Episode #12 Cost Segregation with Yonah Weiss In this episode of Real Estate Investing Made Simple, Yonah Weiss talks about how to reduce your taxes using Cost Segregation.
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 a real estate investor and host of the new podcast Weiss Advice.
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Welcome to The Real Estate Investing Made Simple podcast, the show empowering and educating people on how they can grow, manage, and protect their wealth through real estate investing. Now, here’s your host, Bailey Kramer.
Bailey Kramer 0:22
Hello and welcome back to the real estate investing Made Simple podcast. The goal of this show is to break down complex real estate investing strategies that you can use to grow, manage, and protect your wealth. I’m your host, Bailey Kramer, and today we are joined by our very special guest, Yona Weiss to talk with us about cost segregation. Yona is a powerhouse with property owners’ tax savings. As a business director at Madison specs national cost segregation leader. He has assisted clients and saving 10s of millions of dollars in taxes through cost segregation. He has a background in teaching and a passion
For real estate and helping others, he’s a real estate investor and the host of the new podcast Weis advice. Welcome to the show. Yo, no.
Yonah Weiss 1:09
Thank you. Bailey. It’s a pleasure to be on your show. Congratulations on launching.
Bailey Kramer 1:15
Yeah, it’s an absolute pleasure having you and now you’re known as the cost segregation King. So it’s even better that we have you talking about this topic today?
Yonah Weiss 1:24
Well, it’s it’s it’s something I like talking about, like sharing so happy to do so.
Bailey Kramer 1:28
So why don’t you go ahead and start by telling the listeners a little bit more about your background and how you got into real estate.
Yonah Weiss 1:34
Sure, a little bit about Yeah, I actually spent about after college about 15 years or so. Studying and teaching. So I had nothing to do with real estate until about five years ago.
And, you know, really, really, my passion is teaching so I’m an educator by kind of just by not just by trade, but by my passion. I love to teach and that’s it’s always been something I’ve done since since I was even in high school.
I used to teach and tutor people and I was just you understand them, you know something, you learn something you can teach someone else. And that to me, is something I feel like I do pretty well anyways, cutting to the chase who got into real estate about five years ago when I kind of needed I wish I had learned about real estate, you know, many years prior to that, but it took until I was, you know, well into, you know, my 30s and, you know, a family until I knew anything about real estate and so I just because of my passion for learning and teaching, I wanted to learn everything there was to know like, right right off the bat, so I started listening to podcasts and there wasn’t that much around back then. But then for me learning is always the done best when you’re when you’re actually involved in something and so learning kind of apprenticing from someone else. So I got involved with commercial real estate, first on the lending side and mortgage brokering so that was commercial real estate. I learned about that then I got into you Doing some residential just learning the residential side of not just lending but also brokering so learning how to underwrite a property, learning how to, you know, find properties, going off market properties, you’re going door to door getting getting listings, all kinds of stuff. Literally everything there was to know did a few fix and flips and and then I just kind of searching trying to find something that really spoke to me and I didn’t have enough capital to invest in like buy, you know, like big deals or anything like that. So I was looking to continually learn and continue to teach but at the same time, find a way that I could eventually make it. Long story short, I wound up at this company, Madison commercial real estate services that have a number of services, current real estate, and it’s really the environment where everyone is involved in real estate and you’re constantly talking and networking with people in the real estate industry and I found multifamily specifically to be kind of like an asset class where the people I was Talking to we’re all growth mindset, you know, kind of growth oriented type people, people that really striving to make changes teach about financial freedom and all that really spoke to me. So that kind of, you know, I started working for this conservation company Madison expects but at the same time, I just continued to teaching other people about this helping real estate investors save money on taxes, and network. And so that’s kind of led me to where I am now, which is, you know, really kind of a thought leader in the real estate space and investing myself and finding multifamily deals to do so it kind of all came together.
Bailey Kramer 4:41
Yeah, very cool. Very cool story. Yeah. So let’s start off by explaining what cost segregation is for the listeners who are unaware.
