How Investors Legally Avoid Taxes with Cost Segregation | Jeff Hiatt

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Speaker 31 That's a big concern for people is I don't want to amend the returns and all of that. Well, you can technically go back to 86 when the tax law changed.
No kidding. With the 3115.

Speaker 31 Now, typically, you won't go back that far. The real window of opportunity for people where it makes financial sense because the accountants will often say, Justin, what are you going to do this for?

Speaker 31 It's just a timing difference. Yeah.
That's what they say. They go, oh, it's just a timing difference.
Well, it is a timing difference.

Speaker 31 But if I give you the opportunity, Justin, to take a deduction today versus versus 27 and a half or 39 years, would you rather have it today or would you rather wait?

Speaker 32 What is up, the sides of flipping? This might be my favorite episode year to date because it's all about paying no taxes ever again.

Speaker 33 This episode is one that you are going to want to stick with because I have a dear friend of mine who has done 25,000 cost seg studies in the last 25 years and have saved people over $4 billion.

Speaker 31 Jeff Hyatt, what is up, brother? Hey, thank you very much for having me here, Justin. I'm thrilled to be here.
I've seen some of your prior episodes, and they're amazing. And the folks you bring in.

Speaker 31 So thank you for allowing me to darken your doorway here. So

Speaker 33 I appreciate it. You are my very own cost segregation specialist.
So if you need anybody to do your cost segregation studies, I'm telling you, this man does it for me.

Speaker 33 He's done it for 25,000 other people. He has helped save $4 billion of income taxes, or maybe I'm saying that a little wrong, but $4 billion of taxable income.

Speaker 33 Guys, this is your man. So, first of all, go follow him

Speaker 33 at Depreciation Doctor on Instagram, Facebook. I think he says Jeff Depreciation Doctor.
You got it. Costsegs.com is the website.
Costsegsplural.com. This is my guy, so he's good enough for you guys.

Speaker 33 So with that out of the way,

Speaker 33 let's talk about what the hell is a cost seg and why is it so important.

Speaker 31 So cost segregation studies are the way the IRS allows you to accelerate depreciation.

Speaker 31 So a cost seg per se doesn't give you more depreciation, but it allows you to take the depreciation you would get over 27 and a half or 39 years. It allows you to take some of it earlier.

Speaker 31 And by taking it earlier, what that does for the buyer of the property, the owner of the property, is allow them to reduce their current income tax.

Speaker 31 So instead of sending money to Washington, D.C., they get to redeploy that money in their own world and buy their next property more quickly.

Speaker 31 Or they can, you know, buy, you know, they can improve the building so that thereby they can charge maybe a higher rent without having to go to the bank for more mortgage money.

Speaker 33 Yeah, the simplicity is you don't have to cut a check to the IRS. You can actually keep the money and either improve your property or buy another property, et cetera.

Speaker 33 I mean, that's the simplicity of it. This is why it's, but really, now the key that I want to make a major distinction, because I come from the single family space.

Speaker 33 where's the argument where it's worth it to do a cost-segregation study on a single-family home more often than not now that I'm also in the apartment space and more in the commercial side and all these other things?

Speaker 33 That is the obvious, and we'll get there.

Speaker 33 But for all my single-family lovers that have rentals or maybe even fix and flips or whatever, where's the fine line for you that you advise, like, it's worth it to do a cost-seg study or it's not?

Speaker 31 Way back in the day when we first started, we might have said

Speaker 31 you need to be at about a million dollars. Now, that was 25 years ago because we didn't have the same database, we didn't have the same technology, we didn't have the same team that we have now.

Speaker 31 Because we have about 10 accountant types and about 27 engineer types, we can now push that number down to somewhere around 300 grand of depreciable basis.

Speaker 31 And that could be in one property or it could be across multiple properties.

Speaker 31 So ultimately, what happens is it may not make sense financially for a $100,000 property, but if we can aggregate a bunch of them together, that can start to make sense if we can get to a certain threshold.

Speaker 33 So it can be a really low number.

Speaker 33 Yeah, so for example, I'm doing a bulk loan. I'm taking five of my rentals and I'm wrapping it into one loan.
So I could go take those five and do a cost tag study against those five.

Speaker 33 I'm making up the number. Let's just say they're all five combined are worth $800,000.
I'm making up the number.

Speaker 31 Then it would make sense.

Speaker 33 Where independently they're worth $150,000. And

Speaker 31 that could be a challenge. Because it just

Speaker 31 won't look exciting to you. You'll look at it and go, well,

Speaker 31 whatever. Yeah.
But if you're talking about an $800,000 basis, then we can start to make it look good. Okay.

Speaker 33 So, well, then I'm going to call you after this episode again. We'll put that into my next round of things to do.

