Cost Segregation Study with Yonah Weiss - CREPN #202

Cost Segregation Study with Yonah Weiss – CREPN #202

J. Darrin Gross Podcast, Real Estate

A Cost Segregation Study is a tool available to real estate investors that accelerates depreciation which lowers the taxable income  and improves cash flow in the initial years of ownership.

Yonah Weiss is life long learner.  Formerly a teacher, he turned to real estate, first as a broker, then mortgage broker and investor who now uses all of his real estate experience to help investors understand the value of Cost Segregation Studies.  Today, he represents the cost segregation firm, Madison Specs, which has performed over 14,000 studies throughout all 50 states.  

Here, Yonah provides insight on how cost segregation can improve the cash flow of your property utilizing this IRS approved depreciation accelerator.

Cost Segregation Study

Simply put, a cost segregation study is a way of breaking down the property into faster depreciation lives than the normal straight line, twenty seven and a half (residential) or thirty nine years(commercial). So instead of taking a small deduction every single year, the IRS actually allows you to reclassify or segregate out the costs of everything in the property to these faster depreciation lives. Thereby, resulting in greater depreciation deductions and greater tax deductions in the early years of ownership which equal greater cash flow.

This detailed report becomes a source document for filing your taxes, and must be updated as you replace building elements.   

Depreciation

noun

noun: depreciation

  1. a reduction in the value of an asset with the passage of time, due in particular to wear and tear.

Straight Line Depreciation

Straight line depreciation is recognized when you pay your taxes, depending on the type of property you have invested in.  The property is separated between land and building, because land does not depreciate. Then you divide your building amount by the appropriate number of years, 27.5 or 39, and take the result as a deduction from the property income.

For example:

Residential Property

Purchase price: $100,000

Est value of land: $20,000

Est value of building: $80,000

Annual depreciation: $80,000/27.5 = $2,909

Each year your basis in the building will lessen by $2,909.  

This amount is subtracted from income to determine the income amount you owe taxes on.

Accelerated Depreciation

In order to accelerate the depreciation of you building, you must have a cost segregation study performed by specialist, engineers & accountants.  They will walk the entire property, document all the components, and classify element, light switches, carpet, toilets, faucets, nail, screw, etc. into different categories representing varying life expectancies.  

The result is instead of taking 27.5 years to fully expense an item, you can do so in 5, 7 or 15 years.

Residential Property

Purchase price: $100,000

Est value of land: $20,000

Est value of building: $80,000

Yonah’s estimates approximately, 30% of the building value gets reclassified into shorter depreciation schedules versus straight line.  Conservatively, experience suggest:

In general up to 20% of the building may qualify for the 5 year classification.

Another 10% is classified as 15 year.

Balance 70% remains in 27.5 year schedule.

Cost Segregation Study first year depreciation:

$80,000 x .20 = $16,000

$16,000/ 5 years = $3,200/ yr for 5 years

$80,000 x .10 = $8,000

$8,000/ 10 years = $800/ yr for 10 years

$80,000 x .70 = $56,000

$56,000/ 27.5years = $2,036/ yr for 27.5 years

1st year depreciation: $6,036

This represents 207% of the straight line option.

As the property value increases, so does the value of the cost segregation and increased depreciation.  

When to do Cost Segregation

The time to do a cost segregation study is as soon as you buy or build a real estate investment.  This gives you the maximum potential benefit. This does not mean you are too late if you have owned the property for a number of years, as there may still be an opportunity for savings.  If this is the case, you can amend your tax returns and reduce your tax liability.

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK:  I think more than anything in my experience and that risk is actually arrogance. OK so what I mean by that is when you are thinking that you’re going about and you’re making a million dollars and making 10 million dollars and it’s all you you you you’re right. You did it all. You know there is a certain when you start thinking like that you get into a very dangerous situation not just with yourself personally with the people around you. And everyone knows that real estate investing is really a team sport. And there are so many people that are involved. So when you think, just about yourself, and think about how you did it all by yourself and how great I am. And obviously that’s important. I’m not talking about you know low self-esteem here. But real humility means that I’m willing to cooperate and willing to learn from everyone around me.

How to manage the risk:  I realize that I can’t do this on my own I realize that you know whatever talents I have you know are really God given gifts and I have to be grateful for that and recognize recognize that and use them. But at the same time don’t think that you know I’m I’m the best thing in the world because that’s the biggest risk. As soon as you start thinking that history proves itself over and over and over again, you’re bound to fail and you’re bound to lose whatever you have built you lose whatever friends you made et cetera. And it’s just the easy way to lose friends in general. So that’s what I think the biggest risk is.

For more go to :

Website: http://www.madisonspecs.com/

Email: yweiss@madisonspecs.com