Maximizing Real Estate Tax Savings: The Power of Cost Segregation With Erik Oliver

In this episode of The Same Day Podcast, host Mat Zalk sits down with Erik Oliver, Vice President of National Accounts at Cost Segregation Authority, to discuss maximizing tax savings through cost segregation. They talk about how cost segregation works, its significant tax benefits, and how it fits into broader investment strategies. Erik also addresses common myths and misconceptions and shares practical steps for implementing this strategy to optimize tax savings.

Maximizing Real Estate Tax Savings: The Power of Cost Segregation

Erik Oliver is the Vice President of National Accounts at Cost Segregation Authority, a national provider of cost segregation services. These services assist building owners in maximizing tax benefits and aid accountants and CPA firms by providing services to their clients who have constructed, bought, expanded, sold, or remodeled depreciable real estate. With a solid accounting background, Erik is a member of the relationship management team, where he educates commercial real estate owners nationwide on tax deductions through specialized depreciation strategies. His practical knowledge and ability to simplify complex tax incentives make him a sought-after speaker at regional and national events. His work helps real estate investors accelerate depreciation, minimize tax liabilities, and optimize wealth building.

Here’s a glimpse of what you’ll learn:

• [2:34] Erik Oliver explains cost segregation
• [4:28] When are properties eligible for 100% bonus depreciation?
• [5:16] Which properties benefit most from cost segregation studies?
• [7:37] Bonus depreciation and its implications on taxes
• [11:35] The impact of selling an asset early on cost segregation benefits
• [19:15] The process of initiating a cost segregation study with professionals
• [29:19] How Erik got involved in cost segregation
• [37:03] Erik debunks common myths surrounding the cost segregation process

In this episode…

Real estate investors are always looking for strategies to maximize their returns and minimize their tax liabilities. One powerful but often underutilized method is cost segregation, which can significantly accelerate depreciation deductions. But what exactly is cost segregation, and how can it benefit you?

According to Erik Oliver, a leading cost segregation expert with a background in accounting, cost segregation is an engineering-based study that reclassifies assets to accelerate depreciation. He highlights that this approach allows property owners to take substantial tax deductions in the early years of ownership, freeing up capital for reinvestment. This method is particularly beneficial in reducing taxable income and enhancing cash flow, thereby offering a strategic advantage for real estate investors. Erik also addresses common misconceptions, emphasizing the importance of detailed studies to avoid leaving money on the table.

Resources mentioned in this episode:

• Mat Zalk on LinkedIn
• Yonatan Schmidt on LinkedIn
• Walter Bowser on LinkedIn
• Keyrenter Property Management
• Keyrenter Property Management in Tulsa | Oklahoma City | Arkansas
• Keyrenter Property Management email address: [email protected]
• Chris Lile State Farm 
• Erik Oliver: LinkedIn | Email | Contact no.: 602-568-0032
• Cost Segregation Authority

Related Episodes

• “Why You Should Confer With a Mortgage Lender” with Marc Marroquin on The Same Day Podcast
• “The Value of Private Money in Real Estate Investing” with Jay Conner on The Same Day Podcast
• “Successes and Failures in Real Estate” with Deren Huang on The Same Day Podcast

Quotable Moments

• “Cost segregation really is just accelerated depreciation on your real estate assets.”
• “I want my deductions now versus in the future due to the time value of money play.”
• “If you held the properties for 27 and a half years, in both cases, you’re getting the same amount of depreciation. But there’s a time value of money at play right where I want my deductions now versus in the future.”
• “By creating that large deduction this year, I’m able to reduce my taxable income, save significant tax dollars, which I can then reinvest or redeploy this year and start making money on that money.”
• “I bought it in November… took us 100 hours to set it up… got a huge deduction, about 60,000 of my $80,000 down payment back in the form of a tax refund, and then the following year, I no longer needed to manage it.”

Action Steps:

1. If you are a real estate investor, look into the feasibility of a cost segregation study for your property to save on taxes: Leveraging a cost segregation study can help you realize deductions faster, optimizing the time value of your money.
2. Understand your eligibility for bonus depreciation when purchasing new property: Knowing the bonus depreciation rules can significantly influence your immediate tax benefits upon acquisition.
3. Explore in detail the classifications of assets within your property to maximize your cost segregation benefits: Accurate asset classification ensures that you are not undervaluing your deductions.
4. If you qualify, consider the short-term rental strategy to potentially claim real estate professional status: This move can open opportunities for deducting real estate losses against other forms of income, particularly beneficial for high-income earners.
5. Stay informed on tax laws and seek professional guidance to take full advantage of cost segregation and other real estate tax strategies: Staying up-to-date ensures you capitalize on all tax advantages and avoid costly mistakes.

Sponsor for this episode…

Chris Lile at State Farm Insurance:

This episode is brought to you by Chris Lile at State Farm Insurance.

Chris Lile at State Farm helps you protect your most precious assets and investments, including home and auto.

To learn more about how you can save double digits on all your insurance needs, visit diallile.com or call Chris’ office at 918-878-7771.

Keyrenter Property Management:

This episode is also brought to you by Keyrenter Property Management.

