EP 234: Unlock Tax Savings with Cost Segregation: Sean Graham Offers Exclusive Discount for Listeners

[00:00:00] Hello, and thank you for joining us today on The Gentle Art of Crushing It Show, where we focus on learning and sharing with our listeners all there is to know about how to create success in our lives. This show stands on the shoulders of giants. Our mission is to empower and inspire our listeners to create the life of their dreams whilst having a blast in the process. Let's celebrate life together. Welcome to the show.

[00:00:28] Welcome back to The Gentle Art of Crushing It Podcast. My name is Randy Smith, and I'll be your host today. And I'm really excited to have a friend with us today, Sean Graham. You guys might remember Sean back in the day. He was actually one of our co-hosts as well. Sean is the founder of Maven Cost Segreg and Maven Equities. He's a CPA, he's an active investor, and he's just an all around nice guy. So Sean, welcome to the show. Welcome back to the show.

[00:00:55] Hey, yeah. Thanks for having me. I'm super excited to be here. I think the last episode I hosted this podcast must have been over a year ago now. So it's good to be back. And yeah, I'm glad to see that you're still adding value on a continual basis with these podcasts.

[00:01:14] Love it. Love it. Well, let's jump in with our same question we asked all of our guests at the beginning. How do you see today's market conditions impacting opportunities for the passive investor?

[00:01:25] I'm excited. I'm very excited. I think there's a lot of green space, a lot of opportunity these next coming years, and we're going to see what happens here.

[00:01:40] But I think interest rates obviously play a huge role on the market. Those have really been steady now recently.

[00:01:50] I'm sure that Fed would love to lower those, but it's got to be the right conditions. But I don't see it. I don't see them going up anymore. Now, could they? Yes. But I don't see that happening.

[00:02:02] So I think that it's put a big pause on the market. Deals are still getting done, but not as much.

[00:02:11] So the people that are looking for investment opportunities now, I think there'll be a lot of opportunities in these coming years.

[00:02:19] Now, it's all speculating. I don't know, right? It could go the exact opposite way. But internally, I feel excitement.

[00:02:28] Are you interested in real estate investing but don't know where to get started or think you don't have the time or money?

[00:02:34] Are you stuck in your W-2 because the golden handcuffs make it hard to walk away?

[00:02:38] If this sounds like you, check out impactequity.net and schedule some time to talk with the founder, Randy Smith.

[00:02:45] Randy went from massive income to leaving his W-2 through passive income, and he can help you do the same.

[00:02:52] www.impactequity.net.

[00:02:55] Honestly, I'm surprised as a Kaseg guy that we didn't talk about bonus depreciation in that first question.

[00:03:02] We didn't talk about the change in kind of the political environments and the impacts there.

[00:03:07] But I suspect we'll get into that during this call.

[00:03:09] Yeah.

[00:03:09] No, no, no. I can touch on that.

[00:03:10] You know, it's funny because, look, I don't go one way or the other in terms of politics.

[00:03:17] I think both sides, both parties, like they are pro-business at the end of the day.

[00:03:24] But and there's always going to be opportunity.

[00:03:25] I think it's like what you make at it.

[00:03:27] That being said, I think that there is a strong chance that bonus depreciation comes back at 100 percent in the next coming years.

[00:03:38] If you go back and you look at like the Trump administration back in 2017, right, he took office.

[00:03:44] And by September of 2017, 100 percent bonus depreciation was put into effect.

[00:03:51] And that lasted five years.

[00:03:52] And then it started phasing out like 20 percent every single year.

[00:03:55] So this year in 2024, we're down to 60 percent.

[00:03:59] In 2025, it will be down to 40 percent.

[00:04:02] But, you know, before 100 percent went in, it was at 50 percent bonus depreciation for a couple of years.

[00:04:08] Right. So it's always changing.

[00:04:10] There's always going to be some sort of bonus depreciation every single year.

[00:04:13] It'll change.

[00:04:14] But I think that there is a strong chance that that comes into effect.

[00:04:19] And part of that is because they have control to pass it on multiple sides.

[00:04:28] So we'll see what happens.

[00:04:30] There's even a chance that works retroactively where they say, hey, you can go back and actually, you know, catch up for any depreciation that you didn't have previously, like missed depreciation.

[00:04:42] That's the bill that they were trying to pass before.

[00:04:45] And they decided to wait, wait till after the election.

[00:04:49] They didn't want to pass it through before the election.

[00:04:52] But I think now that the election's over with, there's a good chance that this goes through.

[00:04:56] So obviously, I'm a cost seg guy.

[00:05:00] I'm very excited about that.

[00:05:01] That creates a lot of opportunity for everyone.

[00:05:04] And it's an extra incentive.

[00:05:06] And it'll start it'll help kind of heat up the the real estate market.

[00:05:10] So, yes, I am very excited about that, too.

[00:05:14] Awesome.

[00:05:14] Well, yeah.

[00:05:15] No, I think I think it makes sense that we have this discussion today because we're coming to the end of the year.

[00:05:22] It is everybody's on top of everybody's mind is what kind of changes can I make before the end of the year to impact me in a positive way from a tax standpoint.

[00:05:29] So I think it's the timing is really good that we're having this discussion.

[00:05:33] But before we jump into, you know, the nuts and bolts of cost segregation and the benefits and all of that, can can you remind the audience again a little bit more about yourself and your past, your experience, your expertise and and how you landed where you are today?

[00:05:48] Yes.

[00:05:49] So I am a real estate investor.

[00:05:51] That's, you know, what I do.

[00:05:53] I love real estate.

[00:05:54] I'm a self-storage guy.

[00:05:55] I buy and I build self-storage facilities, syndicate self-storage facilities.

[00:06:01] And I'm also a CPA.

[00:06:02] And so I have a cost segregation firm.

[00:06:05] I don't do full tax practice.

[00:06:07] I'm not doing tax prep or tax, you know, planning.

[00:06:11] But I do help with tax strategy, per se.

[00:06:13] Right.

[00:06:13] That's mostly around how investors, whether passive or active, can help take advantage of appreciation and bonus depreciation loss, too.

