Neil Henderson chats with Erik Oliver, president of Cost Segregation Authority, to introduce the exciting world of cost segregation and how it can save passive real estate investors a bundle on taxes. Turn up the volume to learn how cost segregation studies work, when they make sense to pursue, plus tips and tricks for maximizing tax savings.

Timestamps

  • [1:40] What is a cost segregation study and how does it work?
  • [4:45] Real-life examples of cost segregation savings
  • [8:30] Bonus depreciation rules explained
  • [12:10] Using cost seg to offset W-2 income
  • [17:30] Estimated cost and expected savings
  • [23:20] Managing depreciation recapture
  • [29:20] Other strategies to minimize taxes

Key Takeaways

  • Cost segregation accelerates depreciation deductions by breaking out components of a property into shorter useful lives
  • Studies make the most sense on larger commercial properties but can also benefit residential
  • 30-35% frontloaded depreciation is typical, more with bonus rules
  • Deductions can offset other passive or active income if you meet qualifications
  • Expect at least 10x return for cost of study
  • Must understand depreciation recapture tradeoffs over long-term

Resources

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Transcript
Erik Oliver:

if I'm a high W two earn, let's say I'm a doctor and I make 300,000 a year, I'm paying out a hundred thousand dollars a year in taxes. So why not take that a hundred thousand that I was gonna pay the IRS to put that down as a 10% down payment on a million dollar property, get a $300,000 deduction, and now I've just offset that. So basically I'm still spending a hundred thousand, but now instead of giving it to the IRS and having nothing to show for it, now I've got a revenue generating short-term rental.

Neil Henderson:

Welcome to truly passive income. I'm Neil Henderson. I'm flying solo. This episode, my partner Clint is off being a digital nomad with his family. Our guest this week is Eric Oliver from the cost segregation authority. Eric Oliver, welcome to truly passive income.

Erik Oliver:

Oh, thank you. I'm glad to be here, Neil. Appreciate it.

Neil Henderson:

pleased to have you here with us on a Thursday morning. so we're here to talk about the exciting and mysterious world of cost segregation studies. Uh, and for those of our audience who have no idea what a cost segregation study is, can you give us a high level 10,000 foot view of what those are.

Erik Oliver:

Sure. So cost segregation really is just accelerated depreciation. and so as you know, as an investor, a lot of us get into real estate investing for, a number of reasons, but one of the main reasons is the tax benefits. So you get to write off a portion of your real estate in the form of a depreciation expense every year. And typically for commercial real estate, that's over 39 years and residential is over 27 and a half. So just to make the math easy, if you buy a 390,000 storage unit, you get a 10,000 write off every year to simplify it. So, um, that comes off your taxable income, which is great. So instead of, you know, if I have 100,000 of income every year, instead of being taxed on 100,000 I'm only taxed on 90,000 because I've got this 10,000 depreciation expense. And so that's what a lot of us do. Um, it's called straight line depreciation. And cost segregation is just, instead of taking 1 39th of that every year for the next 39 years, what if I can accelerate that and move those deductions forward? the way that that's done is through a cost segregation study, which is essentially, when you buy a, let's say a storage unit, you're not just buying the units themselves, you're also buying some concrete, some asphalt, some signage, some lighting, some security systems, all these different components. And the IRS says that some of those components should be depreciated at a much faster rate than 39 years. And so we come in and segregate those costs into different buckets, I'll say, that allow us to accelerate those or depreciate those much quicker. For example, concrete isn't a 39 year asset, it's a 15 year asset. So it should be depreciated over 15 years, not 39 years. So if we can front load that and accelerate that through the study, Um, it gives you a bigger deduction in the early years versus having to wait, 39 years to take your standard straight line deduction.

Neil Henderson:

Okay, so To make sure that i'm understanding we've got our normal depreciation schedule, which we have on real estate, which is on Residential real estate. It's 27 years on the basically the the whole property

Erik Oliver:

Yep.

Neil Henderson:

And then on commercial real estate, it's 39 years on the whole property.

