How Investors Legally Avoid Taxes with Cost Segregation | Jeff Hiatt

Summary

Podcast Summary: "How Investors Legally Avoid Taxes with Cost Segregation | Jeff Hiatt"

The Science of Flipping delves deep into the sophisticated strategies that real estate investors can leverage to maximize their profits and minimize tax liabilities. In this enlightening episode, host Justin Colby is joined by Jeff Hyatt, a renowned Cost Segregation Specialist from Depreciation Doctor, to unpack the intricacies of cost segregation and its pivotal role in real estate investing.

---

Introduction to Cost Segregation

The episode kicks off with Ryan Reynolds highlighting the significance of cost segregation in real estate investment. He introduces Jeff Hyatt, emphasizing his extensive experience:

Ryan Reynolds [01:22]: "I have a dear friend of mine who has done 25,000 cost seg studies in the last 25 years and have saved people over $4 billion."

Understanding Cost Segregation

Jeff Hyatt provides a foundational understanding of cost segregation:

Jeff Hyatt [02:49]: "Cost segregation studies are the way the IRS allows you to accelerate depreciation. So a cost seg per se doesn't give you more depreciation, but it allows you to take the depreciation you would get over 27 and a half or 39 years. It allows you to take some of it earlier."

Key Points:

• Accelerated Depreciation: Instead of spreading depreciation over the standard 27.5 years for residential properties or 39 years for commercial ones, cost segregation enables investors to depreciate certain assets over shorter periods (5, 7, or 15 years).
• Financial Flexibility: By accelerating depreciation, investors can reduce their current income tax liabilities, freeing up capital to reinvest in additional properties or improvements.

Eligibility and Thresholds for Cost Segregation

Jeff discusses the financial thresholds that make cost segregation economically viable:

Jeff Hyatt [04:26]: "Because we have about 10 accountant types and about 27 engineer types, we can now push that number down to somewhere around 300 grand of depreciable basis."

Insights:

• Aggregate Investments: While a single property valued at $100,000 might not justify a cost seg study, aggregating multiple properties (e.g., five properties totaling $800,000) can make the study financially beneficial.
• Depreciable Basis: The focus is on the purchase price of the building minus the land value, as land is non-depreciable.

Bonus Depreciation and Its Impact

A significant portion of the discussion revolves around bonus depreciation and its varying applicability based on purchase years:

Jeff Hyatt [15:04]: "If you had bought it in 24, it's a turbocharger. It makes it better, but not as good as a supercharger."

Key Points:

• Bonus Depreciation Rates:
  • 2017-2022: 100% bonus depreciation.
  • 2023: 80%
  • 2024: 60%
• Retroactive Application: Through IRS Form 3115, investors can apply cost segregation studies retroactively without amending past tax returns.

Practical Examples and Scenarios

The conversation delves into real-world applications, simplifying complex tax concepts:

Jeff Hyatt [12:37]: "So purchase price, less land. Because unfortunately the tax code doesn't let us work off of what it's valued at."

Example Scenario:

• Property Purchase: $250,000 home with $50,000 land value.
• Depreciable Basis: $200,000
• Accelerated Depreciation Allocation: 20% ($40,000) to 5 and 15-year categories.
• Tax Savings: At a 36% tax rate, this translates to approximately $12,000-$14,000 in tax deductions for the year.

Special Considerations for Professionals

Jeff addresses how non-real estate professionals, such as doctors, can benefit from cost segregation:

Jeff Hyatt [21:37]: "If your doctor person is buying investment property like the single families and they're renting them out, then that's called a passive income stream."

Insights:

• Passive vs. Active Income: Typically, cost segregation deductions offset passive income, not active income like a W-2 salary.
• Real Estate Professional Status: If the investor qualifies as a real estate professional (spending over 750 hours a year in real estate activities), they can offset active income with these deductions.
• Grouped Economic Units: Professionals who own and operate properties (e.g., a doctor owning the building for their practice) can leverage grouping elections to treat rental income as active.

Strategic Advantages and Long-Term Benefits

The duo emphasizes the strategic advantage of deploying cost segregation studies for sustained growth:

Jeff Hyatt [43:58]: "Well, we’re not taking all of it early. We're taking 15 to 25% early, which means you have 75 to 85% on a go forward basis."

Key Takeaways:

• Reinvestment Opportunities: Accelerated deductions provide immediate tax relief, allowing for reinvestment and portfolio expansion.
• Sustainability: By not fully exhausting depreciation early on, investors retain a portion for future years, ensuring ongoing tax benefits.

Conclusion and Actionable Steps

As the episode wraps up, Ryan Reynolds underscores the importance of leveraging expert advice:

Ryan Reynolds [46:31]: "Depreciation doctor... he will answer your questions directly. He does all this for me. So if he's good enough for me, he's good enough for all of you."

Final Recommendations:

• Consultation: Engage with specialists like Jeff Hyatt to assess the viability and execution of cost segregation studies tailored to individual portfolios.
• Education: Investors are encouraged to educate themselves further through resources like Instagram (@depreciationdoctor) and the website costsegs.com.

---

Key Quotes with Timestamps

• Jeff Hyatt [02:49]: "Cost segregation studies are the way the IRS allows you to accelerate depreciation."
• Ryan Reynolds [01:22]: "I have a dear friend of mine who has done 25,000 cost seg studies in the last 25 years and have saved people over $4 billion."
• Jeff Hyatt [15:04]: "If you had bought it in 24, it's a turbocharger. It makes it better, but not as good as a supercharger."
• Jeff Hyatt [43:58]: "Well, we’re not taking all of it early. We're taking 15 to 25% early, which means you have 75 to 85% on a go forward basis."
• Ryan Reynolds [46:31]: "Depreciation doctor... he will answer your questions directly. He does all this for me. So if he's good enough for me, he's good enough for all of you."

