How To Save Some Serious Tax Savings On Your Rental Properties

Question

Hey, just checking in with my fellow real estate investors! If your Accountant has not done an Engineering-based Cost Segregation study on your investment property rentals, you may want to look into having one done. I just completed mine and I saved $275 K in taxes for just one of my properties (a short-term vacation rental). I was blown away and wanted to share this with the group.

I have a company that I found that will run a 100% FREE audit for owners of rental properties, to see if and where they can save you money and put some cash back into your pocket with your rentals. They use the very confusing/detailed IRS guidelines to save your company money over what a ‘typical’ CPA does (incorrectly keeping everything in the 27 ½ year or 29-year depreciation schedule- which is the 'easy' way to do it, yet it loses you a LOT of money that you could be using NOW to re-invest in your rental portfolio). You can also use this on vacation rental properties or even on any commercially leased or owned buildings. And the best part is, you can take this money anytime that I need it- a chunk now to lower taxes if I had an exceptional year, for example, I can save it for future tax filings. You definitely need this as a tool in your toolkit for income-producing rentals in your portfolio!

This company works WITH your existing CPA to take the benefits (unless you want this company to file them, instead, which they can do). I had my CPA take their audit and directed him to use it as he needs to, based on the income that I have each year- he did take some this year and we're saving a big chunk for future years.

They will complete a free audit for you for your rental properties (or on any small business that you may also own), and if there are NO savings, there is NO fee for the 'free look'. If they do find that you have a substantial sum of money that you can take immediately, they will tell you how much you can get back, give you their fee to recover that money- and you could decide to move forward- or not. They go back 20 years, and the fee to do all of this is only 10% (and even less than that, if you own multiple properties). It takes about an hour phone call, and they will work with your existing CPA to get the depreciation schedule already filed, to see what can be ‘tweaked’ to give you back a substantial sum of money NOW, rather than a dribble here and a dribble there over 27 or 29 years (will you have a need for it then, or would you rather have a big, lump sum now, to re-invest)? Three of my real estate clients over the past two months saved $650 K, $285 K, $189 K, $540 K, and $275 K- and none of them had huge rental portfolios. You can do this with just one rental property- even commercial buildings. Hotel and motel owners (and other small companies) save a lot more, because they have such large portfolios with a LOT of write-offs. some of your properties may not offer a lot in savings- but if they don't, they will tell you it's not worth doing- no harm, no foul. I have had one real estate client who bought a vacation rental property with me, and they ran the audit and told him that it wasn't worth doing, as he wrote all of his income down so that he effectively had a zero tax bill already- but that is pretty rare.

A nice feature that they offer, too,  is that all of their work comes with 100% Audit Defense- unlike with other CPA’s work. My own CPA is now using this company to do Engineering Cost Segregation for his other Investor clients!

And if you are also a business owner, this group also offers other programs, like the Employee Retention Credit, which amounts to $26,000 per employee in 2022 (plus $5000 in 2021). 98% of businesses that qualify for it have not even taken it. My business didn't qualify, as an owner themself cannot take the credit, but it's nice to know that it is out there for those who do qualify.

Bottom line: if you haven’t had an Engineering-based Cost Segregation study done yet for your rental properties- you may be leaving some serious money on the table. Reach out to me and I will help you get in touch with them for a quick call to see what you might save. It’s surprisingly painless and you might be surprised by what they get back for you- I sure was! Happy Real Estate Investing! 😊Kristen Haynes

Bonnie Griffin Kaake · Answer

@Kristen Haynes  What you are describing is no different and may not be as good as a true engineering based cost segregation study. The depreciation timeline on a multi-family or rental home is 27.5 years. If that same home or multi-family is a STR it has a depreciation schedule of 39 years, not 29. Your best best is to ask many questions before engaging with a company. Many companies call themselves engineering-based but only do desk-top studies. A quality engineering-based study requires an on-site inspection inside and out. Also, read the fine print. Are they willing to cover you at no additional cost if you are EVER audited?

All cost segregation companies I am aware of, large or small, offer no-cost estimates for doing these studies. Just be sure you know what you are getting. It may be best to get an estimate BEFORE you sit down with your CPA/tax professional. Keep in mind, they are very busy and short-handed. It is too easy for them to simply do straight-line depreciation which is not usually in your best interests.

Kristen Haynes · Answer

Absolutely, Julio!