Erik Oliver:

Correct.

Neil Henderson:

And what the cost segregation study comes in and does is breaks apart the individual components of, let's say your commercial real estate asset and says, okay, that's not 39 year asset. That's a 15 year asset. We're going to depreciate it at an accelerated rate.

Erik Oliver:

That's exactly right. Yeah, when you think about, let's, you know, use the example of, let's say, a short term rental, you buy a short term rental for a million dollars, you're not just buying, again, the land and the walls, you're buying some carpet, some countertops, some appliances, all those different components inside. Those are actually five year assets, according to the IRS. And so let's depreciate those over five years versus five year assets. 27. 5 and get our deductions up front, which makes sense, you know, carpet doesn't last 27. 5 years. But the challenge is that when you buy it and you hand your CPA your closing statement, your CPA doesn't know the value of those different components. So they just clump everything together as one big asset, 27. 5 years, and you just take your depreciation that but that's why, you know, you, you would hire a cost segregation company to come in and look at it and say, okay, what's the value of the carpet that I just purchased? What's the value of the appliances? What's the value of the cabinets? Um, and that way we provide you a, a revised depreciation schedule that has all these different components broken out.

Neil Henderson:

Gotcha. On a short term rental, does that also include furnishings and things like that.

Erik Oliver:

Uh, it can in certain instances, it definitely does. So if you buy a short term rental, that's fully furnished, we will put a value to all the, interior furnishings of the property and allow you to depreciate that at a much faster schedule than the. The 27 and a half or 39.

Neil Henderson:

Okay. I have a very specific question and I'm not gonna, I'm not gonna like beat around the bush about why I'm asking, cause it's my very specific situation. Uh, we're a big believer in house hacking and we bought a, I'm currently inside a vacation rental that we bought fully furnished, uh, back in May. It operated full time, a hundred percent as a vacation rental up until october of last year when we moved into it. So now we've lived in it, we will have lived in it for two months out of the year. Is it still something that you can cost segregate?

Erik Oliver:

Uh, yeah, you'd want to obviously talk to your CPA first. CPA is kind of the, uh, They're the know all end all for this cost segregation since they're the ones signing the tax return. But yes, um, I would say that you could absolutely do a cost seg study on it because you had rental income coming in for for the year. Now, once you turn it into your primary residence, I don't know if you plan on living there for long or is it is it short term? Are you planning on living there for a while?

Neil Henderson:

We're gonna we're it's a long story. We're converting the lower level to a separate auxiliary dwelling unit. And it's going to continue to operate as a short term rental, but then we're, we'll live in the two top floors above it. So roughly, uh, one third of the property will continue to operate as a short term rental, but we're living in the other two thirds.

Erik Oliver:

Yeah. Yeah. You can absolutely do a cost seg study on it. Like I said, run it past your CPA, make sure they're okay with it. But I would, um, advise to definitely do a cost seg study on it.

Neil Henderson:

All right. So let's, circle back to storage. Cause we were talking about a much, you know, a much bigger asset. Uh, and you mentioned very quickly, some of the different, items that you can do, cost segregation. You mentioned the concrete, the signage, uh, the HVAC.

Erik Oliver:

Um, HVAC is an interesting one. No, typically HVAC does not get classified as a short term asset. unless you've got specific HVAC. So HVAC to keep yourself cool or a unit cool typically no. We do segregate HVAC on like, um, we do a lot of IT buildings where they've got like server rooms and you've got cooling coming into that server room to keep those servers cool. The only reason you have that, uh, cooling coming into those server rooms is specific for those servers, which are a short term asset. And so we can then classify that HVAC as a short term asset. Um, but typically HVAC is a, is part of the building structure. It's not, um, something that's segregated.

Neil Henderson:

Okay. So if it was, you know, you were doing wine storage for instance, where it was very specifically needed to be, kept at a specific temperature, You could cost segregate that kind of attribute. That's very, that's so interesting to me that they, that, you know, it changes for, for people, it's fine for just inanimate objects, fine, but if for inanimate objects that very specifically need to be cooled at that temperature, yes.

Erik Oliver:

Yes. Okay.

Neil Henderson:

All right. IRS, whatever.

Erik Oliver:

And the way the IRS looks at it, um, it's a, that's a great, we actually did a meadery. I don't know if you're familiar with mead. Do you know what mead is?

Neil Henderson:

I don't know what mead is. No, no.

Erik Oliver:

Mead is fermented honey that they make alcohol out of. And so this, this meadery was in Prescott, Arizona. And so they had these big vats, these big 50 gallon drums of honey. And of course, in Arizona, where it gets really hot, you've got to keep that honey at a certain temperature. Otherwise, It gets really runny and it's hard to work with. And so they had these big air conditioning units specifically for these vats of honey. Um, and we were able to segregate that. And the reason is the IRS says it's an extension of, the purpose of the room. So for example, I'll take it back to a short term rental. You have appliances in that short term rental. Those appliances are five year property. But you also have, if you think about like a washer and dryer, you've got plumbing and electrical that's going to your laundry room that's specific for that washer and dryer. And so you get to take that as a part of that short term asset. The light sockets that you have around the bottom of the walls, those are just part of the building. The lighting you have above your head is just part of the building. The plumbing for the bathroom is just part of the building, but you have specific plumbing for your garbage disposal. You have specific plumbing for your washer and dryer. And so you get to allocate that as part of the washer and dryer, which then makes it a five year asset. So that's kind of the idea or the thought process behind the IRS is the only reason you've got plumbing or electrical going into your laundry room is specific for a five year asset. Therefore, you get to include that as part of the five year asset.

Neil Henderson:

Very interesting. Okay. what do you typically see? What are, you know, if you've done, uh, some short term rentals in the past, what are typically the kinds of savings that someone can see from doing a cost segregation study?

Erik Oliver:

Sure. So, kind of the quick back of the napkin math is you take your purchase price minus your land value because land is not depreciable. So let's say you buy it for a million two and the county says the land is worth two hundred thousand. So now you've got a million dollars of depreciable basis. Take that number times thirty percent. And so in that case would be about a 300,000 write off, that you would get in the first year that would go against your income. So you're not paying taxes on that. So it's usually about 30 percent segregation, somewhere between 30 and 35 for residential. Um, and then there's something, I don't know if you're familiar with the term bonus depreciation.

Neil Henderson:

I'm familiar with the term, but if you asked me to define it, I would look stupid.

Erik Oliver:

No, I'll give you a quick definition of it because that's why the numbers are so big right now. So part of the Tax Cuts and Jobs Act in 2017 with Trump's tax overhaul, you know, Trump being a real estate investor, the law was very favorable to real estate investors.

Neil Henderson:

I wonder why.

Erik Oliver:

It's kind of funny how that worked out, right? So what bonus depreciation is, is when we come in and we identify these different components of your Property. So we take your 27 and a half year asset and we break it up into 5, 7, and 15-year assets and then the rest of it is the building which stays 27 and a half. But any asset that has a useful life of 20 years or less, so you're 5, 7, and 15-year. Instead of depreciating your five year assets over five years and taking one fifth, essentially, every year for five years, you get to take 100 percent of those deductions in the first year. You also get to take 100 percent of your seven year assets and 100 percent of your 15 year assets all in the first year because they qualify for bonus. So bonus depreciation as part of the tax law, anything purchased between September 27th of 2017 and December 31st of 2022. So this is the last full year of bonus depreciation of a hundred percent bonus. Excuse me. Once. Next year starts, it goes down to 80 percent bonus, and then the following year it's 60, and then it phases out until 2027 when it's zero. But because of that 100 percent bonus, you're getting roughly a 30 percent deduction off your depreciable basis in that first year. So on that million dollar asset, if you can write off a 300,000 depreciation expense, you know, take a, let's say you're in a 30 percent tax bracket, that's all of a sudden a 90,000 tax savings, um, in the first year, assuming you can absorb that whole deduction.