---

Final Thoughts

This episode serves as a comprehensive guide for real estate investors aiming to optimize their tax strategies through cost segregation. Jeff Hyatt's expertise demystifies complex tax laws, providing listeners with actionable insights to enhance their investment portfolios legally and efficiently. Whether you're a seasoned investor or just starting, understanding and implementing cost segregation can be a game-changer in building a prosperous real estate business.

Transcript

[Capella University]

At Capella University, learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capella University. Learn more at capella. Edu.

[Justin]

My dad works in B2B marketing. He came by my school for career day and said he was a big roas man. Then he told everyone how much he loved calculating his return on ad spend. My friends still laugh at me to this day.

[LinkedIn]

Not everyone gets B2B, but with LinkedIn, you'll be able to reach people who do. Get $100 credit on your next ad campaign. Go to LinkedIn.com results to claim your credit. That's LinkedIn.com results. Terms and conditions apply. LinkedIn, the place to be.

[Jeff Hyatt]

To be that's a big concern for people is I don't want to amend the returns and all of that. Well, you can technically go back to 86 when the tax law changed. No kidding. With the 3115 now, typically you won't go back that far. The real window of opt opportunity for people where it makes financial sense because the accountants will often say, justin, what are you going to do this for? It's just a timing difference. Yeah, that's what they say. They go, oh, it's just a timing difference. Well, it is a timing difference, but if I give you the opportunity, Justin, to take a deduction today versus 27 and a half or 39 years, would you rather have it today or would you rather.

[Ryan Reynolds]

Wait, what is up the sides of flipping? This might be my favorite episode year to date because it's all about paying no taxes ever. Again, this episode is one that you are going to want to stick with because I have a dear friend of mine who has done 25,000 cost seg studies in the last 25 years and have saved people over $4 billion. Jeff Hyatt. What is up, brother?

[Jeff Hyatt]

Hey. Thank you very much for having me here, Justin. I'm thrilled to be here. I've seen some of your prior episodes and they're amazing and the folks you bring in. So thank you for allowing me to darken your doorway here. So.

[Ryan Reynolds]

Yeah, well, I appreciate it. You are. You are my very own cost segregation specialist. So if you need anybody to do your cost segregation studies, I'm telling you, this man does it for me. He's done it for 25,000 other people. He has helped save $4 billion of income taxes. Or maybe I'm saying that a little wrong, but $4 billion of taxable income. Guys, this is your man. So first of all, go follow him at depreciation at depreciation doctor on Instagram, Facebook, I think he says, Jeff, depreciation doctor. You got it. Cost segs.com is the website. Cost segs plural.com. this is my guy, so he's good enough for you guys. So with that out of the way, let's talk about what the hell is a cost seg and why is it so important?

[Jeff Hyatt]

So cost segregation studies are the way the IRS allows you to accelerate depreciation. So a cost seg per se doesn't give you more depreciation, but it allows you to take the depreciation you would get over 27 and a half or 39 years. It allows you to take some of it earlier. And by taking it earlier, what that does for the buyer of the property, the owner of the property, is allow them to reduce their current income tax. So instead of sending money to Washington D.C. they get to redeploy that money in their own world and buy their next property more quickly. Or they can, you know, buy, you know, they can improve the building so that thereby they can charge maybe a higher rent without having to go to the bank for more mortgage money.

[Ryan Reynolds]

Yeah, the simplicity is you don't have to cut a check to the irs. You can actually keep the money and either improve your property or buy another property, et cetera. I mean, that's the simplicity of it. This is why it's be really now the. The key that I want to make a major distinction because I come from this single family space, where's the argument where it's worth it to do a cost segregation study on a single family home? More often than not, now that I'm also in the apartment space and more in the commercial side and all these other things. That is the obvious. And we'll get there. But for all my single family lovers that have rentals or maybe even fix and flips or whatever, where's the fine line for. For you that you advise like it's worth it to do a car sex study or it's not.

[Jeff Hyatt]

Way back in the day when we first started, we might have said you need to be at about a million dollars. Now, that was 25 years ago because we didn't have the same database, we didn't have the same technology, we didn't have the same team that we have now.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

Because we have about 10 accountant types and about 27 engineer types, we can now push that number down to somewhere around 300 grand of depreciable basis. And that could be in one property or it could be across multiple properties. So ultimately what happens is it may not make sense financially for $100,000 property, but if we can aggregate a bunch of them together, that can start to make sense. If we can get to a certain threshold, it can be a really low number.

[Ryan Reynolds]

Yeah. So for example, I'm doing a bulk loan of taking five of my rentals and I'm wrapping it into one loan. So I could go take those five and do a cost like study against those five. I'm making up the number. Let's just say they're all five combined are worth 800 grand. I'm making up the number. Then it would make sense where independently they're worth 150 grand.

[Jeff Hyatt]

And that could be a challenge because it just won't, it won't look exciting to you. You'll look at it and go whatever.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

But if you're talking about an $800,000 basis, then we can start to make it look good.

[Ryan Reynolds]

Okay, so well then I'm going to call you after this episode again. We'll put that into my next round of things to do.

[Jeff Hyatt]

Perfect. And on that note, what I when I said make it look good, typically what we find is that the metric that most clients look at is, hey, if I spend a dollar, how many dollars am I going to get back in tax deferral?

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

So you spend a buck, you say four or five bucks. Most people will say, hey, that's a good deal, let's do it.

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

We hit that threshold kind of at a minimum around 300 grand. Especially bonus depreciation helps turbocharge that number.

[Ryan Reynolds]

Right.

[Jeff Hyatt]

So that can be really good.

