Hidden Real Estate Tax Deductions: How Cost Segregation Works on Older Properties | Dave Clark, Veritax Advisors

Dave Clark (00:00)

Two common mistakes. One is their accountants tell them to not depreciate their property. If they don’t take depreciation, then they don’t have to recapture the depreciation, which is false. Whether you take it or you don’t take it, allowed or allowable, you still have to recapture the depreciation. So that’s the first thing. The second thing that you see is just a straight-line depreciation accountants—they do a basic 80-20 split, land to building ratio, and then they 27-and-a-half-year the property.

Scott Bursey (01:01)

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 Dave Clark, Vice President of Business Development with Veritax Advisors, where he helps real estate investors and professionals get the most out of the properties they own: more depreciation, a lower tax burden, and better cash flow through cost segregation. His whole focus is helping owners understand the tax benefits already sitting inside their investments so they can make sharper decisions with real numbers in front of them. Listeners, get ready to find out where the tax money hides inside a property you already own and how a smart owner turns depreciation from a line on a return into real cash flow. Dave, welcome to the show. Awesome having you here.

Dave Clark (01:53)

Thanks for having me.

Scott Bursey (01:55)

And to help our listeners get up to speed, please give us the ninety-second highlight reel, if you will, of how your career ignited and really where you’re pouring your fuel now.

Dave Clark (02:07)

Yeah, so my career, it’s in sales, selling tax services for the last 17 years or so. The last twenty-four months—so two years—I’ve been in cost segregation specifically. And what I’ve loved about cost segregation is helping real estate investors and business owners use the assets that they already own. They don’t need to go buy new assets or anything of the sort. They’ve already got the asset there, they’re already depreciating it, and if they can qualify, they can actually use that as an active tax deduction against their tax bills. So I’ve been really pouring a lot of my fuel into helping educate, believe it or not, not just real estate investors, but accountants, CPAs, advisors who—they understand, they know the words “cost segregation,” they don’t understand how it works, and they don’t understand how it’s actually performed.

Scott Bursey (02:52)

Thanks for taking us inside your journey. And what really caught my attention about you, Dave, was the way you put it in your own words that real estate should work harder for the owner. Most investors are out hunting the next deal while the ones they already own are sitting on tax benefits they never claim.

Dave Clark (03:11)

Sure.

Scott Bursey (03:12)

You make your living closing that gap. Let’s dig into how an owner actually does it. Where does a cost segregation study find the biggest wins, and what parts of a property hold the most hidden value in your view?

Dave Clark (03:28)

Where they find the biggest one is—there’s quite a few ways to find the biggest win when you’re dealing with cost seg. And it’s if you’ve owned a residential piece of real estate for the last 10, maybe even 12 years—see, people, they don’t realize that you can go backwards and look. So they can go backwards, find the depreciation that’s still sitting in a property that they’ve been depreciating for 10, 12 years and pull forward. And then of course, from that point, right, now they’ve accelerated it; they take that as a tax deduction. And that’s where we really do find the help for these real estate investors.

Scott Bursey (04:00)

When your team studies a property, what do they look for first?

Dave Clark (04:05)

So the first thing that we look for is your basis. So your depreciable basis. And to clarify what a basis is, because a lot of people, they don’t realize it: so the basis is purchase price minus land—that’s your depreciable basis—plus improvements and renovations that you’ve done to the property. So now that’s your basis. We’ve seen success going as low as $100,000 basis on properties. And I know there’s a lot of people out there that hear that, “If it’s under a half a million, it’s not worth it. If it’s under a million, it’s not worth it.” But the first thing that we look for to identify is the basis of the property, and is a cost seg actually going to be worth its money?

Scott Bursey (04:40)

Thank you for that context. Dave, curious to know, what’s the most common mistake investors make with depreciation on a property they own?