Yonah Weiss 4:49
Yeah, and I think you know, a lot of people thrown off by the name and like, what is this and then they hear it’s certainly about taxes and like, Okay, my mind just shut off, right. So here’s the first thing when you hear about taxes, Don’t shut your mind off, okay, especially when it comes to real estate because real estate is one of those industries where there are more tax benefits for basically any other type of industry that exists. So one of the greatest things about being in the real estate industry and real estate investing specifically is are the tax benefits and you need to know a lot about it. So because sometimes your accountant may not necessarily tell you about it, I mean, as we know, you have to be a little bit proactive. So conciliation is really an advanced form of depreciation. Okay, so before we get into what conservation is, man, let’s take a step back and understand what depreciation is right? depreciation. It’s like sounds like a bad thing, right? Sounds like something’s going down in value. That’s if you look in the dictionary definition of depreciation is something going down in value. But real estate doesn’t go down in value. Real Estate actually goes up in value. As time goes on. It’s called appreciation and we try to drive appreciation besides for the natural appreciation going up in value. So what does this thing do? appreciation. It’s a tax deduction. And that’s it. Okay? It’s a borrowed term that the IRS gives you as a tax deduction when you buy a commercial property. So any property, not just commercial, any property besides your personal residence, you get a tax that you’re allowed to now take a tax write off of the entire value of that property. And that’s huge. Okay, that’s depreciation, but you can’t do it all at once. You have to spread it out over a long period of time. So it’s over usually a 27 and a half year period, kind of arbitrary number for other types of commercial properties, but it’s 39 years. So in short, if you buy a building, now you have tax deductions, that’s it. It’s as simple as that you buy property. IRS gives you tax deductions based on the fact that you bought that that’s it. So simply put, depreciation is a tax deduction because you bought a property. Now, cost segregation is an advanced form of that says, Don’t just take a little bit every single year for 27 and a half years, you can do simple You know, division and say, Okay, I need our property, divide that by 27 and a half. First of all, a little bit, give to land, land does not depreciate, but the building and everything on it does so. But whenever you’re now divided into 27 and a half, you will have to worry about, you know, $30,000 a year of tax deductions. That’s awesome, right? But it’s not a huge amount conservation is the way to front load and accelerate certain components of depreciation. So again, the cost let’s talk about the name cost, segregation, we’re segregating the cost, we’re breaking down the cost into different components, that we can now take those tax depreciation deductions at a faster rate. So in a nutshell, that’s what conservation is.
Bailey Kramer 7:46
Awesome. So a typical depreciation is where you take the value of the property minus the land, and you divide it by 27 and a half years, and that’s the tax write off you can write off each year on your taxes but costs aggregation is kind of an accelerated form of that, and allows you to save a lot more on the front end. So you don’t have to wait 27 and a half years to realize the full benefits.
Unknown Speaker 8:10
Bailey Kramer 8:12
So, with cost segregation, I know that there’s different categories or classifications of the actual asset itself. So can you kind of go into that and how that plays a role in cost segregation?
Yonah Weiss 8:25
Exactly. Yeah. So like we said, cost segregation is like component depreciation, right? We’re segregating the cost of the building into different components. And like you said, there are different categories. So the main category is the structure or the building, and that’s where the majority of the depreciation value or what’s called the basis, that’s your tax basis, that depreciation value is put. So again, that’s the structural components like the building the frame, walls, floor, roof, windows, doors, okay, all that stuff that is Is structural. But there are other categories like personal property, which is considered anything that’s in the building, not part of the structure. So even things like carpeting, cabinets, furniture, appliances, fixtures, okay, window treatments, you name it keeps going, the list keeps going on and on. And all these things. When you look at a property, you don’t even think about all these things that are in there. But once part of the process of conservation is having an engineer who has the experience, not just in Building Construction Engineering, but also in the tax code to understand what these different useful lives are, what these different categories are. So that first category which is called personal property, depreciates on a five year schedule, okay, so now engineer comes in identifies what all those things are, okay, there’s, you know, 20,000 square feet of carpeting, there’s, you know, five bookshelves, there’s, you know, 20 I don’t know in a 20 unit, apartment building, there’s 20, washers and dryers. There’s one etc. list what those things are applies a value to them. Now you can take the value of all those assets as a tax write off in the first five years as opposed to lumping everything together. So really what we’re doing is we’re front loading a huge portion of those tax tax deductions to the to, again, the first five years, that’s the first category second category is what’s called land improvements. Okay, again, so first category is the structure 27 and a half years second category, personal property, five years. third category, not second, third category land improvements. Land improvements depreciate on a 15 year schedule. Now land improvements is not land right land doesn’t appreciate land improvements do which is landscaping, fencing, pavement, right? You have a parking lot, you have a sidewalks on property, all that stuff has value to it, and a lot of value sometimes and that can be taken as a front loaded, accelerated depreciation.
Bailey Kramer 11:01
Awesome, awesome. And what do you typically see if someone gets a cost segregation study done? Mm hmm. What percentage of the depreciation? Do they typically? Are they typically able to write off in the first year alone?
Yonah Weiss 11:17
Yeah, that’s a great question. So there’s two there, there’s really two things that happen. There’s First of all, you know, we, the engineer will come and identify what all that’s all these different categories are, apply values to them, create that that study, and in the first, right, five years, again, that’s the five year property, that’s usually typically and this is different for every type of property. But you know, in a multifamily property, for example, it’s typically somewhere around 20%, could be less could be more, typically not more than 30%. Typically, not less than 10%. So again, it’s gonna be somewhere in there somewhere around 20%. That’s the five year property which means if you buy a million dollar property, You’re going to have close to $200,000 of extra depreciation in those first five years now you asked about what are the first year. So simply, you can do what’s called You know, this conservation study. And the extra depreciation in the first year will be the 200,000 divided by five, right? Approximately $40,000 of extra depreciation now, you would may have had 30,000 with straight line depreciation, and now you’re getting an extra 40,000. However, there’s something called bonus depreciation, which is a new tax law that came about a couple years ago that allows you to front load all of the accelerated depreciation into year number one, so he asked about the first year what’s what’s typically, there’s two different ways to do it. There’s, you know, spreading over the five year and then taking that first amount in the first year or you can literally Front Load the entire amount into your number one which will give you you know, that instead of 40,000 get an extra $200,000 in that example of depreciation.
Bailey Kramer 13:05
Wow, that’s incredible bonuses appreciation. Can you walk us through a mock example? Let’s just say on a $1 million multifamily property. Can you kind of walk us through what it would look like using cost segregation with the bonus depreciation as well?
Yonah Weiss 13:23
Absolutely. So let’s give a you know, simple example. Let’s say buy a million dollar property. And you can multiply this or divide this depending on you know, what the thing but again, it’s percentages. So once you have this, those percentages, you can really do the easy math. I mean, I was not a math major. Again, my background is in teaching and it wasn’t math wasn’t teaching math. But when you understand these simple concepts, it’s so powerful and so valuable. So that’s why I highly recommend just just taking a second and understanding his million dollar property. Let’s say we separate a small amount to land, let’s say 15 percents, it’s pretty average, you’re left with the $850,000 basis. Remember, that’s your tax basis. That’s the amount of depreciation you could take. Had you done straight line regular depreciation, meaning every year a little bit, you have about $3,000 a year, okay? But instead, we’re doing conservation, we’re finding 20% of that in the first five years. Again, it’s about $160,000. That’s 20% of 850. Approximately 170. So what happens if you take the entire amount in the first year? Hundred $70,000 of first year depreciation deduction? So what does that look like if you have a million dollar multifamily property, how much money you making from that property and what’s your net operating income and that really, this is really really what matters because how depreciation works is it lowers your taxable income, okay? So if you make you’re making of net operating income, that means all of the income coming from the property, all the rental income, minus all of the expenses. So you have a lot of expensive management utilities, you have no debt service, if you have a loan on the property, all that stuff. So on a million dollar property, typically you’re gonna have somewhere between 50 to $100,000 of net operating income depends on you know, where it is, what it is, etc. Let’s say it’s $50,000. Just keep it keep it on the low end, very conservative at $50,000. Now, if you had regular depreciation, you’d have a $30,000 first year deduction, that’s great. That means on the 50,000 of income, I first before anything else, I subtract 30. That’s depreciation. I’m rounding numbers here, but then you’re lit you’re only taxed on the remaining $20,000. That means, if you have a 25% tax rate, you’re going to have to pay $55,000 in taxes. That’s it. That’s simple. That’s how taxes work. But if you have no tax liability, what happens if you do cause variation? You have an extra $40,000 in that first year or extra $30,000 in that first year. Guess what your taxable liability just went to zero You pay zero taxes. So that’s what it looks like. And if you frontloaded the entire amount in the first year, you have not only no taxable liability, you have extra depreciation extra losses, which doesn’t create a refund, but it will do when necessarily it might miss out on the factory, but what we’ll do is create a passive loss which can be used to offset other income potentially, or just can be carried forward, which means you can use it in future years. Wow,
Bailey Kramer 16:30
wow. Yeah, that’s Yeah, I mean, it’s incredible, though, that you can, you know, take depreciation, speak up and take, like you said, a nice chunk of that in the first year. And even though you’re making, let’s just say $50,000 from that million dollar property, in your in your bank account, you write it off and the government looks at it and says, Oh, you just lost X amount of dollars. So that’s definitely one of the key secrets to real estate and why it’s so attractive to So many investors.
