Cost segregation is the method of reclassifying components and improvements of a real property to personal property. In this episode, Boomer Philbrick, National Account Executive at Cost Segregation Services, Inc., joins Brett as they discuss ways to reduce tax liability and generate cash flow through cost segregation. Boomer dives into the engineering-based method they used in over 22,000 studies in all 50 states and why it’s completely bulletproof. Lastly, learn the requirements for becoming a real estate professional and its benefits for you and your family.
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Tactical Tax Savings: Cost Segregation With Boomer Philbrick
Our next guest specializes in cost segregation and together with his team at Cost Segregation Services Inc., they help property and business owners save millions of dollars every single year. In fact, over the past years, Cost Segregation Services has completed 20,000 cost seg studies covering all 50 states and resulting in billions in tax savings. I want you to please welcome my guest, Boomer Philbrick. Boomer, welcome.
Thanks for having me.
Boomer, give our readers a little bit about your story and your focus.
I appreciate you having me. My background before I got into doing cost segregation, which I’ve been in now for a few years, I worked in college football and the NFL. I enjoyed helping kids and families in that aspect and easily transitioned into this and helping building owners and investors maximize their opportunities and open new doors and avenues for them.
Tell us more about that. What team did you work for? What was your role there?
I worked in scouting and player personnel for the Miami Dolphins under Nick Saban. I got into coaching and recruiting at the University of Miami and Marshall and a couple of other schools before stepping out of that arena.
Working under a legendary coach like Nick Saban, what did he teach you? What’s the one thing he taught you during that time which you apply to your business?
The main thing about Coach Saban is he’s focused driven and if it’s not going to help us win games on Saturday or Sunday, it’s not that important. He was a fair coach. If you stood up for what you believed in, he definitely respected you for it. I definitely think that the preparation, strong mindset, good work ethic, being and organized has definitely helped transition to cost segregation which is what I’m doing now.
Absolutely, because it’s so detailed and crucial to make sure that these studies are done correctly and owners understand exactly what they’re getting into and what they’re not getting into. Before we get into the tactical part of it, I want to understand your success. You’re a wealth advisor for tax at this point is what I consider what you do with the cost segregation, but before your success as an educator, who was Boomer growing up? We’re all given superpowers. What was Boomer’s superpower growing up and how does that help shape how you help others now?A team is only as strong as the weakest link. Click To Tweet
I’ve always been involved in sports, so I definitely developed a strong work ethic, being a good teammate and always pulling up others because a team is only as strong as the weakest link. I was definitely a good teammate, a team player and being able to help others. Especially in the arena of what I’m doing now, it’s all about education and I want to educate you on the opportunities available to you. If it makes sense for you, great. If it doesn’t, at least you know you’ve exhausted the opportunities that are out there. With the Trump plan and tax cuts and JOBS Act, the tax laws are building owner friendly, but a lot of people simply aren’t aware of the opportunities available to them. It’s always education, number one, and then we can talk on a case by case basis if it makes sense for you going forward.
Growing up, I have a similar background playing basketball and football and I’m curious about what sports you play. As a part of being that good team player and learning through that, did your parents say, “Boomer, you were always a team player and always about the team,” or was it forged through the fire of, “This is what a good team player is?” What’s your story there with that gift? Was that a natural gift or do you feel that it was forged to the fire?
It’s more of something that is assumed in a position being a quarterback, a starting pitcher and things like that. That’s where you have an assumed leadership role. Having worked in sports afterward and seeing how coaches relate to players and how players react to their peers, you definitely find out the best strategies and tactics to go about it if that’s going to achieve the maximum results.
You were the quarterback and starting pitcher. Did you play in college any other sports?
I played semi-pro baseball in high school. After that, in college, I was a regular student.
What’s the most rewarding part about what you do? We’re going to dive into the tactical tax savings part but give me the why behind being an educator and helping people build wealth through tax savings. What’s the most rewarding part about what you do in the service you provide?
