The Honest Truth about Cost Segregations! Do they Work?

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Do cost segregations actually work? Well, you need to be careful when you hear about Bonus Depreciation and Cost Segregation Studies. They aren't always cracked up to be what they say they are! This is the honest truth about cost segregations!
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[@holylabs]

#1. He left out that if you or your spouse does not qualify as a Real Estate professional that you can use a property you have as a short term rental IF you rent it out for less the 7 days at a time. So problem solved for his first negative. #2. There is a time limit when the tax savings we’ll eventually play out. Will be many years BUT all you need is ONE good property to keep long term to rep the benefits of NEVER having to pay taxes again including on your W2/1099 money( if have 1 short-term rental) And you can do it over and over and over again. So depending on how much you make, you can buy one or two properties (by using your tax savings you can use it as a down payment for your next investment property) and you’re set for a very long time with paying no taxes untile it runs out. Would be best to keep in mind, going in to it, to keep the properties long term to avoid ever paying taxes again and then once it runs out just repeat it again. #3 You can absolutely use the money you save in taxes as a loan. This is for the Entrepreneurs that know how to turn that money into more and more money. This whole idea of saving taxes is for investors to begin with. Need to think like one. Thats why many “regular” W2 employees and doctors or what not, end up being Real Estate investors as well. Don’t let this guy discourage you. Be informed but also know, this shit works!

[@thecubanolive2359]

Exactly....strategy strategy strategy

[@jimr-ro4sh]

Mark, there are articles on Accounting Today website that say you are incorrect about point #2. That personal property is defined differently for cost segregation vs 1031 exchange. Can you please clarify this and change video.

[@markr8250]

Can you provide link? Thanks

[@ucjustice1]

@Max Eddie sure, whats her handle?

[@tax-modern]

Yeah, at the time he made this video, there was still some confusion on this subject. But the definition of real property in section 1031 of the tax code does still allow for the "improvements" to the property to be included in the 1031 exchange, even if the improvements themselves are defined as personal property after a cost seg. So there is no issue with a cost seg excluding some of the gains from being used in a 1031 exchange. So you can disregard his point #2.

[@Pteromandias]

@@tax-modern Yes there was some confusion when the IRS made the rule changes. On one hand there were footnotes in the legislation saying that the intent was that 1245 property would be able to be transferred in a 1031 exchange.

[@FlyFishingRealtor]

I thought the strategy was that after 5/7/20 years I could then go replace those items for yet another full write off that I wouldn’t get if I had just deprecated over the 27.5 years. I intend to keep the SFH and pass down to my kids.

[@brianpage108]

Isn't there a short-term rental exception to the real estate professional requirement? You make no mention of it in this video so I am just wondering. This is what I have read elsewhere... "Even if you have a day job, there’s one exception that you should know about. It’s a specific type of real estate investing that mimics the deductions you can get as a real estate professional. It’s short term rental (also known as vacation rentals). This strategy is fully legal, supported by the tax code, and can lead to massive deductions come tax time. It’s also a little complicated, so here’s the basic strategy in bullet points: Buy a short term rental Meet the criteria to classify it as an active business Perform a cost segregation study Accelerate depreciation into the first year Legally claim paper losses from your business Use the tax deductions from your short term rental and apply it to your active income" Is this correct?

[@tax-modern]

Yes, that short-term exception is often overlooked. It has to be a short-term rental with an average stay of 7 days or less, and you have to "materially participate", which is a more difficult hurdle than just an "active business".

[@jccastillo2178]

@Mark J Kohler AMAZING content. Question, if I 1031 Exchange Property A (multifamily real estate) where I have a large taxable gain from Personal Property (5/7yr items) that’s been cost seg’d & bonus depreciated, and in the same year I also purchase and bonus depreciate a completely separate Property B (also multifamily real estate) that generates a bonus depreciated loss of 5/7yr items that’s equal to or greater than the Personal Property taxable gain on Property A, will the two offset each other for that tax year and kick the taxable gain can further down the road?

[@77reyles]

Interesting!!!

[@richardpatrick3795]

Contact Kim Lochridge she can explain how this works in detail. 971-213-8686

[@ericgoldshine7001]

Hi Mark, great video! Its my understanding that the IRS clarified that no "personal property" depreciation buckets will need to be paid back when selling or 1031ing. If this is the case can you update this video or make a new one? thanks

[@InvestLikeMike_]

Yeah thats a major issue with this video - I hear that 1031 can defer depreciation recapture

[@brandonl9759]

Yeah this is what I heard as well

[@FrugalDividendDad]

Same, they clarified properties depreciated on 5 and 7 years schedule are in fact real property and not personal properties is my understanding

[@timmy101able]

How far back can the IRS audit you? If you hold the property long enough don’t the waters get a little murky (just asking.. I don’t own any property.. yet)?? How can it be proven how much depreciation one took like 10-15 years ago?

[@markabbottnp8011]

You really are a debbie downer on this and I wonder what your motive is here? I think you downplayed this a lot. Not sure why, but I’m still a fan in 2021 tax market especially as a player in the STR space. Also, you need to check your staff answering the phone. I called Monday to setup a CRT and the ding dong answering the phone says she doesn’t think you guys do that not does she think you form entities. Has she heard of Mark Kohler?

[@michaelwayne9587]

Hi Mark, can you explain why you have to “give back” the $70k at the end of 5 years? You mentioned recapture tax, but it seemed like the “give back” was due to something else. Thanks!

[@AlvarezFernando]

The give back is because now you sold the property and the personal assets of that property and you already spent what you were going to spend in repairs and replacement. Also, the guy who bought it from you can now potentially qualify for that as well. What he failed to mention is the bigger property that your buying with that 1031 exchange will have some bonus depreciation as well that could offset a portion if not all of that. It started to scale down this year to 80 and 60 percent next year and so on so you can’t count on that but if you have the returns on the property you bought, example 6 to 8 percent, the property itself will pay for and give you yield on the cost seg study and the free “irs loan”. And if you keep the property and i stead use leverage from debt pay down and equity appreciation then it’s yours to “keep” as the replacements and maintenance occur.

[@stevenb1557]

Some very good points. As someone that offers this service these are all things that should be discussed as part of the strategy. Remember that a study also helps with setting up a framework for you depreciation for future cap and expenses. But again it comes down to your strategy right? buy? Sell? Planning on holding onto the property for 10years and replacing the roof and windows? Anyways subscribed, good stuff.

[@julianocampo8805]

Thanks 👍🏼

[@Rothbardo]

Mark, does this strategy become more appealing for a Short Term rental that one materially participates in since that's considered active income? Could you do a video on cost seg's for STR's?

[@bradleys2320]

I think I heard on a Bigger Pockets podcast that STR is considered a business (active) instead of passive REI and therefore not eligible for cost segregation.

[@drewangell1457]

@@bradleys2320 I'm not seeing any info that says you can't cost seg an active STR. The conversation about that is typically about whether you want it to be active or passive. Typically, rental income is considered passive. If you have passive losses on paper then you'd be able to offset that passive rental income. What I'm seeing is that if the STR has an avg. stay of 7 days or fewer and you materially participate (manage the property yourself) then it would indeed become active, but that doesn't mean you can't cost-seg. You still can, and because it's an active business instead of passive, now those losses from the accelerated depreciation become active losses which can offset your W2 and active income from other businesses. What I didn't know was that you have to recapture at the full rate instead of the reduced rate. This is the first I've heard that.

[@looqmern]

Can this be filed using HRBlock premium? it has options for bonus depreciation

[@77reyles]

What if you buy ,cost seg, and Hold...And instead of 1031 you Get a HELOC

[@timcoughlin9167]

Also under your example why wouldn’t the owner just do a cash back refi and suck the appreciation out tax free…never sell

[@mia7065]

Is a cost segregation worth it on properties less than $100K?

[@andr0id20]

Why did you leave out the STR loophole to get around REP status?

[@dimitrivancamp1013]

It still seems to work for me. I’m a real estate professional (wholesaling) and buy homes to never resell, it’s just passive income.

[@carriedamico3748]

But if you have other passive income... own an S Corp or have stock market gains or other real estate income, it can off set those gains... it's still a good idea for those of us in that position

[@achesontrading427]

Can capital gains get offset 100%?

[@Earb86]

What if you don’t sell the property?

[@ucjustice1]

is the give back of the $70,000 always based on the tax rate of the year when you took the bonus? or would it be based on your tax rate when you made the 1031 transfer?

