All Forum Posts by: J Scott

Quote from @Ken Press:

Quote from @J Scott:

Thanks @j Scott! Really appreciate the deep response, and the effort to correct typos. 

One more arbitrage question. In addition to the TVM of getting money now (or next April 15) w the bonus depreciation tax write off in year 1… Would I also be gaining the difference between bonus depreciation money now offsetting ordinary income at a 37% tax rate vs the future sale recapture at capital gains rate of 25% (assuming I don’t 1031 into the next property)? 

Example: On a $100,000 depreciation that would mean paying $25,000 in taxes at the future sale date vs $37,000 tax offset today. So an additional net $12,000 in todays dollars  

Do I have that right? 

Yes, potentially.  If it's as simple as using tax benefits today to offset a high tax bracket this year and then paying the recapture at 25% in the future, you absolutely get the savings.

But, in the real world, things can get more complex.  For example, if you keep pushing that tax down the road, the tax code could change and depreciation recapture could end up hurting us more (unlikely in my opinion, but possible).  Another example, sometimes tax benefits come as something other than depreciation (for example, if you dispose of property/materials, you could get a savings based on Section 1231 of the tax code), the repayment could be a lot higher.

Generally, I like to assume that anything saved through depreciation gets taxed at 25% later (exactly what you said), but I always know in the back of my head that's the best case, and things could change.

Quote from @Julio Gonzalez:

@Ken Press Great questions. I think a common misconception with cost segregation studies is that you will receive a refund check as a result of the study. Cost segregations allow you to accelerate depreciation which is a tax deduction and therefore reduces your taxable income. So rather than getting a bigger refund check, you are simply writing a smaller check to the IRS.

Though keep in mind that it's quite possible that depreciation benefits could completely offset all income.  And if you had paid estimated taxes throughout the year, you would be getting a refund for some or all of it.  Even if you didn't pay estimated taxes, you could reduce your tax burden to $0.

I typically have seven figures in depreciation each year, which means I can make a lot of income before I have to start paying taxes. And every dollar I don't give to the IRS this year, I can reinvest and leverage until the day I need to recapture.

Quote from @Ken Press:

Thank you! Great answer… exactly what I was hoping to figure out.

 Sorry for all the typos (I use voice to text).  I just edited and corrected the mistakes...  :)

First, while I always like to know what the tax benefits are of my properties, I rarely factor the financial benefit into my return calculations when trying to determine if I will do the deal. The main reason for this is that most tax benefits will be recaptured at the end of the deal, so the benefit is not quite as good as it may seem.

To be more specific, consider the situation where you get a lump sum of $5,000 back at the end of the year (or avoid paying $5,000) thanks to depreciation.  Given that you will likely have to pay that $5,000 at some point in the future, the benefit is the arbitrage you get from time value of money. Basically, how much can you earn from that $5,000 between the time you save it and have to pay it back.

Factoring this into your returns is probably more difficult than it's worth. At least for single family and smaller properties. Now, if you are doing larger properties where the tax savings are in the six or seven figures, and you have the ability to push that savings out over decades instead of years, then or may be worth the time to factor that into your returns.

There's a simple way to do this and a more complex way. The simple way is that you take the year one or annual savings and you factor that into your cash on cash return for that year. If it's bonus depreciation, it will give you a nice COC bump for a single year, so don't be confused into thinking that's going to be every year.

The more complex, but more accurate way to do this is exactly what I said above. Do a time value of money calculation (PV calculation) on the money you'd save between tax benefit and recapture and add that to the equity that the property would generate for you.

Personally, I treat tax benefits similar to natural appreciation.  I don't assume I'm going to get any or that it will be valuable to me, but I know that anything I do get is a bonus and will make my numbers better than what my analysis has indicated.

I just rolled out of bed, so if that's not coherent, let me know and I'm happy to explain further. 🙂

By the way, if you're going to ask somebody to teach or mentor you in this business (or any business), this is the exact right way to do it.

Lead with value and offer your time and effort in return. As opposed to so many here who simply expect others to provide their services and expertise in return for nothing.

Good job. And if you don't find anybody on BP willing to help, I would take that same message to your local REIA meetups. You'll find somebody.

Quote from @Ronald Rohde:

Is this AJ's firm?

Yes.

Here's a good place to start:

https://www.biggerpockets.com/...

I would be patient and wait for rates to come down.  Low ROE sucks, but enjoy the cash flow for the time being.

And I would shop around for HELOCs. They're out there.

Take the money and run...

Quote from @Kumar Gaurav:

@Ronald Rohde

It’s Class A , 140 Units Baltimore 6% annual coc

Where in Baltimore?