AI Cost Segregation Warning: Why Your Tax Report Could Fail an IRS Audit

Amar Patel (00:00)
100% agree. I think AI it’s a valuable tool. We’ve run across a lot of investors that are whether they’re acquiring properties or building new properties, they’re kind of using AI models to perform cost segregation studies. And they’re kind of bringing us in the back end if an IRS exam is happening and we’re able to kind of look at what questions the IRS is asking.

And it’s detailed records for cost estimates that the AI agent cannot develop, right? They’re just using kind of the logic that’s built in to create some of these estimates.

Issa Hanna (01:53)
Welcome back to another episode of the Real Estate Pros Show. I’m your host, Issa Hanna, and today I have Amar Patel here to discuss tax strategy with us. Amar, welcome.

Amar Patel (02:02)
Yes. Thanks, Issa. It’s great to be on the podcast with you. Looking forward to kinda educating some of your real estate investors here.

Issa Hanna (02:10)
Looking forward to talking to you and the first thing I wanted to lead with in tax strategy, something that that you you know we we discussed earlier in our phone call, cost segregation. For people at home who who’ve never heard of it, can you break it down for them?

Amar Patel (02:26)
Yeah. Yeah, absolutely. So the easiest way I think about cost segregation, it really is an engineering-based tax strategy that’s really designed to help property owners really accelerate depreciation deductions that they’re already entitled to under the tax code. Normally if you’re buying a commercial building, most of that construction or purchase price is going to get depreciated for tax purposes over 39 years. If it’s a residential rental, it gets depreciated over 27 and a half years.

And what we do know is that there’s a lot of components within those real estate assets that can be depreciated quicker, right? And that really is what a cost segregation is. It’s really trying to identify those components that are within the building that can be depreciated over five, seven, or fifteen years for tax purposes. And really by doing so, you’re opening up yourself to some favorable taxpayer regulations out there, specifically bonus depreciation, that’s going to allow for a hundred percent write-off in year one.

And that really is what we’re trying to accomplish with these cost segregation analysis is we’re not creating new deductions. We’re just trying to front load as much of those depreciation deductions as we can in an effort to free up some cash flow in the near term for our—

And so the one thing I always tell my clients, yeah, it’s the difference between receiving your tax deductions over four decades versus one year, right? So it kind of is a no-brainer, right? When you when you when you own income-producing properties, these types of strategies can really help free up some cash flows, whether to reinvest, buy new properties, remodel, et cetera. So it really is a a great strategy for anybody that’s owning real estate.

Issa Hanna (04:10)
One hundred percent. So to the my fellow landlords out there. When we sit down and we the dreaded time every year when we have to sit down and sit with the CPA or the accountant and go through our rentals and he depreciates the assets and the components and the rental property. They’re calculating that over thirty nine years. So what Amar’s saying is through cost segregation, a lot of these components can be cut down from thirty nine years to

One year yeah like you said even or five six years so yeah you’re getting all that money at one shot so my fellow investors if you you’ve never heard of this make sure to check out Amar and he will educate you on cost segregation

Amar Patel (05:45)
That’s right. That’s right. And what I typically tell folks

When you’re dealing with your CPAs and tax preparers, what I always tell folks the ideal time to think about these strategies is obviously before the tax filing season, right? One of the biggest misconceptions when it comes to cost segregation is well, I’ve already prepared my return. I’ve missed the opportunity, even if you’ve owned a property for several years.

It’s simply not the case, right? The great thing about cost segregation is that we—we all the time prepare these types of studies in arrears, right? So it’s called a look-back study. The IRS allows you to go back and pick up all those missed deductions without having to amend your prior-year tax returns and you’re really getting to push all those deductions into the current tax return, which makes this a great tax planning idea.

And for real estate investors, oftentimes they may not have enough income to sustain these deductions in a given year. Well, that’s fine. You can always wait until future tax years when you need the deductions, when you have that income to sustain the deduction. So I always tell folks, people that are listening, it’s never a bad time to talk about cost segregation, even if you have a property that’s fifteen years old, right? That there’s always an opportunity to explore to see if these deduction strategies make sense.

Issa Hanna (07:07)
So you can actually backtrack a little bit and pull some stuff out. So that’s super cool. I didn’t know that. I’ve heard of cost segregation. Like I said, I’m a landlord. Not an expert. So you would be the expert I’d talk to because you know, you know it inside and out. And I wanted to shift gears just a little bit. Sure. We all start somewhere and we all get to where we’re at. So I want to get a little history.

How did you get started in all this?

Amar Patel (07:37)
Gosh, it’s a long, long story. So I graduated from the University of Tennessee with a finance and accounting degree, got my CPA license down here in in Atlanta, in Georgia, began my career career in public accounting, where I spent gosh, fifteen years in their specialty tax department. And that really introduced me to high-net-worth individuals, large public companies that were employing these depreciation strategies.

And you know, after fifteen years, I I I am a real estate investor myself. I I I took to my own advice, started employing these strategies and found that it was really a rewarding career, right? Helping real estate investors, folks that own real estate, really free up some of that cash flow I was talking about earlier and really reinvesting as part of their overall investment strategy. You’d be shocked to learn that a a lot of folks—

We’re generating all these deductions, that it’s freeing up cash in the near term, a lot of folks will take all that money and reinvest it and in as part of their investment strategy. And that’s where I think it really is helpful to have these conversations as part of that long-term investment strategy, right? And I know we were talking earlier, you know, what are some of the limitations, right, when it comes to cost segregation studies. And, you know, one of the things I’d mentioned is hey, if we have investors that are looking to—

Flip a property or only hold it for a few years, there are depreciation recapture implications that may make these types of strategies, you know, not worth it, right? And that’s what we like to vet out early on, right? So again, more reason to get us more involved earlier in the process if you’re thinking about building a property, acquiring a property, or even remodeling a property. Having those conversations with your CPA, a consultant like myself, is always going to help bake those—

You know, long-term strategies into your vision. And then also think about some of the tax strategies as well. But you know, early on if you ask me, you know, did I did I did I think I was gonna be a a cost segregation specialist when I was in college, I I would probably answer no. I always loved accounting and numbers and I just assumed I would go work in public accounting and do tax returns, you know, every day. But

You know, it really has been eye-opening when you help a taxpayer, you know, really save on their cash tax savings. It really helps their business grow and sustain, particularly with some of the smaller business owners. It’s really rewarding. And something that I found that I really enjoyed that that’s really kept me involved in the industry is really helping those small businesses, small real estate investors really continue on their successful journey as they—

Kind of look to buy more and more property. So it’s been an interesting experience. It’s been a great experience. You know, people are always shocked to hear that I’ve been doing this for over twenty twenty-five years.

But it’s been a great, great experience and you know this as well as I do, right? The real estate industry is booming. It’s been booming for the last 20 years. And if you would have asked me 20 years ago when I started my career, a lot of misconceptions around the industry is—

If I don’t own a multimillion-dollar apartment complex, these types of strategies don’t make sense. And that may have been true 20 years ago, but with the advancements in technology and how we are efficient doing these projects, we can actually you know use these strategies for a hundred-thousand-dollar rental property, right? And still have an ROI for our customers, real estate investors that really makes sense, right? And that has been really interesting to see the the—

Evolution of our industry over the last twenty-plus years. You know, so fortunate enough to be to be involved with it, right? And you know, I I always tell folks I’m in a unique position where I am a CPA, I work with engineers, a lot of our staff is degreed engineers, and that’s exactly what cost segregation is. It’s the combination of accounting and engineering principles to help develop a tax strategy. And it’s been, you know, quite rewarding over the past twenty-plus years. So

Issa Hanna (12:24)
Definitely. And we all in in this industry, in the professional industry, we all stumble in almost to our to our little niche. Yeah. Our little our little corner of it. What a great little niche to stumble into and become an expert in. And like you said, you know, I love the smile you got on your face when you were talking about how you can help the small business owner get to that next level just by saving them cash. Because yeah.