Speaker 31 Perfect. And on that note,

Speaker 31 when I said make it look good, typically what we find is that the metric that most clients look at is, hey, if I spend a dollar, how many dollars am I going to get back in tax deferral? That's right.

Speaker 31 So you spend a buck, you say four or five bucks. Most people will say, hey, that's a good deal.
Let's do it. That's right.
We hit that threshold kind of at a minimum around 300 grand.

Speaker 31 Especially bonus depreciation helps turbocharge that number. Right.
So that can be really good.

Speaker 33 And so this is where me and my account go head to head a lot of times, right? What is depreciable? What isn't? What's going to count? What's not going to count?

Speaker 33 So let's talk a lot about the grainy alerts. There's not a lot of people that are nearly as familiar as obviously you or even myself, right? You are infinitely more experienced, but I know enough.

Speaker 33 What is depreciable?

Speaker 33 And how does that look? Let's just use a single family home. Let's stick with that for the time being.
If I buy a home, I renovate the home and then I rent it, the classic Burr model.

Speaker 31 Sure.

Speaker 33 What's depreciable? What is the bonus depreciation? Is it qualified for it? Let's kind of walk through all that.

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Speaker 31 Great, no problem.

Speaker 39 So

Speaker 31 I'll say the tax code says to you, hey, Justin, your building to be a building has to have certain things.

Speaker 31 And it doesn't matter if it's a single-family residential home, like a rental home, or if it's a 30-story building, a building's going to have certain components, okay?

Speaker 31 Without getting into all the detail and all the specific designations, but when you boil it down, it's walls, windows, doors, roof, HVAC, plumbing for a bathroom, and the electrical for lighting.

Speaker 31 Those are the building components, those pieces. So those are either going to be 27 and a half year for a residential rental or 39 years if it's commercial or short-term rental.
Okay.

Speaker 31 So, that's kind of the baseline. So, what we need to do and what a COSEC study does is identify the pieces that are not in those categories.

Speaker 31 And in your mind, and probably our listeners' minds, they're going, oh my gosh, he just said everything in the building, what's left? Right.

Speaker 31 But you typically get into things like the wiring and the floor coverings, whether it's carpet or

Speaker 31 a particular type of vinyl flooring or laminate, that kind of thing. You get oftentimes into the kitchen space or the plumbing for the kitchen, you know, like for the dispose all and the pipes.

Speaker 31 And you're going to have an ice water line to the refrigerator and the electrical for the refrigerator and the electrical for the

Speaker 31 dishwasher and the microwaves and the

Speaker 31 cabinetry is oftentimes considered in that accelerated category.

Speaker 31 So when you stack all that up, you could be somewhere between 15 and 25%

Speaker 31 legitimately

Speaker 31 in a faster life.

Speaker 33 Now, when you say 15 or 20%, you're saying 15 or 20% of the value of the home.

Speaker 31 Of the purchase price of the home.

Speaker 33 Of the purchase price of the home.

Speaker 31 Excuse me. Less land.
So purchase price, less land.

Speaker 31 Because unfortunately,

Speaker 31 the tax code doesn't let us work off of what it's valued at. And us real estate guys, because I am also in the real estate side of the house too.

Speaker 31 Us real estate guys all go, well, it's worth this. Well, unfortunately, that doesn't help us with the tax code.
So the tax code says, what is your basis in the building? Less land.

Speaker 31 So what did you pay for the building? Less land is the correct way to figure this out.

Speaker 33 And then if you do renovate it and turn it into a burr, buy, remodel, rent and refinance.

Speaker 31 And repeat. And repeat.

Speaker 33 Money you spent on the additions and forced appreciation Yep. Does it really factor into this?

Speaker 33 You are just saying if you bought the home for $100,000 minus the value of the land, $25,000, you have $75,000 that is workable.

Speaker 33 Regardless if you spent another $50,000 on the remodel, that's a little bit different.

Speaker 31 Depending on what you spent it on.

Speaker 33 That's right. So let's say I did the new kitchens, new wiring for the kitchens.

Speaker 31 All that good stuff. So that stuff would likely fall into a five-year life.
Okay, a five-year life. Five-year life, yeah.
Residential rental. Yep.

Speaker 33 Because that speeds it up from 27 and a half. So I'm going to try to simplify this because I'm getting it.

Speaker 33 It's almost like talking to an accountant, right? Because it's so detailed.

Speaker 31 It is.

Speaker 33 But your traditional home gets 27 and a half years of depreciating value, okay, minus the land.

Speaker 31 Correct. But that's not very fast for me.
I want this stuff faster.

Speaker 33 So what you're saying is if I go remodel the kitchen on the said property, then I can go take that same level of depreciation, whatever that value is. Let's call it 250.
There's lay-in value of 50,

Speaker 33 and we're going to put in 50.

