How Real Estate Investors Can Legally Reduce Taxes With Cost Seg | Jeff Hiatt Interview

Jeff Hiatt Depreciation Doctor (00:00)
If you’re only going to hold the property for a year or two and you do the cost seg and you don’t do a 1031 or you’re not going to do a, let’s say, ⁓

an opportunity zone type investment after that, then it probably won’t make sense because the tax code is going to grab back or claw back some of that depreciation you took early. As you hold it longer and longer, the recapture bite, which is what that’s called, starts to mitigate over time because either way you go, straight line or accelerated, you’re going to have recapture.

Cody Crabb (02:04)
Welcome back to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel. Today I’m joined by Jeff Hiatt, the depreciation doctor. helps real estate investors legally reduce their income taxes through accelerated depreciation. And he brings a rare mix of deep cost seg experience plus real world investing perspective. Love a good real world perspective. So Jeff, thanks so much for joining us today.

Jeff Hiatt Depreciation Doctor (02:33)
Hey, well thank you Cody. Thanks for having me on. I’m glad to be on Investor Fuel. I’m looking forward to today’s conversation and can’t wait to dig in a little deeper here.

Cody Crabb (02:42)
Fantastic. my first question is, you we have a lot of newer investors. Just real quick, could you give us an example of what Cost Seg is and just quick terms so our audience is kind of on board as you’re telling your story?

Jeff Hiatt Depreciation Doctor (02:58)
Sure, sure, no problem. So the way that it works when you buy real estate is you’re automatically gonna be pushed into…

either 27 and a half year depreciation or 39 year depreciation. That’s what the tax code will kind of default you or push you into. What a cost seg says is wait a minute, there are parts of the tax code that incentivize real estate investors to take advantage of the tax code and accelerate the write-offs so that they can take pieces of their building more quickly without having to wait.

27 and a half or 39 years to get it. You get to take it over five years, seven years or 15 years and with bonus in play they get to take it even faster. So that’s what we help our clients do and we have been doing this since 96.

Cody Crabb (03:49)
Awesome, ⁓ let’s, ⁓ with that in mind, let’s get a little bit of your background. How did you get into this industry? What do you ⁓ provide for people? What caught your attention ⁓ about real estate and this in particular?

Jeff Hiatt Depreciation Doctor (04:05)
Well, back in 1999 when I joined the firm, there was only two people in the firm at that time. We started in 96, but I joined in 99. With that said, I was working with some franchise restaurant owners, know, big ⁓ donut coffee shops and pizza shops and taco shops and was working with them and…

All of a sudden, cost seg became a really big topic, meaning accelerated depreciation. I didn’t even think it was a big deal until I started to talk to these clients and they were very excited about it. So that was in 99. We started to do seminars for CPA firms in 03.

and our business shot through the roof because all of a sudden the CPAs out there realized that the first opening for CostSeg started in 96 and they hadn’t really done much with it

and then the

CPAs that dealt a lot with real estate owners said this is really huge, we need to bring it out to our clients. And that’s what they started to do and we became their ⁓ go-to cost seg providers and we’ve been doing it ever since. We started out, you know, back in the day doing five or 10 a year. Now we do 1,500 to 1,600 studies per year ⁓ with our 38 employees doing the site visits and all of that stuff. So it’s become a big operation.

We’ve got six satellite offices across the country, so we’ve got a nationwide reach and we can do almost any type of property from little Airbnbs to skyscraper buildings and we’ve done them already. We’ve done about 27,000 studies.

Cody Crabb (06:36)
Wow, okay, well so with that kind of experience, I mean it seems like ⁓ you really start to understand this strategy very specifically. So one question I’d have is so when does CostSec make the most sense for an investor? When is it like not, like maybe you shouldn’t, but you should pivot a little bit away from that.

Jeff Hiatt Depreciation Doctor (06:58)
Well, that’s, you kind of have two windows open on the computer screen there. One is when should you do it and the other is when should you not do it. So when you should do it is any time you’re going to hold the property for say longer than three years.

Cody Crabb (07:04)
Yeah, yeah, yeah.