It’s more of helping people realize a huge opportunity that they didn’t know was there before. A lot of these savings from cost segregation and from the tangible property regulations are game changes for people. It’s simply keeping money in your pocket and allowing you, the smart business owner and smart investor, to use it for whatever you want to use it. If you want to buy a new property, improve your property or pay down debt, it’s totally up to you, but you have to have extra capital in your pocket to make those decisions.
Give us an example of a deal that you worked on. I like to work with real-life deals. You don’t have to give any names but give general specs of the deal and how much tax savings that were for that particular individual.
I work a lot in the multifamily sector. A typical saving on a multifamily property is going to be in your 20% to 25% of the purchase price window that you’re going to realize in year one. People who have listened to other podcasts that I’ve been on, they will hear it, reach out to learn more about it and what we do is we run a no-cost analysis on their property to see how it directly applies to them. Each person’s situation is different in terms of their tax liability. Are they a real estate professional and how much savings they’re going to reap in year one? I definitely think that a few people that were not aware of cost segregation, the tax cuts, JOBS Act and how it applies to them definitely opened up doors. It also allowed them to be involved in more deals going forward with extra capital that they saved or kept in their pocket.
Let’s say I bought a $4 million deal and you’re saying with the cost segregation or accelerated depreciation is the actual mechanism here in what we’re doing. We’re taking something that’s let’s say, 27.5 years that you would depreciate on what’s called a straight-line schedule and you’re reducing it into 1, 2, 5 or 7-year type of timeframe. Walk us through that actual saving tip. It’s a $4 million deal so let’s use 25%.
With the tax cuts and JOBS Act, which was released in September of 2017, Trump said that any property that has a class life of less than twenty years, you can reap 100% bonus depreciation on and reap that all in year one. Looking at a property, we’re going to be able to place things like your flooring, molding, kitchen cabinets, countertops, bathroom, any specialty lighting, window coverings and all things like that can be accelerated and placed into a five-year bucket. Things like your parking light, signs and any fences or walls that you have, your landscaping, all of that goes into a fifteen-year bucket. We’re going to be able to accelerate and reap all of that depreciation, instead of in 27.5 years, all in the present year.
On your $4 million property, you’re going to reap roughly an additional $1 million dollars of depreciation expense in the current year. You simply take that times your tax rate. If you’re at a 37% tax rate, there’s $370,000 of cash savings in year one. The beauty of cost seg is it’s not use it or lose it. You can use whatever amount of that $1 million of depreciation expense in 2019 and whatever you don’t use you carry forward indefinitely onto the subsequent year. You can use some of it in 2019, 2020 or in 2021 until it’s exhausted and used up.
Let’s say I had a property I bought for $4 million and it was producing about $175,000 of cashflow. In this scenario, I took about 25% so about $1 million in savings of that 37% rate, meaning $370,000 upfront savings in year one. I could use $175,000 of that $370,000. Are you saying that I would have no tax on that cashflow for that given year? Is that correct?
Yes, that’s correct. All of your properties are going to be aggregated together. Whatever savings you have on this $4 million property is not only for that property alone. You can use it to offset income from your other properties as well because they are all aggregated together. Yes, you have an extra $195,000 for 2019 and you can use for other properties or you can carry it forward and say, “I don’t want to pay taxes too much in 2020. I’m going to go ahead and save that for that.” Yes, you can do that as well.
If I had multiple properties, and let’s say collectively it was $370,000, that was exactly what it was producing, on this one cost seg study, that $370,000 would wipe out any tax in that given year because the depreciation is offset and all of that income. Is that correct?
The time value of money kicks in with what can I do with that extra $370,000. For our readers, the government does these legal tax loopholes because they believe, and studies have shown, that it’s going to incentivize the market to grow. Boomer might take that $370,000 and go buy another property, renovate a property or do something where it’s going to spur economic growth. Spur jobs which in turn are going to spur more income tax which is the study of macroeconomics. If you keep money flowing like water, it generally means there’s a bigger tax revenue coming in. Talk about the legality of this, Boomer. How long has it been around? What is the IRS looking at or is anything to watch out for when you’re doing these types of strategies?
