Cost Segregation Explained: Save Thousands on Rental Property Taxes

Hank Tippins (00:00)
and we were able to take 53%. Now that property had a lot because it had a seawall, it had a dock, a cover boat lift, and it was a nice Airbnb. And we were able to take 53% of that property and reallocate it and get it depreciated in year one. And that owner saw depreciation that they could use to offset their income by two hundred and thirty six thousand dollars. Two days ago we had a ⁓ an investor call up and we had a ⁓ a a meeting with them and she needed to offset two point eight million dollars of income this year. So she needed to find out what types of property does she need to buy and how much.

Joseph Crooms (02:10)
Welcome to Investor Fuel Real Estate Pros podcast. I’m your host, Joseph Crooms. Today I’m joined by someone I’ve been looking forward to chatting with. Very interesting young man. His name is Hank. I can say his last name, Tippins who’s been ⁓ making some serious move in an industry that I’m being educated on and it’s called hey I’m ⁓ you know ⁓ Hank throw what you what you do in right now.

Hank Tippins (02:36)
It’s called co yes sir. It’s called Cost Segregation Hi everybody. But yeah, it’s it’s called Cost Segregation and it’s front end loading the depreciation on rental properties, on commercial investment property.

Joseph Crooms (02:47)
think our listeners are going to take away ⁓ something from this today. ⁓ you’ve been sharing exactly what Cost Segregation is. So I’m gonna let you go right now. So just dive in and take it from there. Go go talk about it.

Hank Tippins (03:01)
Alrighty, thanks, Joseph. Yeah. It so depreciation, if if a person buys a rental property, let’s just say it’s a it’s a landlord buying a single family rental, that one of the benefits of owning real estate is that it depreciates. In other words, the value of the property minus the land, so the building, the value of the building gets depreciated over twenty-seven and a half years. Well, Cost Segregation
, it takes a a portion of that, sometimes twenty-five percent or sometimes up to thirty-five percent.

Of that value and front end loads it into ⁓ either two categories: either five-year personal property or 15-year, which is called site improvements. Now, the IRS has rules regarding how this property is reallocated to a five-year category or to a 15-year category. And depending upon the property, the type, the improvements that have been made, we can take a lot of that ⁓ the value of that property, put it into those two categories, and because of a of

of what’s called hundred percent bonus depreciation. This was enacted last year and properties that were purchased after January nineteenth of twenty twenty five are ⁓ eligible for this. It’s taking everything that falls into those two categories, five-year category and fifteen year category, and depreciating it all in year one. And so ⁓ you know could be potentially be hundreds of thousands of dollars that would offset an an investor’s other

⁓ capital gains income or W two income.

Joseph Crooms (04:28)
⁓ tell me what ⁓ type of real estate are industries that you’re looking into. Because you mentioned to me, you know, sh share with that and also translate say a five year, one five year deal in both of them in each category. How much money could that translate into?

Hank Tippins (04:44)
Okay, yeah, thank you. ⁓ all right, so to your your first question, the types of rental property, I would say investment property are like long term rental. So it’s it can be the single family rental and and a person let’s say getting into the landlording business who owns one rental, they could do it, or somebody who owns a shopping mall. So most of our clients over the years have been like industrial commercial properties, and most people who own

commercial property for any length of time are using this tool. It’s been around for many years. It’s a it’s a it’s a legitimate tax strategy. But now because of the proliferation of Airbnbs and so many people getting into the rental business, short term rental and long term rental, they don’t necessarily know about Cost Segregation
. And both of these industries really are are

Prime because of 100% bonus depreciation. Anything that falls into five-year category or 15 category can be depreciated in year one, like I said. I have an example of one that we just did recently. Actually, this week, we did a condo in West Palm Beach, and we were able to allocate, reallocate 36% of the cost of the property, which is great for a condo because it doesn’t have any land. We need to take out the cost of the land, but in a condo,