Jeff Hiatt Depreciation Doctor (07:13)
and or even less time if you’re gonna do a 1031. So there can be stacking of benefits here. So if somebody’s gonna buy a property and hold it for at least three years, but they won’t consider a 1031 or that’s just not in their mindset, then…

Probably less than a three year old doesn’t make sense, but more than a three year old will make sense. And so the cost seg can really help out there. And if you use it in tandem with, let’s say a 1031 or an opportunity zone subsequent investment, life can be really good then. But there are some times that, you know, the typical standard buy and flip person that’s coming in, buying a property, putting some paint on it, and then selling it shortly thereafter, cost seg one.

help them there because they’re going to have to give back so much in a thing they call recapture. But the bottom line is if you’re doing 1031 or Opportunity Zone investments it can work very very nicely there.

Cody Crabb (08:14)
And you

mentioned a three year hold window, yes? So can you kind of break down why that matters so much and kind of what consequences are there if you end up having to sell sooner?

Jeff Hiatt Depreciation Doctor (08:19)
I did, I did, yes.

Well, ⁓ so that’s a great

If you’re only going to hold the property for a year or two and you do the cost seg and you don’t do a 1031 or you’re not going to do a, let’s say, ⁓

an opportunity zone type investment after that, then it probably won’t make sense because the tax code is going to grab back or claw back some of that depreciation you took early. As you hold it longer and longer, the recapture bite, which is what that’s called, starts to mitigate over time because either way you go, straight line or accelerated, you’re going to have recapture.

The bottom line is you just want to understand that going in. So we tell people if they’re not going to hold the

property for three years or longer, it probably doesn’t make sense to do a cost seg unless 1031 is on the table. The biggest mistake that people make is that they’re often ⁓ not taking advantage of this early enough because what this concept will do for them is help them build their wealth, build their real estate portfolio more quickly. So versus waiting,

Cody Crabb (09:16)
Hmm, yeah.

Jeff Hiatt Depreciation Doctor (09:35)
27 and a half years or even waiting 10 years, they can grab the deduction now, reduce what they have to send to Washington DC and redeploy that money and buy their next property more quickly. Or they can use that money that was gonna go down to DC, now they get to use it and fix up their current property and they can charge a higher rent potentially.

Cody Crabb (09:59)
Yeah,

yeah, mean, wow, that’s kind of interesting. So, I mean, because you’ve kind of done so many studies around this, I’d be kind of curious about your perspective. Are there certain property types where things really are like, this makes, the savings make the most sense here, or they surprise people because it’s just kind of, I’m curious how it differs.

Jeff Hiatt Depreciation Doctor (10:57)
Well, ultimately when you boil it down, the cost seg is going to make sense on almost any property once you get over a certain threshold. And what we find is that it’ll make sense looking at the fee versus the benefit once the purchase price is north of 300 grand.

If somebody’s buying a really small property, ⁓ really low basis, really low purchase price, and they’re not spending a lot of money to fix it up, probably they’re not going to be too excited.

you know, about saving five or seven or ten thousand bucks. But bottom line is once you get above that three hundred thousand dollar threshold, typically almost everybody will be excited about those tax benefits there. And that’s what we find and that’s often what we’ll steer clients towards is also another thing that they want to look out for or make sure that they’re going to be in a high enough tax bracket to fully utilize the tax benefits that the cost seg would bring them.

In other words, if they don’t have much income for a given year, we would say, hey, don’t do this right now. It’s not a good time for you because bottom line is if you’re in a really low tax bracket, then you’re going to burn up the depreciation in a good, in a,

in a low tax rate year that if you waited a year or two when some of those sales of your other real estate occurred, ⁓ you could use it in a better tax year, a year or two from now. So we try to help the client not just do the cost seg because that’s what our business is to sell cost segregation services. We don’t want to do that if it’s not going to help the client most beneficially.

Cody Crabb (12:43)
So I wonder, like I said, because of your background, you had this cost seg experience, you had this real estate investor experience yourself, I’d be curious to know a little bit about your real estate investing experience and how that kind of affected your investing. Did you change what properties you invested in because of that?

Jeff Hiatt Depreciation Doctor (13:04)
Well, ⁓ it’s kind of funny how it happened. I was talking to so many real estate investors and I kind of came to realize, hey, these people are no smarter than me. I’m not dumber than they are. Literally, I was thinking, if they’re making money at this, I can do this too. And so my wife and I started to buy a…

properties and she ended up becoming a real estate professional so she manages our portfolio and we have kind of a smattering of almost everything because often times the clients that I’m dealing with will have a portfolio themselves and they’ll be in the process of getting rid of a particular property or thinking about getting rid of a property or they’ll know of one that they’re not going to buy and they can say, hey Jeff, this might be of interest to you, you want to take a look at it. And so we’ve kind of done that over time.

