Subscribe via:
Show Summary
The conversation delves into the recent changes in bonus depreciation, highlighting its permanence and the implications for property reporting. It emphasizes the risks associated with relying on quick online tools for property assessments, particularly in the context of IRS audits.
Resources and Links from this show:
-
Listen to the Audio Version of this Episode
Investor Fuel Show Transcript:
Chris Streit (00:00)
all of it still qualifies and short-term rentals are…I anticipate we’re about to have a boom in short-term rentals because there’s a lot of dry powder out there for investors. And because of a hundred percent bonus depreciation, somebody who wants to get into real estate, a short-term rental might be one of the easiest ways to do it. Because if you buy the property, then you can take the deduction from a cost segregation very cheaply. And then you can use the capital obtained from that to buy your next property. And then do a cost segregation and use the capital from that to buy the next property and so on and so on.
Kristen (02:05)
Welcome back to the Real Estate Post podcast. I’m Kristen and I’m here with Chris Streit, who’s the CEO of CSA Partners out of Dallas, Texas. And we’re going to talk about cost segregation services today, which I haven’t talked about this, so I’m excited to get into this. Thanks for being here, Chris.Chris Streit (02:20)
Yeah,my pleasure, Kristen. I look forward to the conversation and thank you so much for having me on.
Kristen (02:24)
So how about you get into kind of your background and how you got started building CSA?Chris Streit (02:30)
Sure, so I actually began in tax two decades ago and it’s everything that you would think, it’s not that exciting. And I wanted to get out of this as soon as possible, but it kept pulling me back in. So ultimately where my intersection of experience came was tax and outsourcing.And what we are as a firm, as we specialize in one very specific niche part of the tax code, is thousands of pages, we only have to cover 12. And we do it for the back office for multiple, 11,000 CPAs across the country to provide these types of services. So ⁓ it’s an exciting business. It does track directly with the real estate market. But most importantly, adds equivalent value to the real estate market, almost more than appreciation sometimes.
you get in a tax deduction. it’s an exciting piece of the tax code if you can get into that.
Kristen (03:26)
Yeah, I mean, I think the tax code just confuses a lot of people, freaks them out. So I think that people are looking to outsource that kind of thing. So it’s nice to go to someone who’s an expert, especially in one topic. I think that’s a really great thing, because the tax code is so big. ⁓ So talk about cost segregation and kind of just the general principles around it.Chris Streit (03:47)
Sure. So primarily set up for real estate investors. Anybody who has a property that does generate some type of income, it probably qualifies. What it is at a high level in a nutshell and a brief history on it is when properties were being bought and sold, there was a division or there was a discrepancy between the IRS and the investor or the buyer and the seller in what constituted land and what constituted improvement. Because depending on where you landed on those valuations determined how much depreciation you could take.So once that was satisfied, then the IRS and investors had to get into really detailed items, not just improvements in land. was, okay, well within the improvements, my hardwood floors might last the length of the property, but my carpet won’t, and my cabinets won’t, my bathroom will, but this will, all of these things. And they basically started categorizing all these different assets. And they said, well, this is a five-year asset, this is a seven-year asset, this is a 15, and the rest of them, those get to stay at the
what’s it 27 and a half for residential or 39 for commercial properties.
When you first buy a property, automatically defaults to $27.50 or $39, meaning whatever you paid for it, you can just divide it by that and take that straight line depreciation every year. That depreciation is a loss, basically. So if you made $10,000 and you have $10,000 in depreciation, you made nothing, you owe no money to the government. It’s a beautiful thing. That money is yours. What cost segregation is, it says, actually, those five-year, seven-year assets, 15, taking them from $39 or $27.50,
you get to get all that benefit now.
And with bonus depreciation, bonus depreciation says any depreciation accelerated is your one. So that’s the same home that you might have or that same commercial property you might have. A benefit that looks something like $30,000 in year one might now be $200,000 in year one in a deduction. And if you don’t use it all, it carries forward to the next year and the next year and the next year until it’s gone. So when the intent was, as the government said, we want to encourage investment. We want to encourage people to build affordable housing.
