How to (Legally) Stop Paying Taxes with Commercial Real Estate | Yonah Weiss
Yonah is a powerhouse with property owners' tax savings. As Business Director at Madison SPECS, a national Cost Segregation leader, he has assisted clients in saving over a billion dollars on taxes through cost segregation. He has a background in teaching and a passion for real estate and helping others. He’s a real estate investor and host of the top podcast Weiss Advice.
https://www.yonahweiss.com/
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Key Takeaways:
Cost segregation is an advanced depreciation strategy that allows you to depreciate certain components of a commercial property (like flooring, cabinets, appliances) over a shorter 5-7 year period instead of the standard 27.5 or 39 year period. This can provide significant tax savings.
Cost segregation studies are recommended for properties over $200,000, as the upfront cost of the study is usually worth the tax benefits. Even a $480,000 property can see $120,000 in year one depreciation deductions.
The potential downsides of cost segregation include not being able to use the tax benefits if you don't have enough tax liability, and potential recapture taxes when the property is sold.
Some of the best assets to maximize depreciation benefits are mobile home parks, RV parks, and golf courses, which can allocate 70-80% of the purchase price to 15-year land improvements that qualify for bonus depreciation.
When investing in syndicated deals, key factors to consider are the experience and integrity of the sponsor, the cash flow, and the ability to utilize the tax benefits from cost segregation and depreciation.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
0:00
Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Series central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level, cre Central has the resources you need. Visit www dot cre central.com. To learn more. Welcome back to the commercial real estate investor Podcast. Today we are diving into how to legally stop paying taxes with commercial real estate with the one and only Yona Weiss Yona is a powerhouse with property owners tax savings. He's Business Director at Madison specks, a national cost leader and he's assisted clients in saving get this not a million, over a billion dollars in taxes through cost segregation. Yona also hosts the top podcast Weiss advice, which I have been on before you and I met a couple years ago at the BiggerPockets conference and it's about damn time we got him on the show. Yo, what's going on, man?
Speaker 1 1:26
Thank you so much, Tyler. Great to be here. Yeah, well, that
Tyler Cauble 1:30
was a very brief introduction of you and your background. But tell us a little bit more about yourself?
Speaker 1 1:36
Well, I mean, you summed up what's currently going on, but my background would prevent a decade and a half. But 15 years I was a teacher and got into real estate about 10 years ago, in doing various different things started out doing some commercial mortgage brokering hard money loans that did some fix and flips got my broker's license did some, you know, Residential Brokerage, and the networking through real estate and especially the commercial real estate space led me to this company, Madison, commercial real estate, which Madison specks is the biggest national Cost Segregation company.
Speaker 2 2:13
And it just kind of fell into place. And at that time, believe it or not, I
Speaker 1 2:18
had no idea what Cost Segregation was. And to my surprise, neither did almost anyone else I spoke to so it seemed like to me my teachers kind of cap went on at that point to realize, here's an opportunity to really educate people about the subject that is literally like life changing game changer when it comes to growing your business. Yeah,
Tyler Cauble 2:43
I'm always surprised that people don't know what Cost Segregation is sometimes it's called accelerated depreciation. Can you kind of give us a background on what it is and explain how it works?
Speaker 1 2:53
Well, you're exactly right. It's accelerated depreciation. So think of it just like an advanced depreciation strategy. So anytime you buy a property besides for your primary residence, whether it's residential, commercial, as long as the business or investment property, the IRS allows you to take an income tax deduction called depreciation. Now, it doesn't mean you're always actually going down in value, that's a really important thing to remember. It's just a borrowed term, because it's based on when you buy the property, and based on the value that you pay. So you buy a new property for a million dollars, let's say you're now literally able to write off that million dollars from your income taxes, but over a long period of time, right, so the regular depreciation method is like a 27 and a half year period for residential properties, and 39 year period for commercial property. So very arbitrary numbers. But essentially, they're saying, we're allowing you because you invested in this property, you can now take this tax write off, so that'd be that and of itself, is a huge benefits real estate you we talked about real estate having tax benefits, tax advantages, that's the biggest one depreciation, but remember, it's a borrowed term. And Cost Segregation is really just an advanced form of that saying that there's certain components in the property that actually depreciate at a faster rate than the 27 and a half or 39 years. And if you identify what those components are, you're able to take the deduction of those components at a faster rate. So it used to be called component depreciation, which makes a lot more sense. You say, like, the carpeting, or right, the cabinets and the appliances and all that depreciate in a five year schedule. Let's take those components, depreciation and the faster rate instead, they gave this weird game cost segregation. I still don't know to this day why he maybe did to deter people from doing it or those. Yeah,
Tyler Cauble 4:44
it's funny because but it makes sense, right? Because like an HVAC unit shouldn't be depreciated over 39 years. We all know that things probably not going to make it 10. So can you give us some examples of some of the types of construction that you are able to depreciate on that Five to seven year schedule and how that can actually impact somebody's tax benefits.