Cody Crabb (13:28)
Wow.

Jeff Hiatt Depreciation Doctor (13:56)
and just acquired everything from ⁓ multi-family, single-family. own retail properties, triple net retail properties. So we’ve got a smattering of a little bit of everything.

Cody Crabb (14:11)
Gotcha. ⁓ Okay, so let’s kind of ⁓ make this a little bit more practical. So let’s say I hear this, I’m a newer investor and I say, Jeff, this is all great. Who doesn’t want to save on taxes? This is all awesome. Where the heck do I even start with this? Like what is step one if I want to kind of start looking at making this a better situation?

Jeff Hiatt Depreciation Doctor (14:35)
better situation to reduce your taxes. Probably, yeah, so probably I would say for a lot of people, and I’m not gonna call it ⁓ training wheels, but I’m gonna say it’s a good starting point for a lot of people that may not have ⁓ real estate professional status acquisition.

Cody Crabb (14:36)
Yeah, yeah, that’s what I meant.

Jeff Hiatt Depreciation Doctor (14:54)
right away, they may not be there yet, but if they were to use short-term rentals, because short-term rentals you can get into, you can rent them typically for more than you might be able to rent a long-term rental for, and

any of the income is gonna come into you, but the loss is from a cost seg, so the combination of short-term rental and cost seg give that owner that short-term rental, ⁓

person, it gives them the losses and if there’s excess loss, in other words, deduction from the property they just bought, they get to use it not only against income from the short-term rental, but also from their day job income. So even if they’re an attorney or a doctor or the plumber, whatever they are,

if they’re using the short-term rental advantage. Now, some people on the social media out there call it a loophole, but it’s not really a loophole. It sounds sexy to call it a loophole, but it’s really not.

Cody Crabb (16:43)
Like you’re getting one

over on them. Yeah, I know what mean. Yeah.

Jeff Hiatt Depreciation Doctor (16:44)
Right,

And so that sells, you know, as they say, ⁓ that becomes the headline, the loophole. But it’s part of the tax code. So I don’t really call it the loophole myself. I call it the short-term rental advantage because it’s an advantage. It’s part of the tax code. When a lot of CPAs see the word loophole, they get freaked out and they immediately start to hit the brakes. So ⁓ I tell people it’s an advantage, not a loophole.

Cody Crabb (17:14)
So the reason you frame it like that is because you feel like people, they think they’re doing something like that’s a loophole, they could get caught or that it’s risky. When it’s technically totally legal, it’s just that it’s something that you have to take advantage of intentionally instead of just by accident.

Jeff Hiatt Depreciation Doctor (17:32)
Right, know, it’s oftentimes it’s not the number of deals that people do, it’s that they get to use what the tax code incentivizes and that is a big incentive out there. And if people don’t know about it or if their advisors think it’s some sort of a scam loophole thing, the breaks are going down. But it’s not, it’s just part of what the tax code allows.

Cody Crabb (17:57)
Yeah, for somebody, and like you said, for somebody newer, like this short-term rental can be much more accessible entry point, because it gives you kind of the income potential here, and then the tax potential over here. kind of, yeah, it’s like a double-sided, you know, and it’s not a full-time job to run a rental. I guess, I suppose it depends on ⁓ your clientele, but ⁓ yeah, see what you mean.

Jeff Hiatt Depreciation Doctor (18:05)
Right.

Well, on that

note, with a short-term rental advantage, ⁓ you do get to use it against your day job income if you’re actively managing it. So that doesn’t mean you have to be there full-time 24-7, you don’t have to be there pulling all the weeds and everything, but you’ve got to have active management in it. But as long as you’ve got that active management, as long as you’ve got the active management and everything, you’re good to go and it will work against your day job income.

Cody Crabb (18:32)
⁓

Jeff Hiatt Depreciation Doctor (18:52)
which is a big advantage because if you had that same property and it was long-term rental, i.e. an apartment, then it’s not gonna give you the ability to write off your day job income as well, whereas short-term rental advantage does.

Cody Crabb (19:08)
Gotcha, okay, so tell

us a little bit more about the depreciation doctor. Why is that your handle? Tell me about it, I just wanna know about it.