Keyrenter Property Management is a full-service property management company that helps clients buy, renovate, and operate real estate assets.

The team helps clients build wealth while taking the headache out of property management.

That’s why, no matter what rental you have — single-family homes, condos, townhomes, or apartments — they can give you the management solutions you need.

To learn more about their services, go to https://keyrenterpmc.com/ or send them an email at [email protected].

Episode Transcript

Intro 0:05

Welcome to The Same Day Podcast where we discuss driving incremental business growth and other topics related to real estate, property management and entrepreneurship. Now to the show at hand.

Mat Zalk 0:20

Mat Zalk here. I’m the host of The Same Day Podcast where I connect with top business leaders and real estate experts. Past guests include Marc Marroquin, mortgage lender, talking about all sorts of things related to refinancing your house. He locks, etc. Jay Conner was talking about raising private money, and Deren Huang owns 100 units under management in a host of industrial properties. That was a very exciting episode. You can do it too. Today’s episode is brought to you by Chris Lile State Farm. Chris Lile State Farm helps you protect your most precious assets and investments, whether it’s your home and auto investment rental properties or other valuables. Call Chris Lile State Farm for a quick and painless phone call to potentially save double digits on all of your insurance needs. Call his office at 918-878-7771. Today’s episode is also brought to you by Keyrenter Property Management. At Keyrenter Property Management, we are a full service property management company, helping our clients buy, renovate and operate real estate assets. We help our clients build wealth while taking the headache out of real estate ownership and property management. No matter what rental you have, we can help single family homes, condos, townhomes, apartments. We have the management solutions you need to go to keyrenterpmc.com or email us at [email protected]. Today’s guest, we have an exciting show for you. I’ve long wanted to do an episode on cost segregation, which is a fantastic study a way to decrease your tax liability and accelerate your depreciation. Today’s guest is going to talk about that. He is Erik Oliver. He’s holds a Bachelor of Applied Science and Accounting from Westminster College, and before joining Cost Segregation Authority, where he currently works, Eric was an operations manager for a multi million dollar landscaping and design firm in Long Island New York. Since heading west and joining Cost Segregation Authority, he’s been speaking at local, regional and national events. He brings with him a passion for identifying cost savings and educating commercial real estate owners on the benefits of cost segregation. Erik Oliver, welcome to the show. How are you?

Erik Oliver 2:12

I’m good. Thanks Mat for having me. Glad to be here.

Mat Zalk 2:14

So good to have you. I’ve been we’ve been doing cost segs for years, but I’ve been dying to have somebody on the show that does cost segs for a living, and can give us all the ins and outs of cost segs. Let’s start for people that don’t know what a cost segregation is. Can you? Can you just give us a baseline introduction to cost segregation?

Erik Oliver 2:34

Yeah, cost segregation really is just accelerated depreciation on your real estate assets. So one of the reasons people get into real estate is for some of the tax deductions. And when you buy a residential unit, for example, you normally get to depreciate that unit over 27 and a half years. So just to make the math easy, let’s say you buy a $275,000 home. You’re going to essentially take that divide it by 27 and a half and you’re going to get a $10,000 write off every year for the next 27 and a half years. Now, I oversimplified that a little bit, just for the math sake, but you have to back up the land value. You don’t get to depreciate land. So be your purchase price minus land. Divide that by 27 and a half years. And that’s, that’s your write off every year. It’s a non cash expense that gets to come off your taxable income. Well, for a lot of investors, they’re probably not going to own their property for 27 and a half years, and I want my deductions as fast as possible. I don’t want to wait and take 127 right? So a cost segregation study is an engineering based study where we come into that property and say, Well, according to the IRS, carpet should be depreciated over five years, not 27 and a half. Your driveway should be depreciated over 15 years, not 27 and a half. And so just as the name implies, we segregate that $270,000 cost into different buckets, I’ll say, or asset classes, which allows you to take your depreciation at a much faster rate. Because now we’ve got in that $270,000 single family home. We’ve got $20,000 of carpet. Carpet being a five year asset, we get to spread that out over five years, not 27 and a half. And so essentially, you’re just front loading or taking your deductions at a much faster rate, versus letting the IRS hold on to these for, you know, 27 and a half years.

Mat Zalk 4:17

So that’s beneficial if I’ve got a lot of income this year, but if I also have a lot of income next year, I cannot take as much depreciation on that single asset next year. Is that right or wrong?

Erik Oliver 4:28

Correct? Yeah, if you own that property for 27 and a half years, in either scenario, you’re getting the same amount of depreciation. We’re just front loading it by doing a cost segregation study and taking a big portion of it in those early years. Now, yes, you do get less in future years, but I’m okay with that, because I by creating that large deduction this year, I’m able to reduce my taxable income. I’m able to save significant tax dollars, which I can then go reinvest or redeploy this year and start making money on that money. So the. Of people will do cost segregation to either pay down their debt or go reinvest it in new properties again at the end of the day, you’re right. If you held the properties for 27 and a half years, in both cases, you’re getting the same amount of depreciation. But there’s a time value of money play right where I want my deductions now versus in the future.

