there's just one. So even though the same property that you're going to buy for the same price, a really big luxury single family property buy for let's say a million dollars is not going to have the same tax benefit as you know, a 100 units. I don't know if you can get that anywhere, but let's say a 50 unit property for $1,000,000, you know, out in the Boondocks, right? You're going to get that property, but you're going to have 100 times probably at least to a certain extent, 100 times of the tax benefit in that multifamily property. Yes, yes.
Excellent. Excellent. Are you able to maybe go through a quick
case study analysis, like say like say a million dollar property,
what would be the benefits of cost seg versus not like in terms of
savings? If we go through some, some real numbers, let's just do
the numbers. Like we said, constant
irrigation. You have to automatically take an amount and allocate that to a land which does not depreciate. Okay? So let's just take a round number of 20 percent. Okay? So you left with $800,000, which is going to be depreciated. Okay? Now, if you didn't do cost segregation, right, and you just took it. And then we're going to talk about a multifamily property here is bought for a million dollars, going to take the depreciation based on an $800,000 value. And let's say you didn't do constant irrigation and you just do the straight line depreciation. Okay? So you're going to divide that 800,000 by 27 and a half. Okay? And you're going to get on your tax return $29,000 depreciation deduction each year for the next 27 years. Okay? That's a very round number and that's great. That's awesome. That's one of the benefits. Benefits sell real estate. You get this stuff.
Now, what happens if you do cost segregation and you want to get maximum benefits within the first five years of ownership. So when you do is you will take, the engineer will come down, we'll serve the property, will take, you know the amounts of land improvements, we'll take them as a personal property divided up into categories. Oh and by the way, for the engineer goes to the property, will do and most conservation firms will do is provide a free complimentary feasibility analysis. That's just an estimate based on our vast experience of taking a look at some of the details of your property, where it's located, where the square footages, what kind of property is and tell you our projection of how much tax savings you're going to get. So based on that, you can usually make a pretty educated decision whether or not to go through for the full study and pay the engineer, pay the company to prepare this whole study.
But when once you do that, we're going to take a number. Let's give a round number. Alright, I'm going to be very conservative over here and 10 percent. Okay, we're going to take 10 percent. Which even though multifamily properties usually is going to be between 10 and 30 percent of the value of that is going to be cost segregated and gets extra benefits. Who is going to be on the conservative side, you gotta conservation experts to come and take 10 percent of that value through the study of 800,000 going back to our original number and depreciate that over faster life. Okay. That means an extra $80,000. You're going to be deducted for your tax bill over the next five years. So that $80,000 of extra tax benefits divided by five years as an extra $16,000 per year. Advent to you're 29 and you know, listen, it's not a huge amount.
We are going to be ending up saving $45,000 instead of 29. So on a small property and on a very conservative basis, right? That's going to be. But what happens if he's going to find 30 percent, which is pretty common with multifamily properties of 22 percent of that value. You're talking about a huge amount. We're talking about $48,000 per year of extra tax deductions and that goes a long way. That's amazing. Pay For itself after the first year basically pays for itself in the first year. Absolutely. Just think about it on a larger scale, right? Buying a property for $10,000,000. We're buying a property for $100,000,000. We're buying a property for a billion dollars. Most people don't think about that when they're buying a property for 1 million. Not Think about when am I going to buy my billion dollar property companies out there that are doing that and they're getting major tax benefits along with every purchase that they do.
Nice. Wow. Amazing stuff. Just amazing stuff. Now, what is the overall process look like? Is it like an invasive procedure as the engineer going to go in there and start tearing down walls and going through lifting up carpets and stuff like that? Not at all. The only amount of invasiveness is actually his presence being there, which is a pretty short process, but it involves, you know, just taking a survey, taking pictures, some video documentation and that's about it. And the great thing about a multifamily property is that since the units are pretty much the same like you'll have 100 units building, but you know, some of will be one bedroom, some of the v two bedrooms, so it'd be three bedrooms. So the engineer, there's a law that allows them to actually just to go in for this purpose into one or two of those sample units and then use those findings to apply to the rest.
Multifamily is one of the easiest to do in caustic, easiest work. You know, something like an office building or a shopping mall, right, is going to be a lot more detail because every single unit is going to be different. And so the engineer is going to need to go into every single one and take a lot more detail. Yes, yes. So what does the output look like when it's done? Is this something that you just hand off to a CPA and that's it. It's simple as that. And we worked together with accountants to provide this service. So we'll prepare a depreciation schedule and updated depreciation schedule instead of straight line. We'll get the excel file ready at, hand that over to the to the CPA and then we'll prepare the full report and put it onto a disc and then you just, you put a submit that with your tax return and you're good to go to the irs since this was established and recommended by the irs to do, you know, there are no red flags here. You don't need any. Someone asked me last week actually do, do I need mission from the irs to do this? No, they, they initiated this is, they established this and they provide all the rules is something called a cost segregation audit guide. Right. And there's a whole system to doing this that if, if I'm held to and abided by giving, you're doing everything according to what they want you to do.