I used the Northstar group- they do many things besides just Cost Seg for their business owner clients. I would be interested to see what your company offers and the basic fees for your firm's Cost Seg studies. I have found that many firms charge pretty exorbitant rates, so definitely would like to have a feel for how your firm compares. Feel free to email me, so I may compare the product offerings and fees for those services for my other real estate investor clients. Thanks, and have a great week! Kristen

Kristen Haynes · Answer

Yes, Anthony, it is. It is very different- basically, it is accelerating the benefits, instead of getting a 'dribble' here and there, over 27 or 29 years, like typical CPA's use. Basically, an Engineering Cost Segregation takes everything that is renovated, updated, or done to each property for the past 15 years, and puts each and every item into the proper classes- for example- if you took basic, straight-line depreciation for carpet, for example- carpeting that you put into a rental home- it doesn't LAST 27 1/2 or 29 years- it lasts maybe five- so that is put into it's OWN classification area, using exact guidelines from the IRS for each and every item. Most CPA's don't do anything other than straight-line depreciation, because it is very time-consuming to do and they don't have the experience nor the knowledge to even be able to DO accelerated depreciation, like an Engineering / Forensic Accountant has.

With the group that I use, it's a VERY easy process- basically, it starts with a scheduled call, where the Engineering Accountants ask simple questions about each of your properties- when you purchased it, what improvements you have made to it over the years, and approximately WHEN you made the improvements and the estimated cost thereof of any additions or improvements. Then, they involve your current CPA to get the past depreciation schedules for each property, so that they can know what has already been captured in any straight-line depreciation. At that point, you may have your CPA get on a call with them, as well, if you'd like- this does not replace your CPA who basically files your taxes- this is a complement TO their work- so it's not 'cutting out' your CPA. In fact, this company encourages your CPA to be part of the process (if you and they want to be). Using the information given to Northstar about the above, they will complete a 100% FREE audit and determine what, if anything, they can save you in tax offsets, using the Engineering-based Cost Segregation. If there are savings to be had, they will give you the amount that they can save you, along with what their fee is (this group charges less than most, up to 10% (and less than that if you have multiple properties to Cost Seg- they basically offer a volume discount). For example- they saved my client with two rental properties (one beach condo, one a mountain house) $275K on the beach rentaL, and $89 K on the mountain rental (she owned the mountain house for less than a year, and she made fewer improvements during that time- so the savings were not as high as the beach place). Basically, if you save $100,000, your fee would $10,000 to get the full $100 K back, and even less if you are able to cost-seg more than one property. Who wouldn't pay $10 K to get back $100 K?

Once you know what the savings would be and want to move forward, they will complete the full audit and generate the proper tax form for you and your CPA to utilize, with everything being put into specific categories. It generally takes around two weeks or so to get that back. If they cannot save you money, or if you decide not to move forward- you just got a free audit and there is no fee to check. Then, if moving forward, this group could file the proper form for you with the IRS- or you will give that study and your CPA would file it for you. This particular group uses Engineering Accountants and past IRS Agents to do this, so they guarantee their work with true Audit defense- something no other CPA offers. So it's basically a win-win, all of the way around.

On my properties, I took a big chunk of that money when filing extended taxes last year for 2022- and I saved a bunch to take in future years, when I need it to offset future taxes (you can take some now and some in the future, you don't have to take it all at one time). Does all of that make sense? Reach out to me if you would me to put you in touch with them to see what they might be able to save you. Happy to help! :)

Julio Gonzalez · Answer

Glad you experienced the benefits of an engineered cost segregation study! It can be a very important part of tax planning!

Kristen Haynes · Answer

Yes, I realize that short-term rentals are considered commercial at 39 years- igger Pockets would not allow me to amend my post. Not all engineering Studies DO require an on-site inspection- Northstar Marketing Group doesn't, except in special circumstances- they have a Zoom or conference call with the client and together they fill out a questionnaire, send supporting documents and past depreciation scheduled, and they are done in usually two weeks with the amount of the discovery, and they come with free Audit Defense, as well. I'm sure most CPA's do straight-line depreciation, and you are correct that it depends on what is in the client's best interest. But of my real estate investor clients can get a big chunk of money back NOW, to infuse into their bottom line, versus a 'dribble' here and there- 99% of the time, they want that. It's always up to the client and their CPA how best to use that money- and when- once it is put into the proper 'buckets'.

Anthony Freeman · Answer

So this is separate from normal cost segregation?

How To Save Some Serious Tax Savings On Your Rental Properties

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