So the hardest part, as everybody listening to this podcast knows, the hardest part about real estate investing to generate income is those first couple of years. Equities pain. It’s expensive. The federal government says, here’s money, pay down debt, make improvements, or just get something underneath you to say you’re not cashflow negative. That’s what cost segregation is.
Kristen (06:56)
Amazing. And do you find when you work with people that they don’t even know this exists? Or is this something that people are sort of aware of?Chris Streit (07:05)
There are varying levels of understanding. I would say more on the commercial side, 100 % yes. There’s a high degree of awareness, but oftentimes there’s some fallacies that are believed that maybe it’s not for me. They might say it only works for new construction. Not true. Property could have changed hands 10 times. No improvements. The entire basis is depreciable. Some people might even think this is only something I could do in the year I buy it. Reality is you can go back year after year after year. You don’t have to amend a return. The IRS makes it very easy. Again, theywant you to take this benefit. Now on the residential side or more on the folks who might be more, you want to think of it as like retail investors, there’s a high degree of understanding to be gained because it’s also thought of as something that’s beyond my reach. It’s really, really expensive. One of the benefits that COVID did provide is the IRS allowed for site visits, which are required for a defensible cost segregation to be done virtually. So that expense has been wiped out.
we see high value in people who have a $200,000, $250,000 Airbnb that they just acquired. They can benefit, they might be to get $30,000 $40,000 that can just pull forward in a cash benefit due to cost segregation.
Kristen (08:17)
Yeah, I mean that’s really great to call out. And what kind of qualifies for this cost segregation and what types of buildings?Chris Streit (08:25)
Sure,any building that does produce income is going to have an eligibility for cost segregation. The parts that you begin to start to disqualify, is this a good building or not, is number one, how much you paid for it. You can’t depreciate more than what you paid for it, and also you can’t depreciate land. So if you spend a million dollars on a property and there’s a little shed on it, and the property is worth $980,000 on land, but $20,000 of the shed, there’s only $20,000
to go play with. So that’s a challenge. But if you have a depreciable basis with improvements, then you have an opportunity for cost segregation. When it becomes more lucrative, obviously the higher the number, the more depreciation, but the more improvements inside that building, the more there is to depreciate. So warehouses are great because they’re huge, but they also don’t have carpet typically. So you’re not dealing with an asset to depreciate. They don’t have a finish out on the walls. You’re just straight to the rafters. You might find 10 to 12 % of the basis
that can be deducted, but on a single family home or commercial property or manufacturing facility, you might get 30-40 % off the basis deducted. But really anything that produces income has option, has ability to be segregated and provide a substantial benefit. And if the land, for those of you in California, your land is out of control, but there still typically is some good improvements to go depreciate.
Kristen (09:44)
That’s amazing. so, you know, as you kind of mentioned, people who are just in short-term rental, like with AirBnBs and stuff like that, all of that still qualifies.Chris Streit (10:28)
all of it still qualifies and short-term rentals are…I anticipate we’re about to have a boom in short-term rentals because there’s a lot of dry powder out there for investors. And because of a hundred percent bonus depreciation, somebody who wants to get into real estate, a short-term rental might be one of the easiest ways to do it. Because if you buy the property, then you can take the deduction from a cost segregation very cheaply. And then you can use the capital obtained from that to buy your next property. And then do a cost segregation and use the capital from that to buy the next property and so on and so on.
and
so on so on. And the reason why they’re so great in particular is because the ability to unlock the depreciation from a tax code standpoint is less. There’s something called the short-term rental loophole, which doesn’t require the same amount of hours to unlock the income for a deduction. It’s only 100 hours in a year, so it’s much, much less. But also…
Kristen (11:22)
and what’s in there.Chris Streit (11:24)
Usually it’s a two-pronged approach. You have to be a real estate professional according to the IRS. 750 hours in your primary job needs to be doing that. And then typically it’s an additional 500 hours on top of that to ship. They basically want to make sure you’re not an executive at say, Nvidia. And then also taking all these deductions against your W-2 income. They want to say you are materially involved. The short-term rental loophole gives you that means.Kristen (11:36)
Wow.Chris Streit (11:49)
Airbnbs, you would think they start at $27.50 because they’re homes, but they actually start at $39.00. They’re treated more like hotels. So they’re a 39-year asset, meaning you only get to a tiny, tiny bit of depreciation. So, cost seg makes tons of sense for short-term rentals.Kristen (12:04)
Yeah,oh, that’s amazing to know. for someone, for the extra step, what is the difference working with you guys when someone’s maybe just working directly with their CPA? How do you guys fit into that conversation?
