Income Tax Saving Strategy for Real Estate Owners to Increase Cash Flow: An interview with Brett Hansen of Cost Segregation Authority
This week I sat down with Brett Hansen, who is the VP of Business Development at Cost Segregation Authority. Brett helps real estate investors identify tools they can use to optimize how they’re taxed. Brett has worked with thousands of companies throughout the United States and has helped his clients save over $750 million in taxes.
Our conversation was about the tax-saving strategy called cost segregation and how it can benefit real estate investors and businesses.
Nikole: Hi Brett! It’s great to have you here today.
Brett: Thank you so much for having me over.
N: Could you explain what exactly cost segregation is?
B: Put simply, cost segregation is a tax planning strategy that helps real estate investors of all sizes accelerate the depreciation deduction on their taxes. It’s a reclassification of the various asset within your real estate investments allowing you to depreciation them faster. Without a study, the properties are depreciated over 27.5 for residential or 39 years for commercial. This is a long time.
Cost Segregation will identify assets like carpet, countertops, specialty electrical, or land improvements that can be legally depreciated of 5, 7, or 15 years. This yields a substantially higher deduction against income.
N: …which improves cash flow, right?
B: Exactly. Or, more specifically, which lowers your tax liability which the inherently improves cash flow.
N: Who can take advantage of this?
B: Anyone who owns property other than their personal residence. It was once limited to multi-million-dollar properties, but costs have now made it an affordable strategy for all investors from single family rental homes to large-scale apartment complexes and from office space to casinos and hotels. We’ve seen it all.
N: What exactly does it entail?
B: The IRS requires what is called a Cost Segregation Study. This is an engineering-based inspection and written report formally reclassifying the assets from real property to personal property. It is done by trained cost engineers who count and measure applicable items within the subject property.
N: What sort of items will a Cost Segregation Study identify?
B: Basically, the study will itemize all the assets and their respective costs that can be depreciated faster than the structural component of the building. Easy examples include carpet, countertops, window coverings, cabinets, land improvements. But, there is so much more! A conservative measure is that an average of 25% of the total costs (not including land) is reclassified to a shorter depreciation schedule. These deductions really add up.
N: And doing so will accelerate their depreciation?
B: Yes! Exactly. We will provide the owner and his/her CPA a revised depreciation schedule to be used with the upcoming tax return.
N: When should somebody do cost segregation study?
B: The sooner you get it done the better. Or at least a benefit analysis so you are aware of the potential savings. There is not cost for this.
N: Doing something like this sounds like a magnet for IRS auditors. Can real estate owners expect a visit from the IRS after they do a study?
B: As long as the study is done be a qualified cost segregation company, there is no additional risk on the return. Accelerated depreciation rarely triggers an audit. In fact, the IRS guidelines recommend employing this strategy when done properly.
N: What if the property is for sale or has been sold?
B: Then for sure get it done soon! It is much easier to perform the study before it changes ownership. But, many times we can have an impact even after the sale as long as it was within the past three years.
N: Have the new Tax Laws had any effect on this strategy?
B: 2 words: BONUS DEPRECIATION. I can’t even begin to describe how positively impactful the changes to Bonus Depreciation laws have made cost segregation even more powerful. I would encourage anybody to review more details online, but in short, for properties purchased from now until the end of 2022, the new tax laws allow you to depreciate 100% of the costs of the items the study identifies in the FIRST YEAR. 100%! So if you buy a $1 million property approximately $250,000 will be your Year 1 depreciation deduction as a result of the Cost Segregation Study. Incredible.
N: That’s amazing. What about properties they’ve owned for several years?
B: Almost as good. The IRS allows the taxpayer to “catch-up” any missed depreciation on properties they currently own and it does NOT require an amended return. Everyone should have a benefit analysis done today to see how it works.
N: And what types of properties can have a cost segregation study done?
B: The short answer is everything but your personal residence, which as you may be familiar is not depreciated. But, we’ve seen it all from hotels, to gas stations, restaurants, ski resorts, golf courses, charter schools and even lower cost residential rental properties.
N: Well, thank you so much, Brett. This was very informative!
B: You’re very welcome. It was a pleasure!
Brett Hanson can be reached by email: firstname.lastname@example.org or by phone 801-884-8358.
Nikole Mackenzie is the owner of Momentum Accounting. Momentum Accounting provides outsourced bookkeeping, controller/CFO services & accounting technology support to real estate owners in the Bay Area. To find out more or to get in contact with Nikole, please visit mometnumcpa.com