Cost seg itself has been around since the early 2000s. Our company’s been around since 2001. We’ve done over 22,000 studies in all 50 states. We use an engineering-based method. We have engineers place a value on each asset into your property and place them into their proper and shorter class lives. Out of those 22,000 studies that we’ve done, we’ve never had a single line item overturned. To you, the investor, these studies as long as it is done by an engineering-based study, it’s completely bulletproof to you. Out of those 22,000 studies, we have never once triggered an audit. We’ve had clients audited for other reasons and we defend our work 100%. Normally, it’s a quick conversation with the person with the IRS. We explain our processes, what we’ve done, the court cases that we referenced and you’re in the clear from there. Yes, this is completely bulletproof if it is an engineering-based method.Each person's situation is different in terms of their tax liability. Click To Tweet
That’s a flawless track record, which is so important. You want to make sure whatever tax deferral strategy you’re using has a solid track record and has that defense from the IRS. If and when they do come knocking, they have a track record of performance. I do a cost seg study. I get the tax write off in the given year, but now I want to sell my property. Does the Boogey Man come back and get me here? What are my options? If someone’s going to sell in 2, 5 or 10 years and these reclassifications have happened, walk me through some of the things to consider in that.
If you’re going to flip a property, it’s probably not going to make sense to do a study. If you’re going to sell a property within the current year, the next year that you’ve recently bought, the savings from the cost seg is going to be about the amount of recapture that you’re going to have on a property. We normally say if you’re going to hold a property for 3, 5 or 10 years, that’s when you’re going to reap the benefit. Let’s take two different examples here. Let’s say that you’re going to sell your building outright. If you hold the building for five years, everything that we’ve placed into the five-year buckets is going to have used up and exhausted its life so there’s not going to be any recapture on that. If you sell the building in five years, you’re going to have used 1/3 or that fifteen-year depreciation.
Yes, there will be recapture on your parking lot, landscaping, signs, fences, walls and things like that, but there’s something called salvage value. We don’t simply want to be a cost seg vendor and whenever I give you the final report, we shake hands and go our separate ways. We want to be more of a partner within your tax team to help you throughout the life of the property. There’s a lot of additional savings and benefits that you can have after the cost seg study has been done on that you can reap the benefit. We want to simply be a partner within your tax team to help you take advantage of those opportunities. Going back to this example here. Yes, there will be a 2/3 recapture on your fifteen-year property, but we can help you mitigate that through something called salvage value.
We will help you or your CPA place a value on those items that still have a depreciable basis left that we accelerated and we can help to reduce that at the time of sale. If you’re going to do a 1031 exchange, there’s going to be a recapture on the property that was moved from real property to personal property. The beauty of a 1031 exchange is the property that you’re going to be purchasing after the sale of this current property, you simply do a cost seg on that and it can reduce your amount of recapture from your previous property as well as offset any kind of income you have from your new property. That’s the way that people get around it. If you do a 1031 exchange, it’s an easy no brainer. You do a cost seg on your new property and if you sell the building outright at the time of sale, we will work with you and your CPA to mitigate your amount of recapture through salvage value.
You’re piling costs seg on top of cost seg on every deal you’re doing and collectively, always deferring or delaying this recapture tax. As long as you’re holding long enough periods and buying big enough properties, you should be able to mitigate much of the tax or at least get a big portion of it upfront, yes?
Fast forward 10, 15, 20 years you’ve been doing this. Imagine you’re doing properties, multiple cost segs and multiple 1031 exchanges. What is the ultimate exit from this? What have some of your clients done or are they not selling? Walk us through how this works or maybe even touch on the stepped-up basis if it’s a part of it here.
