Tax Reduction Podcast

Episode 7. You NEED Cost Segregation Tax Strategy

• Boris Musheyev, CPA • Episode 7

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ATTENTION: Rental real estate property and business owners! 

Ever wished you were privy to insider investor strategies that could save you a great deal on taxes? Your prayers have been answered. This episode is a goldmine of tax-saving insights specifically designed for real estate investors. We examine a powerful tax strategy called cost segregation, exploring what it is, who qualifies, and why it isn't always utilized by accountants. We also delve deep into the concept of accelerated depreciation and how this can lead to sizeable tax deductions.

But it doesn't stop there. Beyond cost segregation, we also venture into the wider realm of tax planning and its relevance for individuals. Learn how smart tax planning, inclusive of cost segregation, can create losses from rental real estate properties and thereby reduce your tax liability. This episode is chock-full of actionable advice, resources, and the option to schedule a call for tax planning services. Don't miss out on this opportunity to learn from experts about maximizing your tax savings, all while ensuring you're in line with the law. Tune in and prepare to revolutionize your approach to tax planning.

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7 Write-Offs Every S-Corporation Business Owner MUST Know
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Ready to start saving money on your taxes?
☎️ Schedule your FREE Tax Advisory Session: https://taxplanningcall.com/

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Speaker 1:

If you own real estate property and you take in depreciation, the good news is is that you can actually accelerate depreciation and take about 30% of the purchase price of the property in its first year, even for the properties that you've been owning for the past few years. I will break down a tax strategy known as a cost segregation, but knowing this tax strategy is super, super important. If this tax strategy is used incorrectly and you don't qualify for it, that could actually hurt you on your taxes. I will show you and explain to you what is cost segregation, how to make cost segregation happen for your real estate properties, and who should really be using cost segregation or not. Ready, let's go.

Speaker 2:

Welcome to the tax reduction podcast for money-making entrepreneurs with Boris Mousheyev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

Let's start talking about cost segregation study and really, before we get into this entire thing, what are we going to talk about today is, first of all, why is your account not doing it and you didn't know about it? And how can you fix that mistake? Very easy, fixable. Stay till the end and I will show you how. What is the cost segregation study and who really qualifies, who should be using it, who should not be using it. You will know exactly whether you need to use the cost segregation or not. But let's talk about what is really a cost segregation study.

Speaker 1:

A cost segregation study the name kind of speaks for itself. You take the cost of the property or the property itself and you segregate it out into different classes of assets. You see, generally when you invest in real estate, whether it's commercial or residential, they have two life classes, right? So residential property gets to be depreciated over 27 and a half years. What does that mean? That means if you invest $800,000 in a property which is net of land and it's a commercial property, you get to divide it by, let's say, 39 years. Because it's commercial, your annual deduction is $20,519. That is in a simple terms of understanding. So you invest in something In real estate, you can't take the purchase price and deduct it in your first year. So if you invest it let's say a million bucks it's not like a million bucks is deductible. So IRS says hold on a second. If it's a residential property, deduct out the land and divide it by 27 and a half years. That is your deduction every year for 27 and a half years. If it's a commercial property, it's 39 years. So that's pretty simple.

Speaker 1:

Cost segregation is actually written in our tax code and it says the following it says any property that you invested in should really be segregated into different components of assets, and those components of assets, those classes of assets, have different useful life. According to the IRS table, that means the property could have carpentry, cabinets, hardwood floors, electrical wiring all of those stuff are actually considered some of the assets. Right, they get to be segregated. And when you segregated, those classes of assets have different useful life. It could be 15 years, 10 years, 7 years or 5 years. Now, why is this so important for you to know? Because anything less than 15 years can be depreciated, 80% of it in 2023. In 2022, by the way, it was 100% depreciation.