[Ryan Reynolds]

And so this is where me and my accountant go head to head a lot of times. Right. What is depreciable? What is in? What's going to count, what's not going to count. So let's talk a lot about the grainy alerts. There's not a lot of people that are nearly as familiar as obviously you or even myself. Right. You are infinitely more experience. But I know enough what is depreciable and how does that look? Let's just use a single family home. Let's stick with that for the time being. If I buy a home, I renovate the home and then I rent it. The classic brrrr model. Sure. What's depreciable? What is the bonus depreciation? Is it qualify for it? Let's kind of walk through all that, if you're like me in the real estate game, you know how wild things can get. Managing leads, marketing, sales operation. It's a constant hustle. But let me tell you about something that has been a game changer for thousands of investors out there. Re simply, it's an all in one software that truly is a lifesaver for anyone serious about the real estate investing game. What's crazy about Resimpli is how much it packs into one platform. You've got absolutely everything you'll need from list stacking, driving for dollars, automated drip campaigns, a cold calling dialer, a full phone system, email management, speed to lead buyer management, automated task systems, accounting features, literally the whole nine yards. It's like they built the powerhouse software just for us investors. No more juggling different subscriptions and trying to integrate a million different tools. So if you're anything like me, and if you are ready to streamline your investing business and close more deals, you've got to check out Resimpli. Head over to resimpli.com forward/pod that is R E S I M P L I.com forward slash pod and get 50% off your first month. Oh, and they're also throwing in a free 30 day trial, so jump on while you can. Trust me, you don't want to miss this. Hey, real estate hustlers. Are you sick and tired of seeing potential deals fall through the cracks? You know the ones. They're looking promising, but now they're just dead leads sitting there collecting dust. Well, it's time to change that. And it starts with the science of reverse flipping. Imagine if you could breathe life into those deals, save on taxes and boost your real estate portfolio like never before. With the science of reverse flipping, you get exclusive access to our in house legal team, the country's top loss mitigation pros, and three live weekly calls with investors who've closed over 3,000 deals combined. These are the guys who know how to make the impossible possible and they want to help you do the same. You either want every unfair advantage or don't. Every deal you let slip by is money lost and every day you wait is missed opportunity. But with the science of reverse flipping, you can turn those no's into yeses and those dead listings into deeds. Visit thescience of reverse flipping.com now to join the community of serious investors who are taking action. Don't wait for deals to come to you. Go out there and take them.

[Capella University]

Is it time to reimagine your future? The right business skills may make a difference in your career. At Capella University, we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals like business management, strategic planning, and effective communication, and you can apply these skills right away. A different future is closer than you think with Capella University. Learn more at capella. Edu.

[Justin]

My dad works in B2B marketing. He came by my school for Career day and said he was a big roas man. Then he told everyone how much he loved calculating his return on ad spend. My friends still laugh at me to this day.

[LinkedIn]

Not everyone gets B2B, but with LinkedIn you'll be able to reach people who do get $100 credit on your next ad campaign. Go to LinkedIn.com results to claim your credit. That's LinkedIn.com results. Terms and conditions apply. LinkedIn the place to Be to Be.

[Ryan Reynolds]

Visit science of reverse flipping.com today and let's get those leads working for you.

[Jeff Hyatt]

Great. No problem. So I'll I'll say the tax code says to you, hey Justin, your building to be a building has to have certain things. And it doesn't matter if it's a single family residential home or like rental home or if it's a 30 story building. A building's going to have certain components, okay? Without getting into all the detail and all the specific designations. But when you boil it down, it's walls, windows, doors, roof, H Vac, plumbing for a bathroom, any electrical for lighting. Those are the building components, those pieces. So those are either going to be 27 and a half year for residential rental or 39 years if it's commercial or short term rental. Okay? So that's kind of the baseline. So what we need to do and what a Cossack study does is identify the pieces that are not in those categories and in your mind and you probably our listeners minds, they're going oh my gosh, he just said everything in the building. What's left, right? But you typically get into things like the wiring and the floor coverings, whether it's carpet or a particular type of vinyl flooring or laminate, that kind of thing. You get oftentimes into the kitchen space or the plumbing for the kitchen, you know, the like for the disposal and the pipes and you're going to have an ice water line to the refrigerator and the electrical for the refrigerator and the electrical for the dishwasher and the microwaves and the cabinetry is oftentimes considered in that accelerated category. So when you stack all that up, you could be somewhere between 15 and 25% legitimately in a faster life.

[Ryan Reynolds]

Now in the, when you say 15 or 20%, you're saying 15 or 20% of the value of the home, of.

[Jeff Hyatt]

The purchase price of the purchase price of the home. Excuse me, less land. So purchase price, less land. Because unfortunately the tax code doesn't let us work off of what it's valued at.

[Ryan Reynolds]

Right.

[Jeff Hyatt]

And us real estate guys, because I, I am also in the real estate side of the house too, us real estate guys all go, well, it's worth this. Well, unfortunately that doesn't help us with the tax code.

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

So the tax code says what is your basis in the building? Less land. So what did you pay for the building? Less land is the correct way to figure this out.

[Ryan Reynolds]

And then if you do renovate it and turn it into a brrrr. Buy, remodel, rent and refinance and repeat. And repeat money you spent on the additions. Enforced appreciation.

[Jeff Hyatt]

Yeah.

[Ryan Reynolds]

Doesn't really factor into this. You are just saying if you bought the home for 100 grand minus the value of the land, 25,000, you have $75,000 that is workable regardless if you spent another 50 on the remodel. That's a little bit.

[Jeff Hyatt]

You would, depending on what you spent it on.

[Ryan Reynolds]

That's right. So let's say I did the new kitchens, new wiring for the kitchens, all that good stuff.

[Jeff Hyatt]

So that stuff would likely fall into a five year life.

[Ryan Reynolds]

Okay, five year life.

[Jeff Hyatt]

Five year life.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

That's residential rental. Yep.

[Ryan Reynolds]

Because that speeds it up from 27 and a half. So I'm going to try to simplify this. I'm getting it. I want. It's almost like talking to an accountant. Right. Because it's so detailed.

[Jeff Hyatt]

It is.

[Ryan Reynolds]

But your traditional home gets 27 and a half years of depreciating value. Okay. Minus the land.

[Jeff Hyatt]

Correct.

[Ryan Reynolds]

But that's not very fast for me. I want this stuff faster. So what you're saying is if I go remodel.