There is no land cost. So the entire purchase price is now eligible to be segregated into different categories. So we were able to take 36.7%, which translated into $170,000 of depreciation that the owner could take in year one. We did another one, an Airbnb. This is a short-term rental in in Texas,

and we were able to take 53%. Now that property had a lot because it had a seawall, it had a dock, a cover boat lift, and it was a nice Airbnb. And we were able to take 53%.

of that property and reallocate it and get it depreciated in year one. And that owner saw depreciation that they could use to offset their income by two hundred and thirty six thousand dollars. Two days ago we had a ⁓ an investor call up and we had a ⁓ a a meeting with them and she needed to offset two point eight million dollars of income this year. So she needed to find out what types of property does she need to buy and how much.

And so we were able to talk to her about a few things. There are certain types of property. If someone’s high level ⁓ commercial investor, gas stations are fantastic. So are car washes. They have a massive amount of of depreciation that can be accelerated. This is all about accelerating the depreciation on commercial or residential property, investment property.

Joseph Crooms (08:04)
On a gas station and ⁓ a car wash, what are some of the things that you would ⁓ examine and and then give them and appreciate?

Hank Tippins (08:13)
Well, if a person is in the market like this lady is ⁓ we would we would give them criteria on what to look for when buying a gas station. For instance, not every gas station qualifies, but the IRS has specific criteria that allows there to be massive deductions or I would say ⁓ acceleration opportunity for for depreciation. You can depreciate up to seventy-five percent of the improvements or the cost of the gas station. And the re one of the criteria for a gas station specifically is

Is that fifty percent of the sales need to come from gas sales, the sales of gasoline. If it’s more of a ⁓ convenience store with one or two pumps, it might not fit that criteria. But if it’s a if if it’s primarily the business is at least fifty percent of ⁓ sales from gasoline, then it then it’s eligible. There’s a few other criteria, like I think the size of the store has to be I think under ⁓ fourteen hundred square feet. ⁓ and so a few a few things like that to look for.

But now we’re talking about if we tr move over to car washes, ⁓ that it entirely all of that is equipment. And that equipment can be categorized either under site improvements or under five year personal property. It’s something that would be depreciated. I mean the the shell of a car wash, like the drive-thru types of car wash, the shell, which is just basically a empty shell of you know, maybe a a block building or ⁓ you know con concrete block shell.

Almost everything that’s placed inside of that would be depreciable under a five year ⁓ personal property and because of a hundred percent bonus depreciation is back, all of that can be taken out in year one.

Joseph Crooms (09:48)
Thanks, Hank. ⁓ so this seems like this is a very ⁓ lucrative market that you’ve been how long have you been doing this, Hank?

Hank Tippins (09:57)
Well my partner and I when I when I first graduated my with my mechanical engineering degree, I went to work for an architectural and engineering firm and we partnered with a and we built shopping centers, malls, hotels, we partnered with a group that did Cost Segregation and we actually ⁓ included Cost Segregation in our menu of services so that the cost that they would recoup on the back end of construction would actually offset our architectural and engineering f firm costs. And so this is my

First introduction to this right when I graduated from college about 20 years ago. And I’ve been familiar with this industry since. I’ve been working as a mechanical engineer. And ⁓ several years ago I connected with a family friend of ours who had started a firm ⁓ doing just this for commercial property, you know, large commercial property and also like smaller residential investment property as well. And so he’s been working primarily for accountants and a few investment properties.

groups and he’s been the cost seg go to guy. And ⁓ and so over over the years they’ve done, you know, probably about one point two billion dollars of of reclassification of assets. So this is it’s a strategy that’s well known in commercial groups, not so well known in like the mom and pop ⁓ or Airbnb owner groups.

Joseph Crooms (11:14)
So that’s a new market for you. So how are you positioning yourself to introduce to that type of market?