Mat Zalk 5:16

Especially if inflation is at nine or 10 or 17% depending on what metrics you’re watching. Okay, so what kind of properties do you think benefit most from cost segregations?

Erik Oliver 5:30

You know, that’s a good question, and it’s kind of a moving target, because the the answer to that question has changed over the last couple years. So prior to the tax cuts and Jobs Act of 2017 2018 that was Donald Trump’s tax overhaul. Prior to that, it was really large commercial properties. You have a large asset. When I say large, I don’t mean actual square footage wise, but large in value when you purchase it large basis. So usually properties over about a million dollars, commercial properties were kind of the good candidates back then. The fees were a lot higher, the benefit was a lot lower, and so you had to have a real big property for it to pencil out. With the passing of the tax cuts and Jobs Act, there’s something called bonus depreciation, which kind of puts cost segregation on steroids. And because of that, we’ve seen a lot smaller investor a lot smaller properties make sense. So let’s just take a $300,000 single family home. Typically, when we do our cost segregation study, we are going to segregate around 30% of that. So if you take 30% of 300,000 that’s around $100,000 deduction. Now that deduction, we get to take a large portion of that because of bonus in the first year, depending on when you bought it, you may be able to take 100% of that all in year one. Wow. So on a $300,000 home, if you’re creating $100,000 deduction, and you’re in a 37% tax bracket, you know, you reduce your taxable income by 100,000 you just save 37,000 in taxes. And us fee for us, you know, we do engineering based studies at our firm, so a fee would be around $3,000 to get that single family cost seg study done. So pay three to save 30,000 with the passing of the tax cuts and Jobs Act, it made it a lot more applicable to smaller investors who have smaller properties. But to go back to your question, any revenue generating property is eligible for cost segregation. It doesn’t mean it always makes sense, and so most cost seg providers will run a free analysis to give you an idea of what the savings would be before they ever engage you.

Mat Zalk 7:31

Interesting. When can you take 100% bonus depreciation in year one?

Erik Oliver 7:37

Yeah, so bonus depreciation, the 100% bonus depreciation, was for any assets placed into service between 927, of 17 so September, 27 of 17 through 1231, of 2022. Wow. Anything bought in 2023 is eligible for 80% bonus. Anything bought in 2024 is eligible for 60% and it phases out 20% each year until 2027 when it’s down to zero. Now, saying that that’s the current tax law, there is a bill in front of Congress now that actually passed the house almost unanimously, got stuck in the Senate. I think it’s going to stay there, because we’re in an election year, but the idea was to extend the 100% bonus through 2025 so so my guess is with your presidential election is probably not going to happen this year, but going forward, it should happen after the election.

Mat Zalk 8:30

Bust so any property bought in 2024 is eligible for 60% depreciation. That means that if you buy a house for 60% bonus, and what exactly does that mean? That doesn’t mean sure that you can depreciate 60% in year one. That is 60% of some other number can be depreciated 100%

Erik Oliver 8:47

Yeah, you got it? Yeah. That’s a common misconception. People will call us like, Hey, I thought I could seg I thought I could depreciate 60% of my building. And that’s not the case. It’s only 60% of your short life assets. So back to that example, where we had the $300,000 single family home. If we segregate 100,000 of that, or 30% of that, into short life assets, those short that 100,000 were able to take 60% of that, or $60,000 as a write off this year, the other 40% gets spread out over the useful life of each of those asset classes. So if we’re talking just five year assets, you would get 60% of your five year assets in year one. The other 40% that’s left over gets spread out over years 234, and five. So you don’t again. You’re, it’s, it’s similar to the 100% bonus. You’re gonna get 100% of it if you keep that asset for five years. It’s just you’re spreading it out. You’re not getting all of it in year one.

Mat Zalk 9:42

Got it, and what is considered a short life asset, anything less than how many years?

Erik Oliver 9:46

So anything less than 20 years. So when we do our cost segregation study, and that’s why you can’t utilize bonus depreciation if you’re not doing a cost seg, because remember, from the start of our conversation, a residential property depreciates a. Over 27 and a half years. So we’ll even meet Mat with CPAs. And they’re like, oh, bonus depreciation doesn’t apply to real estate because these real estate assets are 27 and a half years. We’re like, no stop. Hold on. If we do a cost seg study and we identify, and here’s the categories, back to your question, we identify five year assets. That’s everything inside of your building, so that’s could be, can be easily removed, that’s non structural, so things like flooring, countertops, cabinets, appliances, ceiling fans, garbage disposals, window coverings, all that interior stuff falls in the five year bucket. Yep, and there is a seven year asset that’s kind of like your telecommunication lines. We don’t see a lot of seven year assets. And then the other big bucket is the 15 year bucket, and that’s all of your exterior land improvements. So curbs, gutters, asphalt, irrigation, retaining walls, fencing, trees, bushes, shrubs, all that gets classified into 15 and then everything else, which, again, is usually about 70% stays in that long term. 27, and a half year bucket, but it’s this 30% that we segregate that’s eligible for the bonus. And like I said, a bonus just puts cost segregation on steroids.

Mat Zalk 11:09

I love it. That is crazy. What happens if you if you sell the asset, so if you hold it for 27 and a half years, whether you take bonus depreciation and and you actually do the cost segregation for the short life assets, etc, and take depreciation accelerated towards the front end or not, you’re going to be even what happens if you take, you know, 30% of your depreciation in year one and then you sell it in year four? What happens?

Erik Oliver 11:35

Yeah, that’s a great that’s a great question. And that’s a question we get asked probably most often by both tax preparers and building owners, is, Hey, isn’t this just a timing play? Erik, if I take all this depreciation now, don’t I just pay it back in four or five years when I sell the asset? So when you sell an asset, you pay two types of tax. You pay depreciation recapture, which is calculated based on how much depreciation you’ve taken, and you take and you pay capital gains tax. And so the idea with cost segregation is you’re going to take your deduction. So I’m going to create $100,000 deduction today, and I’m going to, I’m going to be able to offset income that’s taxed at 37% that’s my that’s my ordinary income tax bracket. So in that case, I save 37,000 when I pay it back in five years. The goal is to pay most of that back as capital gains. Capital gains is taxed at 20% and then I save the spread, and I don’t even have to all back. Yeah, there’s radar arbitrage. I don’t even pay it all back. I pay some of it back. And let me kind of back into that example, because I think it makes more sense. I buy this. I’m in an office building here. I buy this office building for a million dollars. I pay a million dollars for all this stuff on the outside the inside the building. Pay a million bucks. Five years later, I sell it for 2 million. When I go to settle up with the IRS, I’m telling them that everything is doubled in value. I bought all this stuff for a million. I’m selling all this stuff for 2 million and they’re going to charge me tax on that million dollars of gain. Well, my walls have gone up in value. My land has probably gone up in value, but certainly my dirty, nasty carpet that’s five years old and stained isn’t worth double what I paid for. And when you don’t have a cost seg study, you can’t pull out the carpet, because remember, carpets a five year asset. So what’s the book value of my carpet after I’ve owned it for five years? Zero has zero value left. So why am I selling it for double what I paid for it, and then getting charged tax on that? So again, the idea is you’re taking your deduction against your ordinary income, paying some of it back at a lower capital gains rate at a future date and saving the spread. And so yes, you do have to pay some of it back, but you’re paying it back on a lower amount at a future date, and then again, saving that spread.

Mat Zalk 13:48

But in that example of the carpet, so you paid $100,000 for carpet, it’s now worth 05. Years later, they’re saying it’s doubled. So now it’s $200,000 of carpet, but you’re going to pay capital gains tax on $200,000 of carpet, 20% instead of, instead of some, some 37 and a half percent on on a gain of the 100,000 whatever, right? Yep, exactly. Interesting. You’ve already taken, you’ve already taken the depreciation on the front end against income that was five years ago. So it’s worth more, because the dollar is worth more today than it will be in five years, etc. If you buy five of the same buildings, or, in our industry, more, if I buy five houses on the same street, and they’re all from a new builder, a developer that’s put together a subdivision, can I basically, if they’re all three bed, two baths for the same price, can I basically take one cost seg study and then kind of transfer it across to different properties.

Erik Oliver 14:45

That’s a great question, and it’s kind of a gray area in our industry. You’ll get two different answers if you ask two different people. I have seen people do that the the IRS issues an audit guide that tells their agents how to audit these cost seg studies in the audit. Guide, they do give the opportunity for what they call modeling approach. In that case, that would be a modeling approach where taking, we’re modeling one home and applying it to other homes. Now in the IRS audit guide, it explicitly says in order to use that approach, you have to have 50 samples, and then once you’ve done 50 homes. You can apply an average of those 50 homes to all the other homes. Now, I think that’s a little extreme.

Mat Zalk 15:26

50 homes that are all four bed two baths, or 50 homes that are anything.

Erik Oliver 15:31

Exactly, yeah, 50 identical homes. So we, we work with one of the big we’re a headquartered out of Salt Lake City, Utah. We work with one, a big gas station company out here, kind of like a 711 or, depending on the part of depending on the part of the country you’re in, but they basically build the same gas station, and they ask this the same question, can I just apply your cost seg study to all the different gas stations? If we did 50 studies on 50 The correct answer is, if you do 50 studies on 50 gas stations, then you take the average of those 50 studies, you can apply it to all your gas stations. That’s the answer that’s in the IRS audit guidebook. I think that’s a little extreme. There are some differences. Even though they’re all three bedroom, or, excuse me, four bedroom, three bath, they all have the same finishes. Oftentimes, there is different types of land improvements based on whether it’s a corner lot, maybe one lot’s a little bigger, maybe one lot’s on a hill, so there’s a retaining wall. That’s the problem you run into, is the 15 year assets, the inside is usually the same. The 15 year assets some kind sometimes there can be variation. So do people do it? Yes, you can absolutely do it. Let’s talk a little bit about audit risk, the chance of you being audited doing a cost seg study. Cost seg studies do not increase audit risks at all that we’ve seen. So we’ve done close to 25,000 studies. We’ve been involved in just over two dozen audits within those 25,000 studies, not a single audit was triggered by the cost sake study. It’s triggered by something else. They see that you’ve done a cost seg study, and they will ask to see it. If you were to buy 10 homes, all the same interior finishes and you applied one cost seg study to it, people do that all the time. We see that quite a quite often in our industry. If you were ever to get audited, they may start looking at the land improvements and say, Hey, this one’s on a quarter lot. This is a third of an acre. These other homes are a quarter of an acre. How can you tell me there’s the same amount of grass on these two lots? I mean, that would be my only thing that I think you could possibly.