Chris Streit (12:16)
Sure, so oftentimes the CPA might be doing the cost segregation, but we’re the ones in the back doing it. So we have a pretty expansive white label ⁓ option. I would say the big four and maybe five other really, really huge CPA firms probably do it themselves, but I know for a fact that some of them still outsource it because some of them use us for that purpose. So if you’re going to your CPA, your CPA is going get you in touch with somebody ⁓ potentially. The key thing is you really want to question the CPA if you’re the one bringingbringing
it to their attention. You want them to be proactively doing it and telling you, hey, you have assets here, you have income to offset, you should really do this. And if they’re not, then that’s something else to look at. But if they are, they’re probably routing you to somebody who can take care of it for you. The key thing I would say to watch out, for everybody who watches this and starts to Google cost segregation,
What happened with bonus depreciation seven, eight years ago is we had it. It was great. But then we were being phased out until the new bill passed in July. And now it’s 100 % permanent. But because of that, there’s a lot of pop-ups. There’s a lot of firms that spend a lot of money on search engine optimization. They built really intricate web forms where you can fill in the details of your property, and they’ll spit out a report in 10 minutes. I think the biggest thing people have to be wary of is those types of
things that prioritize your engagement on a search engine and produce something immediately because those are all failing in the IRS when it comes to an audit. You always want to ask yourself, I’m getting savings but at the expense of what? It’s just like taking a drug. You don’t want the side effects to outweigh the benefit of the drug. ⁓ It’s exactly the same thing with cost segregation.
Kristen (13:57)
Yeah, I mean in this industry in general there’s a lot of scammers or phishing, stuff like that. So I mean that’s really good to bring up. And you kind of mentioned, you know, the federal government and how in terms of cost segregation things seem to have improved in the last few months. Can you just talk more about that and kind of where we’re at?Chris Streit (15:01)
Sure. starting with bonus, bonus was a big win for the real estate industry, bonus depreciation, because it lets you pull forward your accelerated depreciation to year one. We were headed down a path where it was going to be completely gone 18 months from now, and we were being weaned off of it, only getting a portion of it. Now, what does this open us up to? Because it’s an expensive thing for the government to say not tax certain money. They have to pay for that somehow. It goes into their budgeting process.And what we witnessed on the federal side of it and the administration of it is bonus is easy to apply for the taxpayer. What most people don’t see is the audit side of it. ⁓ And a lot of people say, the chances of audits are so low and, you know, the administration has cut the IRS down to the rafters. So it’s not really a risk of mine. I would just encourage everybody to not have that type of mentality. ⁓ Not just to be a good steward and a good taxpayer.
what you legally owed, nothing more, nothing less. But also, audits are actually up, especially when it comes to cost segregation. Because if you’re taking 100 % bonus, there’s some easy pass fail tests that a lot of people aren’t meeting, especially if they get sucked in to ⁓ a SEO driven tool that just produces a report immediately. So the IRS has cracked down on that a little bit more and does want to see some very basic things. They want to make sure you’re doing things like calculating
the land value correctly. They want to make sure you’re doing a site visit if you are taking accelerated depreciation. What we saw in audits from 2024, they obviously spiked right before the change in administration, and they went way down with DOGE. And now they’re back up here a little bit, but you can’t get ahold of anybody in the IRS because they’re being furloughed right now. But when they come back, and perhaps if there’s any type of change in administration, there’s going to be a lot of exposure for people who wrote it off.
Whenever you’re looking at savings, whenever you’re looking at deductions, know the government’s there to work for you. But if you take advantage of it, you don’t want to risk the back of their hand because it stings really, really bad.
