Stop Overpaying the IRS: How Cost Segregation Helps Real Estate Investors Save Big on Taxes

Erik Oliver (00:00)
I always tell people, if you own real estate and you pay taxes, you should at least talk to somebody about cost segregation. It doesn’t always mean that it’s gonna be the right fit for you at the right time, but you definitely wanna make sure that you’ve got the information to see because we’re talking about…

tens of thousands, hundreds of thousands, in some cases even millions of dollars of tax savings depending on the size of the asset.

Michelle Kesil (01:55)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil, and today I’m joined by someone I’m looking forward to chatting with, Erik Oliver of Maven Cost Segregation, working for a cost segregation firm and a real estate investor himself. So excited to have you here today, Erik.

Erik Oliver (02:16)
Thanks Michelle, I’m excited to be here.

Michelle Kesil (02:18)
Perfect, let’s dive in. First off, for those not familiar with you and your work yet, can you share what your main focus is?

Erik Oliver (02:26)
Yeah, absolutely.

as you mentioned, I’m Erik Oliver. I work for a company called Maven Cost Segregation. So we work with investors and tax preparers across the country helping reduce tax liability through cost segregation studies. ⁓ So for those of you who don’t know, cost segregation is really just accelerated depreciation on your real estate assets. ⁓

One of the great benefits of owning real estate is the ability to take these depreciation expenses against our income. And what we do is we try to accelerate those through an engineering-based study where we identify short-life assets within your property. as I was sharing with you earlier, Michelle, when you buy a rental property, whether it’s a residential property or a commercial property, you’re not just buying the land and the walls, you’re also buying everything in it and everything around it.

And so the IRS, for example, says the parking lot should not be depreciated over 27 and a half or 39 years. It’s a 15 year land improvement. Well, the problem is when you buy an office building with a parking lot for a million dollars, you and your tax preparer have no idea what that parking lot is worth out of that million dollars. And so just as the name implies, cost segregation, we segregate the cost or your purchase price of that building into different buckets.

which allows you to depreciate it at a much faster rate. so, ⁓ you know, people will ask, well, why do I want to depreciate at a faster rate? Well, you know, there’s time value of money, there’s inflation, a dollar today is worth way more than a dollar down the road. And so give me my deductions now versus letting the IRS hold on to those for the next 27 and a half or 39 years, which again, that’s what most real estate typically gets depreciated at.

Michelle Kesil (04:09)
In which markets do you operate in?

Erik Oliver (04:12)
So we’re a national company, so we do studies in all 50 states, which is great, because lot of investors nowadays, we have a of California clients who don’t necessarily invest in California, they invest in Florida or the Carolinas. And so we do studies in all 50 states and work with CPAs or tax preparers as well in all 50 states.

Michelle Kesil (04:38)
Awesome. And so what does the process look like when an investor comes to you?

Erik Oliver (04:44)
Yeah, that’s a great question. So a lot of times ⁓ what we do first is we always want to do a feasibility study to see if cost segregation ⁓ is right for the client. So cost segregation can always create deductions, but not every investor needs those deductions or can utilize those deductions.

So we’ll always do a benefit analysis first. We gather a little bit of information about the property.

and then we will run some preliminary numbers to see, okay, based on the information you’ve given us, we anticipate at a minimum, you’re going to save X amount of taxes. And so getting the client on the phone asking questions about, do they qualify for real estate professional status? What type of passive income do they have? Is it passive? it active income that they’re trying to offset? So really getting in and trying to dive deep into their tax return as much as we can, we don’t actually

prepare tax returns at our firm. So we need to partner with the investor and their tax preparer to make sure we answer all these questions before ⁓ moving forward with the cost segregation study. Because like I said, I’ve seen far too many times where investors will listen to a podcast or they’ll go online and hear about cost segregation. They’re like, I’m going to save all this money. They pay a firm to do a study and then they give it the study to their tax preparer only to find out that they don’t qualify for real estate professional or

they don’t have enough passive income to offset the large deduction that we create. And so it was basically useless and they’ve wasted time and money. And so we just wanna make sure we dive in with each client to make sure that A, is cost segregation a right fit? And are you gonna save significant tax dollars by doing cost segregation?

Michelle Kesil (07:16)
Yeah, and is it, like, who would you say it’s the right fit for and who would it not be for?

