219: Depreciation Dynamics: Tax Benefits through Cost Segregation with Yonah Weiss

Big Mike Fund Podcast
Big Mike Fund Podcast
219: Depreciation Dynamics: Tax Benefits through Cost Segregation with Yonah Weiss

Join us for another episode featuring Yonah Weiss, the Cost Segregation Expert hailed as the “CostSegKing”! With a track record of saving property owners hundreds of millions of dollars in taxes, Yonah brings unparalleled expertise to the table.

As the Regional Business Director of Madison SPECS, a division of Madison Commercial Real Estate Services, Yonah is a recognized authority in cost segregation within the Commercial Real Estate industry. His knack for simplifying complex tax strategies and his innate ability to connect with professionals and laymen alike make him a sought-after resource.

Tune in as Yonah shares advanced wealth-building strategies, focusing on the intricacies of cost segregation and maximizing tax deductions through accelerated depreciation. Delve into the benefits and processes of cost segregation and bonus depreciation for real estate investors, gaining invaluable insights into maximizing tax benefits for property acquisitions and improvements.

With Yonah at the helm, we’ll explore different asset classes and their potential for passive losses and gains, unraveling tax strategies tailored specifically for real estate owners. Whether you’re a seasoned investor or just dipping your toes into the world of real estate, this episode promises to deliver actionable advice and invaluable knowledge.

Don’t miss out on this opportunity to supercharge your understanding of tax optimization and wealth building with Yonah Weiss! Tune in now to gain a competitive edge in the ever-evolving landscape of real estate investment.


00:23 – Guest Intro: Yonah Weiss

02:23 – Advanced wealth building strategies and cost segregation

03:58 – Maximizing tax deductions through accelerated depreciation

11:14 – The benefits and process of cost segregation and bonus depreciation for real estate investors

14:52 – Maximizing tax benefits for property acquisitions and improvements

21:04 – Exploring different asset classes and their potential for passive losses and gains

25:17 – Exploring tax strategies for real estate owners

If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.


Website: https://yonahweiss.madisonspecs.com/



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Facebook: https://www.facebook.com/yonah.weiss.1/

Welcome to the BigMike Fund Podcast. Where you learn about advanced wealth building strategies from real estate investing to creating massive ROI and securing retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic. Starting now.

Mike Zlotnik: Welcome to the Big Mike Fun Podcast.

I’m the Big Mike. Mike Zlotnik. And today it is my pleasure and privilege to welcome Yonah Weiss. Hi Yonah.

Yonah Weiss: Hey, Big Mike, thanks for having me on the show.

Mike Zlotnik: Thank you very much for coming on the podcast. Yonah hails from Lakewood, New Jersey. He is with Madison Specs, one of the leading cost segregation companies in the United States.

So thank you again, Yonah, for coming. And before we dive, give us a little bit about you, your family. I just love to say I’m married to a wonderful wife. Four monkeys and a cat, four kids and a cat. A little bit about your family.

Yonah Weiss: Absolutely.

Yeah. No, I’m married almost 21 years. I have six children and you mentioned I hail from Lakewood, New Jersey.

I actually currently live in, in Israel, but do all my work remotely. So originally from the US from Los Angeles and our company Madison Specs is based in our headquarters is in Lakewood, New Jersey. So definitely have spent a lot of time there as well, traveling back and forth. But yeah, just to, , livin’ life, enjoying.

Doing the, the cost seg and what else we need to know?

Mike Zlotnik: Makes sense. Yeah. And obviously our thoughts and prayers with our brothers and sisters in Israel, it’s been a tough period of time.

Yonah Weiss: Yeah, it’s been. Absolutely.

Mike Zlotnik: All right, let’s talk a little bit about cost segregation.

So would you be so kind as to give audience a high level overview of cost segregation and its nature, what it does. How are you able to achieve what you achieve? It’s an engineering study of sort of these properties, multifamily, may it be industrial, shopping plazas, and so on. How do you accelerate and provide bonus depreciation?

It’s a great tax benefit, and a lot of investors look forward to bonus depreciation. Let’s just talk about the basics. How does the process work?