Speaker 31 Okay. So, bottom line is, in that case, we're talking about a $200,000 depreciable basis.
Let's say we're calling it 20% that we can reallocate into a faster life.

Speaker 31 So, that's going to be, call it $40,000. So, $40,000 is going to go into that five-year and 15-year life.

Speaker 31 Now, if some of that, a good chunk of that is going to go, let's say, towards the kitchen space, and that's going to give you bonus depreciation.

Speaker 31 If it's a 24 purchase, it's 60% of the five-year and the 15-year that you get to take immediately. That's right.
Okay. If you had bought it in 23, it would be 80% bonus.

Speaker 31 If you had bought it from 17 to the end of 22, it would be 100% bonus. So bonus

Speaker 31 depreciation, depending on the year, is either a supercharger for the car guys out there or a turbocharger. So I would say if you're buying it in 24, it's a turbocharger.

Speaker 31 It makes it better, but not as good as a supercharger. So

Speaker 31 properties bought bought back in 17 to 22, 100% bonus.

Speaker 31 23 was 80%.

Speaker 31 And so at this point, it's 60% in 24. Next year, it'll be 40% bonus, meaning anything pulled out of that slow 27 and a half year life, you get to take either 100%, 80%, 60% in the current year.

Speaker 31 And

Speaker 31 it doesn't matter when you do the cost seg,

Speaker 31 the year you bought the property is the driver. So even though you may have three properties you bought in 22 at 100% bonus eligibility, but you didn't do the cost SEG then, doesn't matter.

Speaker 31 You're still going to be able to do them now.

Speaker 31 You can go retroactive and file a 3115 along with your tax return, which means you get to step back in time, grab the 100% bonus depreciation you could have taken, but haven't yet taken.

Speaker 31 You get to grab it in this tax year.

Speaker 33 Do Do you have to amend that tax?

Speaker 31 No, you don't have to amend. That's the whole key.
That's the good news. 3115 is, I'll say,

Speaker 31 a really nice tool that can be used instead of amending because typically nobody, especially accountants, want to amend. That's right.

Speaker 31 And you can only go back by amending to open years, which is typically three years.

Speaker 31 So if you bought the property back in 15, you'd be out of luck if you had to amend, but you don't have to amend.

Speaker 31 You use a 3115, which is a complicated form, which is why our firm always does the 3115s for our clients so that there are no errors made on it.

Speaker 31 Because if that eight-page form has errors on it, it typically will trigger an audit. So nobody wants that.
So our firm always completes the 3115.

Speaker 33 I probably have another 14, 15, 16 homes that I bought in 2020.

Speaker 33 500%. I got to call you on that too.
This is my guy. You guys got to make sure you get the depreciation doctor on Instagram and costsegs.com.
But

Speaker 33 so I think for people who aren't used to hearing this talk, and I am because me and my accountant go round and round, I talk to you plenty and whatever.

Speaker 33 I want to try to boil this down with simplicity's sake. But in the example we just gave,

Speaker 33 what does that mean? So you said roughly out of the $250,000 home, 50 that going to land, I'm putting 50 grand in. You said roughly there was $40,000 that was spent in the original

Speaker 33 on the purchase. On the purchase was $250,000.

Speaker 31 As opposed to your new spend on the 50,000.

Speaker 33 That's right. Okay.

Speaker 33 But when you say $40,000 is going to fit into that five-year bonus depreciation model,

Speaker 33 what does that mean to the consumer? What does that mean to me? So if I bought this deal and you said, Justin, I'm going to get you $40,000 of this value and give it to you in bonus appreciation.

Speaker 33 What kind of savings am I getting there? What does that actually tangibly mean?

Speaker 31 So what that's going to translate to, the $40,000, let's say,

Speaker 31 of accelerated depreciation times your tax rate, whatever that is. So let's assume somebody's in a not maybe the highest tax bracket, but let's say.

Speaker 33 In Florida, I'm in the 36% tax bar.

Speaker 31 36%, and Florida doesn't have income tax. That's correct.
So then it would be, you would take the 40K times 36, which would be maybe $12,000 to $14,000-ish.

Speaker 33 And I'd be able to write it off on my income.

Speaker 31 Well, no, the $40K would be a deduction against NOI. Okay.
Okay. So that, so whatever you've got as taxable income or NOI, you would sub out the 40.
Yep.

Speaker 31 And whatever your tax rate is, that's what it would yield for you. In my head, I'm doing it, which may not be

Speaker 31 about

Speaker 31 $12,000 to $14,000. That's real money.
Yeah.

Speaker 31 But then you mentioned, oh, hey, wait a minute. What about the 50K you spent on the new spend? So that's going to fall into the

Speaker 31 bonus eligibility as well, depending on what you're spending it on.

