All Forum Posts by: Scott Roelofs

@Michael Plaks

You seems to have a lot of “skin in the game” as you continue to provide false information. You claim to “not promote” DIY, while you post links to their site and slam engineered cost segregation.

You obviously haven’t looked closely into “DIY” cost segregation or the audit protection they offer. If you had done that you would realize that neither are worth the paper they are written on. They simply created a product that people would buy. If they really believed in their “audit protection” why would anyone ever pay for their full price product? Why not just “audit protect” them all?

People say “perception becomes reality”, I say “Unchallenged perception becomes reality.”

@Michael Plaks

Again you are misguided in your understanding of how cost segregation works. Using your example, you paint a negative that this investor was able to acquire multiple properties that are high income paying because he had excess cash from cost segregation? In what world is that a bad thing? Also, how many 7 year cycles does a person have to complete before retirement? 2 or 3, if they are lucky to be young enough. It is tax reduction if you depreciate in high income years and lose that depreciation in low.

Cost segregation is not at all like leverage. Leverage is borrowing money to purchase more than you can purchase on your own. Changing how you account for property you own is not leverage. The timing of depreciation is a strategy used by virtually every corporation on the planet and we believe regular investors should be able to use this technique as well.

And let’s be clear, when the IRS comes knocking because a tax payer used a “diy” strategy, you will not be there to help them, free of charge of course. But I’m sure your IRS agent will allow you to just change your numbers after you receive the audit notice. “Hold on, before the audit, I’m really going to do the cost segregation now.” See how that goes over.

Cost segregation is a strategy. It is complex, but highly beneficial. The work that goes into them is worth far more that anyone charges. It’s not a magic bullet, but it is highly effective.

@Michael Plaks

I'll be holding my breath...

@Michael Plaks

There is nothing to suggest that grouping activities would prevent a change of accounting, automatic or otherwise. The IRS is clear that they allow different types of accounting for different types of inventory. A company can use LIFO for one product and FIFO for another. In fact, the preferred method is actual costs.

As for real estate inventory, there is nothing that specifically suggests real estate grouped for economic purposes is excluded. The intention of the grouping activities is to identify the PAL. Activities, both passive and active, do not forfeit their rights to change accounting methods.

Furthermore, grouping activities doesn’t aggregate the real estate portfolio on the IRS form 4562. Each property still holds their own depreciation schedule, regardless of grouping activities.

The lack of an exclusion of real estate in the regulation and the presence individual depreciation schedules, even for grouped activities, strongly suggests the is no merit to your concern.

@Michael Plaks

I read your article and would like to weigh in on a few items.

First, I am 100% with you on a CSS reporting a “tax savings.” A CSS and cost segregation company does not have all the appropriate information to report a “tax savings.” This is especially true for multiple year projections.

Second, you have a great handle of accelerated depreciation as a tax concept, but some misunderstanding of their practical uses in advanced corporate finance. Let me explain.

Acceleration of depreciation is not “robbing” from future years. For your academic exercise to work, there are two variables you must hold constant.

1. A constant tax rate

2. A single purchase

When you relax these, laboratory style variables, you find that tax timing is intensely important. For example, a business owner has 5 years to retirement and makes $350k per year. Accelerating depreciation for those 5 years would defer high tax income years. The depreciation would fall off after the 5th year, but so would the tax bill. This is not “robbing” from future years.

Second, even if the tax rate stayed constant, repeating the purchase of property every few years would defer taxes as long as the purchases continue. This is a higher level of corporate finance, and a very effective tool. For example a property purchase gives accelerated depreciation deduction of $30k per year for 5 years. At the five year mark, the owner makes a second purchase of the same amount receiving another $30k per year for another 5 years. Then at the 10yr mark you make a third purchase and so on. This gives you an ongoing deferral of taxes.

Finally, I take exception to your categorization that @TylerBaldwin is “just a salesman” and you are some wholistic truth teller. Especially when you ask another “salesman” to weigh in. Unless you are running a non-profit, you are as much of a sale-person as anyone else. And just because we “sell a product” does not me that we don’t look out for the best interest of our clients or that we don’t a strong grasp of the concepts to which we speak. I believe you owe him an apology.

@Susan O. I would say that sounds consistent. Residential lending doesn’t deal with depreciation as often as a commercial lender. It also depends on the particular background of the underwriter. The key to remember is WHY depreciation shouldn’t effect borrowing power. The  cash on hand after other expenses will be used to pay off debtors. You ability to pay that debt is what they are measuring. Depreciation doesn’t reduce the cash on hand, therefore does not increase your risk. With this knowledge, you can ask them if the are counting depreciation and that you believe they are incorrect and should recalculate. 

@Natalia Barriuso the fence does count for bonus depreciation and don’t forget the disposal expense for the old property.

As for the qualifications for a loan, they are referring the the reduction of taxable income you are left with after the large depreciation deduction. This happens from time to time, but you are allowed, and recommended, to push back on the underwriter. To be accurate, they must exclude depreciation from the calculation as it’s a non-cash expense and doesn’t negatively effect cash-flow. If you aren’t comfortable pushing back, you can always ask them how depreciation is treated before getting into underwriting. There are plenty of underwriters that calculate this correctly.

@Andy Becker At first glance, it would seem that a greater understand of the actual assets owned in real estate would be needed. Here are some questions I would want to know before committing to a 1031 exchange:

What personal property do I own in the real estate asset?

What percentage of the total is my personal property?

What is the value of the personal property sold?

Am I going to be using an intermediary for the 1031 exchange?

Usually a cost segregation complicated the 1031 process somewhat, but at the looks of things that process just got more complicated on its own. Cost segregation would make that process of answering those questions easier.

Just the take of a hammer hitting a nail though. (Cost seg guy seeing a cost seg benefit)

That isn’t completely true. 280E states that they can not take any G&A deductions. They are however allowed to take PP&E. This is where cost seg comes in. Most growers have high cash flow and large PP&E. Normally they would have to capitalize and depreciate of many years. Cost Seg is about the only option they have due to these regulations. 

Remember that the defining factor in recapture is the allocation of sale price to the specific asset. If I sold a truck the value would be easily defined. However, if I sold a fleet of trucks in one sale, the value of each truck would have to be allocated. You would allocate a lower sale price for old trucks and higher for newer ones. This is how cost segregation works. When you sell a property, it’s not defined in the contract the value of each asset. It’s sold as one price. So, if I purchased a property, held it for 5yrs, then sold it. How much of the sales price would you allocate to the 5 year property? Probably very little, therefore reducing recapture by a lot.