Wake Up to Wealth Podcast: Episode Summary
Title: The Untold Solutions We Overlook
Host: Brandon Brittingham
Guest: Jeff Hyatt, MSC Consultants
Duration: 38 minutes and 26 seconds
Introduction to Jeff Hyatt and Cost Segregation
Timestamp: 00:57 - 03:15
Brandon Brittingham welcomes Jeff Hyatt, a seasoned expert from MSC Consultants, to discuss a critical yet often misunderstood financial strategy in real estate: cost segregation. Jeff shares his extensive background, highlighting that MSC Consultants has been conducting cost segregation studies since 1996, with over 24,000 studies completed to date. He emphasizes the depth of their expertise, boasting a team of 10 accountants and 17 engineers dedicated to this field.
Jeff Hyatt [02:52]: “We have at this point 10 accountant types and 17 engineer types who do the work. We've done about, in total, about 24,000 studies...”
Understanding Depreciation in Real Estate
Timestamp: 03:15 - 05:14
Jeff explains the foundational concept of depreciation in real estate investment. Typically, commercial properties are depreciated over 39 years, while residential rentals, including single-family homes, are depreciated over 27.5 years. This straight-line depreciation allows investors to deduct a portion of the property's cost each year against their income.
Jeff Hyatt [05:14]: “I'd rather grab it now versus waiting. I don't know if I'll be alive in 39 years or 27 and a half. If I can get some of it today, then I'll take it today.”
The Power of Cost Segregation
Timestamp: 05:14 - 16:35
Cost segregation is introduced as a strategy to accelerate depreciation deductions, allowing investors to take larger deductions in the early years of property ownership. Jeff illustrates this with a $1 million property example, where $800,000 is depreciable after accounting for non-depreciable land value. Through cost segregation, a portion of this amount can be reclassified into shorter depreciation schedules (5, 7, or 15 years), significantly increasing upfront deductions.
Brandon Brittingham [04:26]: “So like, you know, you buy a building, so like, what the H Vac or like, how does that work? Whether you get some, some accelerated depreciation on some of the items.”
Jeff further explains that many investors are unaware they can retroactively apply cost segregation to properties purchased in previous years without needing to amend their tax returns, using Form A-3115. This allows investors to reclaim deductions from as far back as the 1986 Tax Reform Act.
Jeff Hyatt [10:28]: “...you can go back to when the tax law changed, which was the tax reform act of 86 fixed, took away investment tax credits, and at that point, everything became straight line.”
Benefits of Accelerated Depreciation
Timestamp: 16:35 - 26:38
By accelerating depreciation, investors can free up significant cash flow, enabling them to acquire additional properties sooner or improve existing ones without needing external financing. Jeff emphasizes that this strategy not only enhances cash flow but also increases property value through strategic renovations funded by the tax savings.
Brandon Brittingham [28:14]: “It's what you keep... You can grab that deduction now and then. It'll play for you along the way.”
Additionally, Jeff highlights that professional cost segregation studies are crucial. DIY approaches or using inexpensive programs can lead to IRS audits and penalties, as the IRS requires comprehensive documentation, including site visits and detailed analyses, to validate accelerated depreciation claims.
Jeff Hyatt [21:26]: “You need to have an actual site visit. You can't just wing it. You can't do DIY...”
Why Cost Segregation Often Goes Overlooked
Timestamp: 26:38 - 37:23
Despite its benefits, many investors overlook cost segregation due to misinformation and lack of awareness. Jeff points out that only about 30% of eligible investors utilize this strategy, leaving 70% untapped. Common pitfalls include accountants' unfamiliarity with the process and the complexity of IRS requirements.
Jeff Hyatt [15:56]: “It's estimated that about 30% of the people that could have taken advantage of cost seg have done it. In other words, 70% have not.”
Brandon adds that many investors consult general accountants who may not specialize in real estate, leading to missed opportunities for maximizing tax benefits.
Real-World Impact and Financial Example
Timestamp: 28:39 - 36:05
Brandon shares his personal experience, illustrating the substantial tax savings achieved through cost segregation. For instance, on a $4 million property, cost segregation can result in a seven-figure write-off, a figure that would take years to accumulate through standard depreciation alone.
Brandon Brittingham [29:00]: “...it was a seven figure write off on our taxes.”
Jeff reiterates the return on investment, noting that their services typically offer a 4 to 5 times return, making cost segregation not just beneficial but also financially savvy for qualifying properties.
Jeff Hyatt's Commitment to Community and Service
Timestamp: 37:23 - 38:26
Beyond his professional expertise, Jeff shares his philanthropic efforts with Swim With a Mission, a nonprofit organization supporting veterans through service dogs, therapy programs, and other supportive services. Since 2017, Jeff has helped raise $13 million for veterans and their families, underscoring his dedication to community service.
Jeff Hyatt [32:00]: “We've raised about $13 million for veterans and their families, providing support, helping them through tough times.”
Brandon commends Jeff for his contributions and emphasizes the trust and reliability that MSC Consultants brings to their listeners.
Closing Thoughts: Waking Up to Wealth
Timestamp: 35:52 - End
The episode concludes with Brandon and Jeff reflecting on the true meaning of waking up to wealth. Jeff encourages listeners to take ownership of their financial futures, leverage available resources, and support others in their wealth-building journeys.
Jeff Hyatt [37:03]: “Take ownership of it and run with it... If you can help somebody else get to their next level, then do that.”
Brandon reiterates the importance of education in financial success and invites listeners to engage with trusted professionals like Jeff to unlock their wealth potential.
Key Takeaways:
- Cost Segregation Explained: A strategic tax planning tool that accelerates depreciation deductions, enhancing cash flow for real estate investors.
- Professional Expertise is Crucial: Proper cost segregation requires detailed studies and compliance with IRS guidelines to avoid audits and penalties.
- Significant Financial Benefits: Properly applied, cost segregation can lead to substantial tax savings, allowing for quicker property acquisition and improvements.
- Community Impact: Professionals like Jeff Hyatt not only provide financial strategies but also contribute significantly to community and veteran support.
Notable Quotes:
- Jeff Hyatt [05:14]: “I'd rather grab it now versus waiting. I don't know if I'll be alive in 39 years or 27 and a half. If I can get some of it today, then I'll take it today.”
- Jeff Hyatt [10:28]: “...you can go back to when the tax law changed, which was the tax reform act of 86 fixed, took away investment tax credits, and at that point, everything became straight line.”
- Jeff Hyatt [21:26]: “You need to have an actual site visit. You can't just wing it. You can't do DIY...”
- Brandon Brittingham [28:14]: “It's what you keep... You can grab that deduction now and then. It'll play for you along the way.”
- Jeff Hyatt [37:03]: “Take ownership of it and run with it... If you can help somebody else get to their next level, then do that.”
For more insights and actionable strategies on transforming your financial future, tune into Wake Up to Wealth with Brandon Brittingham. Don’t miss out on leveraging expert advice to elevate your wealth-building journey!