[Jeff Hyatt]

Yep.

[Ryan Reynolds]

The kitchen on a said property, then I can go take that same level of depreciation, whatever that value is. Let's call it 250. There's land value of 50 and we're going to put in 50.

[Jeff Hyatt]

Okay. So bottom line is in that case we're talking about two hundred thousand dollar depreciable basis. Let's say we're calling it 20% that we can reallocate into a faster life. So that's going to be, call it 40 grand. So 40 grand is going to go into that five year and 15 year life. Now if some of that, a good chunk of that is going to go, let's say, towards the kitchen space. And that's going to give you bonus depreciation. If it's a 24 purchase, it's 60% of the 5 year and the 15 year that you get to take immediately.

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

Okay. If you had bought it in 23, it would be 80% bonus. If you had bought it from 17 to end of 22, it would be 100% bonus. So bonus depreciation, depending on the year, is either a supercharger for the car guys out there or a turbocharger. So I would say if you're buying it in 24, it's a turbocharger. It, it makes it better, but not as good as a supercharger. So properties bought back in 17 to 22, 100% bonus, 23 was 80% and so at this point it's 60% and 24 next year it'll be 40% bonus, meaning anything pulled out of that slow 27 and a half year life, you get to take either 180%, 60% in the current year. And it doesn't matter. When you do the cost seg, the year you bought the property is the driver. So even though you may have three properties you bought in 22 at 100% bonus eligibility, but you didn't do the cost seg then doesn't matter, you're still going to be able to do them. Now you can go retroactive and file a 3115 along with your tax return, which means you get to step back in time, grab the 100% bonus depreciation you could have taken but haven't yet taken, you get to grab it in this tax year.

[Ryan Reynolds]

So you have to amend that tax.

[Jeff Hyatt]

No, you don't have to. That's the whole key. That's, that's the Good news. Yeah, 3115 is, I'll say, a really nice tool that can be used instead of amending. Because typically nobody, especially accountants, want to amend.

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

And you can only go back by amending to open years, which is typically three years. So if you bought the property back in 15, you'd be out of luck if you had to amend. But you don't have to amend. You use a 3115, which is a complicated form, which is why our firm always does the 3115s for our clients so that there are no errors made on it. Because if that eight page form has errors on it, it typically will trigger an audit. So nobody wants that. So our firm always completes the 3115.

[Ryan Reynolds]

The I probably have another 14, 15, 16 homes that I bought in 2020 that I got to call you on that too. This is my guy. You guys got to make sure you get the depreciation doctor on Instagram and cost segs.com but so, so I think for people who aren't used to hearing this talk, and I am because me and my accountant go round around and I talk to you plenty and whatever. I want to try to boil this down with simplicity sake, but in the example we just gave, what does that mean? So you said roughly, out of the $250,000 home, 50 that going to land. I'm putting 50 grand in. You said roughly there was $40,000 that was going to be on the original.

[Jeff Hyatt]

Let me on the purchase. On the purchase was 250 as opposed to your new spend on the 50. That's right.

[Ryan Reynolds]

Okay, but when you say $40,000 is going to fit into that five year bonus depreciation model.

[Jeff Hyatt]

Yep.

[Ryan Reynolds]

What does that mean to the consumer? What does that mean to me? So if I bought this deal and you said, justin, I'm going to get you $40,000 of this value and give it to you in bonus appreciation, what kind of savings am I getting there? What does that actually tangibly mean?

[Jeff Hyatt]

So what that's going to translate to the 40,000, let's say of accelerated depreciation times your tax rate, whatever that is. So let's assume somebody's in a, not maybe the highest tax bracket.

[Ryan Reynolds]

But let's say in Florida I'm in the 36% tax.

[Jeff Hyatt]

36. And Florida doesn't have income tax.

[Ryan Reynolds]

That's correct.

[Jeff Hyatt]

Right. So then it would be you would take the 40k times 36, which would be maybe 12 to $14,000. Ish.

[Ryan Reynolds]

And I'd be able to write it off on my income.

[Jeff Hyatt]

Well, no, the 40K would be a deduction against NOI.

[Ryan Reynolds]

Okay.

[Jeff Hyatt]

Okay. So that, so whatever you've got as taxable income or noi, you would sub out the 40 and whatever your tax rate is, that's what it would yield for you. In my head, I'm doing it. Which may not be give or take about give or take 12 to 14,000 is real money. Yeah, but then you mentioned. Oh hey, wait a minute, what about the 50k you spent on the, on the New spend. So that's going to fall into the bonus eligibility as well, depending on what you're spending it on. Now, if you're spending it on, let's say a new deck and landscaping and all kinds of other stuff, maybe the landscaping is going to be an expense, but depending on what you're putting in, it might need to be capitalized. So if it's outside of your physical building, so it's from your physical building to the property line and it needs. It's not, let's say, I know in Miami you won't have snow plowing, but you know, those things are just expenses. So not talking about that stuff. So if you put in an irrigation system or, you know, planting beds and stuff, typically that would be a capitalized item, but you're going to put it in at 15 years. So whatever you spent to improve the look of the property or fences or.

[Ryan Reynolds]

So that goes to a 15 year versus 27 and a half.

[Jeff Hyatt]

Correct. And it's bonus eligible. So you're getting to grab 60% of that if it's 24 or whenever it was back in the day.

[Ryan Reynolds]

What about a pool?

[Jeff Hyatt]

A pool would typically go into 15 years.

[Ryan Reynolds]

Yeah. Which is still better in 27 and a half. Maybe you're not as excited about five.

[Jeff Hyatt]

Year, but it's better in 27 and a half. You got it. And keep in mind from 96 when our firm started, I joined the firm in 99. But from 96 to 2017, bonus depreciation never applied to an existing building. Bonus came along in 01, right after 9, 11 as an incentive to get the economy going again. But it only applied to new construction. So it never applied to an existing building. So if you bought an existing building, you would not get bonus. Yeah, from 96 to 2017. But then in 2017, they ended up looking to say, hey, wait a minute, Justin, you're buying buildings. Why would you want to wait 5 or 7 or 15 years? Why don't you grab it now? And so they expanded bonus depreciation under the Tax Cuts and Jobs act to make it eligible. Buying existing buildings. The 5, 7, 15 year stuff got included in bonus.