Hank Tippins (11:22)
No, well for the I would say for the group that doesn’t know about Cost Segregation
. Like for instance, my mom and dad, they own ten rentals and they’ve they had never before I got into it years ago, they had never heard about the you know, Cost Segregation
. So they depreciated their rentals this the slow standard way over twenty seven and a half years, which is called straight line depreciation. ⁓ so there’s a portion of the market now that simply just needs to know that this exists, that it’s ⁓ it’s acceptable, it’s a legitimate IRS

I would say break to accelerate the depreciation. We’re not creating any depreciation out of thin air. We’re just taking the depreciation that would normally be captured over a long period and shortening that time. And as you know, a dollar in your hand right now is worth more than a dollar in your hand twenty seven years from now. Partly because of inflation, partly because you have the opportunity to reinvest that money. You know, so it’s really how much does capital cost and how how much could an investor do

with the money that if they had it in hand right now. And so it not every property qualifies. If if a person’s had their property for more than five years, they’ve probably already claimed what would normally five fall in the five year deduction category. So to to ⁓ to to shift money into a five year depreciation category after they’ve already owned it for five years wouldn’t be worth it. Or if they’re doing a quick flip, it really wouldn’t be worth it for them as well.

Typically they want to own the property at least three to five years before doing a Cost Segregation study would be worth it for

Joseph Crooms (12:51)
trying to word this question the correct way. What what’s been keeping ⁓ know this is not easy in the time, but what’s been the been the key to keeping your machine running smoothly now?

Hank Tippins (13:36)
Well, you know, ⁓ definitely IRS compliance. So we focus, you know, the fact that my my business partner has been in this for a long time and the fact that I’m a mechanical engineer, you really have to be careful about which Cost Segregation group that you choose. On the one hand, there are a lot of startup cost seg firms that are using AI and they use generic templates, and they either can do one one of two things. They either are too aggressive and they overreach and claim too much.

And then they’re susceptible for ⁓ you know, being at risk if an audit comes and you can’t substantiate these numbers. Or number two, if they’re too conservative and don’t claim everything they could claim, of course they’re still charging for the study, and they don’t claim everything they could claim, then they’re leaving some serious tax savings on the table. You know. And so that was that’s pr that’s probably the main ⁓ thing to look out for.

Joseph Crooms (14:27)
And how is that ⁓ how are you doing that right now and and how is it maintaining your business? Are you educating people? Do you do seminars run now, things such as this?

Hank Tippins (14:37)
Yes sir. Yeah, and that’s a great question. You know, so far we have been working mainly w on the back end with accountants and doing it for their clients. And then also we found a few investor groups that we become like their COSEG go to guys. But right now we’re finding out with the proliferation of Airbnbs over the years, we’ve kind of grown into this market, I would say, kind of organically, but we haven’t really done too much on the forefront, you know, on the on direct marketing efforts. And that’s really what we’re trying to do right now. I mean, just trying to get

trying to educate ⁓ you know in and ⁓ investment property owners, number one, and then basically saying, okay, if if you’re looking for a cost egg firm, here’s what we offer. And it’s it’s basically boils down to this lower cost on the on the segregation study itself, maximize the ROI, ⁓ on you know the tax savings, and then make sure that it’s defensible in case of an IRS audit.

Joseph Crooms (15:29)
Thanks, thank that that’s very thorough. Now, every operator I know has a moment where things just don’t go right. You know, it they just get real. ⁓ maybe there’s a deal that went sideways the time that you had to pivot fast. Mind sharing one of those moments with us?