Jeff Hiatt Depreciation Doctor (19:19)
So, ⁓ thank you for asking that. So, shockingly, a lot of people might consider taxes and this whole topic to be exceedingly boring. No, I know, I know, there you go. I’m putting it out there, spoiler alert. Well, we were very popular last week, but the reason I went with that kind of fun name ⁓ was because it does shut down people’s brains when you say,

Cody Crabb (19:29)
You’ve gotta be kidding me. Taxes.

On April 20th.

That makes sense, yeah.

Jeff Hiatt Depreciation Doctor (19:48)
⁓ you we talk about taxes and everything. So I kind of went with depreciation doctor because it’s not only just cost seg, but like we’ve already talked about, you’ve got short term rental that you can use against your day job income. You’ve got 1031. We talked about that. There’s partial asset dispositions, which is taking write offs on other things. So there are a whole lot of different tools that come together. And when people understand that

Cody Crabb (20:00)
Yeah.

Jeff Hiatt Depreciation Doctor (20:18)
It’s not just ⁓ the cost seg, but it’s optimizing what they’re able to use. These tools are really not aggressive. They’re simply allowing you to use the tax code as fully intended when those tax laws came into place. So we don’t just work on cost seg. We help the client’s overall ⁓ portfolio and their position to reduce

the tax bike to help them grow generational wealth more quickly.

Cody Crabb (20:51)
Awesome, yeah, and don’t think anyone here would complain about that. ⁓ So my question for you is, let’s say someone’s like, okay, Jeff knows what he’s talking about, I wanna work with him. Where do you have to live, who do you need to be, who’s an ideal person to work with you?

Jeff Hiatt Depreciation Doctor (21:04)
So ⁓ we’re all over the country. I’m kind of the depreciation doctor. ⁓ Typically the information would come to me and then assuming that the client makes sense. So what we always do is offer a complimentary ⁓ estimate of tax benefit and our fixed fee quote. That’s one of the things you wanna watch out for out there are people that talk about a percentage of savings. That’s not allowed in the tax code for this type of work.

So we always work on a fixed fee quote, but we tell people up front, we would say, Cody, you you bought that property three years ago or seven years ago or 10 years ago. You can step back in time without amending your tax return and grab those deductions currently. So you get to take that deduction now that you missed five or seven or 10 years ago. ⁓ So we’ll give you that estimate and you can get me through the contact information here on the website or all.

which is real easy to get to. I’m DepreciationDoctor.com and happy to give a complimentary meeting and talk through everything for the client.

Cody Crabb (22:16)
Fantastic. Well, thank you so much. I like how you kind of frame this around like timing and strategy. I think it’s so helpful, not just go get deductions. It’s like that’s what you usually hear from, know, it’s a strategy. Tech strategy is called that for a reason. So thanks so much for giving us this kind of detailed explanation that.

Like I said, some people kind of just hear taxes and glaze over a little bit. So the fact that you can explain it in this way in just this little snippet, I really appreciate it. ⁓ Everyone go visit Jeff on the website, make sure you get in touch. ⁓ And ⁓ sorry, did you want to say something?

Jeff Hiatt Depreciation Doctor (22:55)
no, we’ve got a, we’ll offer a nice course. We can offer kind of a mini course, so like a 15 minute scenario if they wanna kinda go through that and we can help them overall. And it’s really just, if they wanna understand, does cost seg make sense for them or does it not make sense? Cause we’ll help them either qualify and make sure that it is gonna make sense for them or we’ll disqualify and say, hey listen Cody,

Cody Crabb (23:00)
Mmm.

Jeff Hiatt Depreciation Doctor (23:21)
it would be better for you to wait a few years to use this because you’re in a low tax bracket or you’re not going to whatever benefit this year versus a couple years from now. So we help people with that. ⁓

Cody Crabb (23:33)
Yeah, great. Well, thank you so much. I think people are going to really appreciate this. Jeff can’t

thank you enough for joining us and giving us some time today. I appreciate you joining us and you listeners. Thanks for joining us as well. If you liked what you heard today, go ahead and visit us on YouTube and follow us on Apple podcasts or wherever you get your podcasts. Leave us a review, a comment, a like, subscribe, whatever all the things so you don’t miss more content like this one. Once again, Jeff, it’s been a real pleasure. Yeah, yeah. See you. We’ll see you next time.

Jeff Hiatt Depreciation Doctor (23:59)
Thank you, Cody. Thank you very much for having me on today. Talk to you later.