Yonah Weiss: So first of all Cost Segregation is a weird name, right? It’s just an accelerated version of depreciation. So obviously depreciation is probably the greatest tax benefit that there is when it comes to owning business or rental properties And the process is pretty straightforward.

It can be done for any type of property whatsoever besides for your primary residence. So as long as like I said as a business rental property can be retail industrial Office multifamily single family, you name it really any type of property like I said can benefit from it. The process is pretty straightforward.

It is an engineering process, so it’s something raking down the building into its components as opposed to depreciating the whole thing over a 39 year period, which essentially is just like taking a little bit of deduction every single year. The amazing thing is that you can literally write off the whole value of your property, but it takes a long time, right?

A little bit every year. So the benefit of cost segregation is taking that pool of potential deductions and taking a big chunk of them in the first year or the first few years. So we’re accelerating depreciation and pulling from that pool of potential deductions to create more cashflow during the earlier years of ownership.

Mike Zlotnik: It makes great sense. So mechanically, it’s beautiful. Bonus depreciation comes in and accelerates a 5, 7, 15-year schedule. So let’s just dive into a little bit of detail. What falls in the 5-year schedule, 7-year, 15-year because those are the items that get accelerated through the bonus depreciation.

Yonah Weiss: That’s correct. So the main things that get accelerated like you said the main two categories are the 5-year and the 15-year and those are described as five years personal or Tangible property and essentially means anything that’s non-structural.

Okay, so that can even include obviously appliances and furniture and equipment and stuff like that, that’s really movable. We understand. But even things that are deemed non-structural like vinyl flooring or carpeting countertops, cabinets You’re talking about in a industrial property. You may not have a lot you have shelving you may have, , security systems and things like that.

But when you go into a multi family property, for example, you have those countertops, you have the cabinets, you have carpeting, you have all the window treatments, even millwork and things like that all goes into the 5-year category, and there’s a lot more. And then the 15-year, which is the other main thing, is considered land improvements.

So, land itself does not depreciate, so we’re always going to need to subtract a small amount of land from our purchase price to establish how much we can depreciate. But the land improvements, meaning anything that’s on top of the land, depreciates, does depreciate on a 15-year schedule. So that can be like landscaping or pavement concrete.

If you have in a retail property, for example, you have a large parking lot. All of that payment in concrete is depreciable over that 15-year schedule accelerated. If you have, and also the signage, if you have a multifamily property, you may have a swimming pool and all that concrete is depreciated as well.

You may have a dog park or playground equipment, et cetera, fencing, all of that is going to go into that 15-year category. So all in all, when we’re adding up the 5 and the 15-year accelerated depreciation categories, it can be up to, , upwards of 20 or 30 percent or sometimes even more of the whole property value is in those accelerated categories.

So that’s why it’s so important to take those deductions faster.

Mike Zlotnik: Yeah, it’s very powerful. And I guess there’s a little bit of variance. And that’s why an engineer comes out and expresses their opinion. Well, we’ve seen 25 to 30 percent being standard multi family. Of course, it’s different on different asset classes.

But it’s really interesting to say that even a swimming pool, if you’re building out or renovating a swimming pool, that can also be bonus depreciated, even though it doesn’t feel like, it’s not your carpeting, it’s not your vinyls or any of that stuff, but all of this can fall under the bonus depreciation acceleration.

Yonah Weiss: Yes, exactly.

Mike Zlotnik: How long does it take to do a study like this and what does it cost? Just curious, relative to the size of the property, it’s almost a no brainer ’cause most of these times, these tax benefits, accelerate tax benefits pay for the cost of the study immediately. But just give us an idea what it costs typically to run a cost seg study.

Yonah Weiss: So it’s never going to be contingent on the tax savings, and that’s what’s great. It’s going to be a flat fee based on the size and type of property. Typically, on average, they run about $5000, $6000. Currently, , at the time of this recording, I can’t speak of, , what it may be in the future, but it used to be limited to a lot of people and people think.

Even still today that it may cost thirty or forty thousand dollars to get one of these things done. And that actually was the case about 10 years ago and was really only limited to like the big accounting firms. Like the big four were the only ones that were 15, 20 years ago were the only ones that were actually doing cost segregation. And so, yeah, that’s where they were charging $50,000 to do it because their clients were, , large corporations or REITs and things like that and could afford it and didn’t matter because it was their accounting firm that was doing it anyways.