Kristen (17:11)
Yeah, andit’s unfortunate because a lot of people I’m sure think they’re doing the right thing and think they’re doing it or at least, you know, getting stuff together that wouldn’t be audited. So that is kind of unfortunate to get kind of trapped into that SEO cog. ⁓ So I’m sure you’ve mentioned a couple things, but I’m sure you see the same mistakes over and over and not just people who aren’t taking advantage of this at all. But is there anything specific that you see over and over you can share with us? ⁓
Chris Streit (17:40)
Sure,the first one, I’ll double down a little bit. If you bought a property in a prior year and that tax year is gone and years have passed in between it.
your opportunity to accelerate depreciation on that asset is not missed. The IRS actually has the forms to take what’s called catch-up depreciation and identify how much straight line depreciation you’ve taken and how much net is still available to you to get in the most recent tax year. So you don’t have to amend your return, you don’t have to jump through a lot of hoops, it’s not a red flag, they actually have a form for it which tells you, okay, this is not scary, it’s not something that they’re… So that’s the first one.
because often people think it’s only in the year they buy it, which is completely untrue. It’s also not going to generate a lot of work for your accountants that can charge you more hourly rate.
⁓ That is a big one. The next one is if you are going down this path or you have already gone down this path is really getting tight on what your land value is. Because you can imagine if your land value is under what it’s stated and what the IRS uses is the state and local jurisdiction. So when you go look to see what the county assesses your property at, that’s where they start to figure out the apportionment. If you have not done that and your property value is way less than it’s stated on
that appraiser site, all that depreciation you’ve taken as a risk for a clawback. So always, always double check the land value. Make sure what’s referred to as your depreciable basis, which is your cost minus your land, is accurate, tight, and could pass audit. And the third one would be, it’s exactly what you were saying earlier about the SEO. If you just Google and you can get a report without ever talking to anybody, then you should be worried about the ability of that to be an engineered study. ⁓ It’s using an approach which
is in the IRS tax code, but it’s basically inviting a failure if anybody looks at it.
Kristen (19:33)
Yeah,I mean those are three really great tips for people. ⁓ And you brought up so many tangible things for people to consider and maybe realize that they’re not doing their own business. And I know at CSA, 65 % of your business is actually direct to the consumer, correct? Yeah.
Chris Streit (19:50)
Correct. Yeah,so what there’s… ⁓
There’s a lot of places out there to provide cost segregation, but people are becoming more more wise to the need for what would be referred to as an engineered study, which is basically I’m buying savings that don’t have a risk associated with me losing all the savings that I identified. And so I think supporting over 11,000 CPAs gives you that ability to have some credibility. So you’re not just buying savings, you’re buying peace of mind. And so a lot of direct consumers come to us ⁓ just that way and we don’t even know how they found us, but they did.
⁓ We’re happy they are and that’s one of the things Kristen has mentioned to you is that as people get more involved in real estate investment because of bonus depreciation because of, well, just, mean, geez, it’s going to be, it’s in so much demand because the shortages we have in housing and other things. We want to be available to those people so it’s on us to make it easier and provide as much education as we can.
Kristen (20:46)
Yeah, so tell everyone where to find you and where to find CSA and how to work with you.Chris Streit (20:50)
Sure, it’s very easy. have one of those unique four letter URLs. It’s just csap.com.You go to CSAP.com, which stands for CSA Partners. ⁓ We have a lot of information on there. And most importantly, if you’re curious, if you have a property, the property you bought years ago, we have a web form in there. All you have to do is put in five, six pieces of data. We can come back to you with an expected benefit. Now, unlike those other firms, we’re not going to tell you here’s a report. We’ll tell you we think it’s going to be here, but we can tell you with a pretty high degree of certainty where we’re going to land and you can take it or leave it. But will you at least be informed in your
done.
Kristen (21:28)
Amazing.Well, I mean, this is all such great information, and I think people should really take advantage of this and get everything in order. Make sure your books are in order. So thank you so much for being here, Chris. And thank you everybody for listening. Hope you learned a lot, and maybe you can take a look at your business in a different way. Definitely check out CSA, and we will see you back next time. Bye.
Chris Streit (21:38)
Yeah, thank you, Kristen.