Neil Henderson:

Gotcha. And so I'm understanding correctly and putting this into, Neil speak. if, uh, you know, like you said, if I'm able to write off, have a 300,000 write off, now I have to have, have had the income to make that write off worth it because, you know, is there. Those losses are not going to, I can't depreciate that carry forward and say, all right, I only made, uh, 90,000 this year. I'm going to depreciate 300,000 That doesn't carry forward to future years, does it?

Erik Oliver:

Uh, the depreciation actually does carry forward. So the way that would work is if you have 90,000 of income and a 300,000 deduction, you would pay, you would wipe out that 90,000 of income, pay no taxes on it. And then you'd have$210,000 of deductions sitting in a bucket that is waiting for your income for next year. And so when you have 90,000 of income next year, you're going to wipe out that 90,000 and then you're going to have, you know, 120,000 of income. Or excuse me, 120,000 of deductions sitting in there for the following year. So yes, it does carry forward. You never lose it. Um, it definitely carries forward and you can be used in future years. Okay.

Neil Henderson:

And is that affected? Is that amount affected by the phase out or once you take, once you take it, it's in the bucket and

Erik Oliver:

it's in the bucket and nobody can touch it. Yeah, that's the great thing. So, and as far as the phase out goes, the phase out typically, unless they change the tax law, but currently. The phase out only affects properties that are purchased in 2023, 2024, 2025, etc. So, if you buy a property in 2022, and let's say you don't do a cost seg study until 2025, you still get a 100 percent bonus because you bought it when the bonus rules were 100%.

Neil Henderson:

Ah, very interesting.

Erik Oliver:

So, yeah, the law applies to the year you put your asset into service. And so, uh, just something to keep in mind as we look towards this phase out period.

Neil Henderson:

Gotcha. Very interesting. All right. So let's circle back to storage. right now we're in the process. we've bought a, uh, a 97, 000 square foot vacant Kmart that we are converting to 66, 000 square feet of climate controlled storage. we're keeping the structure cause we're able to buy it for pennies on the dollar. And then We're demoing it, putting in a nice big, central drive through aisle for people to drive into the climate controlled area and then unload their cars in the climate control. we're buying it with investors. it's a syndication. and our plan is to do a cost segregation study. In this year, and so we should be able to do 100 percent write off on those cost segregation items in this year, but then since we're actually not earning any income in this year one, because we're going to be in the process of doing construction build out, obviously, we're not going to have any income to write off, we can carry that forward for the next several years.

Erik Oliver:

Correct. Yep. So your investors down, it'll be kicked out through the K 1 that you give your investors every tax season. So they'll get a K 1 with a large depreciation number, and then they can actually use that to offset other income they may have coming in from different properties. And if they don't have the income, then it just carries forward, um, until they can use it up.

Neil Henderson:

Gotcha. does it, I think, I think I know the answer to this one. I should make sure I does the, do the K 1 losses. Does it typically roll over into their personal income and I know this is probably more of a CPA question, so I'm sorry to put you on the spot, does it spill over into their, let's say, W 2 income? You know, we work with a lot of doctors and cardiologists, things like that, very high income individuals, does it cause their normal W 2 taxable income to drop?

Erik Oliver:

That's a great question. Typically, real estate is considered a passive activity unless you qualify as a real estate professional for tax purposes. So, part of qualifying for a real estate professional is you have to spend 750 hours a year doing real estate, and it has to be 51 percent of your working time. So essentially, when you file your taxes, there's a line on there that says what is your occupation, and if you can put on there that you're a real estate professional, that's what you do for a living, then the deductions that we create through the cost seg study or that you get on your K 1 can then be used to offset any income you or your spouse may have coming in assuming you're filing a joint tax return. So if you're a doctor, so let's say I'm a doctor and I invested a hundred thousand dollars through your syndication and I get a K 1 that says I've got eighty thousand dollars of depreciation available to me, I, as a doctor, cannot use that deduction against my doctor income, only my passive income, which could be other real estate, stocks, cryptocurrency. There's a number of other passive activities, but that'll be stuck in my passive bucket unless I qualify as a real estate professional. So what we see oftentimes is. Doctors or dentists or lawyers who have high W 2 income, if they're married, they'll have their spouse qualify as the real estate professional because maybe they have a few vacation properties, they're involved in some syndications, they have their spouse qualify as the real estate professional who doesn't have to work a full time job, they stay at home. If they qualify, we file a joint tax return. Now, all of a sudden, the deductions that come down on the K 1 from my investment with you and your storage units can now be used to offset my doctor income, because now me and my spouse qualify as real estate professionals, or one of us does, and we file a joint return. And so that gets put into the active bucket, those deductions versus the passive bucket. Got it. And so, um, that's a great question. So, I do want to touch there's, and I don't know how familiar you are with this or your listeners, but I do want to touch. There is kind of a workaround. There's two workarounds. One is becoming a real estate professional or getting married and finding somebody who wants to be a real estate. I'm married.

Neil Henderson:

I'm not saying people are going to go out and do that, but yes,

Erik Oliver:

I love my wife to death, but, um, I don't suggest you do that route for that purpose. Anyway, there should be other purposes. You get married, not because you're looking for a real estate. Um, the second route is one that you touched on, which is short term rentals. Um, so short term rentals can be set up in one of. A number of ways, but they can be set up so that the deductions on a short term rental can offset my Dr. W 2 income. And the way you do that is you treat your short term rental as a business, meaning it's, you're treating it more like you're running a hotel versus a real estate property. And so there are certain criteria that you'll want to check with your CPA to make sure you qualify. You know, the average stay has to be less than seven days. You have to materially participate in the management of that property. But if you can pass those tests, all of a sudden, You know, I buy a million dollar short term rental, do a cost savings study, get 300,000 of deduction, I make 300,000 as a doctor, I no longer have to pay tax on that 300,000 because I've got this 300,000 short term rental that I'm able to treat as passive activity and it'll apply to my, excuse me, treat as active activity, it'll apply to my active income. So those are the two kind of workarounds is becoming a real estate professional, or there's that, um, short term rental workaround where, you know, if you've got high W 2 income, it's great idea to invest in short term rentals because now those deductions can be used to offset your high W 2 income, or I shouldn't say can, they may be able to if you hit those certain qualifications.

Neil Henderson:

Gotcha. No, I have a, I have a partner, my partner in crime, uh, who is in almost that exact situation. You know, he's got a, still has a fairly high W 2 income, uh, and he's got a thriving short term rental business. Uh, and, oh, by the way, his wife is also a real estate agent. So, oh, so

Erik Oliver:

he's got got it on both sides.

Neil Henderson:

Yeah, so I think he's gonna be, uh, he and he just heard about cost segregation studies like last week and he came home very, a very happy man. So, yeah. Um, he's still gotta have a conversation with his cpa, but, um, uh, it's definitely, uh, should be good news for him. Alright, so I wanna Go ahead.

Erik Oliver:

Oh, I was just gonna say, if you think about it, you're paying the money, like if I'm a high W two earn, let's say I'm a doctor and I make 300,000 a year, I'm paying out a hundred thousand dollars a year in taxes. So why not take that a hundred thousand that I was gonna pay the IRS and go buy a short to put that down as a 10% down payment on a million dollar property, get a $300,000 deduction, and now I've just offset that. So basically I'm still spending a hundred thousand, but now instead of giving it to the IRS and having nothing to show for it, now I've got a revenue generating short-term rental. for the same price that I was going to give the IRS. And so it's definitely, you know, it's a great way to build long term wealth in terms of, you know, you're going to pay the money anyways, instead of giving it to the IRS, put it into something that's going to pay you in the end. Right.

Neil Henderson:

Gotcha. And with the caveat that you have to material. Materially participate in the management of that asset. Correct?