Mat Zalk 17:31

The question is, because you you use the grass as a 15 year as a 15 year asset, they would say you’ve gotta back this out on this you cannot take as much 15 year asset on the quarter acre as a third of an acre. You got to back that out, and you should have your depreciable expense for this year should have been 29 and a half 1000 instead of 30,000 so you asked us $500 back of depreciation in the income. The taxable income on $500 was 37 and a half percent, and therefore that was the money you owe us, 120 bucks, or whatever.

Erik Oliver 18:06

150 bucks. Yeah, so that’s why on single family homes, it can be insignificant. The challenge, or I don’t know if it’s a challenge, the question would be, is, once they see that there’s inconsistencies, then they’re going to start scrutinizing everything. Yeah. So if you want to be 100% bulletproof in an audit, you should just pay to have a study done on each home. If there’s depending on the size of the assets. It may be worth it to do that if they’re smaller assets. When, again, when I say smaller, I mean smaller in purchase price, yeah, smaller in value at the time of purchase. If that’s the case, it may be worth taking that chance, because, again, the chance of being audited is very slim. And if you were audited, and they did question it, that you would say, okay, you know what? You’re right, I overstated my grass on this property by, you know, 500 square feet. Here’s your 150 bucks back.

Mat Zalk 18:57

Right. So what is the actual process if somebody, if somebody calls Cost Segregation Authority, Erik Oliver, and says, I want to have this done. I’ve got a property in Tulsa, Oklahoma, what actually, what are the next steps?

Erik Oliver 19:15

Yeah, so the first thing we always do is want to run that benefit analysis. So we’re going to look at those that property, we’re going to determine what type of tax savings we can generate out of that property conservatively. We always want to underestimate and overdeliver. We’re conservative. We’re going to get you an estimate and say, Okay, on that million dollar home, we’re going to segregate 32% of it. You’re going to get a $320,000 write off. Our fee is going to be, you know, $3,000 for that study. Do you want to move forward or not? Once you’ve talked it over with your tax preparer, then you would engage us to do the study.

Mat Zalk 19:51

Got it so the first thing is done by some sort of ArcGIS survey. Where you take the Zillow listing or, or, how does that work? Yeah, so it’s really just off historical data

Erik Oliver 20:05

So we’ve done, like I said, close to 25,000 studies, so we know, on average, what we’re going to be able to pull out of your typical single family home or your typical duplex. You know, depending on the market, like some markets are different. For example, Arizona, there’s a lot of ceramic tile in Arizona, because it’s so hot there, sure. So those numbers are a little bit less than, because you can’t segregate ceramic tile, those numbers might be a little less than somewhere where there’s carpet, typically, or LVP. So we just have enough historical data that we can conservatively give you a pretty good estimate. And so we do it through Google Images, and then also through just our database of of what we typically get.

Mat Zalk 20:43

But so that also means that ceramic tile in a kitchen in Tulsa would not be, would not be subject to accelerated depreciation.

Erik Oliver 20:50

Correct. Ceramic flooring is interesting. Some flooring is and some isn’t. So if you’ve got ceramic tile, or if you’ve got natural wood, we can’t segregate that. That’s a long term asset, according to the IRS, that lasts longer than carpet or LVP or something along those lines.

Mat Zalk 21:06

So got it. But in our market, a lot of times people put disgusting carpet over beautiful, albeit older hardwood. Yeah, because that was the trend in the 60s and 70s. Was like, yep, only poor people had hardwoods, but all the rich people had carpet everywhere, including the bathrooms, shag carpet. Oh, my God. So what about people that don’t see the value in doing the cost segregation? If you guys have experience doing 25,000 of these, is there a, is there a an order of magnitude solution that costs 1000 instead of three? Where you say, Can you give me, can you give me an order of magnitude? You tell me it’s generally going to be 30, you give me a letter. I take 20 instead, and we call it a day.