[Ryan Reynolds]

The one caveat we haven't talked about. If you're a doctor and you do real estate part time, very part time, does that change how you're able to.

[Jeff Hyatt]

Take bonus appreciation depending on how you're doing it and what you're doing, what properties you're buying?

[Ryan Reynolds]

Okay.

[Jeff Hyatt]

Okay. So let's say you've got a doctor, whether it's a dentist, an md, a chiropractor, whomever it might be. I'm going to give kind of two scenarios here and I may pivot to three as I'm walking through this. But if your doctor person is buying investment property like the single families and they're renting them out, then that's called a passive income stream. Okay. He that doctor is not an active real estate professional. So that means that Dr. Is getting the income from the property as what they call passive income. Cost seg creates a passive loss. So the passive loss for that person, that doctor will only work to offset passive income.

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

Okay, so it won't flow over to his W2 or 1099.

[Ryan Reynolds]

Yep.

[Jeff Hyatt]

Okay, so but that was him buying, let's say a single family long term rental, an apartment, a residential rental, as opposed to him buying a short term rental. Okay, so if, if and if that doctor is somehow some way actively involved in the management, in the maintenance and the upkeep, let's say, of that property, the short term rental, that short term rental now is not treated like a 27 and a half year, I'll call it apartment, but it's treated like a hotel. So it's going to have a 39 year life. Okay, but that doctor is going to get two additional benefits out of it. Anything that they spend on improvements is going to have another category called qualified improvement property. Quip is what it's.

[Capella University]

Is it time to reimagine your future? The right business skills may make a difference in your career. At Capella University we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals like business management, strategic planning and effective communication. And you can apply these skills right away. A different future is closer than you think with Capella University. Learn more at Capella. Edu.

[Justin]

My dad works in B2B marketing. He came by my school for career day and said he was a big roas man. Then he told everyone how much he loved calculating his return on ad spend. My friends still laugh at me to this day.

[LinkedIn]

Not everyone gets B2B but with LinkedIn you'll be able to reach people who do get $100 credit on your next ad campaign. Go to LinkedIn.com results to claim your credit. That's LinkedIn.com results. Terms and conditions apply. LinkedIn, the place to be. To be.

[Ryan Reynolds]

Hey, I'm Ryan Reynolds. At Mint Mobile we like to do the opposite of what big wireless does. They charge You a lot. We charge you a little. So naturally when they announced they'd be raising their prices due to inflation, we decided to deflate our prices due to not hating you. That's right. We're cutting the price of mint unlimited from $30 a month to just $15 a month. Give it a try@mint mobile.com switch.

[Jeff Hyatt]

$45 upfront payment equivalent to $15 per month. New customers on first three month plan only. Taxes and fees, extra speed slower above 40 gigabytes. Details referred to as so for that 15 year prop. So they're going to spend stuff, spend money on items within the property. That's short term rental and they get to claim 15 year qualified improvement property, which means they get bonus on that. Whereas residential folks spending new money don't get to claim qip.

[Ryan Reynolds]

So even if there was a long term rental, that was a high price point.

[Jeff Hyatt]

Yep.

[Ryan Reynolds]

Okay.

[Jeff Hyatt]

Yep.

[Ryan Reynolds]

It's called a million dollars.

[Jeff Hyatt]

Okay, great.

[Ryan Reynolds]

And he's a doctor.

[Jeff Hyatt]

Yeah.

[Ryan Reynolds]

He's going to do a long term rental for it.

[Jeff Hyatt]

Yep.

[Ryan Reynolds]

Right. And the cost seg study happens.

[Jeff Hyatt]

Yep.

[Ryan Reynolds]

Does he get any ability to put it put the tax write off towards his doctor income at all based around the performance of that cost seg study being able to outweigh the income monthly, Is there any way that he can? Because the price of the home changes how much the cost seg study does that make sense?

[Jeff Hyatt]

Yeah.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

So from the scenario you just gave me, my understanding is that that doctor is still going to have passive income.

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

This is still a passive loss. So that in and of itself where you framed it would. He's going to be getting higher rents on that property for a mill versus that's right, 200,000. So any loss that he can't use, the passive loss we create for him would. And he can't use it this year. So let's say his noi is 100 grand. Let's say so cost seg comes in and we give him a deduction of call it 200 grand. Let's say. So now he's got 100 grand of income the first year from the property and the cost said gives him a $200,000 write off against the noi. So now he's only going to be taxed on 100. That's right. He wouldn't be taxed the first year on anything. It wiped it out. Correct. He's got 100 grand, what they call loss carry forward.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

So he's got that in his back pocket for the next year. So now it wiped out two years of taxable income from that property, which is pretty good. I'll change. Remember I said so I got residential property, we got short term rental there. And the third possibility for him might be for that doctor if he is buying a property that he can house his practice in. Okay, so as opposed to renting from Joe Blow down the street, he's now going to buy his own practice building. Now there's a part of the tax code that is called a single economic unit grouping election. For the tax code that's, that's short for a name, it's insane, but single economic unit grouping election. So what that means is that doctor can say, hey, wait a minute, I, yes, I run my practice, but I also own this building and they should be considered together. And so now the doctor can use the grouping election so that it will be treated as active income. So now he owns the building, he's got his own rental income, he might have other tenants in there. So for the other tenants, maybe we got to carve that off and set that aside as passive income. But for his own practice, that grouping election will allow him to use the increased losses against his taxable income, his W2 or 1099. So that's a good tool. And it may not be in the science of flipping group, but you might have one of your followers who is a doctor who would be interested in that part of the conversation.