Erik Oliver:

Correct. Yeah. Okay. Which will rules and regulations. Yeah. Okay. Which will let, I think there's like seven ways that you can claim material participation. Um, so talk to your CPA and they can help walk you through that, but

Neil Henderson:

yes. Talk to your CPA. Okay, so let's get into cost, like what does a typical cost segregation study cost and maybe we'll, we'll touch on, um, when does it become worth it? I mean, your answer may be, it's always worth it, Neil.

Erik Oliver:

No, it's not always worth it. Let's, let's touch on the cost first. So these studies range anywhere from $2,500 up to $25,000 depending on the size of asset. So, uh, most cost segregation companies. Pricing should be based on the size and scope of the project. So we look at the project and say, okay, what's the acreage of the property? What's the square footage of the property? What's the type of asset? You know, a, big warehouse is a lot easier for us to do than a big strip mall where there's 15 different tenants and we have to get into all those different tenant spaces and so, The type of asset, the square footage, the acreage, those are a few of the factors that go into the pricing, but usually it's somewhere, um, like I said, I know that's a big range, $2,500 to $25,000 but on your residential, your short term, residential, you're probably in that $25,000 to $4,000 range. as you get into larger commercial buildings, um, it could go as much as $25,000 Our average study is about $6,000 throughout the year. So, um, but you're going to get, you know, if you pay $6,000 for a study, you better be saving at least 60,000 in taxes. You know, we want to see at least a 10x return on that investment, if not more. And so, um, definitely worth it if you can absorb those deductions.

Neil Henderson:

So your recommendation is If you're going to see at least a 10x return on the money you're going to spend on the cost segregation study, it's probably worth considering doing it.

Erik Oliver:

Oh, absolutely. Yeah. Now on some of the residential, you don't see quite a 10x return, but even at 7x, that's, I'll take that all day long. You know, I spend, 4,000 for a study, but if I'm saving $30,000 to 40,000 in taxes, it's well worth it for me. and then to answer your second question, where does it, when does it make sense? with. Cost segregation used to not make sense on residential rentals before this bonus depreciation came along because there just wasn't enough meat on the bone to justify paying for a study. Now that bonus depreciation is here, um, we do single family rentals that are, you know, 150,000 and they might save 10,000 in taxes. We charge them $2,000 for a study. You know, everybody wins there. once bonus starts to phase out, you know, those smaller projects aren't going to make as much sense. All cost segregation, I shouldn't say all, most cost segregation companies will provide a free feasibility study or what we call a benefit analysis where you reach out before ever signing anything and say, Hey, I've got this property. What would you guys charge me for the study? And how much would you expect that I could save in terms of depreciation expense on this building? And then you can take that information back to your CPA and say, okay, CPA, I've got the numbers here. Does it make sense to do it this year? Or the nice thing about cost seg is you don't have to do it this year. I may buy a property this year but have no income this year. I can keep that property in my back pocket and I can play that card in two years when I sell another asset and have a huge capital gain event or when I start making significant income on these short term rentals. You get to kind of pick and choose when you play this card and so that's one of the nice things or the nice. about the flexibility of cost segregation is being able to pick and choose when you use these deductions. And so, you know, this, it's not usually a matter of if it's just a matter of when, when is the right year to, to implement this strategy. So.

Neil Henderson:

Gotcha. But like you said, once you've done that study and you have gotten that depreciation, it's now sort of sitting in a bucket waiting for you to use.

Erik Oliver:

Yep.

Neil Henderson:

Correct.

Erik Oliver:

Yep.

Neil Henderson:

Gotcha. Okay. So let's get into a nitty gritty, you know, question that you said always comes up, which is, you knowErikic the IRS just goes, Hey, it's your money now. Don't worry about it. Have fun with it. Uh, we're, we're never going to come ask you for it. Correct.