Speaker 1 5:04
Yeah, so a few other few examples. But the crazy thing is, is it's not based on like new construction or, or the actual life value of that ATREX isn't or something like that, right? Not, not like a bank looks at a property when you do an appraisal, and say, Okay, you buy this property, you know, this has a useful life of, you know, the roof has useful life, let's say 15 years, it's our, you know, it was put in 10 years ago, so it only has a value of like five years left. That's not how depreciation works. Depreciation says you buy a property today, where you able to look at everything as if it's new, and then depreciate it on that lifespan that again, arbitrary that we've given it. So some examples of what's called the five year depreciation, what we're doing with Castaing is anything that is interior, that's non non essential to the structure. So the structure, you know, call it the roof, foundation, windows, doors, you know, infrastructure all that depreciates on that longer 27 and a half year, but anything that's interior that's non essential with a structure like, again, flooring, if it's vinyl, or, or linoleum or, you know, LTP, or carpeting, that's a big, big factor, cabinets, countertops, you know, we're just talking like a multifamily property of appliances, furniture, fixtures, window treatments, okay, even millwork, or you have ceiling fans, anything again, it's inside, you wouldn't even look at and think, Okay, this is part of it. But the engineers and this is an engineering based like study of a property worth going in very, very minutiae detail of, you know, how many screws are that right? How many, you know what square footage of carpeting and then assigning a value to that taking that deduction over the faster rate. So there's a huge amount of things and every property is a little bit different. But once we identify what those components are willing to take the value of that as a tax write off at a faster rate. Yeah,
Tyler Cauble 6:56
I've always heard that you shouldn't even consider cost studies unless the property is worth over a million dollars. But I did one on a on my office building that was $480,000. And we were able to ride off about $120,000 in year one, and depreciation so like, I mean, what, at what price point is it start making sense and in your opinion,
Speaker 1 7:18
typically, I recommend anything purchase for over $200,000 makes sense to look into kossei, you know, will always run a free upfront analysis, so you can see what the benefits would be beforehand, because there is a cost of getting it done, right? It's going to cost a minimum, if you're doing a full engineering study, which is recommended, then it's going to cost a minimum of a few $1,000. And so what's the actual after tax benefits? How much am I investing into this few $1,000? Okay, what's the after tax benefit, right off gonna look like? And then again, over $200,000, it definitely makes sense at that point. But there are other factors that are going to be involved to, you know, to make sure you're getting a maximum benefit.
Tyler Cauble 7:58
Yeah, so how does the process work? Like when when would a commercial real estate investor engage, you know, someone like you and your team?
Speaker 1 8:07
The first step is always, like I said, to get that free upfront estimate, you want to know ahead of time, if it's even gonna make sense for you, or your situation, and your property. So that's the first step. You know, it can be done at any point, a lot of people like to reach out, even when they're under contract before buying a property, just to kind of see, hey, is this going to make sense to my business plan, if I have investors is it going to make sense, you know, to the investors that are gonna get benefit from it. So we can run that free estimate at any point. But once you do purchase a property, a lot of people like to get the cost thing done in the first year of ownership, because, you know, set up the taxes the right way. And obviously, if you can benefit from those deductions this year, the time value of money is huge. And so you want to make sure to capitalize on the time value of money if getting those deductions as soon as possible. But it can be done really at any point, which means if you own a property for a number of years, and never did a cost sake, you can do one retroactively and essentially, catch up any missed depreciation deductions without even having to amend your tax returns.
Tyler Cauble 9:07
Yeah, that's one part of the strategy here that you definitely want to employ. We have a property that we bought a couple of years ago that we still haven't done a cost to God because we've been buying other properties. So we're like, okay, let's wait until we don't have something else to depreciate before we go all in on this one. And it's pretty nice to be able to kind of strategize that, and and, again, save money on your property taxes. I've got a mentor that strategically buys commercial real estate every year. He nets about a million dollars and by using this cost segue strategy, he pays $0 in taxes every year, he pays less than I do.
Speaker 1 9:45
That's incredible. And it's important that you point out this is a strategy right? So it's not going to be for every person in every situation and every property. I know a lot of people out there kind of gurus are touting everyone has to do cost segregation on every property, it's the best thing since sliced bread. And the truth of the matter is, if it works for you and your situation, like your example of this mentor of yours, that's amazing, right? He's making seven figures and paying zero taxes. And that's really who and you know, when it's going to benefit the most. But again, it's part of a business plan. He's buying a new property every year, kind of really deferring taxes to a certain extent, because he's using depreciation for one property to offset the loss of you know, the gains from another property, etc. So you keep doing that. Yeah,
Tyler Cauble 10:32
just keep doing it over and over again. What are the potential downsides of cost segregation? Because I know it's not all rainbows and butterflies?