Dave Clark (04:50)

Two common mistakes. One is their accountants tell them to not depreciate their property. If they don’t take depreciation, then they don’t have to recapture the depreciation, which is false. Whether you take it or you don’t take it, allowed or allowable, you still have to recapture the depreciation. So that’s the first thing. The second thing that you see is just a straight-line depreciation accountants—they do a basic 80-20 split, land to building ratio, and then they 27-and-a-half-year the property. So you see a couple of depreciation errors like that instead of looking at a portfolio, seeing that you’ve got cash-flowing properties, or even if they’re negative flowing properties, you still have the ability to actually accelerate depreciation to offset income. So you see that quite often.

Scott Bursey (06:13)

When an owner comes to you too late on this, how much of it still can be fixed?

Dave Clark (06:18)

To be honest, if they come too late, let’s say five years, ten years down the road—catch-up depreciation. There’s still tax benefit there if the basis is still big enough. If they have not taken any depreciation at all, they can literally just catch it up. I know I sell cost segs for a living, but you don’t actually need a cost segregation study to catch up depreciation that has not been taken.

Scott Bursey (06:42)

Thanks for being so candid on that. Dave, let me ask you this: what are investors overlooking in the tax rules as they stand right now?

Dave Clark (06:51)

What they’re overlooking? They’re overlooking the advantages that being real estate investors have. They think that they should—that they’re overlooking that ability to think, “Should I accelerate? Should I not? Who am I going to talk to about it?” So they overlook an advisory portion of their real estate on the tax side. So I’ve been noticing that quite often where I talk to real estate investors and business owners and they’ve heard of cost seg, their accountants tell them, “No, it’s not worth it.” But that’s because their accountants usually don’t want to do a whole lot more work and they don’t actually have a cost segregation partner. So I see that that’s a big piece that’s overlooked.

Scott Bursey (07:27)

Who gains the most from that? The owner who just bought or the one who has held for years?

Dave Clark (07:33)

The one who just bought is where you see the most value. Because of course, you remember, they haven’t taken depreciation. So if you’ve been carrying depreciation for 10 years or five years, depreciation has lapsed, so it goes down every single year. So your depreciable basis is lower, so it’s not as big of a chunk as a brand-new acquired property.

Scott Bursey (07:54)

Dave, thank you for sharing that with us. Let’s stay right here for a second. What’s the risk with cost segregation that no one warns investors about?

Dave Clark (08:03)

Recapture. Everybody wants tax savings, right? “Yay, get that tax savings.” But one of the main questions that I like to ask and like to focus on is: when are you planning on selling it? And are you planning on 1031 exchanging the property? Are you looking to acquire new real estate? Because that recapture is a real thing. And the IRS, that depreciation—whether it be accelerated with cost seg or straight-line—that paper loss, they’re going to want it back. So that is the biggest downfall with cost segregation, is that recapture.

Scott Bursey (09:10)

How do you protect an owner from that recapture when that day comes to sell?

Dave Clark (09:15)

Well, if they’re gonna sell and they’re going to get into more real estate, then 1031 exchanging is always a good option. There’s a thing we call a lazy 1031, which is they sell the property regular and then they buy more real estate and they cost seg out those new properties in the same tax year, right? They sell and purchase in the same tax year, and that way they can kind of offset the gain and the recapture on that side. But other than that, if they’re just selling because they’ve had enough, God help them.

Scott Bursey (09:43)

Appreciate you taking the time to explain that. And I want to go a little deeper on this because you kind of touched on it already: who should not do a cost segregation study and when does it not pay?

Dave Clark (09:55)

So the ones who should not be doing cost segregation studies are obviously, right, fix-and-flip people if they’re just selling the properties, stuff like that. People who aren’t planning on holding the properties for more than five years—those people definitely should not be doing it. Another group of people who should not be doing it, but they are real estate investors, is let’s say they’re long-term holds, right? They’re long-term rentals. These are high-income earners. And they shouldn’t be doing cost seg unless they are having a positive net cash flow at the end of the year. Those people should not be doing cost seg because it’s not going to affect anything but their passive gain.

Scott Bursey (10:31)

So Dave, where is the line? What is the smallest deal where it still makes sense?

Dave Clark (10:38)

I’ve seen—because our fees aren’t astronomical to do a cost segregation study—so I’ve seen benefit at a hundred-thousand-dollar basis, hundred-and-twenty-thousand-dollar basis.