[00:06:23] Really, my goal is to help you lower your taxable income, pay less tax.

[00:06:30] And a lot of that has to come comes down to real estate and the rules around depreciation.

[00:06:35] So I approach everything as an actual investor myself.

[00:06:41] Right.

[00:06:41] These are strategies that I personally use.

[00:06:44] I have used.

[00:06:45] And I'm on I'm on both sides of it.

[00:06:49] Awesome.

[00:06:50] Yeah.

[00:06:50] Thank you for going going through that.

[00:06:52] I thought it was important to kind of share with the audience your background, that you actually were an active or are an active CPA.

[00:06:59] You were practicing in a firm for a number of years.

[00:07:03] You've got an extensive amount of experience.

[00:07:05] And you've just been able to bring that or marry that into your real estate activities to create some unique offerings and some unique experience for your investors and other investors alike.

[00:07:15] Let's jump in.

[00:07:15] Can you share at a very high level what a cost segregation study is and why somebody might want to do that for the maybe the new or newer passive investor or active investor that might be interested in this?

[00:07:27] Sure.

[00:07:28] Sure.

[00:07:28] So IRS requires you to depreciate any type of investment property.

[00:07:35] So we're not talking about primary residences.

[00:07:37] We're talking about rental properties or whether that's office space or it's a single family home, a self storage facility, a hotel, whatever that is, an investment property.

[00:07:46] They require you to depreciate that over X amount of years for residential properties.

[00:07:51] It's over 27 and a half years, meaning like it's primarily used for people living there.

[00:07:55] So apartment complexes, single family homes, residential properties or more commercial properties that don't have people living there.

[00:08:04] Self storage facilities, office space, strip malls, whatever that might be.

[00:08:08] You depreciate those over 39 years.

[00:08:11] What we do is we say, hey, IRS, that's fantastic, but not everything actually depreciates over 39 years or over 27 and a half years.

[00:08:23] In fact, a lot of the components in this building or this property can be depreciated over 15 years, some of them over seven years, some of them over five years.

[00:08:34] And further, like a lot of it is eligible for bonus depreciation in year one.

[00:08:39] And so our job is to accelerate the amount of depreciation into earlier years.

[00:08:46] So if you look at it like from time value of money stance, you get the same amount of total depreciation in the end, right?

[00:08:54] But what we're doing is we're weighting it more heavily into years one, especially years one through five.

[00:09:00] You get a lot more depreciation then.

[00:09:02] So I always ask is like I say, hey, Randy, if I offered you a dollar today or a dollar in 30 years or a dollar in 40 years, what would you rather have?

[00:09:13] And naturally you say, I'd rather the dollar today, right?

[00:09:17] Sure.

[00:09:17] So that's the same thing here is that we are accelerating the benefits.

[00:09:21] We're front-loading the depreciations that you get these depreciation write-offs now and you can take advantage of them now.

[00:09:31] And it helps a lot of real estate investors.

[00:09:34] You know, I think people who aren't as familiar, they may wonder like why don't real estate investors, like why don't they pay any taxes?

[00:09:42] And a lot of it comes down to depreciation and what you're able to do with that and you're able to offset your income.

[00:09:48] And the rules are set up so that Paris wants you to keep growing the economy, keep reinvesting in real estate, providing housing for people.

[00:09:58] Real estate is the backbone of the economy, even in the virtual world that we're in.

[00:10:05] You know, it affects a lot of people, a lot of industries, including me, like cost seg, tax investors, your investors, syndicators such as yourself.

[00:10:16] And then obviously the users as well, real estate agents, brokers, like everything.

[00:10:21] So it's a huge part of the economy and the IRS code set up in a way to incentivize you to keep investing in real estate.

[00:10:31] Yeah.

[00:10:32] I like how, you know, like Tom Wheelwright suggests how the tax code is really just kind of a playbook for you to leverage.

[00:10:40] And it's really it's the government telling you how they want you to use your dollars, how they want you to invest your dollars to become essentially a partner with the U.S.

[00:10:50] government, because quite often they are the biggest investor in most of your projects because of the tax benefits that you're getting and because of the loans that you get on them as well.

[00:10:59] So when you're looking from like mechanically how this works, like you actually have a staff that goes out and reviews these properties or what does it look like if somebody to reach out and say, I want to get a cost segregation done?

[00:11:15] What happens?

[00:11:17] So what we do is first gather basic information.

[00:11:20] You know, what's the address?

[00:11:22] What's the purchase price?

[00:11:23] When did you place it into service?

[00:11:25] Meaning, you know, it could be the day you purchased it, right?

[00:11:28] It was already being rented or it could be that you bought the property.

[00:11:32] Then you started renting it out months later.

[00:11:34] Or maybe it was a primary residence and you converted it into a rental years later.

[00:11:38] I don't know.

[00:11:39] So we get the in-service date.

[00:11:41] We want to gather capital expenditures, which are really like improvements, not just basic repairs and maintenance, but improvements that need to be depreciated.

[00:11:50] And we, you know, we assign a land value.

[00:11:53] Sometimes they will have that through appraisals or we can gather information to use from like property tax assessments.

[00:12:00] But we come up with a depreciable basis, right?

[00:12:03] Which is, again, purchase price plus improvements, less the value of the land.

[00:12:07] And what we do is we also look at photos and we create an estimate for you.

[00:12:13] So we say, hey, you know, Randy, you have this $10 million syndication here.

[00:12:19] We, you know, we reviewed it.

[00:12:21] We looked at pictures.

[00:12:22] We have all the, you know, we have this documentation.

[00:12:23] And our estimate shows that, you know, maybe 10% goes into five-year life.

[00:12:30] 15% goes into, um, 15, 5% goes into, sorry, 10% goes into five-year life.

[00:12:38] Another 15% goes into 15-year life, right?

[00:12:40] And we say we have all this depreciation.

[00:12:43] A lot of that's eligible for year one write-off, right?

[00:12:46] And we'll give you an estimate saying this would be the depreciation expense to approximately expect.

[00:12:52] And this would be the tax savings based on X tax rate, right?

[00:12:57] And from there, we have a proposal.

[00:12:58] And then we would engage in services and take it to the next step.

[00:13:03] Awesome.

[00:13:04] So they get, they provide some basic information to you.

[00:13:07] You provide an estimate as to what that'll be.

[00:13:09] And then if, if they decide to move forward with you, what happens then?

[00:13:14] Do you, do you have somebody go out to the property or is this done remotely?

[00:13:19] Yes.

[00:13:19] So, uh, for the majority of the time we have, we send somebody onsite.

[00:13:23] So we send somebody onsite, take photographs of the property.

[00:13:27] Uh, they work, you know, closely with us.

[00:13:29] They know exactly what to look for in terms of pictures to take and how many photos to

[00:13:35] take.

[00:13:35] They, they know the property.

[00:13:36] So we can do this anywhere in the country.

[00:13:39] And we offer a couple of different types of studies, right?

[00:13:42] We do have like a lower priced study for like single family homes, uh, more basic types of,

[00:13:48] of properties.

[00:13:49] And for those we do virtual, right?

[00:13:52] Or we rely on the customer to provide photos.

[00:13:54] But for commercial properties, generally speaking, yeah, we do, we do onsite visits.

[00:14:01] And send somebody there, have the photographs taken.

[00:14:05] And, um, we have to gather basic information from the client too, right?

[00:14:09] Like appraisals.

[00:14:10] You gather appraisals.

[00:14:11] We need to gather purchase documentation contracts.

[00:14:15] So we actually know what that, the net price was, you know, in terms of whether sellers

[00:14:20] credits, anything like that.

[00:14:22] And we have to get land approval value from you.

[00:14:26] Like we don't assess land value, but we have ways to extract land value.

[00:14:30] Like sometimes that's in an appraisal.

[00:14:32] Sometimes we can take like the, the allocation amount from a property tax assessment and apply

[00:14:38] that to the purchase price.

[00:14:40] So there's different things to go through there.

[00:14:42] And then our team of engineers, they're doing all of the work on the backend in terms of

[00:14:47] the takeoffs, the measurements, signing everything into the correct, uh, lifespan category.

[00:14:56] So, um, they're really the experts in terms of knowing what goes where, I guess if you take

[00:15:03] a step back idea, like I said before is to say, Hey, IRS, like not everything takes 39

[00:15:10] years to depreciate or 27 and a half years to depreciate.

[00:15:13] Right.

[00:15:14] The structural components generally do.

[00:15:17] So the roof, the walls, the foundation, plumbing, like most of that stuff, it's assigned

[00:15:24] to longer term lifespans, but we go pull out the non-structural components.

[00:15:32] That aren't necessary for the building to let's just stay as a structure.

[00:15:39] Right.

[00:15:40] So like we can pull out kitchen cabinets, put those towards five year life, or we could

[00:15:45] pull out ceiling fans.

[00:15:46] Right.

[00:15:46] And they go towards five year life.

[00:15:48] Like certain lighting could go towards five year life.

[00:15:51] There's things like that.

[00:15:52] And so our job is to be the experts in knowing what we can pull out and allocate into a shorter

[00:15:59] lifespan.

[00:16:00] We want to extract as much as possible.

[00:16:02] The same thing with the outdoors.

[00:16:04] So outside, like any site improvements, talking fencing, um, maybe asphalt parking lots, things

[00:16:12] like that landscaping that can all that's non-structural right to the actual building that can go to 15

[00:16:17] year life.

[00:16:17] And so those are the type of things that are eligible for bonus depreciation.

[00:16:22] So our job, you know, is to do a deep dive into all of it and know, know the code, know

[00:16:29] the rules and know what goes to what and properly assign, assign values to those components.

[00:16:36] Okay.

[00:16:36] And so if somebody owns a property that they bought two or three years ago, is that still a

[00:16:43] candidate for this?

[00:16:44] Or is this something you have to do within the first year of acquisition?

[00:16:48] But absolutely is a candidate for it.

[00:16:51] So, I mean, we do something called, it's a look back study.

[00:16:54] So, um, the IRS says that if you want to go, like, let's say that you took just straight

[00:17:02] line depreciation, you never did a cost seg study.

[00:17:04] And then you want to go back and do a cost seg study on a property that you had placed in

[00:17:10] service years ago, and you're just doing straight line depreciation on it.

[00:17:13] Well, we can do a study that shows, Hey, this is the amount of depreciation that you took.

[00:17:18] This is what you should have taken.

[00:17:20] Here's the difference.

[00:17:21] And that difference can actually be taken in the current year.

[00:17:25] Remember, a form called 315, which is a change in accounting method.

[00:17:30] It says, Hey, IRS, we're changing the accounting method from straight line depreciation to accelerated

[00:17:35] depreciation.

[00:17:36] Here's the differences in the numbers.

[00:17:38] Um, it's kind of a complex form, but, uh, we can help with that as well.

[00:17:42] And it allows them to take it, you know, in the current year, you could go back, redo prior

[00:17:49] tax returns, but very few people want to do that.

[00:17:52] It's kind of just, you know, could be opening up a can of worms, right?

[00:17:57] And so it's better to just do this in the current year, figure out the difference and

[00:18:02] then apply it to, into the current year to take advantage of the, those depreciation

[00:18:06] losses.

[00:18:07] And I, my understanding too, is that I think a lot of people assume this is something

[00:18:12] you'd probably have to do in the tax year, but the tax year doesn't necessarily end 1231.

[00:18:17] Like there's some leeway there.

[00:18:19] Like if you did buy an asset this year and you want to do a cost segregation study on it,

[00:18:25] it doesn't have to be completed by 1231.

[00:18:26] Is that correct?

[00:18:28] Correct.

[00:18:28] It just needs to be completed by the time that you are filing your taxes.

[00:18:31] So your CPA needs this information, needs the study in order to file your taxes correctly.

[00:18:37] So if you're filing, um, you know, mid April, April 15th, well, then you would

[00:18:42] need the cost segregation study done before April 15th.

[00:18:45] Right?

[00:18:45] So for, let's say you place it in service in 2024, as long as we get it done before the

[00:18:51] tax deadline and before your CPA is submitting the work, then, uh, we will, we will be good.

[00:18:57] Now definitely get this.

[00:18:59] We have busy seasons, so we get a lot busier towards the, the tax, you know, year.

[00:19:04] And it's kind of one of those things.

[00:19:05] It's like, to me, I encourage people to get it done because we're less busy outside of

[00:19:13] the jam for tax and you'll be less busy too, right?

[00:19:16] When everybody else is like scrambling to get their tax returns done.

[00:19:19] This is just another one of those things.

[00:19:21] So it's great to do it pretty much after you close the property.

[00:19:26] If you close the property, that should be like one of the next steps is go get an estimate

[00:19:30] and see if, uh, you know, a depreciation accelerated depreciation would make sense for, for your

[00:19:36] situation.

[00:19:38] And almost like as you're doing your performance to whether you should purchase the asset or

[00:19:43] not, include these expenses and fees in those estimates on the front end as just part

[00:19:48] of normal businesses.

[00:19:50] Every time you buy a new asset, do a cost segregation study and build that into the savings.

[00:19:54] So let's, um, yeah, maybe, maybe talk about that too.

[00:19:57] Is this a, is this a $2,000 project, $50,000 project?

[00:20:01] Like what do these things cost?

[00:20:03] Like single family, does it make sense to do it if it's under $200,000?

[00:20:08] Like all of those type of fee numbers I'm curious about.

[00:20:12] So previously I mentioned that we have a couple of different types of studies.

[00:20:16] And so we have a modeling study, which is good for single family homes.

[00:20:22] We do modeling studies for basic self-storage facilities to like non-climate controlled

[00:20:28] outdoor ones.

[00:20:31] The smaller residential properties.

[00:20:34] Those are good.

[00:20:35] Those are less expensive, right?

[00:20:37] We're not talking of thousands of dollars.

[00:20:39] Like I think, you know, we're not talking $5,000 or anything that we're talking about

[00:20:43] a thousand dollars.

[00:20:43] And so it's kind of the 80, 20 where we are focused more on the big ticket items.

[00:20:48] We're not going into, we're not going to pull out every single little detail as we would

[00:20:52] in a detailed study, right?

[00:20:55] But we're getting you a lot of the depreciation.

[00:20:57] So it's kind of the 80, 20 benefit of, you know, getting 80% of the value, 20% of the

[00:21:02] cost.

[00:21:03] And so those are good for single family homes, residential.

[00:21:06] And I think a lot of people, they just don't get them because they don't want to spend

[00:21:10] five grand on a study.

[00:21:12] And I understand why.

[00:21:13] So this is a good option for those people.

[00:21:16] Now, if you have a larger Airbnb and there's a swimming pool, and perhaps you bought it

[00:21:21] with a bunch, a lot of furniture and, you know, you have a lot of special things in

[00:21:28] this Airbnb, well, then you're going to want to do a detailed study, right?

[00:21:32] That might be a little bit, a little bit different for a short-term rental.

[00:21:35] And so those range, they could be $4,000 all the way, you know, it could be above 10%.

[00:21:42] $10,000 just depending on the scope of the actual work, right?

[00:21:46] So if we're talking about like a large apartment complex, right?

[00:21:51] Tens of millions of dollars.

[00:21:53] Well, studies can go up to 20 grand, right?

[00:21:56] And so it's really kind of depends on the scope of the work and what we're doing, and how long

[00:22:03] it's going to take us to complete it.

[00:22:05] And I think for a lot of smaller investors, you know, we do studies somewhere.

[00:22:13] It's like around the, under the $10,000 range, I would say is the majority of the work that,

[00:22:20] that comes in.

[00:22:21] And then you have the exceptions to that, which are large hotels or the large strip malls

[00:22:28] or the large apartment complexes.

[00:22:31] And those are, those are more expensive.

[00:22:34] Okay.

[00:22:35] So somebody who owns just kind of full spectrum here is somebody who owns four or five single

[00:22:40] family homes that are, you know, three to $500,000 a piece.

[00:22:44] Maybe it's a thousand or $2,000 to do this, but the cost savings or tax savings could literally

[00:22:50] be tens or even hundreds of thousands of dollars.

[00:22:53] Correct?

[00:22:55] Absolutely.

[00:22:55] So, you know, it's kind of, it depends on the asset class in terms of how much depreciation

[00:23:01] you're going to be able to pull out of it.

[00:23:03] And so what I mean by that is that a warehouse, empty warehouse is just a shell.

[00:23:08] It's just a shell of a building.

[00:23:10] There's not a lot to extract out of that than to put into shorter lifespan, right?

[00:23:17] But an Airbnb that's furnished and everything, there's a lot of things in there that we can

[00:23:21] extract, pull out and put towards, you know, a shorter life class.

[00:23:25] So the more complex the structure is or the property is, the more that we're going to be

[00:23:31] able to pull out in terms of like a detailed study and allocate towards that.

[00:23:35] So I'd say many, several asset classes, like self-storage or apartments, things like that,

[00:23:43] like somewhere around 30% goes towards shorter lifespans, like five year, seven year, 15 year

[00:23:51] life.

[00:23:51] And those are the depreciation amounts.

[00:23:55] So like, let's say we extract, let's say we extract $200,000 out of a $1 million basis,

[00:24:02] okay?

[00:24:02] Into a shorter lifespan, which is 20%.

[00:24:04] It's pretty conservative, but let's just say $200,000.

[00:24:07] Well, if you are at a, um, a 37% tax rate, well, then you're looking at, what is that?

[00:24:15] $74,000 in tax savings.

[00:24:18] So it's the depreciation expense or amount times your, your tax, your personal tax rate.

[00:24:25] Um, and there's different rules, right?

[00:24:28] In terms of like what that can offset.

[00:24:31] Generally speaking, let's say as a passive activity, passive losses, like depreciation,

[00:24:36] offset, passive, other passive income.

[00:24:39] So, um, let's say you have a sale, you know, on one of your rental properties over here and

[00:24:49] you have this large capital gains, right?

[00:24:51] And then you have another, uh, another rental property that you took accelerated depreciation

[00:24:56] on from a costing study where you can use those depreciation losses to help offset the

[00:25:02] capital gains from, from the other property.

[00:25:05] And so it's really a deferral strategy.

[00:25:08] It's just trying to, it's deferring these taxes into the future and potentially forever.

[00:25:13] If you keep playing the game and you keep reinvesting into real estate.

[00:25:17] Now, if you stop playing the game and you just sell all of your properties, well, you're going

[00:25:21] to eventually have to pay those taxes because it's not a permanent expense.

[00:25:25] It's a tax deferral strategy.

[00:25:30] Okay.

[00:25:30] Thank you.

[00:25:31] Yeah.

[00:25:31] Thank you for bringing that up as well, because there's recapture that comes into

[00:25:34] play as well when you sell assets.

[00:25:36] But even if recapture occurs, my understanding, the tax benefits of the passive losses in early

[00:25:44] years actually are greater than the recapture percentage that you could potentially pay, uh,

[00:25:50] at the end of the cycle.

[00:25:51] Can you talk to that a little bit?

[00:25:52] And yet, while you are a CPA, we're not giving tax advice here.

[00:25:56] Of course, we're, we would suggest people talk to their own CPA and get their own legal

[00:26:00] tax advice.

[00:26:01] But what can that look like?

[00:26:03] Because a lot of people throw recapture around as kind of the scary, scary monster that's

[00:26:08] going to come in and get you someday.

[00:26:10] That's not as, it's not always as scary as you might, might think.

[00:26:15] So let's say Randy, that you make a million dollars and you have, uh, you're in a 37% tax

[00:26:24] bracket.

[00:26:25] Okay.

[00:26:25] And then you took, you had these syndications that you did and you had a million dollars

[00:26:30] in depreciation, which as a real estate professional, you're allowed to offset, you know, your income

[00:26:35] with it and it wiped away your taxable income.

[00:26:38] So now your taxable income is at zero.

[00:26:40] Right.

[00:26:41] And so let's say later on, you sell the syndications that, you know, and you have to pay depreciation

[00:26:46] recapture.

[00:26:47] Well, the max depreciation recapture rate, it's either the max of whatever tax bracket you're

[00:26:52] in or 25%.

[00:26:54] So you're paying, right.

[00:26:56] Let's say five years, five years later, you're going to pay, uh, you know, 25% or $250,000

[00:27:03] in taxes, as opposed to in year one paying $370,000 in taxes or 37% rate.

[00:27:09] So can really help you not only from the time value of money, also from whatever tax bracket

[00:27:17] that you are in.

[00:27:17] And further, like ideally you don't pay those taxes anyways, because you either 1031 exchange

[00:27:24] into another property or you, you know, eventually your kids inherit the property, right.

[00:27:32] Or, and then the, the resets, um, or you have enough depreciation from your other investments

[00:27:39] that that helps offset the depreciation recapture in the capital gains.

[00:27:44] Anyways.

[00:27:44] So that's the idea is just to keep playing real, you know,

[00:27:49] And kind of going back to your point earlier, would you rather have a dollar today or a dollar

[00:27:53] in five or 10 or 15 years?

[00:27:55] Right.

[00:27:55] So take the earnings today.

[00:27:58] You can always plan and strategize for tax purposes in the future.

[00:28:01] And yeah, that's got, what's really exciting to me.

[00:28:03] So when I was in my W-2, of course, as a W-2 earner, as your primary source of income,

[00:28:08] you can't take those passive losses against your active income.

[00:28:11] But I was in a unique situation where I left my W-2 mid year and became a sales or a real estate

[00:28:18] professional for that year because of my activities for the remainder of the year.

[00:28:23] So all of my passive losses that were following me like a wave from year to year to year,

[00:28:28] I was able to apply to my active income.

[00:28:30] And I also sold a bunch of single family homes that year.

[00:28:34] And the net impact was that I ended up paying about 4% federal taxes that year on one of my highest

[00:28:42] income earning years of my life, which was a far cry from 37% the year prior.

[00:28:48] It's crazy, right?

[00:28:50] And that helps you kind of on the entrepreneurial journey as well as you're, you know,

[00:28:54] you get started and everything.

[00:28:56] So, I mean, similar for me, I've been a real estate professional for several years now.

[00:29:03] And it's, you know, it certainly helps me.

[00:29:06] And now my wife is involved as well.

[00:29:10] And that's what she's doing primarily too.

[00:29:13] So it's exciting.

[00:29:14] There's a lot of advantages with it.

[00:29:16] Yeah, very cool.

[00:29:18] Well, let's see here.

[00:29:19] You know, there's this strategy that I hear a lot about and I'll throw it out.

[00:29:22] I'm curious your thoughts on it, but there's this like single short-term rental strategy

[00:29:27] that I hear a lot of people talk about leveraging for high-income W-2 people, maybe doctors,

[00:29:33] lawyers, high-income salespeople.

[00:29:35] Can you talk about that strategy at a very high level?

[00:29:39] Because it's, to me, it's super exciting and something I think more people should be doing.

[00:29:43] Absolutely.

[00:29:44] So what, you know, often referred to as the short-term rental loophole.

[00:29:49] So what this means is that, as I've mentioned a couple times, the IRS says, hey, real estate

[00:29:54] is a passive activity.

[00:29:56] Passive losses offset passive, you know, income.

[00:29:59] So meaning a rental property depreciation will offset your rental property income or passive

[00:30:07] or capital gains from the sale of a rental property, right?

[00:30:11] Like that's all passive.

[00:30:13] Then you have your active income.

[00:30:15] And so active income and your earned wages, your W-2 wages, right?

[00:30:19] And so in order to use depreciation losses to offset active income, you either need to be

[00:30:27] a real estate professional, you or your spouse, or there's a strategy called the short-term rental

[00:30:32] loophole where basically what it does is it allows you to take the depreciation from that

[00:30:37] rental property and use it to offset your active income.

