How Cost Segregation Cuts Taxes on Small Real Estate Rentals | Dana Udumulla

Dana Udumulla (00:00)
everyone hears the term cost segregation, Now, the word isn’t sexy, but really the results you get from that tremendously sexy. But there’s a misconception in the markets. It’s only for commercial. you need to have million-dollar deals to do cost segregation. And that’s not true. You and I know this. If you have a rental property, it doesn’t matter if it’s even $100,000.

Land doesn’t get depreciated, but the rest does.

Scott Bursey (00:58)
Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host, Scott Bursey. Glad you’re with us. Today we’re delighted to be joined by Dana Udumulla, who’s a partner at cost recovery experts. Dana is a pro in cost segregation and strategic depreciation planning for commercial and residential real estate, helping investors and syndicators alike dramatically increase cash flow and preserve capital.

In this episode, listeners, you can expect to uncover massive tax savings you might be accidentally leaving behind. Dana, welcome to the show.

Dana Udumulla (01:35)
Scott, thank you so much for having me and what an introduction. I love it.

Scott Bursey (01:39)
It is just awesome having you here, Dana. And help our listeners get up to speed. If you could give us the front row seat on how your career ignited and where you’re pouring your fuel now.

Dana Udumulla (01:51)
Absolutely. So, long story short, I would like to call myself the American dream. And whenever someone says the American dream is unreal, I’m like, no, I’m living it right now. I came from Sri Lanka 10 years ago with just $200 in my pocket And I’ve had a phenomenal time in the last 10 years, Scott. Between my background being financial analysis, I’ve been given a lot of opportunity.

To invest personally as well. I’m a huge proponent of alternative investments, whether it’s real estate, whether it’s startups, whether it’s automotive healthcare, things that are uncorrelated to the stock market, I think is very important. Diversification. And I did a stint in the retirement capital world, self-directed IRAs, where again I’m working with investors, help them use their retirement money to invest.

Say real estate or other alternatives. And now last year I decided I wanted to be my own boss too. And I took two steps. One thing is I joined the world of private equity, where we’re focusing on with ZT Corporate, focusing on healthcare, automotive real estate, and heavy equipment. So talk about diversification there, And I also acquired has a partner and

into a cost segregation firm that I so love because not only does it help me with of course my tax problems as well, Because who wants to pay taxes? But I’ve been able to help a ton of investors out there with their tax liabilities and their tax issues that they didn’t even know they could get help.

Scott Bursey (03:27)
That’s a powerful track record, Dana. Thank you for setting the stage and sharing how you built your foundation. what really caught my attention about you was the way you’ve been able to turn complex tax code into immediate bottom line cash flow for real estate operators. And expanding on that, curious to know, where are you seeing investors lock in the biggest cash flow wins?

using engineering based cost segregation right now.

Dana Udumulla (03:57)
Absolutely. I think Scott,

everyone hears the term cost segregation, Now, the word isn’t sexy, but really the results you get from that tremendously sexy. But there’s a misconception in the markets. It’s only for commercial. you need to have million-dollar deals to do cost segregation. And that’s not true. You and I know this. If you have a rental property, it doesn’t matter if it’s even $100,000.

Land doesn’t get depreciated, but the rest does. So

if you could get a few thousand dollars to reduce your taxable income so you’re not paying as much taxes, that’s cash flow in your hand. Because now you’re not paying Uncle Sam, you’re keeping that cash flow in your hand, and think of it this way: you could reinvest it into something else, You could put it into a passive deal. You could now put it into a high yield savings account to now save up for another down payment for another house. But I’ve also seen investors.

Utilize this on bigger properties, We are talking $300,000, $400,000 properties where the cash flow they saved by not paying the taxes because of the engineered study was enough down payment for them to buy another property. Essentially now doubling their real estate portfolio by because they purchased one property and use cost segregation. And if that is not incredible, I don’t know what is.

Scott Bursey (05:14)
Thank you for highlighting that, Dana. And let me ask you this. Where do most operators show a critical blind spot when it comes to leaving serious tax savings on the table?

Dana Udumulla (05:26)
Mm, now let me ask you a question. Are we talking commercial or residential operators?

Scott Bursey (05:31)
That’s slanted more towards commercial, but you could take us down the path of residential as well.

Dana Udumulla (05:36)
Well, with commercial, If you are a true operator that has a track record, you’ve gone through multiple cycles, then you are well versed with the tax strategies, especially if your deals have investors in it. Because for investors, like me, myself, and I’m vetting a deal to invest, I care more about who the operator is, their track record is, what their knowledge is, not only in the asset class.

But the tax strategies around it versus the returns itself. Because sometimes in this real estate market, the returns aren’t great right now. We’re all going through a little bit of a la. But if you get depreciation benefits, your internal rate of return already went up. Because that’s something you can use right now. So a lot of well experienced operators, they have a really good scope on the tax strategies, from what I’ve seen.