Yonah Weiss 17:01
Absolutely, yeah, this is one of the, you know, unfortunately one of the unkept Unknown Secrets by a lot of people, but those who know, they’re the ones that are not paying taxes. So yeah, you’re absolutely right.
Bailey Kramer 17:14
So can you kind of walk us through the actual process of getting the study done, how long it takes?
Yonah Weiss 17:20
Sure. The first thing you always want to do is get a free estimate. And that’s something we do for every single property. So someone reaches out to us Madison specs, again, largest national company doing this work in all 50 states. We provide an upfront estimate, trying to cut this down to get this back same day, but you know, you take a day or two to get run the numbers on a property, which means we will look at any property, break it down and figure out for you what your potential tax savings are going to be even before you do anything, okay. It’s free, no investment, no time investment whatsoever. It’s just educational. So you can see what You’re looking at, then make an educational decision. Once you have that, you engage a company, they’ll send an engineer, we’ll look at the property. Again, it’s a whole site site visit, there’s a tour, there’s pictures, measurements, all that stuff happening. Right now we’re actually doing this virtually, we’re, you know, kind of pivoting to the climate and figuring out a way to create technology to do this virtually as well. So that’s pretty cool. Once that’s done, the engineer takes all the findings and the property again, creates this study this report, which is, you know, anywhere from 8090 hundred pages long, extremely detailed, has case studies has, you know, court history has all the tag all the nomenclature and numbering system the IRS requires, and then all that does is pumps out, you know, a new depreciation schedule. So there’s one piece of paper, this whole hundred page report that you need to hand to your accountant and say this is now my depreciation schedule. This is what I’m going to take as my tax deductions this year and every year going the only thing forward. And that’s it. It’s a pretty like short, quick process. Right now, it takes us, you know, somewhere between four to six weeks to turn that whole thing around. We’re actually been working on an incredible system software and a whole, you know, soft system that we’ve been developing for the past year, which is hopefully going to come out soon, which will allow us to literally turn these around in a day or so.
Bailey Kramer 19:29
Wow, wow. Yeah. Is it typical that, you know, these real estate investors get audited by the IRS because they’re taking such a depreciation loss? Is that typical to see?
Yonah Weiss 19:41
No, it’s not typical to see because the IRS you know, all these rules are in the tax code, which means you’re not doing anything, you know, above and beyond what you actually should be doing. In fact, according to the to the IRS tax code you’re supposed to be doing Appreciate your property in this method. So you’re supposed to be taking applying different categories and applying different things in your property to have different useful lives, because that’s what’s written in the tax code. However, most people don’t do that. And they just lump everything together on this 27 and a half year schedule. So it’s not, you know, raising any red flags, it’s not doing anything like that. What will happen though, is if a person were to get audited in any way, they will, of course, take a look. And they’re going to look at your depreciation, you’re going to look at your cost segregation. And if you don’t have a proper conservation study done that follows all the rules, and you just created, you know, a lot of depreciate none of a, you know, kind of out of out of a hat, you just like, came up with those numbers. You’re going to be in big trouble.
Bailey Kramer 20:51
Definitely, definitely. And, you know, that’s why they the IRS has that tax code, you know, so you can follow it and those who do follow it benefit greatly. And those who don’t follow it, you know, that’s why that’s why we’re here, you know, educating people about such a great tool that people can use. Yeah, absolutely. Are there any last things you want to touch on about cost segregation before we move on to the next section?
