Alright, let's jump into one of my favorite topics,
which is real estate and the depreciation and the deductions you can get from
real estate. So, right now. The problem is with real estate,
if you buy real estate, like in the current year,
or if you've had it, the default. deduction you get,
it takes like 30 years to write off your real estate.
But through a cost aggregation,
through bonus depreciation, we're going to cover some of this.
You can turn, say, on a million dollar property,
a $37,000 deduction.
into something more like a $300,000 to $400,000 deduction.
Like a 10, like, you can 10X your deduction by doing a cost aggregation.
There's some very specific things you need to go through and things
you need to do to make sure it's done right. But that's the problem
right now with real estate. That,
you can, you can take depreciation deductions,
but it takes a really long time.
So what a cost segregation solves,
and this is what it does, it just accelerates it,
you're a 27 and a half year property or 39 year property,
which it takes that many years to write it off. We convert that,
we break down the comp.. Components of a building,
you think of like what's real estate, it breaks down the components of the,
of the building and the land. Instead of just building and land,
it breaks it down into, like, the landscaping,
and the fencing, and the pool, and the flooring,
and the paint, and the cabinets, all of All those different components that make
up real estate, as part of the cost segregation process,
were brought together. We're breaking down all of those things,
through an engineering-based study, and we're removing some of the slow
depreciation items, and we're putting them into the buckets,
essentially, where it can be deducted faster.
So it's a really, really cool thing.
and so it really just solves being able to write off your
real estate faster. So you,
you do that. You need to remember, so here's, sometimes there's a bit of
a catch when people, they get excited about real estate.
And they get excited about cost segregations and depreciation,
whether it's from talking with me or someone or they heard from a friend
that they got a really big deduction. There's some things.
There's things to watch out for. So one is that it is,
it's a, it's a one-off. One-year deduction, like a one-year,
we'll call it like a massive jump,
but it's a one-year like 10x pump to your,
Depreciation deduction. But then after that,
it drops down back to normal,
just like a slow write-off, like a slow trickle over the years after that
point. So to solve for that,
sometimes people, you might need to be buying property every,
like every single year. To get like a one-time jump.
So the, the timing of when you,
you, of when you do this and how you do it,
you do want to make sure it fits into your, the bigger picture of
your tax strategy. so I've, I've talked about,
yeah. The, the problem that we're solving for accelerating the deductions.
we've talked about how it's a, a first year big deduction opportunity.
And the reason we're getting excited about this again,
and now, now we're in 2026,
but in 2025, they changed the tax law again.
They actually changed the tax law back to what it was from 2018
through 2023 when we had 100% bonus depreciation.
And what that means, so I've talked about like the,
the different components. Components of the building, right,
of the different components of your real estate,
just for really like simplicity purposes.
Let's just think of real estate as having three main components.
It's got the raw land component,
and then it's got the building. Which,
think of this as like the bones or the structure,
so think of from like foundation to walls to roof.
That's the structure, and then it's got everything else,
all the add-ons, like the floor,
the improvements you're doing later, I typically call those add ons,
like the improvements that you're adding on top of the real estate later.
And a lot of times those things could be technically,
removed, but they're not, they're not part of the main structure.
So the land, you get no depreciation deduction.
And so that, in a cost segregation, we typically, we typically want that to
be as low as possible. Sometimes you're going off of the county record,
sometimes you're going off of appraisal,
sometimes you're going off of, off of comparables,
and that's for the land, but then the building portion,
so like, once the cost aeration is done,
you are going to have these three, three main numbers.
The building portion, that takes, either if it's residential property,
takes twenty, twenty-seven years to write off that portion.
Or if it's commercial property, it takes thirty-nine years.
So that building portion, we,
We want that to be as low as possible as well,
because we want to save the big deductions,
the accelerated deductions, or in this Part 3,
so in here, Accelerated Depreciation and Bonus Depreciation,
we're talking about this Part 3, these other,
this Part this other category, these improvements,
these are the things that can be accelerated at a much quicker rate.
Either 100% of it. In the year, or if you don't need it all,
or if there's some planning, you can do it over 5, 5,
7, 15 years.
for the individual components. And I know I'm only talking about 3 main components,
but in a real cost variation study, we do them at Beamington Company,
the CPA firm. We do the cost variation studies.