You have some clients who are simply buy and hold and they don’t want to sell. They’re going to run it within their family or partners. They’re the easiest ones to deal with. The clients who have gotten into the arena that’ll buy a smaller property and they decide, “I’m ready to go bigger. I’m going to join a different deal,” those are the ones that you roll one property into the next property but doing a cost seg on each property to mitigate and eliminate any tax liability that you would have. It’s like you said, cost seg is all about the time value of money and it’s giving you more capital right now and you, the smart investor, to make those decisions rather than giving it to the IRS over a straight line period.
To clarify, I’m going to exit out of all my real estate or I want to pass it to my kids. Will that stepped-up basis eliminate all of this depreciation recapture? What happens there? Who’s going to pay that tax if ever?
After it has been exhausted, you hold the property for a long period of time, all of the depreciable basis is going to be exhausted so you’re not going to have recapture on that. If someone passes away and it’s passed down, there will be a step up in basis, but we will continue to work with you throughout the life of the property to eliminate and reduce any tax liability that you might have. This is what we do. We are calculation experts, but we also have a lot of tax specialists in house to be able to help you take advantage of all the opportunities available. The tax cuts and JOBS Act is in effect in full force with a 100% bonus depreciation through 2022. In 2023, it goes to 80%. In 2024, it goes to 50%. Yes, the tax cuts and JOBS Act is beneficial to building owners and investors that they can take advantage of about 100% through 2022 and we’ll see going forward.
As a plug for the Deferred Sales Trust, a part of what we can do is imagine you had a zero depreciation and nothing else left there. You can now sell and move into the Deferred Sales Trust and partner with your trust and go get a brand-new depreciation schedule. Let’s imagine you had a $20 million deal. You fully depreciate it and you want to get new depreciation schedule. In 1031, the depreciation schedule is going to travel which is not good, but with the Deferred Sales Trust, you can now move all the funds into the trust. It’s tax-deferred at that point and partner with the trust go by that same $20 million deal, get a full brand-new depreciation schedule of which you can perform the cost seg and do all over again. Boomer, I consider you a wealth advisor. You’re out educating not only business owners and real estate owners but also other business professionals. What’s the one thing that you want to make sure that they understand about your services and how you can help them grow their business by using cost seg?
It’s all about education. People simply don’t know about it. People will go, “This is such a great tech strategy. Why did I not hear it from my CPA?” Your CPA is hired to file your taxes, keep you in compliance and keep you out of the audit, but it’s not their job to go and find additional tax savings opportunities for you. That’s why the smart investor who is constantly educating themselves by listening to podcasts, reading books, going to conferences and seminars, as well as people who have friends or colleagues who have done the work and have experienced the benefit before. That’s how people hear about it and I’m taking advantage of it. If you don’t use one of the big four accounting firms, chances are they don’t have engineers in-house to do the studies for them. It has to be outsourced to a company like Cost Segregation or an engineering-based firm.
I like the analogy of we’re dealing with the same thing and when we’re educating people about what we do for the first time. Part of it is like going to your general practitioner like your doctors. Your doctors helped you for years. They’ve done bloodwork, flu shots and all these general work for your situation, for your health. All of a sudden, you might need knee surgery or brain surgery and now there’s a serious specialist who focuses on that one area. Your general practitioner may not know everything about brain surgery or knee surgery, but they know enough that there are some tax liability and tax HIT.
You can’t necessarily count on one to know the other because they haven’t been practicing it. It is of utmost importance to make sure you’re working with a specialist who has a proven track record based upon tax law, surviving those IRS audits, case law and all those things. Just because they don’t know doesn’t mean it doesn’t work. Also, it can make all the difference in your tax situation. What are some of the best questions to ask potential clients or partners that you’re working with? What are the top three things to find out if this is going to work for you?