Twenty thousand dollar in you know, paying twenty thousand dollars a year more in income tax for a smaller business owner, that’s a pretty good hit to their cash flow and their finances. If they could keep that in their pocket, I bet you they’d buy properties or they invest a lot quicker. So yeah. That’s why you gotta keep a guy like Amar in your pocket because he will literally save you thousands.

Amar Patel (13:20)
I was about to say I just I just had a conversation this morning with a client, dentist, purchased an office building in 2025, we did the cost segregation, we just delivered the results today for his tax return coming up. You know, it was about a million-dollar property that he bought, runs his dental practice out of there. You know, we ended up saving him around three hundred thousand dollars of cash and he was just floored, right? And he’s—

He’s told me this morning he’s taking that cash and opening up second location. So to your point, right, these small business owners, it’s helping these types of strategies are helping them expand their current business operations by a simple tax exercise. So it is it’s kind of cool to see when you when you have those conversations and see it really drive value for the business owner. It’s really rewarding.

Issa Hanna (14:11)
Definitely, definitely a rewarding thing. I know as a former agent, one of the biggest rewarding things in my career was seeing how happy my first-time home buyers were or you know, a seller client would be when I’d be like, There you go, there’s your commission. Or I mean there’s your check for the sale. So I can definitely relate. And now I wanna kinda get into a little warning we had, you know, you had for everybody earlier.

With the rise of AI, a lot of people are using AI to do professional work and they’re landing themselves into some hot water with the IRS. So give us some light on that.

Amar Patel (14:51)
Yeah, no, that’s a great segue.

100% agree. I think AI it’s a valuable tool. We’ve run across a lot of investors that are whether they’re acquiring properties or building new properties, they’re kind of using AI models to perform cost segregation studies. And they’re kind of bringing us in the back end if an IRS exam is happening and we’re able to kind of look at what questions the IRS is asking.

And it’s detailed records for cost estimates that that the AI agent cannot you know develop, right? They’re just using kind of the logic that’s built in to create some of these estimates.

And that’s why I always say kind of using a third-party engineering firm that has the background with cost-estimation techniques and really employing those IRS approved technologies and laying those out in an audit-ready deliverable really goes a long way. And we’re actually seeing that in practice, right?

I the IRS is from my perspective, they’re clued into the fact that yeah, the AI you know, cost segregation reports, they may get a an answer close to what a third-party engineer would get you, but the supporting detail is just not there enough to sustain these deductions on a tax return upon an examination. So I’ve seen a handful of those calls. We’re you know, and what’s happening on the back end is we’re having to go and do the full-blown analysis on the back end, which—

You know, that’s gonna help the taxpayer at the end of the day, but just a word of warning, right? That that that is something that we’re seeing being employed more and more, the use of AI in these types of engineering-based analyses. And you know, what I’m seeing is a lot of issues on an examination, right, with supporting documentation that’s not available. You know, one of the things that kind of sets us apart in the industry is

We have the most certified members of the American Society of Cost Segregation Professionals. So all of our reports come with a with a stamp from our certified members. I am one, but that organization is great. They work with the IRS to standardize deliverables so that if a project ever does get looked at by the IRS, you know, we provide free audit support, but the deliverable itself is audit-ready, right? So all of the items that the IRS would expect in a quality cost segregation study—

From the legal basis to the cost-estimation techniques, those are all fully referenced there in our standard deliverable. So it really does limit the back and forth the taxpayer, their CPA have with the IRS. And you know, that goes a long way when you talk about a tax position on a tax return that that could get looked at by the IRS.

Issa Hanna (18:16)
Definitely. And when you’re a knowledgeable guy like yourself, you can prepare these reports, you can go into these, you know, the detail and you’re already giving them an answer. So why there’s no reason to be audited. But you know, somebody who isn’t as professional as you, they’re not ready like that. And you can open an audit on yourself and cost yourself a lot of money. So use the professionals, guys.

