Cost Segregation with Erik Oliver

Erik Oliver holds a Bachelor of Applied Science in Accounting from Westminster College. Before joining Cost Segregation Authority, Erik was an Operations Manager for a multi-million dollar landscaping and design firm in Long Island, NY. Since heading west and joining Cost Segregation Authority, Erik has been speaking at local, regional, and national events. He brings a passion for identifying cost savings and educating commercial real estate owners on the benefits of cost segregation.

Episode Highlights Here:

Erik:

The problem is, when you buy that asset, you don’t know the value of the carpet in that building, you just bought the whole thing for 390 and gave your closing statement to your CPA, and started appreciating away.

Pierce:

Let’s dive into this cost segregation. Let’s just break it down simply for the audience, and then we’ll dive into when it’s useful and some of the values that it can add for you guys.

Erick:

Yeah, so cost segregation is just accelerated depreciation. So many of us get into real estate for some of the tax advantages or a great benefit of getting into real estate, I should say. So when you buy an asset, let’s say you buy a commercial building, typically depreciated over 39 years for a commercial building or 27 and a half for residential. So just to make the math easy, let’s say you buy a 303 $190,000 office, and you’re gonna get a $10,000 write-off every year for the next 39 years. Cost Segregation comes in and says, Okay, well, when you bought that office building, you didn’t just buy the land in the walls. You also bought everything within that building and the parking lot outside the building. The IRS says that the personal property within the building, things as carpet countertops, cabinets, portions of the lighting, and portions of the plumbing, should be depreciated over a much faster period than 39 years.

So as you know, a carpet that doesn’t last 39 years is a five-year asset. So we should be depreciating it over five years. The problem is, when you buy that asset, you don’t know the value of the carpet in that building, you just bought the whole thing for 390 and gave your closing statement to your CPA, and started appreciating away. But if you have a cost segregation study done, we’ll come in and do an engineering study on the building and identify those short-term assets, which allows you to front-load those and take those deductions at a much faster rate and there are several reasons why you’d want to do that.

Pierce:

Yeah, absolutely. So I hope that makes sense. What you know, what we do is we just make sure that all the stuff that is not going to last 39 years gets depreciated sooner, and you get to you get the benefit of that. So who’s a cost segue, just like a home run for anybody who owns real estate and is paying taxes is cost segregation.

Erick:

It’s not a matter of if it’s just a matter of when so if we knew everybody’s tax situation if I knew what your tax bracket was going to be paired in every year going forward for the next five years if I knew what your income was going to be, I could dial down and say this is the absolute moment to maximize your tax savings. This is when you should do cos egg. We don’t always know that information, of course. So really, if you’re making if you have a tax liability, and you own real estate, it’s worth looking into and then it’s a matter of kind of keeping it in your pocket to make sure that you utilize those deductions when you can maximize the tax savings. So hopefully, that answers your question.

Pierce:

Yeah, it does. So let me give you a case study. So and let’s just use a walkthrough as an example. So let’s say a property owner has owned a building for 20 years. Okay. Right. And they’ve just been straight-line depreciating this thing and they got 19 years left on theirs. Would you do a cost segue on that? On that building?

Erick:

Yes and that’s kind of a hard idea for some people to understand even when we educate CPAs. They’re like, Wait, why are you doing a cost study? Before you sell the asset? Don’t you just have to pay all this back as a recapture? and the idea is, is that we’re gonna go in and identify the short-term assets and by doing so when you identify them, let me ask you a question. I’ll kind of back into this example. But we’ll identify five, seven, and 15-year assets within that building. Well, if you’ve owned it for 20 years, what are your five-year assets worth? They’re worth zero or zero book value, right? Same thing with your seven, the same thing with your 15. So the idea is that when you sell that asset, you shouldn’t sell your carpet for more than you bought it for 20 years earlier, and if you don’t do cost segregation, that’s what you’re unintentionally doing. You’re saying I bought this in 2020 years ago, for a million dollars, and I’m now selling it for 5 million, you’re when you go to settle up with the IRS, you’re telling them that everything was 5x value in that property. But that’s not the case. Your carpet is 20 years old, and it’s not worth more than it was when you bought it. The carpet goes down in value. But if you don’t have that carpet broken out, you can’t allocate your sales price to the right buckets per se. And so you end up overinflating the number of capital gains you have to pay.

Pierce:

Let’s dive into that a bit more because that’s super interesting, right? So basically, what it sounds like you’re saying is that if you do a cost thing before you sell it, you’re able to say hey, look, no, I’m not paying this much in gains, because I’ve, I’ve actually already depreciated these things, but I still have, and they’re not worth that anymore, right? So they’re not what is being sold? right? It’s this over here, which is being sold.

Erick:

Over there. Yeah, no, you’re right by putting it over there. You’re pushing, you’re taking your deduction at your ordinary income rate and picking it back up as a capital gains rate and saving the spread, and you’re not even picking all of it back up because your five assets are fully depreciated, so you’re not even picking all those up. You’re picking up a portion of those interesting.