Podcast Summary

Podcast: The Science of Flipping

Host: Justin Colby
Guest: Jeff Hiatt (“The Depreciation Doctor”), cost segregation expert
Episode: How Investors Legally Avoid Taxes with Cost Segregation
Date: August 22, 2025

Episode Overview

This episode explores the powerful tax-saving strategy of cost segregation, featuring Jeff Hiatt, a leading expert who has conducted over 25,000 cost seg studies and helped investors save more than $4 billion in taxes. Host Justin Colby and Jeff break down what cost segregation is, when and how investors should use it, and the major impact it can have on real estate profitability—whether you’re investing in single-family homes, apartments, or commercial property.

The conversation covers everything from the technical foundations of depreciation, bonus depreciation, and who qualifies for what kind of write-offs, to actionable insights for high-income earners and everyday investors eager to supercharge their returns and keep more money from Uncle Sam.

Key Discussion Points & Insights

1. What is Cost Segregation? (02:49)

• Definition: Cost segregation studies (“cost segs”) accelerate the depreciation schedule allowed by the IRS. You don’t get more depreciation, but you get to take it sooner—creating huge tax benefits.
• Benefit: “What it does for the owner 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.” – Jeff Hiatt (02:49)
• Simple Version: Instead of spreading depreciation over 27.5 or 39 years, you can pull some of it forward and keep more cash today (03:33).

2. When Does a Cost Seg Make Sense? (04:12)

• Threshold: Used to be worth it only for properties worth $1M+, but improvements in technology mean it now works for properties with a depreciable basis of around $300k (04:26).
• Bulk Approach: If you have several smaller properties, you can group them together for a single study—for example, five rentals at $800k combined makes sense, versus $150k each on their own (04:58).
• ROI: “Spend a buck, you say four or five bucks. Most people will say, hey, that's a good deal, let's do it.” – Jeff Hiatt (05:53)

3. What is Depreciable and How Does Bonus Depreciation Work? (08:21)

• Depreciable Components:
  • Building: Walls, windows, doors, roof, HVAC, plumbing, and electrical (27.5 years for resi, 39 for commercial).
  • “Accelerated” items: Carpets, certain floorings, kitchen plumbing, wiring, cabinetry—can be 15–25% of basis, qualify for faster depreciation (10:11).
• Purchase Price Less Land: Depreciation is calculated on the property value minus land (10:18).
• Renovations: Improvements like new kitchens, wiring, etc., can often be depreciated over 5 years (11:26).
• Bonus Depreciation:
  • The percentage of bonus taken depends on the year the property is bought (100% for ‘17–‘22, 80% for ’23, 60% for ‘24, 40% for ‘25) (12:38).
  • “Bonus depreciation, depending on the year, is either a supercharger... or a turbocharger... It makes it better, but not as good as a supercharger.” – Jeff Hiatt (12:38)
• Retroactive Application:
  • You can capture past missed deductions using IRS Form 3115—without amending returns (14:08).

4. Practical Example: Tax Savings Calculated (15:46)

• How savings work: $40k of accelerated depreciation x 36% tax rate = ~$14k saved in year one
• “The 40K would be a deduction against NOI... and whatever your tax rate is, that's what it would yield for you. Give or take 12 to 14,000 is real money.” – Jeff Hiatt (16:32)

5. Special Considerations: Passive vs. Active Investors, Professions & Write-offs

For Passive Investors (Doctors, Lawyers, High Earners): (19:11)

• Passive Loss Rule: If you’re not a real estate professional, cost seg only offsets passive income, not W2/salary income.
  • “The passive loss for that person, that doctor, will only work to offset passive income. It won't flow over to his W2 or 1099.” – Jeff Hiatt (20:04)
• Short-Term Rentals Exception: If actively involved in a short-term rental, you can use bonus depreciation against active/W2 income, since it’s treated more like a hotel (21:18).
• Grouping Election: If you own your practice building, you can group your practice income and rental income as “active”—allowing losses to offset (24:00).

For Real Estate Professionals: (31:22)

• Big Advantage: If you or your spouse qualify as a real estate professional (750+ hours/year in real estate activities and it’s your primary business), you bypass the passive loss rules.
• “That could legitimately be called a game changer for that person.” – Jeff Hiatt (31:47)
• Can attorneys qualify as real estate professionals? Only if the time and income balance is met; primary business test applies (32:34).

6. Multi-Family vs. Single-Family Property Strategies (26:45)

• Bigger deals mean exponentially higher returns on cost seg studies; you can see a 10+:1 ROI (27:40).
• “Some of my clients have 150 to 1, some are 800 to 1. But those are obviously much bigger buildings.” (27:45)
• Strong argument for scaling up into multi-unit/commercial.

7. Tactical Tips

• Bulk Cost Segs: If you have many cheap houses, group them for a study once the collective basis makes sense (25:16).
• Tracking Improvements: Detailed cost segs also help you write off “abandonment losses” when replacing big-ticket items (roofs, ACs)—maximizing future write-offs (29:40).
• Strategic Use: Even if only part of the asset gets rapid depreciation, it can free cash to reinvest and “keep kicking the can down the road” with more acquisitions (38:45).

8. Common Myths & Misconceptions

• “Isn’t This Just a Timing Gimmick?”
  • “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 wait?” – Jeff Hiatt (39:19)
  • It’s a timing strategy, but more cash today means more deals, more growth now (40:27).

9. Who Should Consider Cost Segregation?

• Anyone holding real estate, especially if you’re accumulating multiple properties or considering scaling up.
• “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.” – Justin Colby (25:16)
• Real estate professionals and those who can become one (through participation or spouse), get maximum benefit.

Notable Quotes & Memorable Moments

• On immediate deductions: “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?” – Jeff Hiatt (39:19)
• On IRS intent: “They wrote these rules for us. Let's just play by the rules, and it just makes sense.” – Justin Colby (40:37)
• On the benefit of multi-family property: “You might be looking at an 8 or a 10 or a 20 to 1 [ROI on cost seg studies].” – Jeff Hiatt (27:40)
• On cost/benefit for small homes: “If you’re buying a cheap home and it’s 80 grand, it probably just doesn’t [make sense]. And just take your 27 and a half years.” – Justin Colby (25:16)
• On real estate professional rules: “There's a 750 hour a year requirement for spending time in the space. And it really does have to be your primary business.” – Jeff Hiatt (32:34)

Important Timestamps

• What is cost segregation and why do it? (02:49–04:12)
• When is a cost seg worthwhile? (04:12–5:58)
• Components eligible for accelerated depreciation (08:21–10:29)
• Bonus/past years bonus depreciation (12:38–14:08)
• Mechanics of the tax benefit + illustrative example (15:46–16:39)
• Passive vs. active loss usage (doctors, lawyers, short-term rentals) (19:11–24:00)
• Multi-family vs. single family/bulk strategies (26:45–27:45)
• Real estate professional qualification (31:22–32:34)
• Is this just a “timing issue” with no real value? (39:19–40:27)

Resources & Further Learning

• Connect with Jeff (The Depreciation Doctor):
  • Instagram: @depreciationdoctor
  • Facebook: Jeff, Depreciation Doctor
  • Website: costsegs.com
• Jeff also teaches CPE courses for CPAs and offers real estate education (35:48).

Takeaway Messages

• Cost segregation can dramatically accelerate and increase your real estate returns by putting more cash in your pocket today.
• Optimal strategy: Combine cost segs, bonus depreciation, and scaling your property base.
• Active involvement (as a real estate pro) unlocks maximum value.
• Always consult with an expert—rules and ROI vary by structure, year, and personal situation.

If you found the episode valuable, connect with Jeff, consider grouping properties for cost seg, and most importantly—keep acquiring income-producing real estate!