Speaker 31 Now, if you're spending it on, let's say, a new deck and landscaping and all kinds of other stuff, maybe the landscaping is going to be an expense, but depending on what you're putting in, it might need to be capitalized.

Speaker 31 So, if it's outside of your physical building, so it's from your physical building to the property line, and it needs it's not,

Speaker 31 let's say, I know in Miami you won't have snow plowing, but it, you know, those things are just expenses. So, I'm not talking about that stuff.
So, if you put in an irrigation system or,

Speaker 31 you know, planting beds and stuff, typically

Speaker 31 that would be a capitalized item, but you're going to put it in at 15 years. So whatever you spent to improve the look of the property or fences or so that goes to a 15-year versus 27 and a half.

Speaker 33 Correct. Okay.

Speaker 31 And it's bonus eligible. So you're getting to grab 60% of that if it's 24 or whenever it was back in the day.
What about a pool? A pool would typically go into 15 years.

Speaker 33 Yeah, which is still better in 27 and a half. Maybe you're not as excited about five year, but it's it's better in 27 and a half.

Speaker 31 You got it. And keep in mind, from 96, when our firm started, I joined the firm in 99, but from 96 to 2017, bonus depreciation never applied to an existing building.

Speaker 31 Bonus came along in 01, right after 9-11, as an incentive to get the economy going again. But it only applied to new construction.

Speaker 31 So it never applied to an existing building. So if you bought an existing building, you would not get bonus from 96 to 2017.

Speaker 31 But then in 2017, they ended up looking to say, hey, wait a minute, Justin, you're buying buildings. Why would you want to wait five or seven or 15 years? Why don't you grab it now?

Speaker 31 And so they expanded bonus depreciation under the Tax Cuts and Jobs Act to make it eligible, buying existing buildings. The five, seven, 15 year stuff.
got included in bonus.

Speaker 33 The

Speaker 33 one caveat we haven't talked about, if you're a doctor and you do real estate part-time, very part-time, does that change how you're able to take bonus appreciation?

Speaker 31 Depending on how you're doing it and what you're doing, what properties you're buying.

Speaker 31 Okay.

Speaker 39 So

Speaker 31 let's say you've got a doctor, whether it's a dentist, an MD, a chiropractor, whomever it might be. I'm going to give kind of two scenarios here and I may pivot to three as I'm walking through this.

Speaker 31 But

Speaker 31 if your doctor person is buying investment property, like the single families and they're renting them out, then that's called a passive income stream.

Speaker 31 That doctor is not an active real estate professional. So that means that doctor is getting the income from the property as what they call passive income.
Cost SEG creates a passive loss.

Speaker 31 So the passive loss for that person, that doctor, will only work

Speaker 31 to offset passive income. That's right.
Okay, so it won't flow over to his W-2 or 1099. Yep.

Speaker 31 Okay, so, but that was him buying, let's say, a single-family long-term rental, an apartment, a residential rental,

Speaker 31 as opposed to him buying a short-term rental.

Speaker 31 Okay, so if and if that doctor is somehow, some way actively involved in the management and the maintenance and the upkeep, let's say, of that property, the short-term rental, that short-term rental now is not treated like a 27 and a half year, I'll call it apartment, but it's treated like a hotel.

Speaker 31 So it's going to have a 39-year life, but that doctor is going to get two additional benefits out of it. Anything that they spend on improvements is going to have

Speaker 31 another category called qualified improvement property.

Speaker 40 Quip

Speaker 31 is what it's referred to as. So for that 15-year property, so they're going to spend stuff, spend money on items within the property.

Speaker 31 That's short-term rental, and they get to claim 15-year qualified improvement property, which means they get bonus on that. Whereas residential folks spending new money don't get to claim QIP.

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Speaker 33 So even if there was a long-term rental that was a high price point.

Speaker 33 Yep. Okay.
Yep. It's called a million dollars.
Okay, great.

Speaker 33 And he's a doctor. Yeah.
And he's going to do a long-term rental for it.

Speaker 31 Yep. Right.

Speaker 33 And the cost SAG study happens. Yep.

Speaker 33 Does he get any ability to put it, put the

Speaker 33 tax write-off towards his doctor income at all based around the performance of that cost SEG study being able to outweigh the income monthly?

Speaker 33 Is there any way that he can, because the price of the home changes how much the cost SEG study does that make sense?

Speaker 33 Yeah.

Speaker 39 Yeah. So

Speaker 31 from the scenario you just gave me, my understanding is that that doctor is still going to have passive income. That's right.
This is still a passive loss.

Speaker 31 So, that in and of itself, the way you framed it,

Speaker 31 he's going to be getting higher rents from that property for a mill versus

Speaker 31 $200,000.