Speaker 1:

Now, in 2023, anything that's under 15 years of age, 80% of that of that cost can be depreciated in its first year, so you don't have to divide it by 27 and 39 years. That is called a cost segregation study. Cost segregation study is done by an engineering company that comes out to your property, takes some pictures, does some paperwork, sends it to your tax advisor and I hope you have a tax advisor. If you don't have a tax advisor, ladies and gentlemen, I am telling you right now you are overpaying in taxes because only a tax advisor will ever tell you use a cost segregation in your property, what that will look like in terms of tax savings, financially plan for it and show you the tax impact of it.

Speaker 1:

Okay, so 15 years, 10 years, seven years and five years For 2023, right? Any costs, any classes of assets, can be depreciated and it's first year. 80% of that can be depreciated. So let's kind of talk about why your accountant is not doing it and why, most likely, you're not doing it on your taxes and how to spot it. If you qualify, we'll be right back after this break.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Boris put together a free PDF for you, the business owner Seven tax write-offs every S-Corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

All right, welcome back. Let's talk about why is your accountant not doing this? First of all, really lack of knowledge. Before I became a tax advisor, I was a tax preparer. I was working in a tax firm churning out almost 500 tax returns every tax season, and I bet you that is what your accountant is doing right now. They're too busy with tax returns not to know this. When I became a tax advisor years ago, when I've invested in myself and start traveling the country learning from the top tax experts in the country, I came across a cross segregation and I realized that, wow, my clients could be saving a lot more money on taxes using cross segregation study. So really the reason your accountant is not doing it, it's lack of knowledge.

Speaker 1:

As a matter of fact, if you take a look at the IRS code, irs code says that the proper way to depreciate your property is to do the cross segregation study. Now, typically what accountants do is if it's a residential property, they take the cost of the property. They minus the land because the land cannot be depreciated. They take the building value and divide it by 27 and a half years. If it's a commercial property, they take the building value and divide it by 39 years. Now IRS says if this is what you have been doing it and now you wanna do cross segregation on your property, you have to file form 315. Form 315 basically says change of accounting method. I'm changing how I'm doing my depreciation. The only reason IRS requires you to file form 315, if you've been doing something from wrong to right. So that is why you know now that cost segregation is the right way of doing it. Things. When you go from a regular depreciation to doing cost segregation, doing that accelerated IRS wanna know. Irs is like what are you doing wrong? Oh, you're doing something right. Now You're taking a bigger deduction that we allow you. I'm telling you, ladies and gentlemen, irs is on your side. You don't hear a lot of people say that, but only a true tax advisor will tell you that.

Speaker 1:

Now back to us. Let's kinda go through a quick example. Let's say you bought a property. The building value net of land is $800,000. If it's a commercial residence, you divide it by 39 years, you get $20,519 annual depreciation. Now let's say you are doing cost segregation. Okay, you're doing cost segregation.

Speaker 1:

We're gonna use the same example $800,000 building value, 30% give or take right. This is based on my experience I'm not saying that that is the number 30% of that property could be deducted in its first year by making a cost, by doing a cost segregation analysis. So think about it 30% of $800,000 is $240,000. Okay, now the remainder, between $800,000 and $240,000, is now divided over 39 years. Because it's residential property. Okay, because basically, after you did the cost segregation study, $240,000 of the purchase of your building can be depreciated, accelerated, right? It can be accelerated meaning that the what do we I lost my train of thought here right Classes of assets here, okay, is under 15 years.

Speaker 1:

So coming back to our example, first year is 240,000, the Eurkosa aggregation. Then we've got $14,000, which is after we divided by 39 years, it's giving you $255,000 in its first year. So if you're doing it strategically and you can take this real estate loss guess what? By investing in a property that's valued net of land is $800,000, you can actually take an estimated $255,000 deduction in its first year by performing cost aggregation study.

Speaker 1:

But of course you got to speak to your tax advisor. Run these projections, run these numbers, make sure these numbers make sense for you, they work for you. Meet with your tax advisor at least four times a year. I'm telling you, and I've been always saying this if you have a profitable business and you have a tax preparer, you are overpaying in taxes. Now let's talk about who qualifies for cost aggregation. Not every person can just go and start doing cost aggregation on the properties that they own, and in this section, I will show you who qualifies, how to qualify and what to do if you already own the property for a few years. We'll be back right after this break.

