GI48: Lowering Your Taxes by Utilizing Cost Segregation with Yonah Weiss

GI48: Lowering Your Taxes by Utilizing Cost Segregation with Yonah Weiss

Yonah is a powerhouse with property owners’ tax savings. As Business Director at Madison SPECS, a national Cost Segregation leader, he has assisted clients in saving tens of millions of dollars on taxes through cost segregation.

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Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast. I’m your host Charles Carillo. Today we have Yonah Weiss. Yonah is a business director at Madison SPECS, a national Cost Segregation leader, he has assisted clients in saving tens of millions of dollars on taxes through cost segregation. He has a background in teaching and a passion for real estate and helping others. He’S also a real estate investor and host of the new podcast Weiss Advice. So, Thank you so much for being on the show!

Yonah:
Thank you, Charles. I appreciate you having me and let’s do this.

Charles:
So what was your professional background prior to starting with your current business Madison SPECS?

Yonah:
Professionally like, like you mentioned, the introduction, I was a teacher for about 15 years and then I really wanted to get into real estate due to low income that you know, teachers make, and this is just like a side hustle, but then I realized that there’s a lot of opportunities. So it was a commercial mortgage broker for a little while and got my real estate broker’s license just to get a feel of the real estate market, because I want to actually learn how to invest myself. And just residential at that time, did a few fix and flips and then kind of one thing led to the other. And I wound up with this company, Madison commercial real estate services and working specifically in division, this is development and the conservation division. So that’s been, you know, been about three years going on that.

Charles:
Great, great. So cost segregation, something that confuses, I think every real estate investor and especially if it confuses the investor, it’s a, or the operator, it definitely confuses the, the limited partner or passive investor. So can you explain a little bit about what is cost segregation?

Yonah:
Sure, absolutely. And just to maybe give a step back and background that confusing once you understand the principles. So I hope that through this, you know, a few bullet points of understanding you can go, you know, then have at least the tools to understand why it’s so important and why it’s so beneficial. So first and foremost, it’s depreciation. Okay. And we’re going to understand depreciation at first because that’s really what cost segregation is. Cost segregation is just a way to more in advanced form of depreciation, instead of just a very simplified form, which most investors just take the simplified method of depreciation. When in fact you have the opportunity to do this advanced form and get so much more tax deductions and tax benefits from it. So depreciation sounds like a negative thing, right? Means right. Something’s going in value when in fact it’s just, all depreciation is from a tax perspective is the IRS is the IRS gave a tax deduction based on the value of the property. And they allow you to write off the entire value of the building that you buy over a certain number of years. Okay. So for commercial properties over a 39 year period for residential, which includes multifamily, it’s over a 27 and a half year period. So that’s depreciation in a nutshell, if you buy a million dollar building, okay, you have first to take off land land is a small amount of dozens appreciate, but the rest of the building, which is usually, you know, anywhere from 80 to 90%, depending on where you are, let’s say 80% of the building. So $800,000 is leftover to now depreciate that. And as a tax write off literally over 39 or 27 year periods. So you’re going to get every single year, a 20 to $30,000 tax deduction per million dollars of investment have just bought a property. Okay. And that’s going to be deducted from your income tax. That’s going to offset tax that’s depreciation in a nutshell. It’s good as is okay. Cost segregation like the weird name, right? Sounds. We are segregating out the cost of the building. Okay. So what does that mean? That means the IRS actually gave different categories of assets within a property that depreciate at a faster life. Now, again, it doesn’t mean they really go down in value because most likely a property is going up in value it’s appreciating, but it means they gave you a ability to write off those assets at a faster rate. The only catch is you have to do a conservation study in order to write those assets off at a faster rate. So one of those categories is called personal property or tangible movable property, which includes so many more things than you might even think of like any furniture, right. Things that are movable appliances you know, things like that. That’s a no brainer, but even stuff like carpeting, right? Or vinyl flooring you know, curtains, window treatments, special purpose electric and lighting and all kinds of stuff like that. And fixtures for so many, there’s over a dozen categories of things. But those are just a few examples of things that actually depreciate on a five year schedule. Okay. So getting a conservation engineer into the property to identify all those different things, right. The cabinets. Okay. There’s know, 50 unit building there, 50 kitchen cabinets that has a lot of value to it. And now you can write that off as a tax write off in five years instead of lumping it altogether.