Hank Tippins (15:41)
Yeah, this actually you know, ⁓ in in the Cost Segregation business, I mean it’s always it can be a a little bit annoying if we’re dealing with a ⁓ an an a tr you know, an accountant who is a little bit picky and who kind of pushes back on certain things. And that happens from time to time. But one specific deal and you know, and I’ll I’ll kind of pivot here for a second. I’ve been investing in rental properties since I was twenty one years old. I was still in college as a matter of fact. My parents had to own some rental properties and the very first house that I ever purchased

It looked like it was an amazing deal. This is like 2004, and it was a fantastic opportunity. After I it was right when short sales were taking off. And I was able to get it from a friend who had been working for with the bank to try to get this as a short sale. This is in 2004. We finally got the house. He assigned it to me. I bought it for well under market. A guy across the street said, Hey, please don’t even fix this up. My friend wants to buy it, he wants to move into this neighborhood.

And he wants to fix it up so him and his family can move into it. Anyway, he offered to to pi to pay me ⁓ thirty thousand dollars more than what I paid for it. And I was twenty one years old, it was my very first deal, and foolishly I was too greedy. I was thinking, no, I’m gonna fix it up, sell it myself, and make sixty. Well, I tell you what, that was my first flip, and it was my first flop. It was my flip that flopped. So I still own that house, ⁓ you know. And so, you know, we we the the longer I held it, of course the r

the the renovation on it took longer, took more, but it really didn’t matter because we were riding the appreciation. This is down in the Tampa Bay area and the the the ex ⁓ the appreciation on properties was just incredible. The longer we held it, the more pro the the the higher the value went. And we finally put it on the market not for two hundred and fifty thousand dollars like w which was our target sale price. We put it on the market for three hundred and eighty nine thousand dollars and got a contract on it immediately. That contract fell through

But that was the tipping point right around two thousand and six. You know, we we s we were just starting to get into the Great Recession. And so then we I couldn’t sell it for three hundred, then I couldn’t sell it for two seventy five, and the price kept creeping down and and after a while I said, Well, I’m not gonna be able to sell this house. So I ended up getting stuck with it and being underwater with it for many years. Yeah, it was a hard lesson to learn.

Joseph Crooms (18:34)
That’s the kind of stuff people don’t talk about enough. And honestly, it’s what separates the folks who’s just dabbling to the ones who stay in the game long term. Let me ask you this. What are you most focused on solving or scaling next? And you just sort of mentioned that to me. but ⁓ elaborate.

Hank Tippins (18:51)
Well, right now, like I I said, moving back to the Cost Segregation business, this is a a fantastic opportunity for investors and and truly for us as well. We’ve been in this in this game for a long time and right now it’s it’s it’s kind of just attracting attention to what Cost Segregation is all about. There are it’s a bigger push now in the industry, so many you know, the average investor might already know, but many of the ones that I’ve talked to have never heard of it, you know. And ⁓ and so, you know

We’re we’re talking ⁓ there’s people we I just went to a conference last week and ⁓ a mortgage broker when he found out what we had done came to us with a with with one of his clients immediately who wanted to do one on a car condo of all things. This guy had bought a car condo, he was a retired barber and made a lot of money through a crypto ⁓ fund that that that came really well and so he’s in his late seventies and then used the proceeds to buy a car condo and

⁓ but anyway, ⁓ you know, educating the investors is is one thing. I’m actually ⁓ have been come from a background of teaching math as well at a at a in a high school setting. So I love explaining things. You know, that that part of me I do enjoy doing. ⁓ but getting in front of the camera and introducing people to what we do, how it works, and really this is a a a the exceptional opportunity for them. And I think, you know, in doing so, you know, I think st ⁓ I think it was Benjamin Franklin who said

You do well by doing well. This is truly a win win. You know, we’re we we wanna offer you know excellent strategies at fair prices and make sure it truly it’s a win win.

Joseph Crooms (20:27)
Hank, how are you going to ⁓ you sort of mentioned this to me. What marketing strategies are you looking to ⁓ capitalize on now?