[00:30:40] Reason being is it's no longer considered passive if you meet the qualifications.

[00:30:46] And they say, okay, well, you're actually running a business.

[00:30:49] So you have to have average rental days of seven days or less.

[00:30:53] So it has to be turnover.

[00:30:54] And really, you have to materially participate.

[00:30:58] And so what that means is that you have to either be the one like managing everything,

[00:31:04] put in 500 hours in the year or at least 100 hours and more than anybody else.

[00:31:10] And so that allows you to take these short-term rental depreciation losses and use them to offset

[00:31:17] W-2 income.

[00:31:18] So you'll see a lot of high-income earners or doctors who they go buy an Airbnb or short-term

[00:31:26] rental.

[00:31:26] And then their spouse will manage it and do the work, do the turnover work.

[00:31:31] And they qualify for this being an active business that they materially participated in.

[00:31:39] And they take those depreciation losses and they use it to offset that doctor's salary.

[00:31:44] Awesome.

[00:31:45] So they literally could buy a million-dollar short-term rental.

[00:31:49] Going back to your 20% piece, they could potentially get $200,000 in passive losses.

[00:31:54] That could offset $200,000 in active income.

[00:31:58] And they can do that every single year.

[00:32:01] Right.

[00:32:02] And take it even further.

[00:32:04] Like, I mean, sometimes you're getting closer to 40%, you know, just depending on the actual

[00:32:09] property.

[00:32:09] So it could be $200,000, $300,000, $400,000.

[00:32:13] Like it really just depends on the actual property.

[00:32:16] And that's why we do the estimates ahead of time so that we have a decent idea of what you

[00:32:22] should expect.

[00:32:24] But yes, if you keep buying rental properties, then you're going to have a lot of depreciation

[00:32:30] losses.

[00:32:31] The key is when you're making...

[00:32:33] If you're making a lot of money...

[00:32:34] I was talking to a doctor the other day and he was making seven figures.

[00:32:41] And he has to buy a lot of real estate in order to get that amount of depreciation to

[00:32:46] offset all of it.

[00:32:47] Now, a spouse could qualify for the real estate professional status or they could do the short

[00:32:51] term rental strategy, right?

[00:32:53] Either way.

[00:32:54] But you just have to buy a lot of real estate in order to do that.

[00:32:59] I think one other thing to kind of, you know, like that's potential is like if you are a real

[00:33:06] estate professional and you do the...

[00:33:08] There's a grouping election which says like, hey, we're not looking at this, the participation

[00:33:13] hours on that property by property basis, but we're looking at it as a whole.

[00:33:19] Well, then people like who are even if they're qualified for real estate professional status,

[00:33:24] they can start taking advantage of the depreciation pass-through losses from syndications.

[00:33:30] You're a syndicator, you know, you have all the depreciation losses, you're passing them

[00:33:34] on to your investors, they can take advantage of that.

[00:33:36] The thing is, even if you're not a real estate professional, right?

[00:33:40] And you're just materially participating in the syndication, you're just a passive LP,

[00:33:46] right?

[00:33:46] Investor, limited partner.

[00:33:48] And let's say you invest in multiple syndications.

[00:33:51] Well, the depreciation losses that are passed through to your investors, those are passive

[00:33:57] losses.

[00:33:58] And when a syndication sells, right?

[00:34:00] You have a gain on that.

[00:34:02] Well, the depreciation losses from the other ones can help offset that.

[00:34:06] So people will use them to balance each other out and keep investing in syndications, which

[00:34:12] is a very good strategy as well.

[00:34:16] Yeah, it's interesting.

[00:34:18] You know, I mentioned when I left the W-2, I had this wall of kind of passive losses that

[00:34:23] were chasing me.

[00:34:23] And I try to teach the folks that I work with that if you get in a regular cadence of investing,

[00:34:30] even if you're investing $25,000 or $50,000 or $100,000 a year for five years, if you're

[00:34:36] a high-income W-2 earner, you could have $200,000 or $300,000 or $400,000 of passive losses

[00:34:42] that are going from year to year to year.

[00:34:44] And as deals go full cycle, you're going to have some recapture.

[00:34:48] But if you keep reinvesting those dollars, you're going to get more passive losses to

[00:34:53] offset those gains.

[00:34:55] And then at some point when you do leave the W-2, you're going to have a windfall year where

[00:35:00] all of those passive losses could catch up and offset that active income if you can do

[00:35:05] the real estate professional status that year.

[00:35:09] There's just a lot of powerful tax strategies and advantages of investing in this space.

[00:35:15] And really, Sean, that's why I wanted to have you on the show because you know this

[00:35:18] better than anybody I know.

[00:35:19] You're passionate about it and you're an active investor.

[00:35:22] There's a lot of cost side guys out there, but very, very few of them are active investors

[00:35:27] just like you.

[00:35:28] So you can really see how this is actually trickling down to your tax forms at the end of

[00:35:34] the year.

[00:35:35] Randy?

[00:35:36] Yeah, this has been great.

[00:35:37] Yeah, I love it.

[00:35:39] We all love real estate.

[00:35:41] So is there something that I should have asked about cost segregation that I haven't?

[00:35:45] Are there any other kind of magic bullets that maybe we should know about or things

[00:35:50] that you're excited about with cost tax?

[00:35:53] I think so.

[00:35:54] You know, estimates are free.

[00:35:56] We do free estimates.

[00:35:57] So I'm not charging you for the estimates.

[00:36:01] I, you know, again, I'll either work closely with your CPA, your tax CPA.

[00:36:06] There are other tax CPAs that I work closely with that I can help you if like, depending on

[00:36:11] your situation, who you would actually, I'd recommend you to.

[00:36:16] But I'm happy to talk about, you know, if you're looking at a property or assessing a situation,

[00:36:21] I'm happy to chat with you and take a look.

[00:36:24] I think for your, you know, for your listeners too, I made a discount code just so you know,

[00:36:29] like, so they can get a discount on any cost segregation work that we did.