Today, obviously there are many, many conservation companies around the country that do this professionally with , their own engineers employed. And so yeah, it’s become a lot more affordable. And so this can make sense. , a lot of people ask, okay, so $5,000 doesn’t seem like a lot.

At what point does this make sense to do? Right? And again, people would think that and erroneously, I get this all the time, one of the biggest misconceptions is this can only be done on big commercial properties. And really, , my single family rental, It’s not even appropriate, not relevant to me, and that’s just simply not the case.

I mean when you look at the actual numbers and one of the things we like to do is run a free, upfront, estimate or feasibility analysis for any property and when you see those numbers, Yeah, it may cost you a few thousand dollars to get it done but the after tax benefits are going to be 10x of what those costs are. So my starting point is really believe it or not any property purchased for over $200,000. It makes sense to look into Cost Seg.

Now, it may not make sense to get it done because obviously everyone’s tax situation is different, and this is a strategy, so it’s not for everyone at every time and every property, but it can be. And so, , no longer is it limited to, , these huge commercial properties that, , 5 million dollar building. No. Even if you have a smaller property, definitely worthwhile to look into.

Mike Zlotnik: Well, that’s a revelation. I didn’t know that. I thought, , it’s 20 million asset. It’s expected to go bigger, right? Obviously, the bigger they are, they, , the more economical it is, and I assume the price is obviously a function of the size of the property.

So if you’re doing two, three hundred dollars, it’s one thing, but if you’re doing a thousand dollars property, you will charge somewhat more, because there’s more work for the engineer.

Yonah Weiss: Slightly, but believe it or not, not that much more. Meaning, in a rare occasion, we’re going to get above, a ten thousand dollar fee for a study.

Even if we’re talking about like, you want to throw the, yeah, even a thousand dollars, even like a million square foot, industrial property or something like that. Or, a 300,000 square foot skyscraper. Yeah. It may cost, we may charge 10, $15,000, but when you’re talking about, it’s not proportionate to the actual benefits.

If you buy a property, a skyscraper for $300 million, paying $15,000 to get a study done is like a drop in the bucket. Whereas if you buy a $3 million multifamily property, $5,000, so obviously the benefits are not proportional to the cost.

Mike Zlotnik: Yeah, it makes sense but the revelation is that even for small properties under some circumstances, it makes sense I remember years ago, one of the mastermind events I went to, there was a company that was offering this on portfolios of the turnkeys.

It was so crazy. They were coming in and saying, okay we will cost seg your entire portfolio, 300 doors spread all over the map which was kind of fascinating how they do it, but I guess your argument that any property over a few hundred thousand dollars, you could justify under the right circumstances, of course, if you go over a few million, the math becomes much easier and the law, the bigger they are, the more economical it is. Per square foot or per dollar.

How do you go about or this is a CPA discussion, what to bonus accelerate, what not to bonus accelerate, or is it almost always? There’s no drawback. What’s a drawback if you bonus accelerate 5 and 50 in a year, no matter what? You’re just gonna take deduction if you can’t use it all in one year, you just carry forward, right?

That’s the general thought process.

Yonah Weiss: Correct. Yeah. Any additional deductions that you can’t use in the current year will be carried forward. You can use in future years. And so it’s usually going to be beneficial. Now you talk about bonus depreciation is slightly different than the cost segregation itself in that there was a rule passed a few years ago where you’re able to take all those accelerated deductions in the first year. That’s called bonus depreciation. So once you do a conservation study and identify the 5-year or the 15-year assets, like we talked about before, personal property or land improvements, you’re actually able to take 100 percent of those deductions in the first year.

And so that was called 100% bonus depreciation. It’s subsequently been phased down to 80% during 2023 acquisitions. In 2024, it’s gone down to 60% bonus meaning you can take 60 percent of those accelerated deductions in the first year. And I know you were talking about it a little before the show.

There’s currently a bill in in Congress and the Senate to be passed to reinstate it back to 100 percent bonus depreciation.