Amar Patel (18:41)
Yeah, we’re always happy to help and we’ll go the extra mile. Like I said, we’re some of us are CPAs here at KBKG. We’ll work as your CPA to make sure everything gets documented correctly on the tax return. So we all pride ourselves in going that extra mile of making sure if you’re spending money on a cost segregation analysis, we want to make sure it gets put on the tax return correctly. So always happy to have those conversations and work with your tax preparers to get everything correct on the return.

Issa Hanna (19:12)
And now I want to ask you about the future. You know, you you’ve been able to build your business in your own image. Great tax strategy. You’re a CPA. Five years down the line, where are we gonna see KBKG?

Amar Patel (19:30)
Yeah. I think we’re gonna see KBKG as an industry leader, right? So, you know, one of the things I mentioned a few a few minutes ago was, hey, twenty years ago, somebody that had a hundred-thousand-dollar rental property, you know, wouldn’t have even considered this because of the cost it would cost them to do a to do a study like this, right? And you know, here at KBKG we’ve over the last ten years developed self-serve software for that exact—

Scenario, right? So the small investor that has those smaller-based properties can take advantage of a fully audit-ready IRS deliverable at a fraction of the cost that it would cost to hire a third-party engineer. And I think that’s going to be a game changer for the industry, right? We can already see that on our residential software that we’ve created. You know, over the past 10 years, those folks that have the short-term rentals, long-term rentals, small apartment complexes—

They’ve been utilizing our online software tool like gangbusters. So we’ve even opened it up to commercial properties as well. But I do think as interest rates potentially drop, more people getting involved with real estate, even the ones that are currently involved with real estate buying more properties, I do think these online software solutions that are backed by firms like ourselves are going to be a game changer in the industry, right? And so these—

These strategies that we’re talking about are all not only all isolated to the, you know, Fortune 500 companies, right? We’re kind of opening it up to smaller investors, smaller taxpayers, business owners, and it’s really going to drive, in my opinion, a a lot of value for that middle market, right? And, you know, it’s not a strategy that’s for the big, big, big, you know, one-percenters out there. It’s a strategy that even myself, right?

You know, even the small-time real estate investor can take advantage of to again free up cash and really have an investment strategy, right? Buying more and more properties is the name of the game. And I only see, you know, the current administration, right, is really real-estate-focused and there’s a lot of favorable tax law out there for real estate investors. Bonus depreciation is permanently reinstated at 100%.

And again, I think that’s gonna be a big driver of a cost segregation study is the ability to claim bonus depreciation, which is at a hundred percent on these building assets, right? And so typically a cost segregation study is gonna reclassify twenty to forty percent of that building basis to short-lived assets. And if you think about it, twenty to forty percent, that’s gonna be an immediate deduction on a million-dollar property. That’s two hundred to four hundred thousand dollars of deductions.

You know, if you’re using a thirty percent tax rate, that’s sixty to over a hundred thousand dollars of cash that you’re keeping in your pocket on a million-dollar property. And what we’ve seen in in practice is that’s probably enough cash to have a down payment on another property, right? And so I do think this is you know, bonus depreciation has been around since two thousand one. So it is a bipartisan regulation. So I don’t envision bonus depreciation going away.

It has fluctuated between thirty, fifty, a hundred percent throughout the years, but it’s good to know that it’s permanently at a hundred percent. So to answer your question going forward, people can bake that into their capital spend, right? Projections. If they’re if they’re thinking about CapEx for future years, banking on a hundred percent bonus depreciation coupled with cost segregation, you kind of keep that strategy going for year over year. And, you know, firms like us—

Are obviously happy to see bonus depreciation come at a hundred percent because it really drives up the value of the services we provide.

