Journey to Multifamily Millions

Unlock the Power of Cost Segregation for Multifamily with Erik Oliver Ep 111

September 12, 2024 • Tim • Season 1 • Episode 111

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Welcome to the Journey to Multifamily Millions podcast, where we discuss money matters with experts! 

In this episode, Erik Oliver Vice President at Cost Segregation Authority shares his incredible journey from being an accidental landlord to becoming a skilled real estate investor, with a focus on how cost segregation can transform your investment strategy. 

He dives deep into the world of tax strategies, and explains how cost segregation accelerates depreciation on properties, saving investors thousands on taxes.

Erik breaks down the process, the benefits, and when it’s the right move for your portfolio. If you're looking to maximize your returns and secure a stronger financial future through real estate, this episode is a must-listen.


Episode Topics

[001:16] Meet our guest, Erik Oliver
[02:43] First Rental Property Challenges
[05:15] Accidental Landlord Experiences
[1320] Understanding Cost Segregation
[24:14] When Cost Segregation Makes Sense
[35:17] The Role of a Tax Strategist
[38:08] What is one red flag every investor should look out for?
[38:34] What is a myth about the real estate business?
[40:38] Connecting with Erik


Notable Quotes

  • "I was strategic about my investment. So I was either going to pay the government $80,000 or put that $80,000 down on an investment property." – Erik Oliver
  • "I lucked into my real estate investment career, but I’ve been able to learn a lot about tax that I didn’t know before." – Erik Oliver
  • "You learn those valuable lessons early and often, unfortunately." – Tim Little
  • "Cost segregation really is just accelerated depreciation on your real estate investments." – Erik Oliver
  • "I always encourage people to have a tax strategy, not just do their taxes, especially if you have multiple and complicated investments." – Tim Little



👉Connect with  Erik Oliver

👉 Connect with Tim

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https://podcasts.apple.com/us/podcast/journey-to-multifamily-millions/id1634643497

[00:00:00] Erik Oliver: Going and buying a long term rental wasn't going to help me in the tax world that I was in. I needed to go invest in a short term rental. And so I was strategic about my investment. So I was either going to pay the government 80, 000 or go put that 80, 000 down on an investment property. And I was able to work it to where I was able to put that down on an investment property and save about 60, 000 in taxes, which. Almost covered my down payment, but I would have never known that had I not gone to conferences that I did not learn about the short term rental loophole.

[00:01:04] Tim Little: Hello everyone and welcome to the journey to multifamily millions. I'm your host, founder and CEO of ZANA Investments, Tim Little. And today's show we have with us Erik Oliver. Erik is a vice president with cost segregation authority, and he is passionate about identifying cost savings and educating commercial real estate owners on the benefits of cost segregation. Erik, welcome to the show.

[00:01:28] Erik Oliver: Thanks for having me. I'm glad to be here.

[00:01:29] Tim Little: And it is great to have you. I know everybody wants to hear about cost segregation and what it is and how it can save them money. But before we dive into all of that, please tell us more about your background and how you got started on your real estate journey.