[Ryan Reynolds]

Well, and that's why I'm trying to make this because it's very complex and like you just said, you're citing the laws of all this. But I want to make it as simple as possible because what everyone needs to understand is if you're buying real estate in any way to keep this is the best thing that you could possibly do, regardless of whether it's 27 and a half years to your one pivot. Because I've gone down this rabbit hole buying a cheap home and you start to just say is the cost of doing the cost seg dollar for dollar, create the value that actually makes sense for me. And if you're buying a cheap home and it's 80 grand, it probably just doesn't. And just take your 27 and a half years and take it for what it is. And let's go now what I think you really have highlighted. Well, which is, and I didn't know this, so we're going to talk after. But like I could go take 15 of those lower price point homes, group them together. I think I said I have 15. Let's say the average price is, you know, 150 grand. So $3 million worth of assets. Now I can give them to you, say hey, let's do one big cost seg on this entire thing. And they're all berths. I bought them all, I remodeled them all so it would be your traditional stuff. And so that's huge. So I want the listeners to understand, as detailed as Jeff can get, really, no matter how you're doing this, I would encourage anyone out there, you need to be buying assets. I love wholesaling, I love fix and flipping, but you need to be buying assets. And then what I would say is if you can get into the multi unit space, even better. Right? I mean that's where you really want to play. And I'm going to even use my own examples. And you know, because I've told you we bought four apartments, we have a fourplex, we have like a bunch of different stuff. What is the benefit to my 16 door apartment versus single family homes packaging my 15 single family homes? Is there a benefit for one roof, 16 doors versus 16 single family homes?

[Jeff Hyatt]

What you're going to find is that on. So it goes back to that ROI conversation. Somebody might look at one of our proposals and go, wow, three to one. I'm thrilled, let's go. But most people want it to be 4 or 5 to 1. When they're starting to look at it like I spend a$, say four or five, then I'm good to go.

[Ryan Reynolds]

Right.

[Jeff Hyatt]

Where you're talking about a bigger property, theoretically with a bigger purchase price, you know, 16 doors versus one door. Right. You know, you might be looking at an 8 or a 10 or a 20 to 1. That's right. Some of my clients have 150 to 1, some of them are 800 to 1. But those are bigger, obvious, much bigger buildings. So I'm not trying to go there, but it just depends on what is the depreciable basis and how, how can we make that work for you guys? And we'll do everything we can to help your clients.

[Ryan Reynolds]

You know it's funny is so Grant and I, Grant Cardone and I have gotten pretty close and you know, I've always kind of loved the single family space and he keeps just poking me by poking it calls me out a lot about it. But I mean it really makes more sense. The bigger you get in this space of real estate, the more you should really be in the commercial side of it. Right. Is there is some level of like brain damage that you don't need to Be going through having 15 single family homes, 15 separate tenants with 15 roofs, 15 electricals, 15 H vacs, or you have one roof, you have 15 doors, you have, you know, three ACs versus 15 ACs, et cetera. Right. There's an argument to be made and the biggest one tends to be right now for me, as an income maker, right. Like I do very well, I need your services. And it makes a lot more sense to go buy a $3 million apartment than did one by one buy single family homes one after another.

[Jeff Hyatt]

Well, as you, as you call it, possibly brain damage, you know, 15 transactions, 15 leases. That might be late payments. I mean we could. But when you've got one situation going that that can be better. You mentioned one roof. And what I'll go back to is one of the things that differentiate our firm from many of the other folks out there in the cos seg space is that we always identify all of the assets in the building, not just the accelerated items. Meaning many folks out there in the space that I'm in would only give you the five year and the 15 year detail. And you would go, yeah, that's cool, that's what I want. Well, what we're doing is giving details on the 27 and a half year stuff as well. So that when that roof fails, maybe you guys have a big storm down here and the roof is just trash. Finally you, you spent years patching it. That can't do that anymore. It's going in a dumpster. Well, now all of a sudden you're able to, when you put the new roof on, since you have the detail of the original roof, you're able to take a write off or an abandonment loss on that original roof when it hits the dumpster. So that can help you take another bite at the tax apple with a report that's properly completed.

[Ryan Reynolds]

So if you had to give advice. I have a good friend, he's a lawyer, high income earner, and he's playing around the single family space. He keeps buying these single family homes and I love that because I want him to be more in real estate and so I'm not opposed to him. What advice would you give him? High income earner. I mean, he does very well financially and he keeps buying these single family homes, which I encourage him to do because I'd rather him be in real estate than not. Sure, but what advice would you give him from your side of the world? Would you say get into apartments, you know, at least start getting five doors or more, start getting at higher price Points like, what would be your perspective.

[Jeff Hyatt]

For that person if, if to take.

[Ryan Reynolds]

Most advantage of what you offer, right. To say, hey, I know the laws. Here's how you win by following the rules of the laws.

[Jeff Hyatt]

So, okay, so if, if at all possible for your friend, the attorney person, if that person's, let's say significant other or spouse were to get in the real estate business themselves and manage all of the leases and manage the properties and, and do everything that was needed to become what they call a real estate professional.

[Ryan Reynolds]

That's right.

[Jeff Hyatt]

Then the whole conversation about passive loss, passive income goes away. That's right. That changes. And then that attorney who's bought 10 or 15 properties and maybe they're potentially outsourcing property management or something else. But now if that attorney is spending his time or his spouse's time doing the management and they're legitimately called a real estate professional, that would be a big deal.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

And, and that could legitimately be called a game changer for that person.

[Ryan Reynolds]

Yeah, I think that's probably the smartest thing. I mean that's why you suggested it. But now then it does it again. It doesn't really manage, it doesn't really matter what he buys because at that point they're a full blown real estate professional. They get the same stuff that I get. They get the rapid appreciation for active income, et cetera.

[Jeff Hyatt]

You got it. I mean that, that could work. And typically the attorney could also have that grouping election.

