All Forum Posts by: Bernard Reisz

@Michael Plaks Your post, as always, goes way above and beyond!

@Michael Win As a CPA that provides real estate tax services (i.e., a CPA background, but the services provided are Cost Segregation, 1031 Exchange, etc.), can't possibly overemphasize the value of working closely with a tax professional to coordinate your tax strategy. For whatever my opinion is worth, @Michael Plaks is top of the line and among the savviest and sharpest tax pros out there. The best tax pros will uncover tax reduction opportunities the "web" doesn't know about and will help you avoid pitfalls created by web tax info that's incomplete.  

REPS, in particular, is a topic about which there's an avalanche of web content about - and it does truly create incredible tax reduction possibilities - but it is also rife with traps for the unwary. 

When we do a Cost Segregation study, we want it to actually deliver value to our clients. We don't want them to do a study, only to find out at tax time that those losses don't translate into tax savings because of passive activity loss limitations (or worse, they unwittingly claim losses that they create tax risk for them). In many instances, our initial conversation with a prospective client uncovers that they may not benefit from a study. However, When a prospect/client comes to us as a referral from a true real estate tax expert (EA or CPA), we're confident that we're delivering value through a Cost Seg Study.

Lawyer: "Divine Tribunal, what happened? I was as healthy as an ox, and I'd barely passed my 48th birthday!"

Heavenly Tribunal: "48? According to your billable hours you were 172."

Reformat to:

Taxpayer: "Divine Tribunal, what happened? I was as healthy as an ox, and I'd barely passed my 48th birthday!"

Heavenly Tribunal: "48? According to your REPS hours you were 172!"

@Jon Fletcher First thing to do for this kind of thing is get a pro like @Michael Plaks to review the specifics of your scenario. 

A distant second thing to do is to review content created by authoritative pros (We've got multiple superb recordings of Michael in the ReSure member space discussing these topics, but posting outbound links here may displease the BP powers that be.)

Yonah - Count me in for the friends and family round of funding/investing!

The IRS provides an description of a "quality cost segregation study."

The IRS states that:

👉 Cost segregation studies on used real property should properly allocate the purchase price between the non-depreciable land, building and personal property.

👉 A quality study documents how the purchase price was allocated between land, land improvements, building and other assets.

So, how is basis allocated to land, according to the IRS?

In Publication 551, the IRS states:

▶️ If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings.

▶️ If you're not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes.

▶️ In the Tax Court Summary Opinion 2017-31, the IRS relied on County Office of the Assessor’s land allocation to challenge RealEstate depreciation deductions claimed. (Incidentally, the Tax Court ruled in favor of the IRS.)

🤷‍♂️ Are there additional methods of determining land allocation?

💡 There are several additional methods for determining land cost allocation, based on various appraisals.

💡 Ultimately, it's a question of determining fair market value at the time of purchase. It's a "question of fact."

💡 While there are no IRS Safe Harbors for this, the IRS has indicated that they're OK with county tax assessor allocation, making that the "easy way out."

💡 Tax assessor allocation may not be accurate and may reduce your depreciation tax deductions. (Tax assessor may also skew in your favor, and the IRS could, at least theoretically, challenge that. IRS publications are very helpful and are designed to help us, but are not law.) In such scenarios, using one of the appraisal methods is your best bet.

@Michael Plaks Going to do a "copy-paste" of content that I've posted elsewhere (off BP) that's quite apropos. Although posted with regard to a Cost Seg Feasibility Analysis, applies equally to an actual Cost Seg Report. 

How to interpret a Cost Seg Feasibility Analysis

A Cost Segregation Feasibility analysis can be a pretty "noisy" document, so you need to know how to cut through it all to focus on what actually matters.

In most areas of life, we say it's "the bottom line" that counts. In a Cost Seg feasibility analysis the bottom line doesn't count all that much.

In fact, your actual ROI on a Cost Seg Study may be higher or lower than illustrated on a Cost Seg feasibility study.

Ya see, the actual tax and financial benefit you get from doing a Cost Seg varies based on a number of factors that are outside the scope of cost seg cost allocation and asset classification.

👉 What portion of the purchase price gets allocated to land?

👉 What's your marginal federal income tax rate?

👉 What's the applicable state income tax rate?

👉 Does the applicable state conform to Federal Bonus Depreciation rules?

👉 What is the time-value of money to you?

👉 What additional tax and financial incentives might you qualify for by reducing your taxable income?

The bottom-line tax or financial benefit reported on a Cost Seg feasibility analysis NECESSARILY incorporates ASSUMPTIONS regarding all the foregoing.

However, those assumptions certainly do not fully conform to your personal tax and financial reality.

Assumptions are necessary, but you've got to know what they are so that you can adjust the "bottom line" to your personal reality.

So, what does matter in a Cost Seg analysis

👉 The percentage of depreciable basis allocated to short-life assets.

That's it. Short, Sweet, and Simple!

@Michael Plaks

As I've said in the past, in response to your posts, BP has got to provide something more effusive than a "vote!"

I'm with you all the way on this, which is the purpose of my posts and what has driven me to get involved in these tax services. Hopefully, bridging the chasm between tax tools and tax advisory.

Land allocation is a complex topic, with 80/15 "rule" being baseless, but widely used. We use tax assessor as a default because it has substantial basis (pun absolutely intended!) and explain the context to investors. We're glad to update the report based on specific request from the taxpayer or their tax professional. (Yes, there are requests to apply the 85/15, 80/20, 75/25, 70/30 "rules;" more so than requests to update based on appraisal.)

Would actually be glad to get involved in more complex land valuation, but for that to have any success there's got to be greater awareness and advocacy on the part of taxpayers and their tax professionals.

Overall, astute and expert tax professionals like you are better for investors and better for us, as we're in total alignment. Alas, @Michael Plaks, you're truly exceptional!

@James Hamling Great perspective! 

Cost Segregation studies for new development is very different than cost segregation studies for acquisitions. With development, cost basis for many of the components are available. In contrast, on an acquisition there's a lump sum cost for the entire asset that must be allocated.

Real estate tax tools are incredibly powerful! When used repeatedly, and in conjunction with each other, their compounding effect is astounding!

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