Erik Oliver (07:23)
Yeah, so that’s a question. So cost segregation can technically be done on any revenue generating properties. So if a client has anything from a basement apartment to a large office complex, cost segregation can be performed. As I was stating earlier, just because it can be performed doesn’t mean it’s always a good fit. so ⁓ when we’re doing costing, I’ll use myself as a, I’ll use myself as an example here. So I invest in properties. I’m a W2 employee for Maven cost segregation.

My wife is in the school district. She’s ⁓ a social worker in the school district. She’s a W-2 employee and we own real estate. And if I do cost segregation on my long-term rentals that I own, those deductions that are created through the cost-sake study are going to be considered passive deductions and can only be used to offset my passive income. Well, my small real estate portfolio doesn’t create a whole lot of income right now. And so,

me creating a big deduction isn’t going to really help me because I can’t use that deduction to offset my W-2 income. That’s where my taxes are the most is on my W-2 income, on my wife’s W-2 income. And so you have to make sure that A, you’re a real estate professional. So to be classified as a real estate professional for tax purposes, you have to spend 750 hours a year doing real estate activities and 51 % of your working time.

So that’s why a lot of times you’ll see high W-2 earners, maybe their spouse stays home and manages their portfolio of properties, well the spouse becomes a real estate professional for tax purposes. And because the spouse can claim that they do real estate for a living, they can do a cost segregation study on that real estate, use those deductions to not only offset their rental income or their passive income, but also all of their active income. And so that’s the first thing is becoming a real estate professional.

So you either, in order to fully utilize cost segregation, A, you have to have passive income. So you have to, your rentals have to be producing a lot of cash or a lot of income so that you can offset that income. If your rentals are not offsetting a lot of income, then it helps to be a real estate professional because then again, you can use it to offset your W-2 income. And then the third thing you want to look at is, and again, I’ll use myself as a live example, it was,

2022, I had a high W2 year that year and I ran into a tax problem. I was going to owe the IRS a lot of money at the end of the year. So before the end of the year, I knew that I had my long-term rentals that I could do a cost segregation study on. But again, those weren’t going to help me offset my active income.

So there’s something called the short-term rental loophole. I hate to use the word loophole because it sounds like you’re doing something nefarious, but it’s just part of the tax code.

So what I did is at the end of 22, I went out and bought a short-term rental, an Airbnb property. And the IRS looks at those differently. They look at Airbnb type properties as more like hotels. So if the average stay at your Airbnb is less than seven days, and you materially participate in the management of that property, so there’s seven tests that the IRS lists, you only have to meet one of those seven tests to prove that you

materially participate in the management of that property. The test that’s most often met is you have to spend 100 hours at that property and more time than anyone else. So I strategically bought my property at the end of the year because I knew I was going to be up at the property getting it ready for, you know, staging it, getting furniture in, getting it ready to advertise on Airbnb. So I spent my 100 hours. I spent more time than the cleaner because the cleaner only went five or six times between October when I bought it and the end of the year.

So because I spent my 100 hours more time than anyone else and the average stay was less than seven days, the IRS now looks at it like, well, Erik, you own and operate a hotel. It’s not really real estate. You have a hotel business. Because I manage that hotel business, those deductions now become active and I could use those deductions against my active income. So I was able to, I put $80,000 down on that property and I was able to get about $65,000 back.

in the form of a refund check from the IRS. Well, part of it was in a refund check and part of it ⁓ I didn’t have to pay as much ⁓ that year in taxes and so I was able to obviously save the money. So those are kind of the things that we’re looking for in clients. A, you’ve got to be a real estate professional. B, you’ve got to have a lot of passive income. Or C, you’ve got to have short-term rentals or active participation in the management of those. And those are usually the best candidates for cost segregation.

That was a long answer to your question, Michelle. Sorry, that was so long-winded, but that was a good question.

Michelle Kesil (12:53)
Yeah, absolutely. think that was a very helpful and thorough answer. So thank you. And as an investor yourself, what type of investments are you looking at? Are you looking to continue scaling into real estate?

Erik Oliver (13:10)
Yeah, you know, I am. I just kind of quick story. kind of, I’m like a lot of us, I kind of became an accidental landlord. I lived in Virginia for a number of years and moved to New York and kept our house in Virginia as a rental property when I moved to New York and learned a lot of valuable lessons in doing that. I was, you know, a couple of states away. I didn’t have a property manager. The tenants that we had ended up not paying rent. We had to a victim. It was a mess. And so

After that experience, realized, and after working for a cost segregation company and working with a lot of real estate clients, I realized that real estate really is a great way to help with that financial freedom as I get closer to retirement. And so my goal is to have enough passive income to eventually offset my W-2 income and my wife’s W-2 income so that we can retire at an earlier age. And so I do anticipate continuing to invest.

I think I shared with you earlier, right now I’ve got two long-term rentals, a short-term rental, and then I’m a limited partner in some micro-apartments locally here. And so ⁓ it’s been good so far. I think that the biggest lesson I’ve learned is you really need to surround yourself with people who know the industry. I can’t be an expert at everything. I don’t claim to be an expert at everything. I know a little bit about real estate taxation, but I don’t know a lot about property management.

I don’t know a lot about screening tenants. I don’t know a lot about marketing properties. so because of some of the early lessons I learned, ⁓ I’ve tried to surround myself and build a team of people who can help do that stuff, who do that stuff for a living. ⁓ So yeah, I do plan on continuing to invest. ⁓ It’s a great way to help supplement income.

It’s a great way to provide housing for people.

⁓ So yeah, I’ve enjoyed the journey so far. I’ve only been investing for ⁓ I don’t know. I mean that first Virginia property was probably 10 years ago. And then once we sold that I didn’t get another property Until about six years ago and so, ⁓ you know trying to buy a property every year or two is kind of the plan and then by the time I hit retirement age I should have enough to be able to to retire ⁓ So that’s the plan

Michelle Kesil (16:15)
Yeah, amazing. And so what do you feel have been some of the main keys that have allowed your business to grow and run successfully?

Erik Oliver (16:26)
Yeah, you know, in terms of the cost seg business, think, you know, we were talking a little bit about this earlier, Michelle, is that one of the challenges we find in this industry is there’s not a lot of people out there who just have cost segregation knowledge. It’s kind of very niche. ⁓ And so being able to find and retain talent has always been a challenge. You can find talent, but…

Oftentimes in our industry, could take eight months to a year to train them on what cost segregation is, how it works, parts of the tax code. And so, ⁓ you know, that’s always been a challenge that we’ve had to face. But, ⁓ you know, I think there’s a lot of opportunity out there with bonus depreciation, ⁓ being reinstated as part of the one big, beautiful bill that kind of puts cost segregation on steroids. It takes what we do and amplifies it.

And so I think there’s a lot of opportunity in the coming years. It’s just going to be a matter of finding the talent A and then utilizing some of the new technologies. Obviously with AI out there, there’s a lot of ways that we can use AI in our industry to help ⁓ streamline or speed up some of our processes so that we don’t have to be so labor intensive. And, ⁓ you know, that’s been, that’s been huge in terms of our businesses utilizing some of the AI that’s out there to streamline that.

Michelle Kesil (17:50)
Yeah, definitely. And so the clients that come to work with you, is it a one-time thing or are you kind of like working with them through a longer process?

Erik Oliver (18:03)
Yeah,

that’s a good question. So you only have to do cost segregation once per owner per asset. So when you buy a property, you only have to do cost segregation on it once. And then when you sell that property, the new owner would do cost segregation when they buy it. So we tend to just do it once per building. Now, there oftentimes are some improvements that happen at buildings that will require an additional study. So if you buy a building this year, and then in three years, you’ve got it and renovate it, you may want to do or it may be

worth it for you to do an additional study when you do those renovations. But typically it’s one study per building per owner. And then we do have a lot of repeat clients, as you probably are aware through your podcasts and stuff that, you know, people are buying properties each year. And so each year we’ve got clients coming back saying, okay, I bought these two properties this year. I want to do cost segregation like I did last year. And so as long as we can provide, you know, good service and stuff, people will come back because they’re constantly buying properties.

And like I said, with some of the tax incentives that are out there now with bonus depreciation, ⁓ you’re really missing the ball if you’re not doing cost segregation. So

always tell people, if you own real estate and you pay taxes, you should at least talk to somebody about cost segregation. It doesn’t always mean that it’s gonna be the right fit for you at the right time, but you definitely wanna make sure that you’ve got the information to see because we’re talking about…

tens of thousands, hundreds of thousands, in some cases even millions of dollars of tax savings depending on the size of the asset.