We'll take essentially from, like, 2 components.
Like, from land and building, and we'll turn that into,
like, 50 different items. And of those 50 items,
we're putting those into the different buckets of whether it's land,
of whether it's in the building category, or of whether it's the other category.
you do want to make sure that the cost irrigation is doing that.
So the cost irrigation, it's,
it is of course required. It's a breakdown of the depreciation schedule.
If you have taken, like if it's an existing project,
if it's not brand new to you, you may have already taken some depreciation
on that. And so as part of the cost aeration study,
we're offering We're actually also considering the past depreciation you've taken on it,
or we're doing allocations and catch-up adjustments to get the net new depreciation
right. So that's why you'd want it done by a CPA and not just,
yeah, there's some online that cost aeration.
Companies that are pretty, they could be pretty quick and pretty inexpensive,
a lot of times they don't have the audit support. And most of the
time they're not doing those tests. Tax calculations,
which you're going to have to have done anyways, and that's what's going to
hold up in an audit, because you want that audit protection.
Even though, like, we, in all these years,
we've never had one audited,
and we've never had to,
like, we've had to provide it. and just,
like, break down to the depreciation, but there's n- not been any adjustments having
to reverse any depreciation deductions. So,
you just want to make sure it's done right, and if you do need
to send something to the IRS, if they're doing a random audit,
or if they're just looking at stuff and they want to,
want you to send documentation, you want to make sure that you've got all
that. Okay, so,
we've talked about, yeah, how the cost aggregation works,
I've broke down the three components. So, like, the acceleration part,
so when you hear, remember when you hear bonus depreciation,
acceleration, accelerated depreciation,
it's all in this, related to that third category was talking about.
And now the next thing I want to talk about is how all of
this, like how would it actually works,
like how it actually ends up on your tax return and why and how,
like, what it actually looks like when it's saving money.
So,
if you think of your tax return, think of,
like, your investments, like, whether it's a real estate property or even an apartment.
Even if it's your own business and you're buying real estate,
you can do this on your own business as well.
But think as a business owner and investor.
And you've got a profit and loss statement, right?
A profit and loss statement is an income statement.
You've got income up top, like typically on one line.
And then you've got a bunch of categorized expenses down below there.
Then at the very bottom, you've got net income,
or what we're going for, taxable income. Which is income after all
your deductions. So think of, say, it's a rental property.
And we'll do an example of that.
Think of a million-dollar rental property. Let's say you've got $100,000 of rent
up top. So $100,000 of gross rent.
Revenue, gross income at the top, and then you've got your expenses.
Like for a rental property, you're going to have maybe some utilities,
some repairs, some interest, some property taxes.
Those are like the normal things you're going to be thinking about.
But then you've got when you do the tax return.
You've got a new line called depreciation,
which you didn't pay for this. Like, or it's not,
it's not cash that came out of your pocket. But this depreciation expense,
it's a calculation done at tax time.
If you don't do a cost aggregation on this million dollar project,
like we just came up with, we're creating the profit and loss,
right? So we had $100,000 of income,
we had $500 miscellaneous expenses, say it was $50,000 of expenses,
we get down to like $50,000 of net taxable income.
But, we're not we have to add in depreciation.
So, on a million dollar property, your depreciation is going to be about $30,000.
And that's just the default, just kind of ongoing,
regular depreciation you'd probably have on a million dollar building.
So, you go, okay, we're at $40,000. $50,000 net taxable income.
Then we take out depreciation. Now we're at $20,000 of net taxable income.
So even the default depreciation,
even real estate investors and anyone buying real estate,
like that default depreciation deduction.
It's still pretty good, like $30,000,
like that reduces your taxable income.
And depending on your tax rate, it could save you.
$10,000 or $15,000,
maybe about $10,000 of taxes on that $30,000 deduction.
But now here's where, here's where the magic happens.
So a, a real, or an example of exactly how,
like, the accelerated depreciation would fit into your profit and loss,
and how that's gonna flow through to your tax return.
So, think of that same example I just gave,
so $100,000 a month, $50 of income,
$50,000 of other expenses, and now,
instead of default depreciation, let's say we've got.
this accelerated depreciation,
you've done the cost aggregation, you've paid for the study,
it's signed off, you've just got this report.