But some of the newer operators, they’re trying to do it all by themselves, They don’t want to put too much money in the experts. That’s where they go wrong. Where now they’re trying to be an expert in something they have no idea about. And I see this all the time where they will do a they’ll tell me their CPA did a cost segregation study. And when I ask more questions, and the CPA is great, but CPAs aren’t the cost segregation experts,

You need an engineering team for that. We realized, like, this is not a real cost segregation study. This is something that was put in a software and you just got an output. So I think that’s where a lot of operators are leaving a lot on the table. Because if you do a real study, an engineered study, the benefits are far more from a general, like a standard report you’re just printing out from somewhere. So, and these are benefits you get to pass down to your investors. So

Very important operators educate themselves.

Scott Bursey (08:01)
What’s the lowest hanging fruit on a balance sheet that syndicators routinely overlook during acquisition?

Dana Udumulla (08:08)
now that’s a loaded question, Cause there’s so much things syndicators need to look at when they’re looking at a balance sheet in general, just the whole offering memorandum of an acquisition. For me, I think it’s location, when it comes.

More than the more than the financials, because I have seen some amazing financials for a multifamily property, like an apartment complex. But when you go beyond the financials, it’s not a great deal. Cause the location isn’t great. There’s not a lot of workforce moving into the location. So really, who are you really marketing these units to? So

I think it’s a great question you asked, but I think we focus a little too much on the balance sheet sometimes, a little less on the variables around it. And when it comes to multifamily, I’m sure a lot of people out there have been burned. I was just on a call this morning where a very well-known multifamily operator complete scam and a lot of people have invested into it. But people invested into it because they looked at the financials. Financials

Absolutely can be mimicked, changed with, played with. But when you look at the overall, What is the location, What is this property, When was this built, construction, like occupancy rate, Now you get a better picture of the deal. Who are the operators, their track records? I think a lot of operators, new operators, let me correct it, overlook the location, the rentability.

the markets when it comes to acquisitions.

Scott Bursey (09:32)
Well said. And I guess the better question is you’re now a partner with cost recovery experts. What would you like our listeners to know first about your firm?

Dana Udumulla (09:41)
Well, I think the first thing I would like listeners to know about cost recovery experts is the fact that we are there not to sell you on cost segregations. We are there to have a conversation. And I always tell everyone if you don’t know our cost segregation is give us a call. Me or one of my team members would love to just sit down and have a conversation and understand where you are in right now in your real estate journey,

What are what is your tax liability you’re looking at? Is there a way we can help you with that? Let’s see, let’s run some estimates, let’s run some proposals and then work with you, your tax professionals. And that’s I think where we differ. Like we are very much client oriented. It’s for us not about just the sale. It’s about, well, are we making a really positive impact on this client’s real estate investment journey?

Scott Bursey (11:08)
Dana, walk us through what changing tax policy or audit risks are you most concerned about for commercial property owners?

Dana Udumulla (11:17)
Well, right now, it’s funny you bring this up. We were talking about this morning too, The big beautiful bill went live last year, which by the way was one of the best things that really happened to commercial real estate folks. And it became permanent. However, with changes in administration,

The administration placed a huge impact on real estate. And that’s just facts. On real estate, on immigration, on a lot of very important subjects, the administrations always doesn’t matter who is in office, there’s going to be an impact. The big beautiful bill really has provided us a ton of tax benefits when it comes to investing in real estate. It has become permanent because prior to that, bonus depreciation was getting phased out.

Jan 2025 bonus depreciation was supposed to drop to 40% until the big beautiful bill came in, and now it’s back to 100%. Anything placed after service after January 19, 2025, and it’s permanent. However, will that change? We need to keep constantly monitoring that. Will the change in administration change this? And if so, we have a very limited timeline to take advantage of it,

It’s a benefit and a risk we’re always monitoring. And then the other side is the IRS has become very, strict with its audit policies, especially with AI coming into play. So now when you’re doing studies like this, where it’s basically you’re going and telling the IRS, hey, this is your strategy, you approved it. So now we’re going to be deferring the taxes, Or reducing our tax liability because of this.

There’s a certain set of guardrails and restrictions the IRS is going to like, okay, if you’re doing that, I’m going to look into this even further and deeper. So it’s not really a law change risk because there was nothing else the IRS is doing different. They’re just now doing it better, deeper with these audit inquiries, these just really taking a look at your tax returns of far, well, especially for commercial, Like these multi-million dollar deals, you’re getting millions in depreciation savings in the first few years.

They’re going to be scrutinizing that. And you really want to make sure your study is done well. Because you never want to be on the wrong side of the IRS. Trust me on this one.

Scott Bursey (13:25)
Looking ahead, what is the biggest misconception investors have about cost seg on residential versus commercial assets?

Dana Udumulla (13:33)
I love this question, Scott. You just, I feel like you’re in my head when you ask this question. one of the reasons I got into cost segregation, I work with a lot of tax professionals in all 50 states. And I get this a lot. if your property is only like $100,000, $200,000, $300,000 of anything below half a million, it’s not worth it. You don’t need a cost seg.

And I’m like, wait, isn’t the people, the real estate investors who own those smaller property values really need the tax benefit? So why are we telling them it’s not worth it if that means they can at least get a few thousand dollars in reducing their tax liability, I had a I had a case in Houston. After the land value was gone, the property was worth $257,000.