Charles:
Okay. So what’s the process of getting a cost integration done is that you, you started with it, you bring in someone, but how does that whole process work?

Yonah:
It’s first of all, it’s a pretty straightforward, simple process from beginning to end. Okay. There’s usually a few steps involved. The first step is we always run a free analysis in essence, which we’ll show you even before we do anything, going into the property, anything like that, we’ll just look at some details and tell you what our projections of the tax benefit is going to be. So it’s really a no brainer to look at a property and say, Hey, if I do it, this is what I’m going to save on taxes. And it’s, and it’s always a conservative projection. So, you know, ahead of time, you know, what your result is going to be. Okay. So it’s not like, I guess, like what happens if we hire you and we don’t find any tax benefit? No. You know, no at the minimum, you know, conservatively what you’re going to get. That’s the first step. Second step is when you engage with a conservation company, we’ll send an engineer out to the property. Okay. That’s a first step is required to engineer. Actually, I to go to the apartment, walk the property, take pictures, measurements, get basically a full analysis of the thing. And all the units. Third step is they come back and take that data and prepare a report, which, you know, breaks out all the costs, you know, segregating the costs right into all these different categories creates this, you know, very detailed report, which is, you know, anywhere from 80 to 100 pages long extreme detail, a lot of source sources to the tax code showing where we get all those numbers from. And then that produces an updated depreciation schedule, which now you take that and plug it into your tax return. That’s it like that?

Charles:
And that’s just provided to your CPA.

Yonah:
Exactly. Once you get that, yeah. They’ll take that depreciation schedule, that updated depreciation schedule, and then go, and just plug that into the tax return.

Charles:
Is there anything specifically that investors should know before getting a cost segregation, Don or starting one?

Yonah:
I think the first, you know, the most important thing is really just to know is this going to be beneficial? It’s not going to be beneficial for everyone. And therefore, that’s why we provide this upfront analysis to show. You can now take those numbers, discuss it with your CPA and say, Hey, is this going to be good for our situation or not?

Charles:
Okay. And w does the deal size matter? Like, are you guys working on a specific size deals or does it have to be, or it could be anything or

Yonah:
It could be anything, theoretically, we usually you know, my rule of thumb is any property purchased for over a million dollars is usually a no brainer. There’s so much benefit there. And I say purchase because the depreciation is based, not on the value of the property per se, but actually the purchase price, what you actually spent. And it may not be what you spend again, cause you may have, you know, this property finance from a bank for 70, 80%, you’re putting down a small Mac, you may have it seller finance, which means you’re putting zero down. Nevertheless, you get the tax write off on the dollar value of a, of what was spent. So under that value under million dollars, it still can be beneficial and we’ve done plenty of them, but you know, anything over that, it just exponentially grows the tax benefits and we’ve done, you know, many believe it or not over a billion dollar transaction. So you know, and that’s just, you know, yeah, crazy amounts of tax safe.

Charles:
What are, what are the costs for, for performing a cost of creation?

Yonah:
So there’s usually a one time you know, one time not upfront, but one time fee based on a scope of work involved, which is going to vary slightly from property to property. But it’s usually in a pretty pretty general range, you know, somewhere between, for us, for example, now in 20/20, our price is somewhere between four and $10,000, you know, depending on the size, shape, location type of property. Okay. An office building, for example, it has a lot of sweets in it, engineers. And again, each one is going to be unique. There’s a lot more work involved there. Maybe a little more time consuming. There’s going to be a lot more you know, work involved in that. So that’s, that’s it one time.