Hank Tippins (20:36)
Well, right now we’re we’re we’re just building our website literally for the ⁓ for the first time. It’s a company called Tax Depreciation Professionals and then we’ve got a s a smaller side that’s just specifically marketing to the owners of single family homes and maybe small multifamily buildings. call Precision Cost Segregation . So really tapping into to online marketing. I know it sounds like we’ve been in the stone age for years, but really that’s what it’s been and and really marketing efforts have been

very small only because of an you know enough business has come in through accountants and the few investor network that we’ve been connected with, but we’d really like to scale the business.

Joseph Crooms (21:15)
That mu that next move can either compound or create chaos depending on how you play it. Now I know a lot of people listening are are early ⁓ in their journey to looking up to leveling up. I think they’ll benefit from hearing this. When it comes to building relationships and growing your network, what’s the biggest difference for you?

Hank Tippins (21:33)
Th well y when you say the biggest difference, you mean like the biggest challenge in

Joseph Crooms (21:37)
It could be the challenge or you know, or what have you found is going to be very effective for you?

Hank Tippins (21:42)
okay. I gotcha. Well, well, you know, first of all, building upon the relationships that we’ve already have, I mean, we’ve got about three hundred clients over the years and many of them are repeat customers, and most of our business has come through a ref referrals from our existing business. So really once a person does one Cost Segregation study and then, you know, they submit it to their accountant and then they see how much they save on, you know, it sh it shields their income. I mean it it they’re they’re sold.

And so it’s just ⁓ basically earning the trust to be able to do one. And and once that happens, it’s just building the relationship. You know, some people are a little bit timid about this, but I I would say the thing that we focus on the most with somebody who’s brand new is is basically it’s it’s holding their hand throughout the entire process. You know, I’m mechanic we have it we we lean on our strengths very heavily, but we don’t talk and use language that’s kind of

you know, so technical jargon that it doesn’t make sense or goes over somebody’s head. We try to really boil it down to the most basic things and give the customer ⁓ or the potential customer just a sense of trust right from the early, you know, stages that we’ve that we’ve got this, it’s gonna it’s gonna be ⁓ seamless, turnkey for them, and in case of an audit, we will one hundred percent guarantee that we will substantiate their ⁓ you know, the the claim of the depreciation that we find.

Joseph Crooms (23:03)
That’s valuable. Yeah, you can’t fake that. Relationships, everything in the space. Alright, Hank, before we wrap up, if someone wanted to reach out, connect with you, maybe collaborate or learn more about what you’re doing, what’s the best way to reach out to you?

Hank Tippins (23:17)
Well, it can reach out to me by email at [email protected] or I can I’d be happy to give out my phone number eight one three two eight five nine one two two. And we can we can work up an estimate. If they’re looking to buy a property, we can give an estimate on how much that property would potentially bring in for ⁓ capitalizing on the depreciation or if they’ve owned one within the last if they’ve owned one that they’ve either bought or done a major renovation on in the last three years

That would be a a good conversation to have. They would be an eligible for Cossack study.

Joseph Crooms (23:49)
Repeat that one more time just so for I could sort of say somebody was fumbling to try to get their pin.

Hank Tippins (23:53)
yeah. Yeah. Happy to do that. Yeah. So it’s it’s And and then my number is eight one three two eight five nine one two two. You can either call or text and w we’re not sophisticated in the AI space, so we don’t use AI. So it that’s my direct line. It comes right to me. And really that’s kind of what we we focus on. We’re we want to

Hold the customer’s hand and give them a total feeling of assurance that we’ve got their back a hundred percent of the time.

Joseph Crooms (24:27)
Perfect. Well listen, I appreciate your time, Hank. ⁓ your story. ⁓ thank you for introducing me to what y’all do. ⁓ I was educated, so we need more people in ⁓ in this space who are doing it the right way. Thanks again for being here. And for you tuning in, if you got t value from this, ⁓ make sure you subscribe. We got more conversations coming with operators, just like Hank Tippins, who’s who was out there building real businesses, helping real people.

We’ll see you on the next episode. Hank say goodbye to everyone.