How Investors Legally Avoid Taxes with Cost Segregation | Jeff Hiatt - The MORE Show

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.

Summary

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

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."