The number one thing is cost seg simply offsets income. If your property is not making money and doesn’t have a tax liability, chances are it’s not going to make sense for you now. Cost seg works on both new and existing properties. Not because you’re not making money here in 2019. It doesn’t mean that there might be a big change and in 2020 or 2021, you become extremely profitable. Yes, you can do it on existing properties as well. There’s something called a Form 3115. It’s a change in accounting form. It tells the IRS, “I was doing straight method. Now I’m changing and doing accelerated depreciation.” That’s the thing that we will complete for you and give it to your CPA to file. That’s number one. You have to be making money. If you’re a real estate professional, this will offset any kind of income that you have. If you are a high earning W-2 wage earner, it’s only going to offset your passive income. It’s not going to offset your W-2 income, it’s only going to offset your passive income. That’s another thing to look at as well.
What if my wife was a real estate professional and I’m a high-end W-2 earner? Let’s imagine I had $500,000 of accelerated depreciation. Let’s say my property’s making to $250,000 and then I’m making another $150,000 as a W-2 person. My wife’s a real estate professional. Would I be able to offset that W-2 income?
Yes, you’re exactly right. If your spouse qualifies as a real estate professional, it’s all going to flow down to your personal return and this will offset your W2 income as well with your spouse being a real estate professional.
Walk us through real estate professionals so we make sure that’s crystal clear. How do you qualify as a real estate professional and how might one’s spouse who is not a real estate professional become one?The beauty of cost segregation is it's not use it or lose it. Click To Tweet
There are eleven different real trades or businesses to qualify as a real estate professional. What they say is you need to spend a minimum of 750 hours a year in one of those eleven real trades or businesses. It equates to roughly fifteen hours a week. If you are a W-2 earner and you have a job that’s 40 hours a week, the IRS is going to know that, “I spent 40 hours a week on that job. I spent fifteen hours a week to equal my 750.” This is low hanging fruit with the IRS and the real estate professional designation and it’s something that they will check.
For example, your spouse, your wife is to qualify. She simply needs to document what she has done throughout the course of the year to reach those things. It can be the kind of thing where she is talking to tenants. If you manage your own property, she’s collecting rent, doing the books, talking to a contractor, her travel time to and from the properties, looking at new properties. All things like that will help her qualify for the 750 hours in the real estate professional designation. It’s for people who they and their spouse are both W-2 earners and don’t manage their own properties. That’s where you’re going to struggle to qualify. The IRS knows that it’s low hanging fruit and it’s something that they track rather closely.
If you are a W-2 earner and you work 40 hours a week, the amount of time that you spend doing your real estate work has to be equal to that and you have to earn that same amount of money. That’s how the real estate professional designation is difficult to attain for a W-2 earner that’s working 40 hours a week. The example that you gave with, “Can my wife qualify?” The answer is absolutely and that’s how a lot of people will get around it and be able to qualify because being a real estate professional is a game-changer in being able to offset all of your family’s income.
There’s almost nothing that I’m aware of that can do that and that’s unique to this cost seg and accelerated depreciation. To clarify a couple of points there for the designation for real estate professionals, if I’m a W-2 earner, it’s not likely that I’m going to qualify in the sense that I need to at least double my 40 hours to 80 and do all that with real estate. That’s going to be tough to A) do that practically and B) the IRS is a low hanging fruit so be careful there.
The second one would be let’s imagine my wife wasn’t making any income. She’s a stay at home mom, but she wants to help with some of the real estate management and she already is maybe helping with the real estate management. Whether that be collecting rents, doing the books, looking for new deals or lining up contractors, any of the management on an average of about fifteen hours per week. Yes, she can qualify as a real estate professional which turns off collectively total income tax return. We can offset all of that W-2 income if we have enough. Is that a fair summary?
Yes, you nailed it exactly.
How many people are implementing this strategy? The other part would be you need to have a property to do this. Can you be a passive investor and still qualify or maybe the answer is in the fifteen hours. You probably need to have owned something yourself on your own name. Maybe you can have partners, but you are the general partner. Walk us through practically what that looks like. Can I own a house across the street that’s a rental home and spend fifteen hours a week there? Walk me through the practicality. Do I need to have three rental homes or a ten-unit apartment complex? At what point do you think it’s safe to say you’re going to be working fifteen hours a week on your rental property?