And you send that, or you include that in your tax filing,
which helps create the depreciation scheme. And now,
instead of a $30,000 deduction,
that deduction is probably closer to $300,000.
Like, a 10x, like the first year is probably about 10 times what you
might normally get. So, a $300,000 deduction.
So, we were at, what? $50,000 of positive taxable income before depreciation.
You put a 300,000... $300,000 deduction on there.
Now, all of a sudden, we're negative 200...
what is it? Negative And it's like, wait, what am I going to do
with the negative 250,000 dollars?
You might look at it and be like, wow. I didn't lose,
I didn't lose $300,000 and you didn't,
it's a paper loss. The property didn't go down eventually.
Value by $300,000, like when you hear paper loss,
that's what it is. It's literally just a tax allocation,
called depreciation, and we're putting it on to the paper,
the tax return or your P&L in this example,
and it's just showing up on paper. You didn't lose that money.
It's just a, a tax benefit for you.
So now that $300,000 deduction,
that really the next question is. And at,
at the end of this, I'm going to give you a checklist,
like for every investor, every business owner,
five things. You should be doing before you do a cost seg,
before you do a cost segregation, just to help you think,
think through this, but I'll, I'll finish this example first,
then we'll get into that, but if you can use that $300,000 deduction,
we're in this example we're at negative $250,000.
So now this is where it gets a little, it gets a little technical
when it comes to the taxes. And if you if you listened about or
if you listened to cost variations or you heard about something from a friend
or you saw it on social media,
a lot of times, the conversation doesn't get this far.
Like, the excitement of how, of a big deduction.
And tax savings, like it's, it's very high level and it's awesome because it's
exciting and the magic of depreciation.
But then you get into like, okay, who,
what, where, when, and why, like actually how is it done and are there
limits to it? Who can actually use it? That's what I'm here to explain
to you today because real estate,
by default, is passive. And in the tax planning world,
that's a little bit of a swear word there,
like, passive losses. 30,
40 years ago, they changed the laws. where passive losses cannot
offset your W-2 income.
Like, cannot offset your other,
like, like, interest income. Like,
it can't offset just your regular, ordinary income.
Unless, there are exceptions. Or unless you have different types of income.
So here, here are some ways around it.
Or here are some planning opportunities. So,
number one, passive losses can,
like, it's possible for passive losses to offset passive income.
So, if you have another rental property that's got positive income,
your big loss, this is the $250,000 net loss that we're
talking about, that can be applied to your other passive income.
You could have a, be a co-owner in a business.
You can have an investment on the side that's got income.
You could have other rental properties, all those other passive activities.
If you've got income over there, these losses can offset that.
That's, that's easy. Like, that's just a no-brainer.
That's easy. There's no additional work or planning you even need to do for
that. But what if, here's a scenario,
what if you don't have passive losses? What if you have W-2 income?
Or, you don't have passive income,
and you only have W-2 income, and you've got this big loss coming through
now, and you can't use it in that year.
So if you, you can't use it in that year, you'll be able to
use it in future years. So sometimes have had to explain that to people.
People like, you've got the loss, it's secured,
it's sitting on a, buried a little,
but on a tax form that's carrying forward for you automatically.
When you file your tax return through,
like, some of these professional softwares, and definitely use a professional channel.
Tax Preparer to make sure these carryovers happen for you,
because you don't want to lose that. Because the IRS,
they're not going to carry it over for you. You have to file the
forms to carry over. But when that property sells,
or at the point when you have income, passive income coming in,
that loss is preserved until it's actually used.
So, the loss is not lost. for, yeah,
lack of a better way of explaining it. So,
the other way, another main way,
and, like, we've done some other podcast episodes on this,
are some of the examples. that you can create passive,
or that you can turn passive losses to ordinary losses,
and that's how that's how you create
You or your spouse, if you're a real estate professional,
that's a way where you can release, we can release these passive losses to
offset, say, your W-2 income as a doctor or a dentist.
Or an accountant, or an attorney. You can offset that type of just ordinary
income. Or if you are,
you've heard of the short-term rental loophole, we've talked about that,
we've done episodes on that as well, the short-term rental loophole is if it's
a short-term rental, and you're managing it yourself,
you create those losses, you can offset your other income.