Speaker 39 So,

Speaker 31 any loss that he can't use, the passive loss we create for him,

Speaker 31 and he can't use it this year. So, let's say his NOI is $100,000, let's say.
So, CostEg Seg comes in and we give him a deduction of call it 200 grand, let's say.

Speaker 31 So now he's got 100 grand of income the first year from the property and the cost seg gives him a $200,000 write-off against the NOI.

Speaker 31 So now he's only going to be taxed on 100.

Speaker 31 That's right. He wouldn't be taxed the first year on any.

Speaker 31 He's got 100 grand, what they call loss carry forward. So he's got that in his back pocket for the next year.
So now it wiped out two years of taxable income from that property, which is pretty good.

Speaker 31 I'll change, remember I said,

Speaker 31 so I got a residential property, we got short-term rental there. And the third possibility for him might be for that doctor if he is buying

Speaker 31 a property that he can house his practice in. Okay, so as opposed to renting from Joe Blow down the street, he's now going to buy his own practice building.

Speaker 31 Now, Now, there's a part of the tax code that is called a single economic unit grouping election.

Speaker 31 For the tax code,

Speaker 31 that's too short for a name.

Speaker 31 It's insane, but

Speaker 31 single economic unit grouping election. So, what that means is that doctor can say, hey, wait a minute,

Speaker 31 yes, I run my practice, but I also own this building, and they should be considered together. And so, now the doctor can use the grouping election so that it will be treated as active income.

Speaker 31 So now he owns the building, he's got his own rental income, he might have other tenants in there, so for the other tenants, maybe we've got to carve that off and set that aside as passive income, but for his own practice, that grouping election will allow him to use the increased losses against his taxable income as W-2 or 1099.

Speaker 31 So that's a good tool. And it may not be in the science of flipping group, but you might have one of your followers who is a doctor who would be interested in that part of the conversation.

Speaker 33 Well, and that's why

Speaker 33 I'm trying to make this as, because it's very complex. And there's, like you just said, you're citing

Speaker 33 the laws of all this, but I want to make it as simple as possible because what everyone needs to understand is. If you're buying real estate in any way to keep,

Speaker 33 this is the best thing that you could possibly do, regardless of whether it's 27 and a half years, to your one pivot. Because I've gone down this rabbit hole buying a cheap home.

Speaker 33 And you start to just say, is the cost of doing the cost seg

Speaker 33 dollar for dollar create the value that actually makes sense for me? And if you're buying a cheap home and it's 80 grand, it probably just doesn't.

Speaker 33 And just take your 27 and a half years and take it for what it is and let's go.

Speaker 33 Now, what I think you really have highlighted well, which is, and I didn't know this, so we're going to talk after, but like, I could go take 15 of those lower price point homes, group them together.

Speaker 33 I think I said I have 15, let's say the average price is, you know, 150 grand, so $3 million worth of assets.

Speaker 33 Now I can give them to you, say, hey, let's do one big cost seg on this entire thing. And they're all bursts.
I bought them all. I remodeled them all.

Speaker 31 So it would be your traditional stuff.

Speaker 33 And so that's huge. So I want the listeners to understand as detailed as Jeff can get.

Speaker 33 Really, no matter how you're doing this, I would encourage anyone out there. You need to be buying assets.
I love wholesaling, I love fix and flipping, but you need to be buying assets.

Speaker 33 And then, what I would say is, if you can get into the multi-unit space even better, right?

Speaker 31 Cool.

Speaker 33 I mean, that's where you really want to play.

Speaker 33 And I'm going to even use my own examples, and you know, because I've told you we bought four apartments, we have a four plex, we have like a bunch of different stuff.

Speaker 33 What is the benefit to my 16-door apartment versus

Speaker 33 single-family homes, packaging my 15 single-family homes. Is there a benefit for one roof, 16 doors versus 16 single-family homes?

Speaker 31 What you're going to find is that on

Speaker 31 so it goes back to that ROI conversation. Somebody might look at one of our proposals and go, wow, three to one, I'm thrilled, let's go.

Speaker 31 But most people want it to be four or five to one when they're starting to look at it. Like I spend a dollar, say four or five, then I'm good to go.
Right.

Speaker 31 Where you're talking about a bigger property, theoretically with a bigger purchase price, you know, 16 doors versus one door. Right.

Speaker 31 You know, you might be looking at an 8 or a 10 or a 20 to 1. That's right.
Some of my clients have 150 to 1.

Speaker 31 Some of them are 800 to 1, but those are bigger, obviously. Much bigger.
Much bigger buildings.

Speaker 31 So I'm not trying to go there, but

Speaker 31 it just depends on what is the depreciable basis and how can we make that work for you guys. And we'll do everything we can to to help your clients.

Speaker 33 You know, it's funny is so Grant and I, Grant Cardone and I have gotten pretty close. And, you know, I've always kind of loved the single family space.