This is something that people think of, “I need a document so when the IRS asks, ‘Show me your hours.’” You can document it in a journal type deal or an Excel thing and you’ve got to do it every month, bi-monthly or things like that. You can’t, at the end of the year, spend two hours and say, “I’m going to document everything that I did throughout the year,” because the IRS will know that. You have to document throughout the course of the year what you’ve been doing to be able to do that. It’s not necessarily a number of units or properties.
If you are a passive investor, be it in syndication or anything like that where there are 20, 30 or 40 different investors, it’s going to be hard for you to reach that 750-hour threshold by doing it. It’s more of you being hands-on having direct contact with the properties and things like that. If you own several properties, you don’t necessarily have to manage the properties yourself, but your contact with the contractors, management company, and all things like that can help go towards those 750 hours.
We’re going to finish with these last questions. This is more of a personal question. Boomer, how do you stay centered in your values and keeps you from being discouraged? In other words, how do you stay encouraged to keep driving on? You’re successful in what you do and you’re helping a lot of people. Share with our readers how you personally stay centered in your values and keep encouraged to drive on.
It’s more so about considering every line of work that I’ve been on is all about relationships and it’s a relationship business. I always want to do the right thing, to treat everyone how I would want to be treated if the roles were reversed. That’s how you develop relationships and trust because let’s be honest, nobody’s going to do a deal if they don’t trust you. You first have to establish that trust and show them through your organization following through with what you said you were going to do, coming through with the results that you talked about or promised to them. That’s how I found out to be successful in any business that you choose to be in.
It’s simply not getting off course, not making these false promises, pretenses or anything like that. It’s staying true to who you are. I will try to put myself in the other person’s shoes with, “Do I want someone calling me constantly? Do I want someone reaching out all the time or can it only be at times that there are needs?” I’m not going to simply get your contact information. I’m not going to be a pest and continue to stay on you. I always try to put myself in your shoes and say, “How would I want the situation to be handled? How would I want to be treated if we were on the other side of the table?” That’s how I run my business and how I’ve proven to be successful and have other people trust me.
Practicing the golden rule and being a value add resource who’s there when you need them and not over contacting and pressuring people. It’s a great reminder for all of us. I want to thank you, Boomer. Any last thoughts on cost seg and or where to reach you? Where can they find you?
I’m low pressure. What I would like to do is, if you own a property that you think cost seg might benefit you for, please reach out. What I will do is I will learn a little bit more about the property: when you bought the property, what was the purchase price, have you done any renovations or improvements to it and what’s the address. With those four questions answered, our engineers can take a look at the property. It’s a no-cost analysis and after I get that back from the engineers, we can set up a time to spend 5 or 10 minutes to go over it and review it. Also, review your individual situation. What kind of tax liability do you have? Do you qualify as a real estate professional?
You can reach me at my cell (812) 6390-656. I’m on LinkedIn or you can reach me on Instagram it’s @CostSeg. On Facebook, it’s Cost Segregation Boomer. Feel free to reach out in any of those avenues. I’m happy to simply talk and educate you on the opportunities available to you and if it makes sense going forward, great. If not, at least you, the educated investor, know that you’ve exhausted the opportunities but as your situation changes and as your portfolio grows, it might make sense to you down the road, but at least you can find that out now.
Boomer, I want to thank you for dropping Capital Gains Tax Solutions bombs of value that are incredible with what you can do if you know about cost segregation, accelerated depreciation and you’re working with a group who has a proven track record such as Boomer and his team. I want to thank our readers again for reading. As always, we believe that most high net worth individuals and those who help them struggle with clarifying their capital gains tax deferral options.
Hopefully, you’ve heard from Boomer how you can improve your situation through cost segregation and perhaps become a real estate professional. What a great goal. Maybe your spouse can become a real estate professional and you can offset some of that W-2 income or offset additional income from different properties using cost segregation. As always, not having a clear plan is the enemy and using a proven tax deferral strategy is the best way to grow your wealth. Until next time. Go make it a great day.
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