All Forum Posts by: Bonnie Griffin Kaake

@Yonah Weiss Yes. Nevertheless, there are some exceptions in cities or resort towns where the land values are off-the-charts as you probably know. I just pulled up my last duplex project and although I don't have the land value easily accessible, the ratio is a little over 37% of the basis after land allocation. Our studies should not be all that different from each other on the bottom line. 

@Brian Leong 

You have been given some great advice from @Dave Foster. When you make that 1031 exchange into a building that you will be using for your business, be sure your CPA/tax professional groups your business with the building. This must be done in the first year of ownership and will make your property "active" so that you can use any paper losses generated by doing cost segregation, against your business income. If this is not done, the building is a passive investment and losses can only be used against what you are paying in rent to yourself. 

@Michael Plaks  You are correct that if the property is not yet in service and you do the fix-up, it does change the situation and it gets added to the basis. On the other hand, if there was occupancy prior to the renovations, and they are being done a year after that occupancy/purchase, a Partial Asset Disposition, which is part of the Tangible Property Regulatons, can be done. This is a complex and specialty area of tax law that we teach CPAs and tax professionals about in CPE classes. Cost segregation can only be done after a property is placed in service. I did not see anywhere where the person mentioned that the fix-up/rehab was being done prior to occupancy or that there was or was not occupancy when the property was purchased. Maybe I missed that point. That is why I responded the way I did. I really don't like seeing investors pay more in taxes than they need to pay. 

@Donald F. This is a specialty area of taxation. There are many tax and cash-flow benefits available all during the ownership of a commercial or residential rental property. It appears that you are in the 24% tax bracket. If you do a cost segregation study on the hypothetical $800k duplex/triplex, you can expect about 30-40% of the purchase price will consist of tangible property that can be depreciated in year one. You can usually count on about 6-10% of your purchase price in after tax cash-flow the first year. That is about $48k to $80k in taxes you don't have to pay and can reinvest. The American Institute of CPAs (AICPA) recommends to their member CPAs that a cost segregation study is done on EVERY property over the purchase price of $750k. It is usually beneficial for any commercial or residential rental over the purchase price of $200k. Our range nationally is $200k to $2 billion in purchase price. CSSI and I teach CPAs/tax professionals how to leverage tax benefits for their clients. 

There are many other benefits available to commercial property owners and I would be happy to talk to you about additional benefits of getting a cost seg done and beyond. Under the current administration, leveraging the available tax benefits is going to be even more important for commercial property owners. And, doing it with an engineering-based study (IRS' preferred methodology) with audit defense included, is going to be even more important. The IRS is currently hiring thousands of young aggressive and technically savvy tax professionals. Audits of depreciation schedules will be on the rise. Why pay more in taxes than you need to pay? Reinvest that bonus at a more lucrative rate of return than letting that money sit with the IRS.  

@Dan H. An investor does not have to be a RE Professional to benefit with a cost segregation study on a property. As long as the property or a group of passive commercial or residential properties is showing an income sufficient to have to pay federal + state taxes, it is well worth getting an engineering-based estimate. Passive losses on RE can be used against passive gains on other investments. 

On another point you made, yes, as a RE Professional your tax benefits can be used to offset non-investment income. Also, an owner/occupant who has grouped their building with their practice/business can use the NOLs from cost seg against their business income. 

@Costin I. You are correct in that if you have no income, it is unlikely that cost segregation will be of benefit to you with a few exceptions. Under the Cares Act, if you are a RE Professional or an owner/occupant (i.e., restaurant, doctor owning his own building, manufacturing facility, etc.), you can use cost segregation's big NOLs to get a refund from the IRS on previous years' taxes when you did pay taxes. 

If any commercial or residential RE investor can't use all the benefits in the first year of doing the study, they can push them forward to years going forward. You also asked about my reference to "cash flow upfront". If you don't have to pay state & federal taxes, that gives you cash upfront that is available to re-invest or use as you prefer. And, it is usually 6% to10% of what you paid for the property in after-tax cash flow. Think of it like winning the lottery, do you want cash upfront or dribbled to you over years and years? Why let the IRS hold that money, when you can reinvest it at much higher returns.  

You also mentioned "recapture" upon sale. It is not likely that the carpeting, as an example, is going to be worth what it was valued at when the study was done. A sharp CPA/tax professional knows that he/she can easily justify a decrease in value of the tangible property upon sale. And, upon sale, the value of the dollar will be lower...think "time value of money". Even the American Institute of CPAs (AICPA) recommends doing cost segregation studies on all properties purchased for $750k or more. We do them on properties from $200k up to about $2 billion. 

I hope this answers your questions. I am available to discuss in more detail if you want to contact me directly. 

@Derek Peruo You are right, the margins can be higher for short-term rentals. Nevertheless, those crunching the numbers for a STR need to take into consideration the longer term depreciation schedule. You must use 39 years instead of the typical 27.5 for a residential rental. If you miss this, you can be a target for an IRS audit and many tax pros are missing this. On the other hand, a cost seg study can give you extra cash-flow upfront no matter if it is a short-term or long-term rental. This can give you the extra cash-flow to upgrade the unit(s) and increase the rent.

I too feel bad for investors with tenants that have taken advantage of the Covid eviction moratorium. The Cares Act has been a big help to those same investors by allowing the large NOLs created by cost segregation to be used 5 years backwards and put refunds in the banks of those investors. The Cares Act advantages only apply to RE Professionals and owner/occupants and must be done for 2020's tax filing. If you have already filed, it is not difficult for your tax pro to adjust (not amend) those 2020 taxes before the end of 2021. Of course, you will need a cost segregation study. We have saved many many restaurant owners across the country from closing their doors permanently by helping them and their tax professionals get this done. I am available if you want more information. 

@Christian Duke  I am orignally from Ohio and have lots of family there. Welcome to the fascinating and profitable world of real estate investing. 

Another thing to add to your list of "MUST KNOW" is how to leverage the tax advantages of owning commercial RE and residential rentals. The benefits have never been better! Don't expect your CPA/tax professional to be your tax strategist. You may not have to pay taxes on your rental income for a long time. It represents about %6 to 10% of what you paid for the property in taxes (federal + state) that you will not have to pay. Don't leave money on the table. Estimates are at no cost.  

@Kaitlyn Castillo Many years ago I fell into RE when I was with a Fortune 100 company in marketing and they transferred me to another city and then another state. I owned my own home at the time and decided that I would rent it for a few years while I was moving from state to state. My brother-in-law helped me when things had to be repaired/replaced. It was a great experience and gave me the bug. It took me years later to get my RE brokers license and begin working in and investing in commercial RE. My license is now inactive but I continue to work in and invest in RE.