Erik Oliver:

Not quite. Okay, I wish that was the case. So one question, as you mentioned, we get asked quite often is there's something called depreciation recapture. And without going too far into the weeds, I'll try and keep it high level and just give you an overview. But when you sell an asset, you pay two taxes, you pay a capital gains tax, And you pay depreciation recapture. And so the depreciation recapture is calculated on how much depreciation you've taken over the course of the ownership of that property. So if you think about it, why do I want to front load all my depreciation? If I just have to turn around and pay it right back when I sell it, that's the question we get asked quite often. And the reason you would do that is there's a couple of reasons. One is there's a time value of money element. Um, you know, especially with the inflation rates that we're going through today, a dollar today is worth way more than a dollar 27 and a half years from now, or even 10 years from now. So give me my deduction today, even if I had to pay it all back dollar for dollar. Give me my deduction today. Let me pay down debt. Let me go buy a new asset. If I have to pay that all back in 10 years, I'm paying it back at a lower rate due to inflation, time value of money. It's a good deal. But the second thing is you're actually not paying it back at that rate. You're paying it back at a lower rate. So if I take my deduction today at 37%. Personal income tax rate, and I have to pay it back in five years at 25%. I'm going to save that 12 percent spread and have the time value of money benefit as well. So I got my money for five years and I had to pay it back at a lower rate. So I got to keep the spread. So there's a rate arbitrage between what we're taking our deduction at today and what we're paying it back at a future year, and you're saving the spread. So those are the two main things. The third one though I think is the one that's most overlooked, and I'll try and kind of back into this because for simplicity, let's say you don't do cost segregation. So let's say you build this storage unit for a million bucks and you sell it in five years for two million. Okay, the market was great, economy's great, it doubles in value. When you go to sell that, you're telling the IRS that everything doubled in value. And that's just not the case. You know, your walls and your land double in value, but that dirty carpet that's been in your office for five years, it didn't go up in value. It's not worth double today what it was when you put it in five years ago. And so if you don't do cost segregation, that's what you're telling the IRS. You're saying everything doubled in value in that instance. But if you do a cost segregation study and you have everything broken out into these different categories, you can kind of pick and choose what went up in value. Your carpet doesn't go up in value. Carpet goes down in value. So you actually don't have to pay any recapture on that carpet in this scenario because carpet is a five year asset. You've owned the asset for five years, so it's worth zero when you sell it. So to make it simple, you get to allocate your sales price upon sale to the right buckets when you do cost segregation. And so that's really the best way to answer that recapture question is you're going to take your deduction at a high rate. Pay back a portion of it at a lower rate at a future date and save the spread. And that portion amount is dependent upon how long you own the asset. The longer you own it, the less you have to pay back. So hopefully that doesn't confuse anybody. That's a lot of tax talk, but I tried to simplify it and give you an idea. Don't pay. Your carpet doesn't go, if you remember anything from this podcast, don't pay tax on your carpet, your carpet doesn't go up in value. And if you're not doing cost segregation, when you sell your asset, you're telling the IRS that your carpet is worth more when you sold it than when you bought it 10 years prior. That's just not the case.

Neil Henderson:

Erik thank you for coming up with podcast episode. It's going to be Don't Pay Tax on Your Carpet.

Erik Oliver:

Right. Perfect.

Neil Henderson:

So, so again, This is, this is a conversation to have with your CPA, with your individual situation. The reason Erik is having to talk at a very, uh, general level is because it just, it so depends on your situation, how long you've owned the asset, how much your income is. I mean, just, it's really a conversation for your CPA, what are some other ways that you know about to maybe, I don't want to say dodge because we're not tax dodges here. What's a better word to, uh, to describe, um,

Erik Oliver:

to manage your tax liability,

Neil Henderson:

manage your tax liability. Yes, Erik Thank you for that word. when you sell an asset.