[Ryan Reynolds]

This is actually an actual question that I don't know the answer, so I'm going to ask it. Could the attorney ever be a real estate professional? So if he's buying enough of these, at what point do you say, Well, I bought 30 homes, so I'm a.

[Jeff Hyatt]

Professional, there's seven, there's a 750 hour a year requirement for spending time in the space. And it really does have to be your primary business. So if that attorney friend of yours is, you know, making 200 grand a year in being an attorney, but he's making three or four hundred grand a year in real estate that you, you. And again, this would have to be passed through the, his accountant.

[Ryan Reynolds]

Sure.

[Jeff Hyatt]

CPA to make sure that all the other little nuances are met. But then that could be justified, seemingly with the limited information you've given me.

[Ryan Reynolds]

There.

[Jeff Hyatt]

And they could spend their time doing that then. But if he's making 4 million a year as the attorney person and he's making 2 or 300, that's going to be a bigger stretch to get over that real Estate professional designation because 4 million a year of income as an attorney and it's going to be hard for him to tell the IRS. Oh, I'm a real estate professional making, you know, 200 grand a year in real estate and 4 million a year in my.

[Ryan Reynolds]

Do you. So I guess, like, what about loan brokers? Realtors? Realtors are probably the obvious.

[Jeff Hyatt]

Yes, they can be if they're somehow some way managing real estate. So I, I, my understanding is that a plain old real estate broker that doesn't have any ownership, you know, and doesn't manage their properties and things like that may not per se qualify. Interesting.

[Ryan Reynolds]

I wonder what they would. Because wouldn't that be a real estate professional?

[Jeff Hyatt]

Well, they typically, it will typically be listed as real estate agent, I think, but again, it depends on the accountant.

[Ryan Reynolds]

And if they, and whether they're willing to play the game.

[Jeff Hyatt]

Well, it's not the game, it's within the code. I mean, if they, so if they're buying property. So if it's a real estate agent. So if it's just a real estate agent that's just doing real estate transactions, that's different than a real estate agent who's also an investor who is also managing property, which might be, you know, you've got five or seven or 10 properties and that real estate person is managing those and maintaining the leases and negotiating with the, the grass, you know, the landscaping company and the various other services that need to go along. If that person is amassing the 750 hours, then that would probably be okay.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

But again, I deal with CPAs and, and the tech.

[Capella University]

At Capella University, learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course to the workplace. A different future is closer than you think with Capella University. Learn more at Capella. Edu.

[Justin]

My dad works in B2B marketing. He came by my school for career day and said he was a big roas man. Then he told everyone how much he loved calculating his return on ad spend. My friends still laugh at me to this day.

[LinkedIn]

Not everyone gets B2B, but with LinkedIn you'll be able to reach people who do get $100 credit on your next ad campaign. Go to LinkedIn.com results to claim your credit. That's LinkedIn.com results. Terms and conditions apply. LinkedIn, the place to be. To be.

[Ryan Reynolds]

Ryan Reynolds here from Mint Mobile. With the price of just about everything going up during inflation, we thought we'd bring our prices down. So to Help us. We brought in a reverse auctioneer which.

[Jeff Hyatt]

Is apparently a thing Mint Mobile unlimited premium wireless. 30, 30 bid to get 30, 2020 bid to get 2020 biddy get 15, 15, 15, 15.

[Ryan Reynolds]

Just 15 bucks a month. So give it a [e-mail] switch 45.

[Jeff Hyatt]

Upfront payment equivalent to 15 per month. New customers on first three month plan only.

[Ryan Reynolds]

Taxes and fees, extra speed, slower above 40 gigabytes.

[Jeff Hyatt]

Detail code all the time. So I, I've got to kind of stay in the, in the guardrails that, that I know of for sure. Of course, the CPAs, we teach all the time and they're.

[Ryan Reynolds]

Do you guys, when you say that, do you teach? Like is there somewhere your website obviously, but in your Instagram, can someone be taught more of this? Do you guys have some level of education on this?

[Jeff Hyatt]

We teach many, many of the nation's accounting societies. We teach for them. So we do continuing ed credit for CP depending on the state as well. We can do continuing ed credit for real estate folks as a CPE for their real estate license, depending on the state. So we do that all the time. And depending on how long you want to go. So for some of the state societies for CPAs, we'll do an eight hour course.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

Which is painful.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

If you're not a cpa. But if you're a CPA and you really want to drill down on this, we've got eight hours of content.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

But then typically we're doing one or two hours and we do them via Zoom or we do them live.

[Ryan Reynolds]

I would even just tell everyone here as you have questions. I'm sure you guys are thinking like, reach out to him on Instagram, ask him. He's very easy going. Right. He's the one that does all my cost seg stuff. And so again, I think that's probably the path of ease for them to reach out to would be Instagram depreciation doctor.com or @depreciation doctor on Instagram. But I think as you guys were sitting here like, what about this? What about this? Maybe I'm not asking the right questions for you. That's okay. Go to Depreciation doctor on Instagram and just start asking Jeff questions. And the question I'll kind of lead with now will be is if you are a W2 employee, there's essentially how I heard it. There's no world that you can get the bonus depreciation in the same way I do as a real estate professional, short term rentals.

[Jeff Hyatt]

So what you just said wasn't exactly correct. Okay, so to clarify, if they're doing.

[Ryan Reynolds]

Short term rentals, 15 year as a.

[Jeff Hyatt]

Short term rental, 15 and 5. So you get the same thing. It's just where is it going to apply? So what you're getting is the ability as a short term rental manager.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

You're getting to claim that more against your W2.

[Ryan Reynolds]

Yep.

[Jeff Hyatt]

Because you're an actively, actively involved.

[Ryan Reynolds]

Yeah. Yeah, that's right.

[Jeff Hyatt]

So kind of like that grouping election. Kind of. This isn't exactly correct, but it's kind of like the grouping election for the dentist or the attorney that runs their own practice out of the building they rent or that they own. I should say. But when you're doing short term rental, that could work for them. But a W2 employee, that would be the play for the W2 employees to doing short term rental in this scenario.