Speaker 1 10:40
It's not and the biggest downside I would say is, well, just first of all, if you can't use it, if you can't benefit from it, right? So think of an example, if you are not tax liable, right? If you have enough losses from other properties, or other businesses, or what have you, that you just you're not making any profit on the property. And so you don't have any reason to get those deductions of, you know, a prime example of that. Or another prime example, I would say is, if you're doing the redevelopment project, right? First you buy property, there's likely going to be little to no income from that property. So not having any need for that tax benefits. Getting those deductions is probably the biggest downside, you're just not doing it. But another big downside and a person has to consider is, whenever you sell a property, you're going to be subject to a tax called recapture tax. Now a lot of people get this wrong and, and think recapture means I'm paying back all that depreciation, which is not what it means at all. So recapture is a name of a tax. And it's anytime you sell a property similar to capital gains tax, right, if you made a profit on the sale, you're going to be taxed on that difference of the amount that you made the promise. So to the amount of depreciation taken during the whole period, you're going to be taxed on that amount. But there's a big difference between being subject to a tax and paying a tax legally, because you may have other deductions or other ways to defer that tax. In the year of the sale, for example, a 1031 exchange, you can defer that recapture tax along with a capital gain tax. Other losses, like probably your your mentor, hat, maybe sells a property, but he'll sell a property and in the same year, he'll he'll he'll buy another property and have the losses from that new property with the use of concept to offset the gain and the recapture tax for the sale of the first property. And so that is it big downside I would say if you don't plan accordingly.
Tyler Cauble 12:39
One thing that I came across a few years ago want to get your take on this because I thought it was interesting, I had never heard of anything like it had a call from a group of investors out of New York. And they were representing high earning individuals. And they wanted to invest in our deals strictly for the depreciation, they went to zero cash flow, they said you keep 100% of the cash flow, we want the depreciation and we want you to do a cost segregation study. How often are you seeing that? And how often are you working with with these high earning individuals just to protect their current income?
Speaker 1 13:15
You know, it's it's a strategic play, right? Obviously, some people invest for the cash flow, some people invest in properties for, right, the tax benefits, etc. So I've seen it before, obviously, the structure needs to be different in order to allocate funds to or depreciation to one person. But the important thing to remember is that, and this is something that a lot of people get wrong, also, is that unless you or your spouse is a real estate professional, meaning your full time real estate business, then you're not even going to be able to maximize the benefit or the use of those losses of those deductions from depreciation from causing. So if those people were high earner earners in the real estate field, or their spouses were in, you know, in the real estate field, that yeah, obviously, that's a great, a great play great strategy. If not, it's almost like, what's the point because those losses unless they had a gain, again, it's very practical. If person sells a property, and you have a gain from the sale, you can use the losses from processing to offset that gain. So I mean, there are a lot of ways to use this to benefit you. But yeah, I've definitely seen that it is a little bit of a different structure. But again, everyone needs to use it according to you know how they're going to benefit most.
Tyler Cauble 14:30
Yeah, I do always find it funny how the spouse of these high income earning individuals always happens to be, you know, a real estate agent or something like that works out pretty well for them. What are the best assets to depreciate because I know not all commercial real estate is created equally. So I mean, if I, if I wanted to go out and buy an asset this year, strictly because I need the depreciation and I can worry about the cash flow and stuff like that later. What should I be looking for?
Speaker 1 14:57
What are the biggest things in cost today? is when we talked about the bonus depreciation, which allows you to take those accelerated deductions upfront. And it used to be 100% of those deductions in the first year now, and 2024, it's down to 60%. But still, that bonus, depreciation is huge. So if you can, the more accelerated deductions you can get, the better. And the highest type of property that gets those accelerate deductions are RV parks or mobile home parks or golf courses. And the reason why is because this, the common denominator between those three is they all have a huge amount of land improvements. Okay, so land itself does not depreciate, which means anytime you buy a property, you're gonna have to subtract a certain amount for land, and you're not depreciating that. But anything on top of the land depreciates over a 15 year schedule, which is considered accelerated and is eligible for that bonus depreciation. Now, think about an RV park, if it's paved, or even if it's gravel, all of that, you know, you don't have any structure or very little structural components. So what you're buying is you're buying land and the land improvements. And so the majority of what you're buying goes into the land improvements, which again, can be accelerated depreciation. So in the years of 100%, bonus depreciation, which is huge, because you're getting this huge lump sum literally 70 to 80% of the, the actual purchase price can be allocated to this 15 year land improvement category, which is not the case, like you said, not everything is created equal, like office buildings, or multifamily and self self storage are usually between 20 to 30% of the purchase price is going to go towards the accelerated depreciation. And so obviously, when you're talking about 70 to 80%, it's got huge data. So if if you're looking to buy a property, and you don't care what type of property it is, look for a mobile home park or RV park or something like that.