[00:36:35] And so I did that.

[00:36:36] You know, my website's mavencostseg.com and forward slash Randy.

[00:36:40] Right?

[00:36:40] And so then I know they came from, from you or the general art of crushing it.

[00:36:44] And that will, I'll give them a bit of a discount as well.

[00:36:49] But yeah, I think we covered the basics.

[00:36:53] Hopefully, hopefully your listeners learned something or learned a lot.

[00:36:59] And let's say just, you know, keep, keep investing in real estate and take advantage of the rules

[00:37:07] because you don't need to pay more taxes than you have to.

[00:37:10] So I advise talking to the right people anyways.

[00:37:15] And those are having the correct CPA in your corner too, who's going to help you take advantage of that.

[00:37:23] Yeah.

[00:37:23] And I think that's a good point.

[00:37:25] There are, and maybe you can provide some insight here.

[00:37:29] A lot of people in this space are working with tax professionals that don't know

[00:37:34] the many benefits of real estate because they just don't focus on it.

[00:37:38] It's no where on their part.

[00:37:40] They just don't spend 60 to 80 hours a week like a lot of CPAs do working with real estate professionals.

[00:37:47] So I'm curious, as we shift into some of our final questions that I'd like to ask everybody,

[00:37:52] maybe I'll kind of restructure these a little bit.

[00:37:54] But I'm wondering, is there a due diligence question that they could be asking their CPA

[00:38:00] to understand whether they have the skills and expertise in working with bonus depreciation

[00:38:08] and cost segs and all of the tax benefits of real estate investing that might give our listeners

[00:38:15] some insight as to whether they should work with these CPAs or not?

[00:38:19] Sure.

[00:38:19] I think just asking your CPA, what is their experience in terms of working with real estate

[00:38:28] investors?

[00:38:29] And that doesn't mean this person has to be a full-time...

[00:38:31] Like, they just...

[00:38:32] Like, the real estate investor could mean that's all they do, or it could just mean, like,

[00:38:38] that it's somebody who has a W-2 and has rental properties on the side, right?

[00:38:43] But asking how you could take advantage of accelerated depreciation or if a cost segregation study would

[00:38:51] help you and how it can help offset your active income or your W-2 income, right?

[00:38:59] And the truth is, everybody's a human.

[00:39:02] Everybody has different niches.

[00:39:03] They have different expertise.

[00:39:04] And not everyone knows everything.

[00:39:06] And so there's a lot of CPAs in there who just...

[00:39:09] They don't know real estate.

[00:39:11] And that's fine.

[00:39:12] Like, maybe they specialize in something else.

[00:39:14] It doesn't mean that, let's say, the CPA is good or bad.

[00:39:18] It just means that it might not be the right fit for you.

[00:39:22] So I don't say that in terms of, again, like, I don't have a full tax practice, right?

[00:39:26] I don't...

[00:39:26] I'm not looking to do your tax returns or anything like that.

[00:39:30] I, you know, I make a living through cost segregation studies.

[00:39:35] But that being said, you do want to work with a CPA who knows and understands the real estate

[00:39:44] rules and the code.

[00:39:47] Awesome.

[00:39:48] Well, Sean, this has been like super, super valuable.

[00:39:51] I learned some things today.

[00:39:52] And you clearly have your head around this space.

[00:39:55] And there's a lot of competition out there in the cost segregation space.

[00:39:59] But you proved to me once again that doing business with you, not only in this respect,

[00:40:04] but all areas is probably a good choice.

[00:40:07] So yeah, thank you, Sean, for being on the show.

[00:40:09] I do have a couple of other questions I do like to wrap up every podcast with if you got

[00:40:14] a couple of minutes.

[00:40:14] So now keep in mind that our average listener is new or newer to the passive investing space.

[00:40:21] So when asked what a good educational resource would be for that avatar, what would you suggest

[00:40:28] to the newer, newer passive investor?

[00:40:31] Well, I mean, I spend a decent amount on bigger pockets than I think a lot of people do.

[00:40:36] And that's really where I got started in real estate.

[00:40:40] And that's fantastic.

[00:40:41] All of Robert Kiyosaki's books are great.

[00:40:45] And then as you go along, you start building more of a business or you start getting into

[00:40:51] more complexities of like running a team.

[00:40:54] Principles by Ray Dalio is a great book that I really enjoy.

[00:40:58] And one book that I've been reading lately that's non-business related, but I love is

[00:41:02] it's called Meditations by Marcus Aurelius.

[00:41:05] I don't know if you've read that, but it's really about stoicism.

[00:41:09] And I enjoy that.

[00:41:12] It's amazing how you can look back and it's 2000 years ago, but somebody's writing about

[00:41:20] something that's still very relevant to this day.

[00:41:25] So yeah.

[00:41:26] Yeah, I love it.

[00:41:26] As Jim Rome would say, if somebody comes to you talking about new principles run the other

[00:41:31] way, because these principles we run our lives by are just the same principles that have been

[00:41:36] followed and discussed for thousands and thousands of years.

[00:41:39] So yeah, great suggestion.

[00:41:41] I'm a huge fan of Ryan Holiday.

[00:41:43] Anything that he puts out there is just fantastic.

[00:41:45] He actually has social channels that are really, really beneficial as well.

[00:41:50] Right.

[00:41:51] And so Ryan Holiday is, I think he runs some courses and stuff just about stoicism.

[00:41:56] And he talks a lot of his foundation of his work is based around.

[00:42:01] Yep.

[00:42:02] Meditations.

[00:42:03] Meditations.

[00:42:03] Marcus Aurelius, that book.

[00:42:05] And if you're not familiar with who that is, if you've ever seen Gladiator, he is the,

[00:42:12] I guess, what do you say?

[00:42:13] Emperor in the beginning of the movie.

[00:42:17] So that's Marcus Aurelius.

[00:42:19] At least that's his character in Gladiator, but he was a real person.

[00:42:23] Fantastic.

[00:42:24] All right.

[00:42:24] And then, you know, we've been focusing a lot on kind of economics and economic trends.