Speaker 37 And he keeps just poking me by poking.

Speaker 33 He calls me out a lot about it. But, I mean, it really makes more sense.
The bigger you get in this space of real estate, the more you should really be in the commercial side of it, right?

Speaker 33 Is there is some level of like brain damage that you don't need to be going through having 15 single family homes, 15 separate tenants with 15 roofs, 15 electricals, 15 HVACs,

Speaker 33 or you have one roof, you have 15 doors, you have, you know, three ACs versus 15 ACs, et cetera, right? There's an argument to be made.

Speaker 33 And the biggest one tends to be right now for me as an income maker, right? Like I do very well, I need your services.

Speaker 33 And it makes a lot more sense to go buy a $3 million apartment than to one by one buy single-family homes one after another.

Speaker 31 Well, as you call it, possibly brain damage, you know, 15 transactions, 15 leases that might be late payments. I mean, we could.

Speaker 31 But when you've got one situation going, that can be better.

Speaker 31 You mentioned one roof. And what I'll go back to is one of the things that differentiate our firm from many of the other folks out there in the CostAg space is that

Speaker 31 we always identify all of the assets in the building, not just the accelerated items. Meaning, many folks out there in the space that that I'm in

Speaker 31 would only give you the five-year and the 15-year detail. And you would go, yeah, that's cool.
That's what I want. Well, what we're doing is giving details on the 27 and a half year stuff as well.

Speaker 31 Sure. So that when that roof fails, maybe you guys have a big storm down here and the roof is just trash finally.
You spent years patching it.

Speaker 31 Can't do that anymore. It's going in a dumpster.
Well, now all of a sudden, you're able to...

Speaker 31 when you put the new roof on, since you have the detail of the original roof, you're able to take a write-off or an abandonment loss on that original roof when it hits the dumpster.

Speaker 31 So that can help you take another bite at the tax apple with a report that's properly completed.

Speaker 33 So if you had to give advice, I have a good friend, he's a lawyer, high-income earner, and he's playing around in the single-family space. He keeps buying these single-family homes.

Speaker 33 And I love that because I want him to be more in real estate. And so I'm not opposed to him.
What advice would he give him? High-income earner.

Speaker 33 I mean, he does very well financially, and he keeps buying these single-family homes, which I encourage him to do do because I would rather him be in real estate than not.

Speaker 31 Sure.

Speaker 33 But what advice would you give him from your side of the world? Would you say get into apartments and at least start getting five doors or more, start getting at higher price points?

Speaker 33 Like, what would be your perspective for that person?

Speaker 33 If, if, um, to take most advantage of what you offer, right? To say, hey, I know the laws. Here's how you win by following the rules of the laws.

Speaker 31 So, okay.

Speaker 31 So, if, if at all possible for your friend, the attorney person,

Speaker 31 if that person's, let's say, significant other or spouse were to get in the real estate business themselves and manage all of the leases and manage the properties and

Speaker 31 do

Speaker 31 everything that was needed to become what they call a real estate professional,

Speaker 31 then the whole conversation about passive loss, passive income goes away. That's right.
And that changes. That changes.

Speaker 31 And then that attorney who's bought 10 or 15 properties and maybe they're potentially outsourcing property management or something else, but now if if that attorney is spending his time or spouse's time doing the management, and they're legitimately called a real estate professional, that would be a big deal.

Speaker 31 Yeah. And that could legitimately be called a game changer for that person.

Speaker 33 Yeah, I think that's probably the smartest thing. I mean, that's why you suggested it.

Speaker 31 But now,

Speaker 33 then it does, again, it doesn't really manage.

Speaker 33 It doesn't really matter what he buys because at that point, they're a full-blown real estate professional. They get the same stuff that I get, they get the rapid depreciation for active income, etc.

Speaker 31 You got it. I mean, that could work.
And typically, the attorney could also have that grouping election.

Speaker 33 This is actually an actual question that I don't know the answer, so I'm going to ask it: could the attorney ever be a real estate professional?

Speaker 39 So

Speaker 33 if he's buying enough of these, at what point do you say, well, I bought 30 homes,

Speaker 33 I'm a professional.

Speaker 31 There's a 750-hour a year requirement for spending time in the space, and it really does have to be your primary business.

Speaker 31 So if that attorney, friend of yours, is

Speaker 31 making

Speaker 31 $200,000 a year in being an attorney, but he's making $300,000 or $400,000 a year in real estate account. That's a good question.

Speaker 31 And again, this would have to be passed through his accountant or CPA to make sure that all the other little nuances are met, but then that could be justified, seemingly, with the limited information you've given me.