Charles:
Now there’s like you were saying that I take it, with the, what are the differences between straight line appreciation and then there’s also, you have accelerated depreciation,

Yonah:
Right, So it’s actually a misnomer. This is, this is when we talk about cost segregation. Usually we describe it as accelerated depreciation because what we’re doing is we’re taking what was on a 39 year, 27 and a half year schedule. And we’re accelerating certain assets to a five year schedule or a 15 year schedule. So those are, that’s what we say, but in truth in straight line depreciation is just taking the entire thing and lumping it into a 27 and a half year bucket and taking equal amounts every year for 27 years. But in truth, there’s actually several other slightly varied forms of depreciation, which I’m not going to get too in depth on the tax, but there’s something called double declining balance or 200 declining balance, which is a calculation of even if you’re doing the 27 and a half year method, you can actually front load a certain percentage of that. So it is more heavily loaded in the first years of 27 and a half years and less. So in the 20, in the later years of the 27, that’s the 200 decline bounds. We also do that, apply that, but you know, in simple terminology, it’s, you know, accelerating it to a five year, 15 year schedule.

Charles:
Okay. I’ve heard there’s some parts of Trump’s tax plan from a couple of years back that are in regards to depreciation. And I heard some of them might be expiring in the next couple years. So how does that work? How does his tax plan work with depreciation?

Yonah:
So the biggest probably the biggest news or the biggest benefit for conservation was actually in that tax plan, the tax cuts and jobs act, which suddenly called 100% bonus depreciation. So what that did was allows you a new tax law that allowed you to take any amount of depreciation, any amount of assets that depreciate at a faster life under 20 years. So that’s all the stuff that we’re finding in across irrigation study. Once you do the conservation study and you identify an allocate and sometimes give each week between, you know, 20 and 30% could be even more so in certain types of buildings of the building reclassified into those values. Okay. So let’s give our example of a million dollar building. And 800,000 is being depreciated, right? But 20% of that, or $200,000 or 25%, let’s say $200,000 of that, is fits into those faster categories who 100% depreciation rule bonus depreciation rule says you can choose to take that entire amount in the first year. So has it paid off $250,000 in the first year as a tax write off, which is huge. I mean, credible.

Charles:
Yeah, that is, I mean, for an investor that’s investing, especially if they’re passive investing on it and they start finding out that their first year they’re getting these huge tax breaks coming back on their K-1 when they’re receiving them. I mean, that is a, it’s something. That’s awesome. So what do we have, I’ve heard that there’s, there might be changes in regards to depreciation response to COVID which is obviously just starting up right now and possibly the effects of it are now hitting real estate. Is there anything new that’s they’ve talked about or that they’re proposing?

Yonah:
There are a few things. They, you know, we’re talking here on on April 1st, right. And they just pass this huge cares act you know, on March 27. So was four days ago, we’re, we’re still muddling through this 800 page report. And, and what, what of those, what in there actually applies to taxes and what will apply to conservation? The CPAs on our team are spending, you know, basically going through that, but a couple of things that we’ve already noticed, and I’m not going to say this definitively because we haven’t gone into all the nitty gritty, but a couple of things is one thing that’s called the qualified improvement property, which was kind of a glitch in the tax cuts and jobs act in the 2017 tax report. There was a glitch in there that it was meant to take what’s called qualified improvement property or QIP, which refers to commercial building specifically not multifamily, not residential commercial buildings, and really applies to like restaurants and retail, that kind of stuff. We’re actually doing a significant amount of interior improvements on the property. So for example, let’s take a restaurant where you would go buy a building and then you put in all your, you know, equipment and all the, you know, kitchen appliance, everything like that, all that money spent, if anything in there actually can actually now be considered a 15 year improvement asset depreciating on a 15 year schedule, any money that was spent, and that would apply, excuse me, that would be eligible for the bonus 100% bonus depreciation. So that should have been included in the tax reform in 2017, however, it was left out. And for some reason, someone had the, you know, the state of mind to actually remember that and put it in the new act. I don’t know how it got in there. It doesn’t have really anything to do with you know, I guess it does have to do with economic you know, benefit for those restaurant owners, et cetera. But that’s one of the biggest things because that, again, replies to congregation one, there’s a bonus depreciation. The second thing, and again, we’re still looking at, this is another thing that was outlawed in the tax reform two years ago, or three years ago. And now they wrote something in that it’s going to come back at least temporarily, which is something called a net operating loss, carry back. Okay. So net operating loss means, and this is something that happens when you use a tremendous amount of depreciation. Okay. If you have more tax deductions, then you have income. What that does is that creates a loss. It creates a net operating loss, right? You are actually making money. Okay. Let’s say you made a hundred thousand dollars, but you have $200,000 of depreciation, that hundred thousand dollars, that $200,000 depreciation, excuse me, first knocks off a hundred thousand dollars of income from your income taxes. And you get to keep all that a hundred thousand dollars without paying taxes on it, that’s in your pocket. But what that does is that leaves over another hundred thousand dollars that you can’t use because there’s nothing else to offset what that does. It creates a net operating loss, okay. That loss carries forward with you, which means you can use it next year on your tax return. So it’s still going to benefit you to get all that depreciation because moving forward, what they did when they made the 100% bonus depreciation in 2017, is that the outlawed, a net operating loss carry back, which means if you create a huge amount of deductions in 2020, you can’t now retroactively apply that to your income in 2019. Okay. You used to be able to go back five years to take operating losses and actually offset income and get a refund on your taxes. Again, I don’t want to get too deep involved in this, but this is a huge benefit because they now reinstated net operating loss carry backs. Okay. So you can now get a huge bonus depreciation and now offset income from a year or two or three years ago.