Nice. Excellent. So I mean it seems to me though that with the detail engineering study like this and you're, you guys are assigning values to the individual components. You can actually use that to determine reserves if you're going to do a new purchase. Is there anybody ever done anything like that or do you guys. Yeah, people do that, people put that into their proforma, they'll put that into their business plan, you know, and that's why a lot of people like to get this done even before closing, a lot of times people will like to get this done or at least get this study done as soon as they buy a property, so they're going to have their business plan ready to go show their investors. Even before closing, this is what I'm planning on doing. This is going to give us more cash flow and that's amazing.
Yeah. Sometimes I even liked to do the cost seg afterwards and I would just be an added bonus that that weren't even expecting. Absolutely. That's just me. I personally do. That's amazing stuff.
Now, how do you handle repairs versus improvements in those scenarios where say they're adding brand new upgrades of bathrooms that 100 units versus just fixing the faucets or something like that, so any upgrades that you're going to do, you have the option to then go ahead and depreciate the new item. First of all, right off whatever you disposed of from a value perspective and the new assets that you're going to be replacing them with, you can actually use that to do a new concert irrigation. If it's a huge amount, it may be worthwhile to get an engineer to come in and prescribe value to all of that so you can depreciate that over faster life. Amazing stuff, which now with the new tax law, which maybe we'll touch upon, maybe not this time was called bonus depreciation where you can get in the first year, you don't actually even have to wait five years anymore. You can decide to take all of that depreciation that you would have taken over five and 15 years in the first year.
Excellent. Wow. Amazing stuff. It really is just amazing stuff. Now, talking about time limits, is there a time limit? You can do a cost seg analysis. If I held onto a property for like 10 years and just said, we talked about the beginning of the show, someone realizes, Oh wow, I can do a cost seg on this. Are you kidding me? What's amazing can is it retroactive? You can do it retroactively. Yes. So one of the things that people ask a common question is, well, I didn't. I never did this. I never knew about this. Can I still do this? Like you're saying on a property you bought five years ago, 10 years ago, the answer is yes. And they'll say, well, I don't want to go up, you know, open up my previous year's tax returns. I get it if I'm going to do it from now onwards, how do I do that and get the benefits retroactively? And that's something. There's a form that's called 220.127.116.11.5. It's a form that is a tax form that goes together with your tax return and it's A. Somebody allows you to change the way that you've depreciated depreciating your property and this is a no commissioner consent on doing this. You don't need permission for the irs to do this. You can decide whenever you want to go ahead and change the way that you depreciated property, but important to know you can't go backwards. You can't say, I've been doing it the conservation way and I want to go back to the straight line. That's the one disadvantage. You can't go backwards. You can only go forwards, I guess we'll say and change that. So what that does is it says I'm going to look at this property and look back and we call it a lookback study. That's her kind of a coined way of saying it that you can look back and see all of the tax benefits I missed over the last 10 years and catch up and get them all and what happens is you're going to get a huge, huge, huge boost in that first year. Excellent.
I guess to touch on something you just mentioned under what condition would someone want to do and look back to treatment? Try to go straight line. I mean I guess if they're losing money, right? I mean if there were losing money, this will accelerate the law, so I would imagine, unless I want to take it off the personal, maybe that's. That could be a strategy that's a whole other ball of wax it sounds like. Excellent. If somebody wanted to get a study going like today, what would you need to at least I guess come up with a proposal or come up with a where the rough idea as to what you can possibly do for them?
Absolutely. So if it's a large commercial property, we just need some very basic details and then the rest we can get from public records and so what the details we would need and like I mentioned before, we'll prepare a free estimates and most companies will basically need the address of the property which allows us to pull some public records to get more details like square footage and how many units when it was built, stuff like that. We don't need all that information from you. The address is usually enough. And then the place and service date, which is usually the day that you purchased that property unless it was not ready for rent. That and therefore the placed in service would be the day that you place it. In service. I mean the day that people start renting it out already for rent. So we need those two things and the purchase price so that we can properly establish or determine the basis of the property. So three things, address, place and service date, the purchase date usually, and the purchase price. With those three things, we can get you an estimate and tell you, you can look at those numbers, see if it makes sense to run it by your accountant, see if it makes sense for your overall tax strategy, which it doesn't for everyone. So we allow you to make that educated decision and see the numbers. And once you do that, most people decide why in world would I not do this?
Excellent. I mean, essentially that's a great, great tax strategy to save yourself some money and pass on a lot of profit to the investors to just stuff. Amazing stuff. Now, if somebody did want to get this done, how can they reach, you?
You can find me on LinkedIn. That's a great place to find me is like, that's where we connected first, Agostino, and my number direct line is 732-331477. You can reach me anytime. madisonspecs.com, put in the show notes if you want or whatever, and yeah, absolutely. Reach out. Happy to do that estimate and see if it makes sense for you.
Great. Great. Great. Well, I know what your honor. Thank you so much for being on the show today. It was great speaking to you and I think that this is a great strategy that people just need to start using. This is just amazing stuff. Amazing stuff. Thanks so much. Know. It's been a pleasure anytime.
Thank you so much for joining.
Welcome to the show.
Hey, I appreciate you having me buddy. I'm excited to be here.