[00:42:30] I'm curious, are there any books or podcasts around that subject that you've read or listened

[00:42:36] to recently that you might care to share?

[00:42:38] And if not, that's okay.

[00:42:39] Not outside of what I do.

[00:42:40] You know, I kind of stay in my lane in terms of, I think there's a lot of shiny object syndrome.

[00:42:47] And so like the stock market has done fantastic, right?

[00:42:50] I've been looking at it recently and like over the last couple of years, but I think I'm a real estate guy.

[00:42:56] And so like, that's where I spend my time and my energy.

[00:42:59] And if I'm going to go invest in the stock market or I have extra funds, I'm going to stick it in an index fund, right?

[00:43:04] Then I'm just going to let it sit there and go.

[00:43:07] So in terms of the economy, I don't, you know, we don't, again, we can't predict anything.

[00:43:14] We can't predict what's going to happen.

[00:43:16] I think it's just kind of picking your niche and sticking to it.

[00:43:21] To me, the most valuable use of your resources is reinvesting in your own business or your own skill set and your own time.

[00:43:31] If you're on the passive side, it's finding the right syndicator who's doing that and knowing all that stuff such as yourself, Randy,

[00:43:41] and, you know, looking at impact equity and seeing what the opportunities are, right?

[00:43:45] Finding that person who you believe in, who knows the economy and knows where to put your investments.

[00:43:56] Yeah, that's my personal take.

[00:43:58] Okay.

[00:43:58] Yeah, very good.

[00:43:59] And then kind of a couple of fun questions to wrap it up.

[00:44:02] Do you have a recent bucket list item or one you're hoping to check off your list in the near future?

[00:44:07] Oh, I went to a couple of years ago.

[00:44:10] I think it was, yeah, man, the time goes quickly.

[00:44:12] I think the last one we did.

[00:44:13] So I'm a dad.

[00:44:15] I have got a two-year-old and I have another boy on the way.

[00:44:21] Congratulations.

[00:44:22] Yeah, thanks.

[00:44:22] But on the baby, we went on a baby moon before my son was born and we went to Lake Louise in Canada and we went to Banff, Banff National Park up in Canada.

[00:44:33] Yeah.

[00:44:34] And so if you've ever seen like pictures of these like blue lagoons almost like up in the mountains, it's gorgeous.

[00:44:41] I really recommend that.

[00:44:43] So that was kind of a bucket list.

[00:44:45] So.

[00:44:45] I love it.

[00:44:47] Yeah.

[00:44:48] Yeah.

[00:44:48] Very cool.

[00:44:48] There.

[00:44:49] Yeah.

[00:44:50] And I think you and I met just around that time when you were getting ready to go on that baby moon.

[00:44:55] So that is great to hear that.

[00:44:57] That's still the lasting memory prior to prior to that.

[00:45:00] So.

[00:45:01] All right.

[00:45:01] And then our final question I ask everybody, because we are all about investing, specifically passive investing.

[00:45:06] So if you had a hundred grand that you needed to place before the end of the week and you couldn't put it in your own deal, where would you put that hundred?

[00:45:14] I think it all comes down to who you know, like and trust.

[00:45:18] Right.

[00:45:19] And that's what's what it's all about is relationships.

[00:45:22] So I if you, you know, if you have the net worth to do a syndication, then I would do I would do a syndication.

[00:45:31] And so I would go with somebody that, you know, you like your trust.

[00:45:35] Right.

[00:45:36] Um, or I would talk to you.

[00:45:38] All right.

[00:45:38] I would talk to you, Randy, and see, see what opportunities there are.

[00:45:41] Now, you might not be an accredited investor.

[00:45:44] And so you might not have an opportunity there.

[00:45:47] Um, and in that case, I wouldn't force, I wouldn't force anything.

[00:45:53] I guess I know it's not answering your question, but I wouldn't force anything.

[00:45:58] The week would, I would keep reinvesting in, in my own, my own skillset.

[00:46:02] And you don't need to spend a hundred thousand dollars to reinvest in, in your own skillset either.

[00:46:07] So despite what some of these seminars might, might tell you and try to get you to fork over it, you really don't, don't need to do that.

[00:46:14] But, um, I think reinvesting in your own skillset and your own network is, is really the key.

[00:46:50] I love it.

[00:46:50] I love it.

[00:46:50] Reach out to me.

[00:46:51] Let me know.

[00:46:52] Um, Sean at mavencostseg.com is my email.

[00:46:57] So it's spelled the correct way.

[00:46:59] S E A N for sure.

[00:47:01] Correct way.

[00:47:01] I love it.

[00:47:02] Even M M as in Mary, uh, A V E N.

[00:47:06] So mavencostseg.com is my website.

[00:47:10] But, um, yeah, feel free to shoot me an email and then I'll put in the, that link up there as well for any of your listeners to get a discount.

[00:47:18] So that's going to be mavencostseg.com forward slash Randy.

[00:47:22] I'm happy to take a look at any properties that you, you might have or to tack to talk.

[00:47:29] Strategy with depreciation and real estate with you.

[00:47:32] Awesome, Sean.

[00:47:32] Well, very good.

[00:47:33] And for our listeners, as always, we encourage you to continue your education journey.

[00:47:38] But more importantly than that, make the decision to invest in your first passive investment opportunity.

[00:47:43] Uh, both Sean and I would agree that, uh, you will be happy that you'll do, you did.

[00:47:48] And you'll just wish that you had started that much sooner.

[00:47:50] So be for, be sure to join us again next Thursday for another great episode and be sure to like, and subscribe wherever you listen.

[00:47:58] And thanks so much for listening today.

[00:47:59] Well, there you have it, ladies and gentlemen, another episode of the gentle art of crushing it.

[00:48:04] It was an amazing episode.

[00:48:06] We know we sure learned a lot and we hope you did as well.

[00:48:10] We want to take a second and thank you so much for viewing or listening to this episode.

[00:48:15] And please just know that we only ask for one favor and that is to make this life magnificent.

[00:48:21] Thank you and have a wonderful day.

[00:48:23] Thank you.