Charles:
Wow. Yeah, that’s, that’s very, that’s very enticing. That first part of it, what you were saying in regards to commercial properties and the tenant improvements for restaurants. That’s, that’s great because those are going to be obviously a very hard hit already section of our real estate asset classes and for also the tenants that are actually putting that money out. So how, when someone’s working with your company, what are we talking about in general of, I mean, you work in all different States. How long does it usually take to do one of these, one of the process, a process of doing cost segregation.

Yonah:
So Madison SPECS and how many I worked for we’re actually specs is an acronym for specialized property engineering, cost segregation. It’s a little confusing. We just like to call it SPECS, but we are the biggest conservation company I’m solely focusing on conservation in the country. So I’m working all 50 States. We have a whole huge team of engineers in house, on staff and the process, like I said, usually, you know, we create that analysis upfront. And then from that point on, once you engage with us, it’s usually about a six to eight week process to complete the entire study. And that usually just has to do with the fact that we have such a huge volume and we only have such a size team to take all the work we’re doing. For example, in 2019, we did over 2,500 concentrations so that, you know, it’s a lot of work. We have a team of only about 60 people in house, including our operations team that does a lot of the actual nitty gritty work, the engineers accountants. So yeah, so that’s, that’s the process it’s pretty straightforward. We’ll tell you upfront what your tax benefits are going to be. We’ll tell you upfront what the fees are going to be. It’s not contingent on any tax savings, but really just you know, trying to help people out save taxes. And this is really why I love my job because I get to help people. And really, I get to just educate people, which is what I love doing anyways. But in turn that helps people save hundreds million, a hundred thousand millions of dollars, tens of millions of dollars in taxes, which is incredible.

Charles:
That’s awesome. So how can our listeners learn more about you and your company?

Yonah:
You can check me out on LinkedIn. That’s probably the best way to find me. I’m actually very active. They’re posting a lot of content. You can check out madisonspecs.com. That’s our website. It’s actually going under a renovation. So only some of the pages are the new pages and the other ones are getting updated as we speak. But yeah, please check me out there and I’d love to, see if we can help you out.

Charles:
Awesome. Well, thank you very much for being on the show today. I’ll put all those links into the show notes and I’m looking forward to connecting with you in the future.

Yonah:
Likewise, Charles, it’s been a pleasure.

Charles:
Thank you.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. thank you.

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About Yonah Weiss

Yonah is a powerhouse with property owners’ tax savings. As Business Director at Madison SPECS, a national Cost Segregation leader, he has assisted clients in saving tens of millions of dollars on taxes through cost segregation. He has a background in teaching and a passion for real estate and helping others. He’s also a real estate investor and host of the new podcast Weiss Advice.

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