Erik Oliver 21:48

No, unfortunately, we can’t do it that way. So there is properties where it doesn’t make sense. So there, let me back up and say, remember, I was telling you the IRS gives us actually, I said modeling was one of the preferred methods. There’s actually six preferred methods to do cost segregation. At our firm, we do something called an engineering based study. So our reports are a little more robust. We actually look at the property. We measure how much carpets in the in the living room, or what have you. There is another accepted method called a they actually call it rule of thumb approach in the audit guide, and that’s kind of like the Turbo Tax of our industry. So there’s software there. There’s even cost, say, companies that they don’t even want to spend the time looking at any asset less than 500,000 because they don’t make as much money as they do on the larger projects, so they just try to not do the smaller ones. So there is software out there where you can do cost segregation. You can go to a website, input some information, pay 750 bucks, and it’s going to spit out a report same day. What I found is, in 95% of the cases, when you do those online ones, because they’re using that rule of thumb approach or a modeling approach. They’re extremely conservative. So we had a client who had five residential rentals. They used the online studies, they got results anywhere from 12 to 22% segregation got it. And so we typically on an engineering based study, we don’t find anything less than about 30% so on a $300,000 home, a 10% difference is $30,000 worth of depreciation. Again, if you’re in a 37% tax bracket, it’s 10,000 $30,000 that’s $10,000 of additional tax savings. So you paid 1000 for your study instead of paying 3000 but you left 10,000 on the table. And so in most cases, it makes sense to pay for an engineering based study. One, you get better results. Two, it’s audit proof. And then three, the third reason, I just lost my train of thought, it’s audit proof. You get better results. I can’t remember what else there was one of the one other point, it’ll come back to me. Come back. But oh, I know what I was gonna say. There is a place for those online studies. If you have a $60,000 home you picked up in downtown, yeah, it doesn’t make sense to pay $3,000 on a study if you’re only gonna save 3500 on your taxes, because you’re gonna have to pay some back, and you end up losing money. So for the real small properties, the online ones work well, I always will tell people anything over about $250,000 of depreciable basis. Again, that’s your purchase price minus land value. If that’s over 250,000 you’re probably going to come out ahead by paying a few extra dollars to get an engineering based study done, versus the online got it.

Mat Zalk 24:40

What about this scenario? I made $100,000 last year. I am an accidental landlord. I’ve moved my primary residence into a an investment, into being an investment property, and I moved out of state. I made okay, just say, let’s say not $100,000 I made $70,000 last year. You can do a cost segregation. Can find 30% 30% of 300 is $100,000 let’s call it $90,000 and I don’t have $90,000 of taxable income to write off. What do I Sure? Is it worth it?

Erik Oliver 25:12

So in sometimes? The answer is sometimes, and it depends on other variables in your tax in your tax returns. So couple things to think of. One is the deductions. You’d never lose the deduction. So let’s say you made, we created $100,000 deduction. You had 90,000 of income, we would wipe out that 90,000 and then next year you’d have 10,000 left over. That would wipe out the first 10,000 of income. What you don’t want to do is, if you only have 10,000 of income, it doesn’t make sense to pay for a cost seg study that’s going to create $100,000 deduction because it’s going to take you 10 years to use it.

Mat Zalk 25:48

You lose the time value of money.

Erik Oliver 25:50

Right. Just take your standard deduction and don’t pay for a study. So that’s the first thing you got to have. You got to have income to be able to utilize the deduction for it to make sense. The other part to think about is there’s this active income versus passive income. So I’m a w2 employee. I’d say I make 150,000 at my job every year. I’ve got a rental property, a long term rental, let’s say it makes $20,000 of income. I paid 300,000 for it. I get 20,000 of income every year. Again, a cost sake study on that might garner $100,000 deduction, but unfortunately, I can’t use that $100,000 deduction to offset my 150,000 of w2 income. I can only utilize it to offset that 20,000 of rental income unless one I’m a real estate professional, which that’s a whole nother topic. That’s the golden ticket. Yes, yeah, that’s the Goldman ticket. 750 hours a year doing real estate, more than 51% of your time doing real estate. Then all of a sudden, I become active real estate or Trader business, and I can use those deductions.

Mat Zalk 26:53

Is that the lower of of either 750 or 51%?

Erik Oliver 26:59

Both.

Mat Zalk 26:59

Or what I’ve heard is the short term rental. If you have a short term rental, you’re automatically granted real estate investors.

Erik Oliver 27:06

Not automatically, not automatically, but that’s the workaround. So I’ll give you a real life example. I’m a w2 employee. My wife works in the school district. She’s a w2 employee. I have some long term rentals. I could do cost seg on them, but I can’t use them to offset my w2 income, right? And we don’t make a lot of money from our real estate right now. We make our money from our w2 jobs. So what we did is, at the end of 22 I took advantage of the short term rental loophole. We went and bought a short term rental. In November, I put $80,000 down. This is the same 80,000 I was going to have to send to the government in April. I took that 80,000 instead of, instead of sending it to the government, in April, I bought a short term rental. We managed it. That’s one key, you have to manage it. And two, you have to show the average day has to be less than seven days, which it typically always is on an Airbnb type property. And you have to show material participation. There’s seven tests to show material participation, the one test that I only had to meet, one of those tests, the test that I met was I spent 100 hours at the property and more time than anyone else in that year that I bought it. So remember, I was strategic. I bought it in November, sure, because I didn’t spend more time there than our cleaner and more time there than our maintenance folks. And so I bought it in November. It took us 100 hours to set it up. We managed it from November and December, we got a huge deduction. I got about 60,000 of my $80,000 down payment back in the form of a tax refund. And then the following year, I no longer needed to manage it, so we hired a management company, and now I just got a $60,000 tax savings instead of sending that money off to the government. To the government. So, yeah, very smart. The short term rental loophole is a way around that passive loss limitation, but you do have to show material participation in order to take advantage of that.