Mike Zlotnik: Yeah. Thank you for sharing that. That’s a welcome news. From what I heard, it’s in the Congress and of course there are political divisions, but I like to call there are well off Republican real estate investors and well off Democratic real estate investors.

So they both I think won it because it is a very popular deduction and it’s been it’s been used. So, from what I heard, again, of course subject to what the Congress will decide to do, they’ll retroactively go back to even ’23 and allow 100 percent bonus in ’23 and obviously change ’24. And I don’t know what they’re going to do on a forward basis.

But if it’s going to happen, it’d be very, very beneficial for the industry.

Yonah Weiss: Yeah. And it’s quite fascinating. I think, like you said, yeah, obviously there are politicians on both sides of the aisle that would benefit from this. The amazing thing is that the bill was already passed in the house.

With a resounding majority on both sides because the bill is not just bonus depreciation. Just to kind of clarify this, it’s a family, I think, tax reduction act. And so there’s a lot of different things in there, including child tax credits and other things that would basically tax benefits for families and the economy in general.

So it was passed resoundingly in the house, like I said. However, bureaucracy is really what’s holding it up more than anything. I think it’s not that it hasn’t even gone to this, to the Senate to vote yet. So once it does, I would assume it would pass relatively quickly. Again, with support on both sides of the aisle.

Mike Zlotnik: Yeah. That’s great. My quick comment is it’s funny how every single one of these bills has this wonderful name, Family Savings Act, or Family Tax Reduction Act, or Family Support Act. They come up with these very great sounding names, and then they jam in all kinds of interesting stuff in them.

Obviously things, some needed for our industry, and some other things needed for the special purposes, special needs. Just how the Congress operates.

Yonah Weiss: Yeah.

Mike Zlotnik: Alright, so let’s talk a little bit about second year. So first year. Is there anything that can be done second year? In other words, projects that go through renovations and improvements, and some money gets spent.

I’m just curious what you’ve done with some of the clients. First year, is there anything for the second year that can be also done?

Yonah Weiss: Yeah. So the first thing we always do, like I said, we’ll run that feasibility analysis and then you’re looking at doing a cost seg on a property. It’s a one time thing that’s done on the acquisition.

However, when you do improvements, then you can do a cost seg on those improvements. So it’s looked at a little bit separately, meaning they’re going to be on different depreciation schedules. So it’s not all lumped in together. However, like I said, once you do the costing on the acquisition, you’re going to get the majority of the benefits, accelerating that depreciation in the second year or in subsequent years.

If you do renovations and are spending money, all that money should be and can be capitalized and appreciated. And if you want to maximize the benefits, you’ll want to do a cost seg on the improvements again, because you’re going to get the those benefits at an accelerated pace. And especially because of the bonus depreciation, you can take a large percent of those deductions in the first year.

Mike Zlotnik: Appreciate that clarification. No number of sponsors and operators who have done this. So especially when I have you value at renovations where there’s a lot of work that gets done after the acquisition, this becomes a lot more relevant in in the second and third year.

However long it takes getting those tax savings is important too. So what happens on the other end of the spectrum? And this is more of a CPA question, but folks have asked. So we’ve got always wonderful bonus depreciation quite often depending on how these deals are structured, but you could have even capital accounts going negative.

So somebody writes a check into syndication. And then they have a substantial leverage, a lot of debt. It’s changed, of course, with banks tightening up. A few years ago, it was the norm. Might come back again when leverage is high and the equity invested is actually less than the total amount of tax benefits.

So as a result, folks go into negative capital accounts where they either write off the entire investment and even go to a negative number. When the property sells, Whether the number is positive or negative doesn’t matter, but they’ve taken all this deduction up front. What normally happens? Is it generally treated as a recapture or is it treated as a capital gain on sale?

And the other important element is how long do you hold the property? Because I’ve seen a few different versions. I’ll let you kind of elaborate a little more on this, but imagine a (inaudible) where property is owned for at least three years. There were heavy value add renovations after acquisition and all these depreciated items have been replaced.

I’ve heard those items can certainly be treated as capital gains because the property value increased.

Yonah Weiss: Yeah.

Mike Zlotnik: Just would love to hear your thoughts on that.