Tyler Cauble 16:50
Yeah, that's pretty great. I've heard car washes are pretty good, too, is that
Speaker 1 16:54
car washes are interesting, because they have different rules. So it's not that they are using Cossack per se but the actual rules IRS is that a carwash itself, the whole property is considered a 15 year depreciation, which means there's no structure, even the structure is considered fixtures, which means Yeah, which means you can literally write off the whole thing over a 15 year, which again, with a bonus depreciation to take that upfront.
Tyler Cauble 17:20
That's pretty great. Yeah, we've had my buddy Dylan Marma on the show a couple of times, he's doing RV parks. And yeah, I didn't realize that you were able to get such strong depreciation out of those, I'm gonna have to look into that a little bit more, because those are apparently doing well today.
Speaker 1 17:35
They're doing well, you know, it's a little bit of like an offbeat asset class done, not too popular. Right. So hasn't gotten the, you know, the institutional eyes on it just yet. So, you know, there's still a lot of potential out there. Yeah,
Tyler Cauble 17:49
I always appreciate that. It's like what self storage was like, five 710 years ago. I mean, man, I remember when I first got into commercial real estate back in 2013. You could buy self storage facilities like 18 and 20%. Cap rates nobody wanted. For sure. It's, it's just insane. Well, Yoda, I know that you are also a limited partner you like to invest in syndications? I mean, considering today's market and environment, what are you interested in investing in? Like, what how are you evaluating the deals that are being put in front of you?
Speaker 1 18:18
Well, on the same principles, as before, the interesting thing is I haven't invested in the last 12 months in a deal. And part of the reason why is that all the deals that didn't until this point, which I'm in a different syndications, currently as an LP, they, like many of them kind of paused distributions. Thankfully, no, I haven't had any capital calls or anything like that. But it's was a difficult kind of market and situation. But the things that I look for number one is the strong sponsor, someone who's had a lot of experience, that's the number one thing I look for, right? So someone that I need to know someone that I have a relationship with someone that I can trust, and know that they're, you know, they're going to be hold to their word, they have the integrity to, you know, to hike up their, you know, their pants, if the situation is getting rough, you know, they're not going to just let it go, which unfortunately, I've seen other friends of mine or other people I know that have had just lost investment because the sponsors were inexperienced and didn't want to deal with the situation, just kind of let it go give it back to the bank or whatever. Thankfully, that hasn't happened. Other things I look for are going to be the cashflow. I'm looking to invest for cash flow, which is hard to come by right now. Right? If, obviously, if you can find a deal, the cash flow is great, wonderful. The tax benefits are a big factor to me, which is why I've invested personally in RV parks and Milan parks, for that very reason. But, but again, just coming back to the fundamentals, looking at the deal doesn't make sense. What's the long term play? And do the sponsors have enough experience to kind of get it through?
Tyler Cauble 19:58
Yeah, I mean as an LP investing into these syndications? How do you protect your tax benefits? Because every syndication does it differently. So can you know you've got a unique perspective on that? So can you tell us a little bit more about it?
Speaker 1 20:12
Yeah, I mean, I think it's a lot of just doing the due diligence and understanding what each different sponsor what their long term plan is, if they are planning to do the cost segregation, obviously, most of the deals that I've invested in have, you know, I'm consulting them. So it's part of part of that, but it everyone's situation is different. Again, if you can't use your you don't need those tax benefits, then that may not even be a factor for you. Yeah,
Tyler Cauble 20:38
that's very true. Yona, this has been an awesome action packed conversation. I appreciate it. Man. If anybody listening wants to reach out and have a conversation with you about legally paying nothing on their commercial real estate assets, how can they get ahold of you? You
Speaker 1 20:54
can find me I'm pretty active on all the social media platforms. You don't always just my name is the handle. I'm most active on LinkedIn, Instagram, Twitter, but you can also go to Yona weiss.com. Easy
Tyler Cauble 21:05
enough. Alright, everybody. Thank you for joining us today with Yona Weiss our guests, go to Yona wise.com, and learn more about cost segregation. And we will see y'all in the next one. Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Cre central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level. Cre Central has the resources you need. Visit www.cre central.com To learn more
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