- Hey guys, in this video,
we're going to talk about cost segregation.
All right, let's get started.
So if you've been wondering
what the heck people are talking about
when they say cost segregation,
they're talking about this,
putting more money back in their pocket.
We're talking about taking their assets,
their residential real estate, their commercial real estate,
and accelerating the depreciation.
Now, if you're not aware of it, which you should be,
when you buy a real estate,
the reason they call it a tax shelter, to some extent,
is the fact that you're able to depreciate the property,
in fact, you're supposed to depreciate the property.
And depending on the type of asset you buy,
commercial or residential,
you have different straight line depreciation years.
For example, if it's a commercial property,
it's gonna be 39 years,
if it's a residential property, it's 27 1/2 years.
And so what they look at
when they're depreciating properties,
let's say you bought a piece of property for $400,000, okay?
So this is your rental house, it's residential.
Now you're gonna subtract out the value of the land.
Your CPA would do this.
And let's assume that the value of the land was $75,000.
So that's gonna leave you with an asset value,
the structures, at 325,000, okay.
This is what we're gonna be depreciating.
So if you did it on the straight line depreciation,
which is the way most people always do it,
you would take 325 divided by 27 1/2 years,
and you would come up with about $11,800 a year
in depreciation.
That means that the value of that asset
is declining over time as someone continues to live there
and it's gonna have to be replaced eventually.
So how does this factor into my taxes?
Well, let's assume that this property
generates for me on this particular year,
$28,000 in income.
Well, when I take that income
and I take all my other expenses against it,
let's say that brings me down now
to $24,000 in income.
Now I don't have to pay taxes on that full amount,
even though that went into my bank account,
because this Mr. depreciation is gonna come up here
and I'm gonna be able to write off 11,800
against that $24,000 in income.
So really now I'm gonna be paying taxes
on $12,200.
So I put 11,800 into my bank, it was completely tax-free.
So that's how standard depreciation works.
Well, comes now cost segregation,
which is accelerated depreciation.
And what does that mean?
Well, accelerated depreciation,
what we're going to do is we're gonna look at this asset
and we're gonna say, yeah, it's a house,
but a house is comprised of many different things.
It has cabinets, it has fixtures,
it has appliances, it has landscaping, right?
It has carpet, paint.
And so we're gonna break all of those things out,
basically disassemble the house and say,
you know what, some of those things,
they're gonna wear out a lot quicker.
And so if we can show that they're gonna wear out
a lot quicker,
then that means we don't have to depreciate them
over 27 1/2 years,
we can put them on a different depreciation schedule.
And the IRS lays out some different depreciation schedules
for assets based upon their useful life
and what category they fall into.
So with cost segregation, what you're looking to do
is you're looking to take this asset
and turn that number into something more.
And the reason you wanna do this
is because now if we are to take this,
and let's say, in this example here,
I have performed a Cost Seg study on it.
They look at that and with the bonus depreciation right now,
that you're still allowed to take,
on that I run my cost segregation study and they say,
you know what, this year you get an extra 50K.
So if I put on an extra $50,000,
I now have $61,000
in depreciation.
This is what we're talking about,
how real estate can really put a lot of money
back into your pocket
if you know how to work the tax code in your favor.
So you have this study done typically by someone
who's a cost segregation expert,
we use companies such as Cost Segregation Authority
to do this,
but they'll come in, they'll look at your property
and they'll run it through some calculations,
maybe they send someone out to it, and they do an analysis
and they come back and they give you a number and they go,
"This is what you're able to deduct."
Now, what does that mean to me as a real estate investor?
Well, it means that if I have passive income,
because remember, real estate is a passive activity
and you fall under the passive loss rules.
So this 61,000 is only beneficial to me
if I have at least $61,000 in passive income.
Well, obviously on this property
I had $24,000 in passive income.
So 24 from the 61,
that puts you at what, $36,000
or $37,000, something like that.
So you're at 37,000
of losses that go unused.
So what are you gonna do with those losses?
Well, we don't wanna be in a situation
where we have unused losses, you know.
So again, my example, 24,000 from this property,
$64,000 in losses for depreciation,
oh, it's 61,000, okay,
it puts you at 37K, just back that,
hopefully I'm doing my math right there.
So I'm at 37K in losses.
So these would just get basically suspended.
But if I have other income from other activities,
passive activities, rental income,
let's say I had three more properties
that are generating this $12,000
after their standard depreciation,
well, I could take that 36, remember it's three times 12,
'cause they each get their standard,
I can take that $36,000 over here under this line,
and now I only have $1,000 in loss that I carry forwards.
But what I did is I took $24,000 in income
from this property,
I took a combined $36,000 of taxable income
after the standard depreciation
applied to my other three properties
and I paid zero tax on it.
So essentially in this example that I just showed you,
you earned $60,000
tax free, okay.
This is the benefit of performing this type of strategy
in owning rental real estate.
Now these numbers get even better
when you have certain types of properties,
and it gets even better
if you're a real estate professional,
because I was just explaining to you
that you have to have passive income.
Now maybe you have real estate
that doesn't produce a lot of passive income
because you're chewing it up with all your deductions.
So then what do you do?
You become a real estate professional,
and now you free up this.
So there's $37,000 up here.
If I'm a real estate professional,
I don't need to go look for passive income anymore
to offset it against.
I look for any income.
So if my spouse is working
and my spouse is bringing in $100,000 in W2, okay,
working for the state.
Okay, we made 100 grand,
well, let's take 37,000 up there,
write that off against $100,000,
so really, I made $63,000.
You see how these numbers can work out in your favor.
And you don't have to do it all the first year,
you can just stay or stagger your properties.
That's something that I do with my investing.
I look at my taxes,
do an analysis and decide each and every year
which properties I'm gonna utilize for cost segregation
to minimize my overall taxable income
from my real estate investing.
Because there's no sense in going out there
and wiping it all out
and having huge losses to carry forwards,
so I try to match it up.
Hey, this is something that's out there in the tax code,
the bonus depreciation
which allows you to take these huge upfront deductions,
that runs out in 2023 and then it starts to...
Actually it doesn't run out,
it starts to decline after 2023
by 20% a year until 2026.
So if you've got something like this in your portfolio,
you may wanna take advantage of it.
In addition to that,
I mean, this is how people can get into bigger deals
'cause we talk about the down payments
that you have to put down to go into these larger deals.
Well, if you perform a cost segregation study,
a lot of times that down payment,
it's gonna come from the tax savings you're gonna get
just from depreciating the property.
So it covers your down on the real estate you're buying.
Lots of planning around this guys.
If you're a real estate investor
and you're active and you have the properties,
make sure you're checking into this.
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All right, take care of you.
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