Yonah Weiss: Yeah, I mean it is a little bit complicated. Obviously we’re getting into the weeds a little bit here. But yeah, anytime you sell a property you’re going to have a recapture tax, which is essentially treated like a capital gain. However, it’s taxed on three different schedules, right?

Three different rates that is taxed at because there are different components in the property that are going to be recaptured at different rates. Now, recapture doesn’t mean that you’re paying back the depreciation. It’s a common misnomer. I get a lot of people that say, “Oh, you take this depreciation. It’s going to be “recaptured”. Meaning I’m gonna have to pay it all back. No, you’re going to be taxed on that amount. And it’s similar to a capital gain. However, like you said, there are strategies that can be done to actually reduce that gain or that recapture tax. And one of the most common is something called a partial asset disposition, which means once you’ve done a cost seg and you’ve allocated the different components to these different, 5-year, 15-year, let’s say, you have the carpet, right?

The carpeting in the building, let’s say it’s worth $10,000. Okay? Now I’ve allocated $10,000 to that on a 5-year schedule. When I go to sell a building, and I’ve already allocated that, and it’s been five years or even if it’s been less, I can literally write on a tax form called partial asset disposition that carpet has already been depreciated, no longer has value because of i’ve shown that with the cost seg, and I no longer have recapture tax on that amount. So you can actually reduce your 5-year recapture amount, which is a big portion, especially when you’re doing costing, you’re doing the bonus depreciation.

You can reduce that to almost zero in many cases. So yes, it is something that has to be looked at. And obviously, if you are doing improvements, similarly, if you are replacing carpeting a few years down, you’re going to write off the value of the carpet that you originally cost segregated.

And so you no longer have the recapture on that, et cetera. Again, there are a few different ways to reduce this tax or even defer it like a 1031 exchange can defer that capital gain, can defer that recapture tax as well.

Mike Zlotnik: Yeah, I appreciate that. That technique reduces potential recapture, number one.

Number two, 1031 exchange takes care of the business if it’s a truly, exchange. Or even if there is some recapture, those recapture items can be also offset with a fresh investment and a fresh bonus depreciation, fresh cost seg, where new passive losses come in and then they wipe off those passive gains that come in on the recapture.

So yeah, those are both we call it pseudo 1031. By selling a property and investing the money to something else and having passive losses or new bond with depreciation offset the passive gains from the from the sale. What other things that again, multifamily is one of the most common asset classes, but let’s just talk about a few other asset classes that you have done. So I’m just curious, obviously, industrial has been popular. We’ve also seen quite a bit of resurrection of retail, open air shopping. They’ve come back. It was kind of a scared asset class with the Amazon effect, e-commerce, but it has held up pretty well.

Very limited new construction, existing properties continue to get better rent per square foot. Have you done those? I’m just curious if we can go a little bit beyond multifamily. What have you done? Shopping, maybe some self storage? Industrial?

Yonah Weiss: Yeah, I mean, all of the above are amazing asset classes.

I think we’re the biggest national cost seg company. So we’re doing thousands of these a year, every single type of property. I think one that gets overlooked a lot is self storage because people think of it. Okay. So much like a warehouse where you would think there’s really not much in there. Well, when it comes to storage, sure, there are differences in types of self storage buildings. So if you’re talking about like a block building, there’s not going to be much there, but if you’re dealing with kind of an open area self storage property where there’s a lot of land improvements, a lot of pavement, like we talked about before, all that goes in a 15-year category. There’s a lot there.

As well as when there’s climate control. Where a lot of obviously new development and newer self storage facilities have the climate control. That’s actually a big factor. It goes into the 5-year. All the HVAC units, they’re going to the 5-year category and therefore it’s going to be a big amount. It’s going to be going to the faster depreciation rates. Upwards of, sometimes 35 or 40 percent of the total purchase price is going to go into the accelerated depreciation categories with cost seg.

Another type of property that’s gotten a lot of traction over the past few years and believe it or not, we talked about size and types of properties, is short term rentals, right? Single family properties where, different from long term rentals for a couple of reasons, right?