[@brandonl9759]

Curious to know about this as well

[@illijah]

Wait, if I bonus depreciate and asset that was on a 5, 10 or 15 schedule, shouldn’t I not have to pay back depreciation if I hold the house for more then 5, 10 or 15 years? And even if I sell before, it shouldn’t be a full repayment? Some of that depreciation was valid.

[@charleslaw4317]

Great Video! I have a client doing a deal and we're at the planning stages of doing a cost segregation. I needed a video to back me up on my concerns. May be calling you.

[@kelleysean72]

Great video of the pros and cons!

[@MarkJKohler]

Thanks so much!

[@joeb1522]

Great video. From what I have seen, it's rare people do a 1031 exchange. It's much more common people recapture the personal property at ordinary rates when it's sold. Rather than at 25% maximum rates under section 1250.

[@joeb1522]

If you make less than about 400k, long term capital gain tax rate is 15%. If you make more, it is 23.9% (20% plus 3.9% Medicare surtax). The 25% tax rate I referred to is the tax rate attributable to gain when you sell real property. The gain is taxed at a maximum 25% when the gain is associated with prior depreciation expense taken. If you sell the property for more than you originally paid, it is a section 1231 gain, which goes through a netting process, and is usually just taxed at long term capital gains rates.

[@joeb1522]

@RealestRealist Long term is more than 1 year. Short term is 1 year or less.

[@kentlbrown5810]

There is a 4th issue. At the point of sale, the sales price is allocated between real and personal property. If your gain on the personal property portion is greater than the recapture, that gain is reported not deferred.

[@davidsantilena6897]

If you invest in an opportunity zone and cost segregate, and hold for 10 years, will you have to pay back the depreciation?

[@asterisk911]

Referring to the $200,000 as an "interest-free loan" certainly underscores its limitations, but it also points in the direction of an advantage that it still has. Since money is fungible, that $70,000 tax savings in year 1 is money that you otherwise would be paying in tax but can invest instead. You could, e.g., use it to buy into a syndication that has a similar target date as your target date for the initial property. Another way to look at it: if you get that $200,000 paper loss in year one but have to declare it as income the year you sell, then that's okay as long as you're buying a new property that very same year that has a $200,000 paper loss of its own. I.e., you get $200,000 of income that is going to generate a $70,000 tax bill (reversing your savings from year 1), but then you also get a $200,000 paper loss on the NEW property that knocks $70,000 from that year's taxes. (Unless, of course, Congress changes the laws, which they tend to do!)

[@gracec5424]

The $70k that you have to give back is treated as ordinary income; however, unless you are classified as real estate professional, the $200k paper loss on your newly purchased property can't be used against ordinary income so it won't really offset the first $70k you have to pay back.

[@julianperez4525]

Thanks for your insight Mark and thanks for signing your book for me and my wife yoshira when you visited Chicago.

[@MarkJKohler]

Thank YOU!!! Chicago crowd was amazing. Made for a great trip. LOVE coming to Renatus in Chicago.

[@willywonka69xx]

Nice video. I'm rubbing my chin on a VBRO purchase and running a cost segregation. (I will have 4 to 6 years of spiked income so paper losses are welcome.) I will keep the property till I die and pass to my kids. I assume step-up would paper over capital gains?

[@timcoughlin9167]

If I decide to do a Cost Seg for a property that closes near year end, does the CS need to be done before year end or just before filing?

[@achesontrading427]

Anderson's video said all the way to Oct. in the following year?

[@heyisforhumans]

Amazing content, love it.

[@edwinvargas931]

Excellent !

[@RK-zs5j6]

Thank You

[@julianocampo8805]

Great content.

[@gerrywilson9162]

Thanks

[@Coast_to_Coast]

You mentioned recapture if it’s owned personally. What about if it’s owned in an llc?

[@MarkJKohler]

Same thing. Absolutely. An LLC doesn't change the tax situation and equation AT ALL. Be careful. Continue to research and get a 2nd or 3rd opinion. Thanks for watching.

[@Coast_to_Coast]

Mark J Kohler thanks for the reply. Keep up the great videos!

[@c4brian]

@@MarkJKohler What if the LLC is a partnership with several members? Some of them full time professionals, but others not?

[@karynwhitesuperwoman]

This is why I love you Mark!!! HONESTY!!!! 😃