Speaker 31 And they could spend their time doing that then. But if he's making $4 million a year as the attorney person and he's making $200 or $300, that's going to be a bigger stretch to get over that

Speaker 31 real estate professional designation. Because $4 million a year of income as an attorney,

Speaker 31 and it's going to be hard for him to tell

Speaker 31 the IRS, oh, I'm a real estate professional making $200,000 a year in real estate and $4 million a year in my...

Speaker 31 Do you

Speaker 33 so I guess, like, what about loan brokers,

Speaker 31 realtors?

Speaker 33 Realtors are probably the obvious, yes.

Speaker 31 They can be if they're somehow, some way managing real estate. So

Speaker 31 my understanding is that a plain old real estate broker that doesn't have any ownership

Speaker 31 and doesn't manage their properties and things like that may not per se qualify. Interesting.

Speaker 33 I wonder what they would because wouldn't that be a real estate professional?

Speaker 31 Well,

Speaker 31 it will typically be listed as real estate agent, I think, but again, it depends on the accountant and if they and whether they're willing to play the game. Well, it's not the game.

Speaker 31 It's within the code.

Speaker 31 I mean, if they're so if they're buying property, so if it's a real estate agent, so if it's just a real estate agent that's just doing real estate transactions, that's different than a real estate agent who's also an investor, who's also managing property,

Speaker 31 which might be, you know, you've got five or seven or ten properties and that real estate person is managing those and maintaining the leases and negotiating with the grass, you know, the landscaping company and the various other services that need to go along.

Speaker 31 If that person is amassing the 750 hours,

Speaker 31 then that would probably be okay.

Speaker 31 But again, I deal with CPAs and the tax code all the time, so I've got to kind of stay in the in the guardrails that I know of for sure.

Speaker 31 The CPAs

Speaker 31 we teach all the time. And they're do you guys, when you say that, do you teach?

Speaker 33 Like, is there somewhere your website, obviously, but in your Instagram, can someone be taught more of this? Do you guys have some level of education on this?

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Speaker 31 Prices may be higher in Hawaii, Alaska, and California and for delivery. We teach many, many of the nation's accounting societies.
We teach for them. So we do continuing ed credit for CPAs.

Speaker 31 Depending on the state as well, we can do continuing ed credit for real estate folks as a CPE for their real estate license, depending on the state.

Speaker 31 So we do that all the time. And depending on how long you want to go, so for some of the state societies for CPAs, we'll do an eight-hour course, which is painful if you're not a CPA.

Speaker 31 But if you're a CPA and you really want to drill down on this, we've got eight hours of content.

Speaker 31 But then typically we're doing one or two hours. And we do them via Zoom or we do them live.

Speaker 33 I would even just tell everyone here as you have questions. I'm sure you guys are thinking, like reach out to him on Instagram.
Ask him. He's very easygoing, right?

Speaker 33 He's the one that does all my cost seg stuff. And so, again,

Speaker 33 I think that's probably the path of ease for them to reach out to you would be Instagram,

Speaker 33 depreciation doctor.com or at depreciation doctor on Instagram. But I think as you guys are sitting here, like, well, what about this?

Speaker 31 What about this?

Speaker 33 Maybe I'm not asking the right questions for you. That's okay.
Go to depreciation doctor on Instagram and just start asking Jeff questions. And the question I'll kind of lead with now will be is,

Speaker 33 if you are a W-2 employee, there's essentially how I heard it. There's no world

Speaker 33 that you can get the bonus depreciation in the same way I do as a real estate professional.

Speaker 31 Short-term rentals. So what you just said wasn't exactly correct.
Okay.

Speaker 31 So to clarify, if they're doing short-term rentals.

Speaker 33 15-year as a short-term rental.

Speaker 31 15 and 5. So you get the same thing.
It's just where is it going to apply? So what you're getting is the ability as a short-term rental manager. Yeah.
You're getting to claim that more against your

Speaker 31 W-2

Speaker 31 because you're an actively involved.

Speaker 31 So kind of like that grouping election, kind of, this isn't exactly correct, but it's kind of like the grouping election for the dentist or the attorney that runs their own practice out of the building they rent or that they own, I should say.

Speaker 31 But when you're doing short-term rental, that could work for them.

Speaker 31 But a W-2 employee, that would be the play for the W-2 employees to be doing short-term rental.

Speaker 31 In this scenario, where you can.

Speaker 33 Yeah, I mean, that's what people want to know is how can I take take advantage of these laws that were written for me? And I love real estate, and I'm here listening to Justin every week.

Speaker 33 And so I want them to know that. And again, I may not be asking every question that they have, right? And I'm kind of doing my best to think this through.

Speaker 33 But would I, again, go to Depreciation Doctor on Instagram or costsegs.com.

Speaker 33 What haven't I asked that maybe you would say people really should also know this?

Speaker 31 Well,

Speaker 31 many times people want to know, again, kind of going back to going back, what if I missed it?