Speaker 2:

If all your accountant does is taxes, you may be overpaying in taxes by thousands of dollars every year. Every week, boris releases a tax strategy on his podcast so that you, the business owner, can pay less in taxes every single year. Be sure to subscribe to our podcast to be notified when a new tax strategy is released. If you're ready to work with a tax advisor on your tax strategy and planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. Again, that's wwwtaxplanningcallcom.

Speaker 1:

Welcome back. After this break let's talk about who qualifies for a cost aggregation. So the only way that you can take losses that are generated by your rental real estate now remember, you only wanna do cost aggregation or, in most cases, really, you wanna do cost aggregation. If it's gonna give you a really really nice loss and in most cases it will Then you need to be able to deduct that loss against your other income, whether it's your business income, your W-2 income or any other form of income. In order for you to do that, either you or your spouse needs to qualify for what's called a real estate professional. No, it doesn't mean that you have to be a real estate agent. If you couple the cost segregation study with being a real estate professional, you can really generate a lot of losses from real estate that duct against your business income and give you a really really nice tax deduction. Remember, only tax. Your tax advisor can tell you this. Okay, who qualifies for cost aggregation? Really, if you're a real estate professional, definitely run a cost segregation study. Make sure that it works for you. Second thing do not do cost segregation study on your properties if this is not a long-term investment. If you're looking to sell this property three years, five years, you're waiting for it to appreciate and value, whatever that may be. Do not do cost segregation study, because what happens is that if you do that study and you're able to take those losses when you sell the property at a gain, that gain typically is subject to capital gains tax right, which is awesome 20% is the max there but but any depreciation that you took, including cost segregation, will be recaptured at your ordinary income tax rate. So it doesn't make sense to do cost segregation if it's not a long-term investment.

Speaker 1:

What I don't like seeing is that a lot of times, people scroll through their YouTube or scroll through their shorts and reels and whatever that may be, and there's companies that promote investing in real estate, cost segregation, this, this and that. All of that is correct, but it's not necessarily right. It's not necessarily right for you in your business. You've got to have a strategy to do this. What if it's not a long-term investment? What if you have other goals with that investment? So don't think that, hey, I can do cost segregation, benefit from the depreciation right away. No, I don't know what your situation is like. You, only you know your situation. You've got to be able to talk to your tax advisor about it.

Speaker 1:

Now, when can you do cost segregation? Definitely the best thing is to do it on a new property. If you qualify, if it works for you, makes financial sense, definitely do it on a new property. What if you bought the property five years ago? Like Boris, I bought the property five years ago. Oh my goodness, I'm lost. I lost the opportunity to do this. My accountant is this my accountant is that Don't worry, irs loves you. Okay, irs loves you and says hey, if you bought the property a few years ago and you haven't done a cost segregation study, go ahead and do cost segregation study. Have your accountant file form 3115 that lets us know that there has been a change in depreciation method. Okay that you went from regular depreciation to accelerated depreciation, which IRS 100% allows it. I promise you. It's all written out on a tax code and you can do that on the old property.

Speaker 1:

So before you do cost segregation, you've got to speak to your tax advisor. Does it make sense for you? Does it make financial sense for you? Do you qualify? If you don't qualify, how can you qualify? How can you generate those losses from your rental real estate properties, including cost segregation and the doctor against your business income. If you're not consistently talking to your tax advisor about this, then you are missing out on money, missing out on big tax savings and most likely you don't have a tax advisor. You probably have a tax preparer who puts the right numbers in the right boxes, meets with you once a year, doesn't even talk to you about things as cost segregation, whether you would qualify in it or you would not qualify for it. Thank you so much. Till the next time.

Speaker 2:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.