Because of 100% bonus depreciation, the client got $85,000 approximately, $85,000 in depreciation benefits in year one. Imagine that. That’s $85,000 in passive loss in year one. Now, if the client had listened to their tax professional, who by the way didn’t say this, they actually encouraged the client to do the CUSE, the client would have lost $85,000 in passive losses this year. So

I think that is something that we are really trying to get more ahead of. And I love that we have the opportunity with platforms like yours where we can talk a little bit more about this, especially on getting two investors who don’t know this. Commercial side, I think they’re the best operators. They know how to use these tax strategies, not only for themselves, but also for their investors.

Scott Bursey (15:04)
Dana, thank you for breaking that down. That was excellent. And let me ask you this. What does your professional network look like currently?

Dana Udumulla (15:13)
Well, I’m blessed. I have I travel a lot, so I have a lot of amazing people around me in all different states, But a few professional networks that’s coming to my mind is I am part of catalyst. a group of amazing women getting together and really trying to get female entrepreneurship out there. And the whole motto is, hey, let’s get rich together, but with integrity. And I love that, And more

Women and no offense to men, but there’s a lot of male clubs. Let’s have more women clubs. And what? Men can join our clubs too, and they should. So I love that group. I’m also heavily involved with this community called CCIM, certified commercial investment members. I think if anyone, and I tell this with a lot of conviction because I know some of amazing people in this community, if you’re getting involved in commercial, Acquisition, sale, lease, whatever it is.

Work with the CCIM. Trust me, not only is your deal gonna go better, but it’s gonna be handled with the most ethical integrity where you feel like you’re in safe hands. And another great organization that I’m looking at getting in involved in, I’m sure entrepreneurs organization. There’s a lot of chapters all over. So I’m that’s one now that I have a little bit more time, I’m thinking about getting involved in as well.

Scott Bursey (16:29)
Wow, that’s the thirty thousand foot view there. Appreciate you sharing. Dana, this is the deep dive question that I know our listeners are gonna want to hear from you. What is the one tactical move an active syndicator can make this month to maximize their next acquisitions tax shelter?

Dana Udumulla (16:49)
Well, cost segregation. currently I am working with multiple syndicators and something that they do that I really love is part of their underwriting, they include depreciation, but they make sure they’ve send the information to us prior to acquisition so that they can actually see okay, what are our potential depreciation savings on these properties? So they don’t guess the numbers.

They are actually getting estimates so that their underwriting models are closer to the actual numbers, and they’re making depreciation a big part of their acquisition thesis. And I think that’s something a lot of syndicators, new ones, need to start implementing. Because I’ve seen some people, they just put a number, yeah, we’re gonna do 70% depreciation. What are you basing that out of, Because there are some syndicators like buildings, properties.

you might not get that much depreciation. So get ahead of it prior to the acquisition, I think is something not only this month, I think until hundred percent bonus depreciation is a thing we should all be looking into.

Scott Bursey (17:51)
That’s a very clean perspective on a complicated piece of business there.

Dana Udumulla (17:56)
Yeah.

Scott Bursey (17:57)
And you have given us a lot of great perspective here today. But Dana, is there a nugget or two that you’d like to leave with our listeners?

Dana Udumulla (18:06)
Absolutely. America has a lot of middle class people. And the American dream is to own property. And I think now that we have AI in place, information isn’t scarce.

We want to arm ourselves with information, but not too much to a point that you we go down a rabbit hole. I think people really need to start taking their investing to their own hands. Yes, have stocks and bonds. I totally, absolutely, I myself do as well, but also diversify your portfolio into other things. Could be real estate, It could be passive deals, it could be operating businesses. But start generating your wealth. Don’t always depend on your W-2.

Start building your wealth in other ways because now we have the information and it’s never too late. I have investors, they started in their 50s, 60s, and 10 years later they’re so happy they just started. So if you can invest at least $100 today, do so and then work towards diversifying your portfolio outside of stocks and bonds.

Scott Bursey (19:06)
Very powerful. Thank you. And for those of our listeners that want to keep this conversation moving, stay in your lane or collaborate with you on future deals. What’s the best way for them to plug into your pipeline and reach you directly?

Dana Udumulla (19:19)
You can also reach out to me on LinkedIn at Dana Udumulla, spelt Dana. Scott and I had this conversation that I do that all the time. And then my email address is [email protected]. And honestly, I always love when new investors, experienced investors reach out just for a conversation so we can compare notes,

What’s in our portfolios? What has worked and more importantly, what hasn’t worked?

Scott Bursey (19:45)
Dana, thank you for joining us today on the Real Estate Pros podcast.

Dana Udumulla (19:49)
Perfect. Thank you for having me, Scott. This has been such a pleasure.

Scott Bursey (19:53)
This has been an absolute master class. And to our listeners, we appreciate each and every one of you. If you receive value from today’s episode, please subscribe. We’ll be filling your tanks with a lineup of elite guests, just like Dana, who are accelerating and setting the pace for the rest of the industry. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode.