E170: Cost Segregation 101 - Yonah Weiss
This week I have Yonah Weiss on the show, a cost segregation specialist, and we dive deep into this amazing way of minimizing or even eliminating your income tax. Don’t miss it!
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So what is cost segregation? Well, it's an advanced form of depreciation and depreciation is a tax deduction that any property owner gets when they buy a property. This means that you can take the cost of the property (aside from your personal residence) and take it as an income tax writeoff. As this typically happens over a long period of time, we can reallocate that cost to different components that depreciate at faster rates. This means taking larger tax reductions in earlier years of ownership. So this is something fundamental that you really want to be doing as an investor to save a lot on your tax returns.
Yonah is a powerhouse with property owners' tax savings. As Business Director at Madison SPECS, a national Cost Segregation leader, he has assisted clients in saving tens of millions of dollars on taxes through cost segregation. He has a background in teaching and a passion for real estate and helping others. He’s a real estate investor and host of the new podcast Weiss Advice.
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1. What is cost segregation: It's an advanced form of depreciation. Depreciation is a tax deduction that any property owner gets when they buy a property. This means that you can take the cost of the property (aside from your personal residence) and take it as an income tax writeoff. As this typically happens over a long period of time, we can reallocate that cost to different components that depreciate at faster rates. This means taking larger tax reductions in earlier years of ownership.
2. Real estate is an amazing way of minimizing or even eliminating income tax.
3. On average from 25% - 50% of the purchase price can be reallocated in cost segregation depending on what type of asset class it is.
4. Depreciation starts when you buy a property and it's based on purchase price.
5. On a major renovation project, only the renovation cost can depreciate at a faster rate and not the purchase price. The depreciation also only starts when the property is rent ready.
6. It typically takes a few weeks to turn around the cost segregation study.
7. An engineer is needed to carry out the study and it's for this reason that someone like an account can't do the job for you.
8. For people that aren't real estate professionals, you can still benefit from depreciation but only on the passive income you earn and not on your regular income. The main beneficiaries of this technique are going to be real estate professionals as they can use depreciation across all their income.
9. As a passive investor with multiple investments, the depreciation from a property can spill over and be used to offset income from other investments as well.
10. If the property is refinanced then the money you receive as an investor will be tax free.
11. Bonus depreciation means that once you've allocated assets to faster depreciation schedules, you can take 100% of the depreciation tax deduction in the first year instead of spreading it out.
12. A depreciation recapture tax means that you're taxed on the amount of depreciation that was taken over the investment period. It doesn't mean that you have to pay back everything you've saved in the process.
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