Hey, everyone.
Today I'm going to show you how you could potentially eliminate your entire
tax liability with this one simple tax hack.
So let's get into it.
First, let's start with a little bit of background.
We know that back in December 2017, the Tax Cuts and Jobs Act was passed.
And if you watch my other videos, you probably remember that
as an important part of that legislation, there was 100% bonus depreciation.
Bonus depreciation, and it's for now new or used assets
that were placed in service between September 27, 2017 and the end of 2022.
So if you buy qualifying assets
during this time period, you can write off 100% of that cost.
Most of us think about things, for example, like cars
or appliances or all the equipment and things that are used in a business,
but not typically real estate unless you're doing a cost segregation
study or something.
But I'm going to show you
an asset that you could purchase that will actually qualify for this.
If you look at the assets that qualify,
one of the qualifications is that it is an asset with a useful life
as determined by the IRS of 20 years or less.
And within the code section there is actually an exception
for retail motor fuel outlets and that section says
that those assets are actually depreciated over 15 years
because those assets have a 20 year or less useful life.
Because it's 15, you can actually write off 100% of the cost.
So the question is what actually qualifies as a retail motor fuel outlet?
So let's go to the board and find out.
So there's three requirements,
and this didn't actually come from the actual IRS code.
This is actually from guidance released by the IRS over the years
and case law that this is developed from.
But there are three main requirements.
First, 50% or more of its gross revenues are generated from petroleum sales.
So that's the first requirement.
Second, 50% or more of its floorspace
is devoted to petroleum marketing sales.
And lastly, the C store building
is 1400 square feet or less.
And I say C-store because that is essentially
how this special exemption is referred to.
Kind of like a convenience store.
Now, any one of these items
can be true in order for the asset to qualify.
But you have to be really careful and actually examine
the asset itself so you don't end up in a bad spot.
Because there was actually a case where a large company had many truck stops
that they said qualified for this, and they indicated that it met the 50%
or more of its floorspace was used to market petroleum sales.
But when the IRS and the courts actually looked at it,
most of the floorspace was actually for convenience sales,
shower rooms, restaurant things like that
that were not directly petroleum sales,
even though what they claimed was, well, all of that is ancillary
to the petroleum sales and assists in it, and therefore it is petroleum sales.
Well, that didn't really work.
So you have to be careful
when you're going through these requirements
so that you make sure it actually qualifies.
Because if you think you're getting a large deduction and you don't,
you may end up in a worse spot if you have to correct that later,
because now not only are you paying tax that you didn't think you'd have to,
but now you're potentially paying late payment penalties and interest.
On top of that. So you want to be careful.
Always talk to your CPA before you do this.
If you're expecting the deduction, I want to go over a really quick example
and this is a real example that has happened recently.
I had a client that sold a property with a gain
of approximately 800,000, actually multiple properties.
So they had a capital gain of 800,000.
And of course, like everyone else,
you want to figure out a way how you can avoid the taxes.
So the idea was identify a C store property
for which they did, and the cost is about $1.2 million.
So because this property will qualify as a C store
and you could write off 100% of the improvement cost
as long as it's purchased and in-service before the end of 2022.
That means in this case, if we allocate
800,000 of that purchase price to the building, so improvements
and 400,000 to the land,
then that means that we could
actually take a 100% bonus on 800,000
because remember, land is not depreciable,
so we're only getting in on the improvement cost.
So if we have a gain of 800,000 and because we've
bought an asset with improvements of 100,000
that qualify for bonus, we now end up with zero taxable income.
But of course, as you know, if nothing else, change this property
as soon as you bought it was probably still worth 1.2 million.
Yet you have used this now to completely eliminate your tax liability.
Now, real quick, a little bonus
idea here because you may not actually want
to acquire that type of asset for whatever business reason you have.
So another option is you could do a cost segregation study.
And I go into this more in another video.
So if you want to know more about cost segregation studies and kind of more
details behind the numbers that I have here, check out that video
because that's a little beyond the scope here.
But essentially in a cost segregation study,
depending on the type of property,
how new it is or a variety of factors,
you could write off anywhere between 25 and 40% of the improvement costs.
So what does that mean if we want to eliminate our tax liability
when we have 800,000 of income, whether it's a gain from something
or some other type of income, and we want to eliminate it
to get the same effect as a C store exemption, we'd actually have to assuming
we could get a 40% write off, we have to buy an asset for $3 million.
So this could be a multifamily apartment complex
for 3 million and then you would do a cost segregation.
And the way I'm getting to that is all I'm doing.
And these are rounded numbers just to make a point.
So you just take 1.2 divided by 40% and that's how you get your 3 million.
So then following it through,
just to kind of check the math that we'll get to the right place,
I assumed 3 million I assumed 67% of the property was depreciable.
And the reason I use 67%
was because in our prior example, the C store,
I said of the $1.2 million
purchase, 800,000 was improvements.
That's approximately 67%.
So to compare apples to apples, I'm using the same percentage.
So that means of $3 million purchase, 2 million of that would be depreciable.
So if 2 million of it is depreciable and we do a cost segregation study
in which 40% of the property is eligible
for 100% bonus depreciation, that means that 2 million multiplied
by 40% equals our same $800,000 write off.
So you can get the same effect by
doing a cost segregation study on a property,
but you have to put more into it, whether it's debt
or equity, in order to get that deduction.
Now, of course, you can do the same thing if you want to assume
you only get a 25% write off same math.
I'm not going to go through all of it, but 1.2 million divided by 25%.
I think it comes out to about $4.8 million
property have after purchase if you had a 25% write off.
And if you want to know
whether you're going to get 25% or 40% or somewhere in between,
always best to check with your CPA, make sure they are familiar with cost.
If not, find someone that's very familiar with the cost segregation study
and can give you an idea of what the typical eligible piece that you could
write off for the type of property you're looking at, because it differs
between the property you have, for example, multifamily property.
Generally you're on the higher end
and industrial, you're generally on the much lower end
because you don't have as many build outs and things
that you can break out as lower class property.
And then office and retail are usually somewhere in the middle,
depending on the type of property.