Scott Bursey (10:46)

Appreciate you sharing your perspective on that. How much of your business runs on relationships, Dave?

Dave Clark (10:53)

About ninety percent.

Scott Bursey (10:55)

And over the years, what have you found—what type of value have you found being around like-minded individuals in your industry?

Dave Clark (11:03)

So in our industry, you can kind of work together a little bit. I know it’s like Wendy’s saying to McDonald’s, right, “Hey, well, they’ve got better fries than we do,” sort of a thing, right? But some cost seg firms, they won’t go under a half a million, so then they can throw to us. Some cost seg firms, they don’t do commercial real estate, so they throw to us, right? So we can kind of work together in areas. Some people, they don’t want a cost seg firm that’s based on the West Coast, because I’m in Utah, right? They want one—I have clients that say, “Hey, I want the cost seg firm here in New York.” “Okay, well, let me get you to a cost seg firm that I know of that’s in New York and you can deal directly with them.” So the relationship in that side of it, right? Yes, we’re business competitors, but at the same time, right, you want what’s best for your client, period.

Scott Bursey (11:49)

That’s the truth right there. Relationships compound just like money does, Dave. Yes. Dave, let’s dive deep. If an investor is holding a property that barely cash flows, let’s say, how does the tax side turn that same property into a winner without selling it?

Dave Clark (12:07)

So if they are considered real estate professionals, right, the REPS status, as we hear so many things talk about, whether or not a property is positive cash-flowing or negative cash-flowing or just breaking even, it doesn’t matter, because the depreciation can still be used against all incomes, right? It’s not just property-specific. So you might have cash flow from three or four other real estate properties and then one that’s just a turd that’s just sitting there not really doing a whole lot, but it’s a great property to have. It’s just not generating a lot of revenue. You can cost seg out that property and it can actually offset the income from the other real estate.

Scott Bursey (12:43)

Thank you for the detail on that. And Dave, you have really given us a lot of detail on cost seg here today. But is there any additional words of wisdom or any more advice that you could leave with our listeners?

Dave Clark (12:56)

If you are looking to only purchase real estate for tax purposes, it’s probably not a smart thing to do only for tax purposes. Real estate’s a business. Whether it be a passive business or an active business, it is a business. So I talk to a lot of people and I try to educate. It’s crazy: I educate more than I sell. So if you are in real estate and you are looking for long-term holds, looking to grow wealth, but also looking for tax savings, perfect. We do no-cost benefit analysis to help them identify which properties are going to do both for themselves. But again, if you aren’t looking to hold long and you’re only looking for tax benefits, you definitely don’t do a cost seg.

Scott Bursey (13:38)

Dave, thank you for your education on cost segregation here today. For those of our listeners that would like to keep this conversation moving, stay in your lane, or perhaps even collaborate with you on future deals, what’s the best way for them to plug into your pipeline and reach you directly?

Dave Clark (13:55)

Yeah, so my cell number is the best way. That’s where everybody gets me. Do you want me to give it right now so they have it, or…

Scott Bursey (14:02)

Sure, that’d be fine. Yeah.

Dave Clark (14:04)

So it’s (801) 557-2034. That’s my cell number. My email address is just dave.clark@veritaxadvisors.com. You can go to our website, obviously veritaxadvisors.com. We have a calculator on there as well if they’re just curious about: is this property going to be a good candidate for cost segregation? You can actually go onto our calculator, and that calculator actually pulls from our cost segregation studies that have been completed. So it’s a great way to go about it. But that’s usually, honestly, my cell number is the best way to go. Just shoot me a text or shoot me a call, and I’m very quick to respond.

Scott Bursey (14:41)

Awesome. Dave, thank you so much for joining us here today on the Real Estate Pros Podcast.

Dave Clark (14:46)

Absolutely. Thank you for having me.

Scott Bursey (14:48)

It has been a pleasure. And to our listeners, we appreciate you. If you received value from today’s episode, please subscribe. We’ll be fueling your tanks with the lineup of elite guests, just like Dave Clark, 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, everyone.