Mat Zalk 28:52

But you don’t even need to own it for a year. Fantastic. No, no, like we you don’t even need to keep it. I meant you don’t. You don’t need to even keep it as a short term rental for a year. Theoretically, you could.

Erik Oliver 29:01

I could transition into a long term rental. Yep, when it, when I created that huge deduction, it was a short term rental. So that huge deduction, because it was created in the year was a short term rental, is considered active. Therefore, doesn’t matter what I do to it next year, as long as, as long as it’s active in the or, yeah, active in the year that I did it.

Mat Zalk 29:19

So beautiful. Eric, how did you get involved in cost segregations?

Erik Oliver 29:23

You know, my kids ask me that all the time.

Mat Zalk 29:26

Did you want to be a cost seg expert?

Erik Oliver 29:30

No, so it’s kind of a crazy it’s not a crazy story, but my degree is in accounting. I was never a CPA. I’m still not a CPA. My degree is in accounting. We have CPAs here at our firm, but so numbers always came easy. When I was in school, it was either finance or accounting. I just wanted to get out of school as quickly as possible. Hated writing papers, hated hated science. So I’m like, Math has always come easy. So I went to accounting. I got an accounting degree, and then I actually just stumbled across this job. I had one rental property at a time. I was looking to move from New York back to Salt Lake City, Utah, where our company’s headquartered, came across this job, and it’s like, oh, you’ve got to have accounting background and some sales experience. I kind of checked both those boxes. I had to Google what cost seg was before I came to my interview here, because I had no clue. That was about seven years ago, and it’s been great ever since. I’ve learned a lot about real estate, I’ve been able to increase my portfolio, and then again, help investors all over the country reduce taxes. So it’s been a great, great career.

Mat Zalk 30:29

I love it. What do you what do you do to stay abreast of the industry? Do you go to industry conferences? Do you listen to podcasts? Do you read a ton about this?

Erik Oliver 30:39

Yeah, a little bit of all of that. So one of the benefits that I personally have within our company is I do a lot of speaking engagements at different conferences across the country. So I get to speak on cost segregation, but then I’m also there at the conference, and I get to hear about the short term loopholes, or I get to hear about the changes to the tax laws, opportunity zones. There’s a whole bunch of things that I’ve been able to learn just by going to learn just by going to these different conferences and and whatnot. So conferences are a big thing, and then we actually have two employees here, and that’s basically their only job is to stay on top of these tax laws, because it is very niche, and these tax laws do change, and this is why your typical CPA probably isn’t offering this service. It’s not because they’re negligent, it’s not because they’re incompetent. They just don’t have the bandwidth. It’s the same reason your general practitioner, your family doctor, doesn’t do heart surgery, yeah, you just can’t learn to do heart surgery and brain surgery and everything else. You got to kind of specialize and so a lot of what we do is partner with CPA firms and tax advisors across the country, and we do this work for their clients. And so because of that, we work with some really progressive CPAs, some progressive real estate investors, and we kind of get to see a little bit of of what’s going on around the country. And so it’s led to some some really cool opportunities.

Mat Zalk 31:56

So let me ask you this. I had a colleague. I said I was, I was going to interview you related to cost segregations. And he said to me, Well, I don’t really want to pay for a cost segregation I just if I have more income in a year, I tell my my CPA to get a little bit more aggressive. And if I have less income in a year, I I tell my CPA to get a little bit less aggressive, on on on depreciation for the real estate assets that I own. Is that even possible. I was thinking about it. And how would you even do that? I mean, I guess if you have, if you’re adding to your portfolio every year, you can theoretically do that, but you have no basis in doing that. You have no justification if the IRS were to come audit you to say to them, Well, I did a 27 and a half year straight line appreciation, on the on everything but the land, on this asset, but on this asset, I accelerated depreciation on something else. Does that in your mind make any sense?