And so if you’re not looking into it, you could potentially be leaving a lot of money on the table.

Michelle Kesil (19:44)
Definitely. And what are some of the biggest obstacles or challenges that you’ve overcome, whether it’s within class segregation or as an investor?

Erik Oliver (19:56)
Yeah, I think I mean this will be a personal one for me both as an investor and doing cost segregation is just I I have a hard time letting go of some of the control of different tasks and I’m not utilizing my I’m not utilizing my talents to the best of my ability because I’m doing tasks that I shouldn’t be doing and sometimes that’s not because I don’t have

qualified people around me. It’s because I want to be in control of those different processes. And so that’s my biggest challenge. Again, just personally and professionally is being able to let go ⁓ and build that team and trust those team members. sometimes somebody has to, you I know that if I do it, it’s going to be done right in my mind, but sometimes you have to let somebody fail once or twice so that they can then learn how to do it.

And now you’ve just taken that off your plate and now you can go do what you do best. And so that’s been the biggest challenge is just, you know, as we build out both teams here at Maven cost segregation and build out teams on the real estate side, being able to trust those individuals to do it the way you want it done, which, know, it doesn’t know. I’ve had to learn. It doesn’t always have to be done the way I want it done. There’s a lot of ways to skin a cat, they say. And so ⁓ being able to trust those people so that I can free my time up to do.

things that I should be doing has always been a challenge and so continuing to work on that but getting better at it for sure.

Michelle Kesil (21:29)
Absolutely. And is there any advice you’d give to someone that’s newer in the investing space?

Erik Oliver (21:37)
Yeah, I would say learn from my lessons. Like you have to identify what it is you’re good at and stick to that and then hire or outsource everything else. Like don’t try to be the jack of all trades because if you’re just okay at doing your taxes or you’re just okay at property management, ⁓ you oftentimes are not maximizing your production or your income.

because you’re leaving a lot of stuff undone or untouched. And so I think that whatever it is, if you are a, you know, if you’re a real estate broker, you know how to buy and find properties, but that doesn’t necessarily mean you’re good at managing those properties. And so go find the best property manager out there. It’s going to cost you a little bit of money, but like I always tell people, you know, especially in cost segregation, like if you don’t have a CPA or tax preparer who understands real estate,

If you have a portfolio of 20 properties and you’re taking your taxes to H &R Block, they’re probably not maximizing your tax savings. Yeah, it’s cheaper to go to H &R Block than it is to hire a full-time CPA, but if you can hire a CPA, it might cost you $10,000 more, but if they’re saving you $80,000, $100,000, $400,000 in additional taxes, then it’s well worth it. Just try to find…

what it is that you’re good at, outsource everything else. And I think you can maximize your efficiencies a lot better that way.

Michelle Kesil (23:11)
Absolutely, thank you for sharing. Well, before we wrap up here, if someone wants to reach out, come back to learn more, Where Can People Find You?

Erik Oliver (23:20)
Yeah, so I’m on LinkedIn. It’s Erik with a K, E-R-I-K, last name’s Oliver. You can find me on LinkedIn. If you go to ⁓ mavencostseg.com/Erik, again, E-R-I-K, ⁓ we do have a link there where if you have properties and you want to see if those properties are good candidates for cost segregation, you can provide your information there. ⁓ Please use this as a resource, you guys. If you have anything ⁓ related to

to real estate and taxation call us. ⁓ We’ve got CPAs on our staff. If we don’t know the answer, we’ve got resources to be able to get you the answer. I don’t know a lot about earned business income or child tax credits. Again, we don’t do taxes at our firm, so I can’t help you there. But if it’s about real estate and about tax and real estate tax, we can usually get you an answer. So please feel free to use this as a resource.

Michelle Kesil (24:15)
Perfect, we’ll appreciate your time and your story. Thank you for being here.

Erik Oliver (24:20)
Yeah, thank you, Michelle.

Michelle Kesil (24:22)
And for those tuning in, if you got value, make sure you’ve subscribed. We’ve got more conversations with operators like Erik who are building real businesses and we’ll see you on our next episode.