Yonah Weiss 21:16
I would just say, again, like I said, at the very beginning, don’t be afraid of taxes, okay? Especially when it comes to real estate. It’s so, so important. It’s so important. And it’s one of those integral things, learn about it be, you know, knowledgeable enough to ask the right questions, and make sure that you have an accountant. That is, you know, taking being proactive, and if not, you have to be proactive, and you have to make sure that you’re getting this process done. Because, again, conservation is an engineering service. It’s not something your accountant can do. So that’s why you have to you know, don’t assume your accountant is taking care of it.
Bailey Kramer 21:58
Definitely a great point. So now we’re gonna move on to the next section of our show, which is the big four, where we ask our guests the same four questions. So number one, you know, what’s your number one habit for success.
Yonah Weiss 22:11
Number one habit for success is giving. Okay, the more you give, the more comes back to you. So that and that’s not only my habit for success, that’s my definition of success.
Unknown Speaker 22:28
Like that. I like that a lot.
Bailey Kramer 22:31
So number two, limiting beliefs, our thoughts in our head that hold us back from realizing our potential. What is one limiting belief that you were able to crush and how did that impact your life?
Yonah Weiss 22:43
One limiting belief that I had was, you know, that, like, Who am I like, I don’t really know that much about X, Y, and Z. And it’s kind of like this imposter syndrome where you feel like you don’t belong in the room. And what I what I realized was that you’re not expected to know everything right? You if you know anything, and this is kind of how I’ve lived my life, if you as a teacher, if you know something, that one thing that you know, you can teach, so if you know, the ABCs, you can teach someone else the ABCs, even if you just learn that a week beforehand, or two weeks before, so that’s a limiting belief when you think like, I think I need to know so so. So, so much to be qualified to even be in the room. No, you have to realize, right, all of life is a growing experience. It’s a learning experience, and just kind of getting over that being humble to know. I’m here to learn. And there are more people that know a lot more than me, but I still have, you know, a plate a seat at the table.
Bailey Kramer 23:51
Totally agree. I love that. So number three, what advice would you give to someone who is considering investing actively or passively in real stayed for the first time.
Yonah Weiss 24:03
I would say, figure out what your goals are. Okay, figure out what you know, what you want? And what do you want to get out of investing either passively or actively. And then once you figure out what those goals are, you know, create a group of peers around you that have similar goals, and that you can kind of be there for each other to, you know, don’t finger think that you can, you have to do everything on your own, even make those decisions or figure out when you know what to do. You can bounce ideas off off that peer group.
Bailey Kramer 24:38
For sure. So number four, what is your favorite real estate business or personal development related book?
Yonah Weiss 24:46
So as a great book as a business book called selling, like serhan, or sell it like serhat Okay, Ryan serhant. He’s like one of the, you know, best real estate broker. He’s got he’s got a TV show, right the million dollar listing and best selling author anyways. He’s the number one residential broker in New York City, which you know, for 10s of thousands of brokers. That’s, that’s a pretty, pretty big deal. So in that book, sell it like serhant One of the things that spoke out to me more than anything was just the idea of relationships in business, okay, and being there just to add value to other people, and seeing what you can do for other people. And then the business kind of comes, comes by default.
Bailey Kramer 25:36
For sure. I actually read that book a few months ago. It’s definitely a great book. And no, the emphasis on relationships is key. So you know, Where can the listeners get ahold of you?
Yonah Weiss 25:46
You can go to Yonaweiss.com. best place to find me or LinkedIn. Either one of those because that’s where I am most of the time LinkedIn. Again, like Bailey said at the beginning of the episode, check out Weiss
Advice podcast. It’s not as much of a what your, you know, like you’re learning here, but subject matter which is great, but it’s more just about kind of getting to know those people behind the business. And so I highly recommend you check me out there.
Bailey Kramer 26:15
Awesome. Well Yona, it was an absolute pleasure having you on the show today. Thank you so much for sharing your knowledge with my listeners. We’ll see you next time.
Yonah Weiss 26:23
Awesome. Thank you, Bailey.
Thank you for listening to the real estate investing Made Simple podcast. For more resources or to connect with us further, please visit our website, http://www.baileykramer.com. We’ll see you next time.