Long term single family properties typically aren’t the best for cost seg for a couple reasons, but one reason is with a short term rental, you typically own all of the furniture and all the appliances and all the amenities and so that can add up to a lot. Whereas in a long term rental, you may not own that. The tenant may own all that stuff. So there’s going to be less benefit there in the 5-year category.

The second thing is there’s actually a different rule in the tax code when it comes to short term rentals and the passive loss rules. Typically speaking, if you own a rental property, any income that’s coming from that rental property is considered passive income and depreciation and cost seg can only be used to offset your passive income. Okay? Unless there’s a couple exceptions to the rule. If you’re a real estate professional, if your full time job is in real estate, then you can use those passive losses, those deductions against your active income, anything like that. Short term rentals, believe it or not, have a totally different rule.

And therefore, if you self manage your short term rental, and that’s an important factor here, self managing and materially participating in that, you no longer have that passive loss limitation. Meaning you can use cost seg to offset your W2 income, which is not the case with any other type of real estate.

And so, it’s a big asset class that’s gotten a lot of attention because of that rule.

Mike Zlotnik: That’s fascinating. So appreciate that explanation. I didn’t know that. I learned something on the call. But the short term income from the short term rentals, obviously material participation and self management classifies this as an active income or loss if you cause sector property and then you can offset it against the current income without being real estate professional. Is that what you’re saying?

Yonah Weiss: Yeah, and that’s yeah, exactly. And that’s the most amazing thing. Typically you have people, it’s limited. Cost seg is beneficial for real estate professionals, right? But not necessarily for someone who’s not. And short term rentals are beneficial even if you’re not a real estate professional.

Mike Zlotnik: Because if you own them, I guess it’s considered to be an active business. That’s why it’s falling into that category. That you own a business. So it’ll show up as business loss, the result of the cost seg.

Yonah Weiss: Exactly. Also like car washes, too. Car washes are also another case where it looks like that. It’s like a business.

Mike Zlotnik: Interesting. Yeah, that’s very powerful. And these businesses, well, these are real estate investments, are partially active businesses. It’s kind of funny, real estate in general, is passive. And with exception of real estate that is, let’s just call them semi active, like you’re saying short term rentals car washes.

What about senior living? Are those falling into the same category? Assisted living, senior living?

Yonah Weiss: It can be, yeah. It can be an active business in that regard as well. Obviously, there’s a lot of factors involved but make sure, and we probably should have said this at the beginning, right? This is not legal advice or tax advice, right? Make sure to discuss it.

Mike Zlotnik: Yeah, full disclaimer, consult with your attorney, CPA professional.

Yonah Weiss: Exactly.

Mike Zlotnik: Yeah. That’s very powerful. Really, really great podcast. A couple of final thoughts? Anything else, anything you want to share, any sort of good book that folks should read or at the end of the day if they have a project, any real estate, you said it’s down to a couple hundred thousand, worth having a conversation with you to see if this is a good match?

And obviously if it is, they should check with their CPA. Some are no-brainer projects and some are borderline, and that’s where it’s worth to check.

Yonah Weiss: Yeah, absolutely. I would say one thing I just mentioned, another thing that often gets overlooked is people think that you can only do this in the first year, and this is actually something that… You can do cost segregation on a property that you’ve owned for a number of years. And you don’t have to go back and amend your tax return. And so, that’s another huge benefit about this, is that it’s a strategy that can be used at any time that is best for you.

Mike Zlotnik: That’s very powerful.

You can wake up one day not knowing that you could have done it and just do it today, and basically take advantage of the opportunity. It’s kind of very, very powerful.

Yonah Weiss: Yeah.

Mike Zlotnik: Appreciate the sharing. What’s the best way for folks to reach out to you? Is there a good website, email? How do folks reach out to have the conversation to ask about their project and to learn what you can do for them?

Yonah Weiss: Yeah, I mean you can go to yonahweiss.com. That’s my personal website. You can also find me on all the social media platforms. Just my name, Yonah Weiss. Like we mentioned, Madison SPECS, the biggest national cost seg company working for, and yeah, check us out anywhere you find us.

Mike Zlotnik: Thank you and I appreciate your wisdom.

Thank you for coming on the podcast and sharing. Much appreciated.

Yonah Weiss: My pleasure, Big Mike. Thanks so much.


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