Take Advantage of Cost Segregation this Year – With Erik Oliver

Erik Oliver has a degree in accounting and has been working with CPAs across the country for the past seven years to help accelerate real estate investment deductions, helping to save investors money on taxes.?

Cost segregation is accelerated depreciation, allowing real estate investors to take depreciation deductions against their incomes, by segregating various costs in real estate investment – such as carpets or tile – and front loading these deductions in the early years of an investment, rather than spreading it out across a 15 or 30 year period.

The government incentivizes this to help stimulate the economy and the Tax and Jobs Act of 2018 increased depreciation deductions to 100% through December 2022.?

“When you buy a building, you're not just buying the land and the walls,” said Erik “You're also buying some carpets and countertops and cabinets. And so take these deductions. The IRS says carpet, for example, should be depreciated over five years. So we accelerate those deductions by breaking out or segregating those costs into different buckets.”

“That bonus is a lever that's used by the IRS and the government to stimulate the economy,” he said.

Erik pointed out that The Tax Cuts and Jobs Act of 2018 added a bonus, where depreciation deductions increased from what was 50%, up to 100%. However, after December 2022, it will gradually be reduced again (to 80% in 2023).?

“If the economy is struggling, they throw this bonus out there. So people go out and buy stuff,” he said. “It doesn't just apply to real estate. If you were to buy a new bulldozer, you'd get bonus depreciation on your bulldozer.”

But right now, he said, “you get to take 100% of any deduction that has a useful life of 20 years or less, meaning year five, seven and 15 – all in the first year. And so this is huge for investors.”?

“If you're a real estate professional, if you're a broker, or an agent, and you do that for a living, you kind of have the golden ticket when it comes to this cost segregation stuff,” said Erik. “The deduction that we create on your real estate is considered active because you're an active real estate professional, which means it can go to offset any of your active income.”

“Let's say you're married and your spouse has a high W2 income. Let's say I'm a real estate agent, my wife's a doctor and she makes $500,000 a year. I can use that $300,000 deduction in that example tonight,” he said. “Not only offset my real estate income, but also my wife's high w2 income. So, again, for real estate professionals, it's kind of the golden ticket because the rules change a little bit for them.”

“We've seen real estate investors basically paid little to no taxes over the last five to seven years,” said Erik. “If you own real estate, and you're paying taxes, it's definitely worth looking into because the laws are so favorable right now.”

Erik said that most cost segregation companies will provide a free benefit analysis.?

“I know our firm, we never want to engage a client to do service with us unless we're gonna save them significant money,” he said. “If you've bought or got a property that you purchased this year, or you've got a property you're looking at, you can definitely reach out to us, we would run what we call a free benefit analysis.”

They suggest doing an analysis before you buy a property so that you can see if you can take multiple deductions, one before you do renovations and one after. It all depends on your intent.

“From a strategic standpoint, if you buy a building that you know you're going to renovate, if it's rentable, or if you could rent it out for let's say, a six month lease, it might make sense to rent it out for six months as is because you can take the deduction on all those old assets,” said Erik. “And then, once the lease expires, after six months, you go and you renovate it. And now you get to take the depreciation on all the new assets as well.”

Of course, you want to make sure you are doing this in line with the law – and that’s where having a cost segregation analyst and talking to your CPA are important.

“The IRS is always looking,” said Erik. “Whenever they audit these types of things, they're looking at your intent. And so if your intent was just to maximize your depreciation and take advantage of the system, they'll catch on to that. But there are scenarios where you might only rent it for a month or two, because there's an existing lease. I mean, we see that quite often with retail space, or even residential space where I buy a building that's got renters in there. We let their lease play out for the next month or two, before we go in and make our changes.”

“I don't see any reason why, you know, our intent wasn't to just maximize the deductions,” he said. “It's just that's the way the scenario lined up, because we allowed them to play out their lease agreements. So it comes down to intent.”

“The whole idea behind cost segregation is take your deductions today at your high ordinary income rate, pay back a portion of it, and that portion is dependent upon how long you own it,” said Erik. “Pay back a portion at a future date at a lower rate, and save the spread.”

To watch or listen to Dan Lesniak’s full conversation with Erik Oliver, check out Episode 387 of the HyperFast Agent podcast.