Issa Hanna (23:26)
One hundred percent. And you guys are making it accessible to, like you said, not just the one percent. Twenty, thirty years ago, even ten years ago, these type of cost analysis, these type of strategy sessions, they cost big bucks. A lot of the like you said, the smaller investors didn’t know even anything, even that they could be eligible for this kind of stuff. So the fact that you’re making it available for the middle investor, that’s gonna grow—

That class substantially because they need that cash in their pocket a lot more than the one-percenters do. So I think yeah, definitely. It’s just a matter of getting the word out there, getting the message and I’m super happy to have you on the podcast because I you are definitely a game changer. What you’re doing is definitely a game changer.

Amar Patel (24:05)
Exactly right.

Yeah, and think no, we yeah, I appreciate that. And a lot of us here at the leadership level at KBKG, we’re real estate investors ourselves, right? So we understand the power of these types of tools and strategies and that’s really why we’ve created we saw a need in the industry for some of the software solutions that we’ve created. And like I said, we’ve launched the residential side of things ten, fifteen years ago.

And it’s been going so well. We recently launched in November the commercial tool as well. And we’re experiencing you know, like a four hundred percent increase in the amount of users of our software. And so I know we’ve talked about the software and I know for your listeners we we’ve got a product code to give them ten percent off if they’re interested in using the software, but I’d encourage every real estate investor that that’s—

Is interested in learning more about cost segregation, go to CostSegregation.com. We have so many tools that are available on that website. Even if you’re contemplating buying a property, we have an estimator tool that simply takes the property address, a purchase price, and it’ll give you know, as part of your due diligence, what the potential tax cash savings would be. So we’ve invested heavily in in the software because of what you’re talking about. We think it’s gonna be a game changer over the next 10 years.

You know, we’re working with a ton of commercial real estate brokers, residential real estate brokers that are using our estimator tool to help offload, you know, assets. So it it’s a slick tool. And the cool thing about our software solution is you can go ahead and punch in all your property details within 15 minutes, you’ll get an audit-ready report. But it’ll allow you to preview what those benefits would be as well. So you can kind of see after you punch in all your property characteristics—

What the depreciation benefits would be, and then you could purchase the final report, right? And so you kind of get a preview of what the results will look like before you even pay for anything. So you know, we’re really proud of the solution. Don’t ask me how we got CostSegregation.com, right? It’s a great domain, but I I encourage everyone to go check it out because it really is kind of the future of cost segregation in my opinion.

Issa Hanna (26:38)
Definitely. And you guys have all those tools available for them right on CostSegregation.com. So make sure you guys check it out. And also for my investors sitting at home and their ears are perking up and they’re like, I need to talk to this guy. How could they reach you?

Amar Patel (26:56)
Yeah, so my email is [email protected]. I believe you guys have my cell phone and office number. Feel free to reach out at any point. I’m always happy to be a resource. And one of the things we do is obviously as part of our feasibility analysis, which is free of charge, we really want to make sense—

We really want to make sure that these projects make sense for you as a real estate investor. So always happy to have those conversations early on to make sure these types of strategies are something that fits into your overall tax strategy. And always happy to educate, work with your CPAs to make sure these things will work for your tax positions.

Issa Hanna (27:44)
Definitely. Amar, I’m all out of time for today, but I would like to invite you back on the show. Maybe within the next month, and I’d like to make you our tax strategy guy. So we’ll have tax strategy discussions next time you come on.

Amar Patel (28:01)
Hey, I’m always happy to talk to tax strategy. I know it’s Friday afternoon. Tax season’s right around the corner, so it’s probably a great time to talk about tax strategy. But nonetheless, appreciate the opportunity. I think it’s a great session, great message for real estate investors, and obviously always happy to come back on and you know talk a little bit more detailed around tax strategy. So happy to be a guest.

Issa Hanna (28:26)
Definitely. And we’re always going to be happy to have you here. You brought a wealth of knowledge in this short twenty minute burst that we had. So I I want to thank you again. And then to my viewers at home, if you guys enjoyed this conversation I had with Amar and want to know more and want to learn more, make sure to hit like and subscribe. I talk to people every day that could bring us different knowledge on every aspect of the real estate industry. Until next time, the Real Estate Pros are out.