Erik Oliver 32:51

No, it doesn’t. I’ve seen it, though. I’ll give you a real life example. I work with a guy named Chris. He’s a CPA out of Phoenix. He called me. He’s like Erik, I just inherited this client, they’ve done a casual cost segregation study, right? Can I send this property over to you and see what you guys can do? And I’m like, Chris, you’ve known me for five years. I’ve never heard you say casual cost segregation. What the hell are you talking about? He goes, let me send you the depreciation schedule, and I think you’ll understand. So he sends me the depreciation schedule, and the old tax preparer had done just that. Guy bought a building. It was a 16 unit building. So normally a depreciation schedule will say, building and land. There’s just two items this. CPA, their client, needed an additional write off. So the CPA said, Well, I know this building has a parking lot, so I’m going to put the this was during 100% bonus. So he goes, I’m going to put the parking lot at 80,000 he goes, I know these apartment units have appliances, so I’m going to say the appliances were 12,000 so he just created a $92,000 deduction for his client without ever paying for a cost saving problem with that one is, if it ever gets audited, they’re going to throw it out immediately, because they’re going to say, okay, CPA, is that six inch concrete or four inch concrete in the parking lot? And you better have documentation to come up to how you came up with that 80,000 number two. Don’t ever use whole numbers. Don’t use 80,000 that’s the other thing. 80,000 104, 72 use some rounded numbers. But so that’s the first thing. It’ll get up. But the second thing is, we looked at that property, and the parking lot was actually $120,000 worth of asphalt, and the appliances were actually $24,000 worth. So they shorted anyways. They shorted him. So yeah, they shorted the guy. So in the end of the day, it cost the client money. The CPA thought he was doing a solid for his client, saying, Hey, don’t worry about your tax bill. I’m going to take care of it, and you’re not going to have to pay for a cost seg study. But had they paid the $4,000 for the study. In that example, they would have created another. Let’s see, on the parking lot, it was 40,000 on the other ones, it was 20. So another $60,000 worth of deduction. Again, at a 37% tax bracket, that’s over 1819, $20,000 worth of deduction. Yeah. And also, you saved your client four, but you cost them 20 by not doing the cost seg. So, yeah. Again, any asset over 250 300,000 is certainly worth looking at. Anything over 500,000 is a no brainer in most cases.

Mat Zalk 35:10

But on that, in that example, would you have gone out? Would would cost seg authority have gone out and, like measured the depth of concrete?

Erik Oliver 35:19

Yeah. So the we do a pretty robust study. So we don’t always measure the depth of concrete, but our our founders were developers, and so there’s certain thickness of concrete you have to have in different jurisdictions.

Mat Zalk 35:32

Six inches of driveway or whatever.

Erik Oliver 35:34

Yeah, and it depends on and even different jurisdictions are different depending on how heavy their heaviest, um, fire engine is. So some places who have the big fire engines, they have to be able to drive in your parking lot, and so they need certain type of asphalt. And so their building codes are different. And so we look at all that stuff, we don’t actually go in and and drill out a core it out and figure out that it’s four or six inches, but we have the expertise to know how thick it is. And in some instances it is thicker than others, and it creates a much larger deduction.

Mat Zalk 36:05

So do you guys, in general, visit properties that you, that you do segregations on, yep, 100% of the time.

Erik Oliver 36:13

So the IRS requires an site visit. Now, one of the good things that came out of covid is we were able to start doing some of the smaller properties virtually. So we set up basically a zoom call. We have our costing engineer on one line, the property manager or the building owner on the other line, and we say, Okay, walk us around the property, show us the flooring, show us the appliances, show us the electrical panel. There’s certain things we need to see in order to do the study, but for any large project, we have in house engineers that fly all over the country, and we group them together, so we do projects in different states at different times and whatnot. But yeah, the IRS does require for it to be a quality study. It does require a site visit.

Mat Zalk 36:55

Last question, are there any are there any misconceptions about cost segregations that you’ve encountered, that we haven’t discussed already, that that you want to debunk.

Erik Oliver 37:03

No. You know, you hit. You hit the two big ones. One is, can I just do this online? And the answer is yes, you technically can, but oftentimes you’re leaving money on the table, yeah. And the second, the second one we get is, hey, I just have to pay this all back when I sell it. And the answer is no, and that’s because of that rate arbitrage and the ability to allocate the sales price to the right bucket so you’re not paying tax on your dirty, nasty carpet. And so that is one of those are two that the probably most common misconception of cost seg.

Mat Zalk 37:33

I love it. Erik Oliver holds a Bachelor of Applied Science in Accounting from Westminster College before joining Cost Segregation Authority. He was an operations manager for a multi million dollar landscape and design firm in Long Island New York, but he wanted to make his way out to sunny Salt Lake City. Can’t blame you. Point of the mountain out there. I like to paraglide out over overlooking the Oh, dear, the Great Salt Lake. Yep, it’s such a nice place to be. Since heading west and joining Cost Segregation Authority, Erik has been speaking at local, regional and national events. He brings with him a passion for identifying cost savings and educating commercial real estate owners on the benefits of cost segregation. Erik, we appreciate you educating us on how we can save a little bit on our tax liability by doing a cost segregation study on our investment properties. So great to have you on.

Erik Oliver 38:21

No, I appreciate it. Thanks for the opportunity. Have a great day.

Mat Zalk 38:23

How do people reach you? Real quick. How do people reach if they want to?

Erik Oliver 38:27

So the best way is through our website. It’s just www.costsegauthority.com. My contact information’s on there. My cell phone’s on there. If you guys ever have any questions, please use this as a resource. We’re kind of again, we don’t do tax returns at our firm. We just do these cost segregation studies. But we’re happy to help. We don’t bill by the hour. If you have a question, don’t hesitate to reach out and call. I’m happy to answer any questions I can. Don’t ask me questions about earned business income and child tax credits, because I don’t know anything about that stuff. But if it’s depreciation or real estate, we can certainly help. So we’re happy to help any way we can.

Mat Zalk 39:02

Awesome, Erik, thanks for being on. Appreciate you.

Erik Oliver 39:04

All right, take care.

Outro 39:09

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