Another thing is if, yeah, real estate professional,
short-term rental loophole. there are some,
like, if, and remember, if you, or, or, or your spouse qualifies for either
of those, that would, or,
you or your spouse are managing the property,
or you're the real estate professional, that would definitely qualify.
So, make sure you can use the planning. So, to go to go into
the, the checklist to wrap up here. So,
five things that I'd recommend that every, every investor do before doing a cost
segregation. One, is,
Determine how much is the potential first-year deduction.
So, I, we've kind of talked about that, but if you can, If go
to the cost segregation website I have,
we have a calculator there for the benefit.
It's costseg.beamontcompany.com.
So costseg, so c-o-s-t-s-e-g dot beamont
company. And that's,
we've got different types of calculators, but it could be 20% of the purchase
price of the property, up to some types of properties like up to 80%.
So it's a pretty big range. We've got videos and explanations there and calculators
there to help and So, show you how to do that. So,
number two in the investor checklist,
before we do a cost seg, is to see if you can actually use
the loss in the year. Because cost segregations can get pretty expensive
from a $1,500 to $10,000.
and so I talked about passive losses,
short-term rental loopholes, real estate professional status,
if you have other types of income to offset.
The list Those are the types of things you want to think through to
see if you can actually use it in that year. The fallback is if
you can't, we can carry on. Number three,
before doing a cost aeration, is what is your exit plan?
Because with cost aerations and depreciation, you're There is
a recapture of the depreciation,
meaning, your capital gain,
so like, if you, a quick example of this, of how impactful it can
be. If you bought a property for a million,
you didn't have a $300,000 deduction,
like threw in a cost egg, and then a year later you sold it.
You sold that property for a million. So in your mind you're like,
I didn't gain anything, like there's no gain because I bought it for a
million, sold it for a million. But for tax filing?
For filing purposes, there is a gain because that write-off,
the depreciation brings the basis down.
It brings your basis to $700,000. So there is a potential gain in this
example, $300,000 gain. So make sure you're planning for that,
and you're either, you're You're planning a 1031 exchange,
so you're not having to pay the tax on the gain right away and
you're rolling the gain into a new product. Or you're doing,
like, an opportunity zone investment, or if you're in a really low income tax
year, it might be, like, you could, could have gotten a much better benefit
from the deduction in the year you did the cost seg,
compared to, to the recapture tax,
which is, you, it's not gonna be more than the tax that you saved,
but you actually do have the opportunity to pay quite a bit less,
if you you're in those lower tax brackets in a future year.
So, that's number three. number four. Or, with cost segregations,
make sure it's an engineering, like,
the study is engineering based and it's signed by a CPA
like it's an academic. Actual audit proof and audit supported cost segregation study.
We've seen some online calculators. Which,
it do, like, they break down the components,
but there's no backup to it and no support.
It's not signed by CPA, in an IRS document.
We, we'd expect they'd just want you to rebuild the cost segregation
and redo it. And it could potentially cause a headache and nightmare down the
road. But a big part of that is making sure,
I did mention a CPA doesn't have to be signed by a CPA.
But the reason I mentioned a CPA is because of those tax calculations,
or the 481 calculations. I'd recommend that those are done by a CPA or
someone that's been doing the tax returns or planning to do the tax returns
for that. That probably would be helpful.
Number five, just make sure, before just jumping in and doing it,
make sure it fits into your tax strategy.
Like, if you can't use the loss immediately,
you never expect to be able to use it, and you're planning to
get into another type of investment, like, it might just not fit.
So,
make sure you've got the deduction dialed in, make sure you can use the
loss, or have a plan for it.
Plan for your exit. Depreciation recapture in 1031 exchanges,
make sure the, it's an engineering based,
a study and CPA signed and make sure it fits in your bigger tax
strategy. So that is it for today. That's the episode.
This is a couple of years ago. We did another one. But things have
changed slightly. Wanted to do another one,
mentioning that Bonus Depreciation has come back.
The 100% Bonus Depreciation is back for 2025 through 2028.
So we have that exciting opportunity again.
And for a few more years, and that is it for today.
Have a good rest of the day and I'll see you soon.