Erik Oliver:

Sure. So, um, there's a couple of things. One is obviously we've, uh, most of you guys have heard of 1031 exchanges, so they work great hand in hand with cost seg because you buy an asset, you do a cost segregation study, you get this gigantic write off. And then when you sell that asset in, in a few years, if you 1031 exchange, you're just pushing your depreciation recapture and your capital gains into the next property. So a lot of investors will buy an asset, 1031 exchange, 1031 exchange, 1031 exchange. And then unfortunately we all die at some point. And then we hand those properties down to our heirs. If they're, behave, speaking of my son, if he behaves, he may get something when I die and he doesn't have to pay tax on that because he gets a step up in basis and there's no tax on that. And so that's one method is, you know, the 1031 exchange. You know, one we were talking about before we got on the call here was the, um, the opportunity zone. So if you have a large capital gain event, um, there's something called opportunity zones that you should look up where you're able to defer some of your capital gains tax into one of these opportunity zones. And if you can put it into a project in an opportunity zone and you significantly improve that project, there's all kinds of tax benefits when you. When you pull out of that opportunity zone. So, um, something else to look into, but those are kind of the two that, that I'm most familiar with.

Neil Henderson:

Uh, we, we actually, I can't talk about in details, but we have a asset coming up in the pipeline that is in an opportunity zone. We're very excited about it. So yeah,

Erik Oliver:

some great benefits there.

Neil Henderson:

Well, Erik Oliver, thank you for like demystifying cost segregation studies for us. I know that, uh, I know at least two people who have gotten a lot of this, myself and a friend, and I know a lot more people have gotten a lot from it as well. If people want to reach out to you and find out more about you, what would be the best way for them to do that?

Erik Oliver:

Yeah, so you can just email me, my email is just Erik with a K, it's erik@costsegauthority.com, um, or you can go to our website, which is just www.costsegauthority.com. Um, but please use me as a resource. I would love to hear from you guys. I would love to answer. Please don't call me and ask me questions about child tax credits or earned business. I don't know that stuff. But if you have a depreciation question, I'll share with you a quick story. My best depreciation question I got was from a gentleman in Milwaukee who has a I don't even know what you call it, a deer breeding farm. They breed deer and then people go out on their property and shoot these big bucks. Like a kind of a hunting lodge, almost. Hunting lodge, yeah. And he's like, how do I depreciate these mule deer? And I'm like, you know what? That's the first time I've been asked that question. I don't know the answer, but I can get the answer for you. So I was able to get him the answer. So I get asked all kinds of questions on depreciation. Feel free to use me as a resource. Um, send me an email, ask me questions. Um, if you've got properties you're looking at, or you're looking to invest in. We can do it before you even own the property, send me the address, I can tell you what your tax savings would look like on a property like that, and then that may be something that you can use in your, you know, return on investment equation and figure out, yeah, this is, you know, if I'm going to get a big chunk of this back, maybe it's worth me investing in this property. So, um, yeah, please use this as a resource. We'd love to help any way we can. Okay,

Neil Henderson:

my last question. What's how what's the depreciation schedule on mule deer?

Erik Oliver:

I don't remember.

Neil Henderson:

Oh, no,

Erik Oliver:

I want to say, I want to say, I don't remember. I actually I'll be lying to you if I make up a number. So I don't remember. But we have a book, the IRS publishes a book, it's thousands of pages. And it has Everything that you can imagine and what the depreciable life is. And so you just have to find a category that makes the most sense. There wasn't actually a category for mule deer or bucks, but there was a category for livestock. I think is what we ended up using was a category for livestock. But gotcha.

Neil Henderson:

Gotcha. Anyways, great stuff. All right. Well, thank you, Erik for sharing with us today. It was great talking with you.

Erik Oliver:

Oh yeah, no problem. Thank you for having me. You have a great rest of your day. All right, you too. Take care. Bye bye.

Neil Henderson:

Thank you so much for listening to this episode of the Truly Passive Income podcast. If you liked the show, if you think it would be useful for someone else, the greatest compliment you could give us would be to share the episode with a friend and leave us an honest review wherever you listen to podcasts. If you have any questions, please don't hesitate to let us know on Twitter at Truly Passive. And remember with Truly Passive Income comes freedom of time, place, and the freedom to pursue your higher purpose.