Speaker 31 And that's a big concern for people is I don't want to amend the returns and all of that. Well, you can technically go back to 86 when the tax law changed.
No kidding. With the 3115.

Speaker 31 Now, typically, you won't go back that far. The real window of opportunity for people where it makes financial sense because the accountants will often say, Justin, what are you going to do this for?

Speaker 31 It's just a timing difference. Yeah.
That's what they say. They go, oh, it's just a timing difference.
Well, it is a timing difference.

Speaker 31 But if I give you the opportunity, Justin, to take a deduction today versus 27.5 or 39 years, would you rather have it today or would you rather wait? All day today.

Speaker 31 Twice on Sundays. Exactly.
Most people say that and they go, wait a minute, I don't know if I'll be alive in 27 and a half years. Don't know if I'll own the building then.

Speaker 31 Don't know what the tax code, tax rates are going to be. I'll take it today if I can.
And so

Speaker 31 with that said, it is a timing difference.

Speaker 31 But if you can redeploy that money, and typically my clients or our clients say they can kind of think of something better to do with it than sending it away in a tax payment, they can redeploy it and improve their portfolio, make it better and stronger, and make their financial world better as things go.

Speaker 31 So that's a kind of a question there: is that the accountants often say, Well, hey, Justin, you're going to take all your depreciation early, and then what are you going to have?

Speaker 31 Well, we're not taking all of it early, we're taking 15 to 25 percent early, which means you have 75 to 85% on a go-forward basement.

Speaker 31 So you still have most of your depreciation. It's just.

Speaker 33 And the point that you're bringing up is so valuable to people, at least like me, I can go buy another one.

Speaker 31 That's the treadmill.

Speaker 33 I have multiple businesses, but one of my businesses has a bookkeeper slash accountant, and he always talks about playing for overtime. And that's the treadmill.
You keep kicking for overtime, right?

Speaker 33 Great. Give it to me today, and I'll figure out next year when next year comes.
Let's keep going as I keep kicking this field goal down the road.

Speaker 33 And, guys, I mean, this is probably my favorite subject because, as someone who makes money, you don't necessarily want to pay to the IRS.

Speaker 33 I'm all about being a great citizen, but they wrote these rules for us. Let's just play by the rules.
And it just makes sense.

Speaker 33 And I know a lot of the billionaires and names will be restricting, but listen, Donald Trump gets a lot of hate about not paying taxes, but all he's doing is playing by the guidelines the IRS gave him.

Speaker 31 You're absolutely right. And another one that's a tool that's an adjunct to CostSEG,

Speaker 31 and we don't do 1031s, but 1031s are a great tool.

Speaker 31 And that, as you said, kind of kicks the can down the road for the tax on the gain, but the CostSEG can apply to the relinquished property, the first leg, as well as the acquired property if the new acquired property has enough basis in it.

Speaker 31 So you can kind of potentially do a cost seg for both ends. There are some nuances that need to be kind of followed there, but it's doable on both sides.

Speaker 31 So there's lots of good tools out there. You just have to know how they all fit together versus just kind of winging it.

Speaker 33 Well, and that's why I say reach out to Jeff, go to Depreciation Doctor at Depreciation Doctor on Instagram, Jeff Depreciation Doctor on Facebook, costsegs.com. I mean, he's a world of knowledge.

Speaker 33 He will answer your questions directly. He does all this for me.
So if he's good enough for me, he's good enough for all of you. I appreciate you being here on the science flip.

Speaker 31 Oh, I'm so glad to be here. And on the

Speaker 31 Depreciation Doctor on Instagram, every Thursday is Thor's Day. And originally the

Speaker 31 beginning of Thursday was originally, in Roman times, Thor's Day. So my dog, my German Shepherd dog, is Thor.

Speaker 31 So you've met him.

Speaker 31 And so Thor, every Thursday or Thor's Day, has some sort of fun little video on my Instagram channel and Facebook and LinkedIn and all that. Nice.

Speaker 31 But Thor will go find depreciation deductions for clients and it's kind of a fun play on that. So with that said, just give me one second.

Speaker 31 So I'm giving you a depreciation doctor, Thor. Yeah.
What's up, Thor? Look at this.

Speaker 33 Thor, for those that can see in the camera, give it to all the cameras. Thor, this looks just like your dog book.

Speaker 31 Well, yes, exactly.

Speaker 33 So thank you very much. Oh, yeah.

Speaker 31 I thought you might have a little fun with that. And thanks for your time today and for allowing me to join you here.

Speaker 33 Reach out to Jeff. Appreciate you guys.

Speaker 33 If you learned at least one thing and you think there's someone you know that needs to learn a little bit about cost sags, depreciation, not paying taxes, real estate, share this episode with two of your friends.

Speaker 33 See you guys in the next episode.

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