[Ryan Reynolds]

Yeah, I mean, that's what people want to know is how can I take advantage of these laws that were written for me? And I love real estate and I'm here listening to Justin every week. And so I want them to know that. And again, I may not be asking every question that they have. Right. And I'm kind of doing my best to think this through. But what I again, go to, you know, depreciation doctor on Instagram or cost segs.com. what? What? Haven't I asked that? Maybe you would say people really should also know this.

[Jeff Hyatt]

Well, many times people want to know again, kind of going back to going back. What if I missed it? You know, and that's a big concern for people is I don't want to amend the returns and all of that. Well, you can technically go back to 86 when the tax law changed. No kidding. With the 3115 now, typically you won't go back that far. The real window of opportunity for people where it makes financial sense because the accountants will often say, Justin, what are you going to do this for? It's just a timing difference. Yeah, that's what they say. They go, oh, it's just a timing difference. Well, it is a timing difference. But if I give you the opportunity, Justin, to take a deduction today versus 27 and a half or 39 years, would you rather have it today or would you rather wait all day today.

[Ryan Reynolds]

And twice on Sundays?

[Jeff Hyatt]

Exactly. Most people say that and they go, wait a minute, I don't know if I'll be alive in 27 and a half years. Don't know if I'll own the building then. Don't know what the Tax code, tax rates are going to be, I'll take it today if I can. And so with that said, it is a timing difference. But if you can redeploy that money, and typically my clients or our clients say they can kind of think of something better to do with it than sending it away in a tax payment, they can redeploy it and improve their portfolio, make it better and stronger and make their financial world better as things go. So that's a kind of a question there is that the accountants often say, well, hey, Justin, you're going to take all your depreciation early and then what are you going to have? Well, we're not taking all of it early. We're taking 15 to 25% early, which means you have 75 to 85% on a go forward basis.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

So you still have most of your depreciation. It's just.

[Ryan Reynolds]

And the point that you're bringing up is so valuable to people at least like me, I can go buy another one.

[Jeff Hyatt]

So that's the, that's the draw mill.

[Ryan Reynolds]

I have multiple businesses, but one of my business has a bookkeeper slash accountant and he always talks about playing for overtime. And that's the treadmill you keep, you keep kicking for overtime, Right? Great. Give it to me today and I'll figure out next year when next year comes. Let's keep going as I keep kicking this field goal down the road.

[Jeff Hyatt]

Yeah.

[Ryan Reynolds]

And guys, I mean, this is probably my favorite subject because as someone who makes money, you don't necessarily want to pay to the irs. I'm all about being a great citizen, but they wrote these rules for us. Let's just play by the rules and it just makes sense. And I know a lot of the billionaires and names will be restricting, but listen, Donald Trump gets a lot of hate about not paying taxes, but all he's doing is playing by the guidelines the IRS gave him.

[Jeff Hyatt]

You're absolutely right. And, and another one, that's a tool that's an adjunct to cost seg. And we don't do 1031s, but 1031s are a great tool. And that, as you said, kind of kicks the can down the road for the tax on the gain. But the cost seg can apply, apply to the relinquished property, the first leg, as well as the acquired property, if the new acquired property has enough basis in it. So you can kind of potentially do a cost. There are some nuances that need to be kind of followed there, but it's doable on both sides. So there's Lots of good tools out there. You just have to know how they all fit together versus just kind of winging it and.

[Ryan Reynolds]

Well. And that's why I say reach out to Jeff, go to depreciation doctor depreciation doctor on Instagram, Jeff depreciation doctor on Facebook, cost segs.com. i mean, he's a world of knowledge. He will answer your questions directly. He does all this for me. So if he's good enough for me, he's good enough for all of you. I appreciate you being here on science Flipping.

[Jeff Hyatt]

Oh, I'm so glad to be here. And on. On the Depreciation doctor on Instagram, every Thursday is Thor's day. And originally the beginning of Thursday was originally in Roman times, Thursday. So my dog, my German shepherd dog is Thor.

[Ryan Reynolds]

I know.

[Jeff Hyatt]

So yeah, you've met him.

[Ryan Reynolds]

Yeah.

[Jeff Hyatt]

And so Thor, every Thursday or Thor's day has some sort of fun little video on my Instagram channel and Facebook and LinkedIn and all that.

[Ryan Reynolds]

Nice.

[Jeff Hyatt]

But Thor will go find depreciation deductions for clients. And it's kind of a fun play on that. So with that said, just give me one second. So. So I'm giving you a depreciation Dr. Thor.

[Ryan Reynolds]

Yeah, what's up, Thor? Look at this, Thor. For those that can see in the camera, give it to all the cameras, Thor. This looks just like your dog, by the way.

[Jeff Hyatt]

Yes, exactly.

[Ryan Reynolds]

So thank you very much. Oh, yeah.

[Jeff Hyatt]

I thought you might have a little fun with that. And thanks for your time today and allowing me to join you here.

[Ryan Reynolds]

Reach out to Jeff. Appreciate you guys. If you learned at least one thing and you think there's someone you know that needs to learn a little bit about cost, segs, depreciation, not paying taxes, real estate. Share this episode with two of your friends. See you guys in the next episode.

[Capella University]

Is it time to reimagine your future? The right business skills may make a difference in your career. At Capella University, we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals like business management, strategic planning, and effective communication. And you can apply these skills right away. A different future is closer than you think with Capella University. Learn more at Capella. Edu.

[Justin]

My dad works in B2B marketing. He came by my school for career day and said he was a big roas man. Then he told everyone how much he loved calculating his return on ad spend. My friends still laugh at me to this day.

[LinkedIn]

Not everyone gets B2B. But with LinkedIn you'll be able to reach people who do get a hundred dollar credit on your next ad campaign. Go to LinkedIn.com results to claim your credit. That's LinkedIn.com results. Terms and conditions apply. LinkedIn the place to be to be.