[00:01:45] Erik Oliver: Yeah, no, those are good questions. So I'll start with my background first. So my, born and raised in Salt Lake City, Utah, went to school here looking to get out of college as quickly as possible, didn't know what I wanted to do with my life. Ended up with an accounting degree of all degrees, simply because math always came easy to me and I hated writing papers and didn't do well in science. So I'm like, how do I get out of this place as quickly as possible? And so it was an accounting degree. Never had any ambition of becoming a CPA, never really used my accounting degree. Once I got out of college, I ended up in some business development positions that took me around the country, sales type jobs. ended up in Richmond, Virginia for 12 years and then Long Island, New York for five. and then I decided to move back to Utah. I had some aging parents and had kids by that time, and was married. Wanted to get back to Utah and came across this job not knowing what cost segregation was. All I knew is it had to do with real estate that had to do with accounting and I'm like Those are two things that I'm very interested in and so ended up here at cost seg authority. As far as my Investing journey goes, my first investment property was by chance. It was when we were moving from Richmond, Virginia to New York. We decided to keep our primary residence that we had in Richmond, when we moved up to New York, I dare say it was an absolute nightmare? My first rental property. My wife and I are fairly frugal and we were like, we're not going to pay a management company. We got this. We know what we're doing. I've read enough books. I can figure this out. And needless to, yeah, needless to say, it was an absolute disaster. So we moved up to New York. We had some tenants in there, didn't run background checks, didn't run credit checks. Seemed like nice people at the time they paid their rent for the first three months. And then they started getting garnished from their prior rental property that they weren't, that they didn't pay rent on. So once they started getting their checks garnished, of course, they couldn't pay me. Anyway, long story short, I finally got them out through a long court process of trying to do that by myself from New York. While these guys were living in Virginia, we were able to get them out of there. Actually about seven years after that experience, I got the check and the mail from them through, finally got paid from those guys, but learned a lot on that first rental property. Then when we moved to Salt Lake, we actually sold that property in Virginia and bought our home here. we switched homes, kept that rental property, our first home here in salt lake, we kept that as a rental property. By that time I was into the cost seg business, learning more and more about it. Real estate attending conferences. One of the great benefits of my job is going out and presenting cost segregation to different conferences across the country. I also get to attend these conferences. So I get to meet a lot of great people, learn a lot of great information. And since then, we've got.

[00:04:24] Tim Little: Two long term rentals, a short term rental, and then we're a passive investor in some micro apartments, here just north of Salt Lake. And, so that's what got me started on this investment journey, Yeah, that's awesome. And, I want to hit a couple of the things you talked about. Cause it sounds like you and I were opposites. I liked writing and was fairly good at it and math did not come naturally to me. So it took a decade or so in the real world before I actually even thought about getting a business degree when I got my MBA, because I was very intimidated. Because I knew they'd make me take math. That

[00:05:01] Erik Oliver: Right.

[00:05:01] Tim Little: That wasn't negotiable. So yeah, I've had to take a few accounting classes. I wouldn't say it went well, but it didn't go disastrously either. I managed to pass, and that's what matters in the end, right? And then you talked about what we call being an accidental landlord, almost, right? what was your primary residence in turning that into an investment property, which, it's the challenge with that is you didn't come into it as an investment. So it's not like you ran the numbers on it when you were buying it. As an investment, that was the place you wanted to live in, right? Is it right for you? Is it right for your family? You weren't thinking about how much free cash flow you would get at the end of the month. and sometimes it works out great. And, but other times, we learned some lessons from that and it sounded like. You learned some of the same lessons that I did. I did my primary residence in Colorado Springs. I had to rent it out because I didn't want to sell it at the time And this was you know around the 2000 Eight time frame. So I, you can imagine how that went. luckily I wound up breaking even on it. but that was about the best I could hope for during that time frame. And we had decent renters, so it wasn't too bad, but I wasn't nearly as ambitious as you at that time to try to self manage. Oh, so I was willing to shell out that 10%, mostly because I wasn't local enough. with anything. and then, you talk to Richmond, which is actually where my first investment property was. I bought a little duplex in North Richmond, bit of a rough neighborhood, lower income. it wasn't like it was super high crime or anything. I inherited a renter. And I was like, having a renter is better than not having a renter, right? depends who your renters are. And like you, it's like I discovered very quickly, they paid for two months. And then all of a sudden the payment stopped and as soon as I started knocking to say, where's the money, they just disappeared one night, like just left everything there and we're just gone. So then you have to pay like thousands of dollars to have their stuff removed, then get it rent ready, like all these things that I hadn't even thought about. beforehand. you learn those valuable lessons early and often, unfortunately. but Richmond wound up being pretty good to me from an appreciation perspective.

[00:07:36] Erik Oliver: Yeah.

[00:07:37] Tim Little: So I can't complain in the long run, but, and then, the other thing that I wanted to bring up is that you learn a lot at conferences and we see this a lot, right? Like it's not just real estate aficionados going to real estate conferences. It's those people who are enablers to people in real estate. Who, maybe they're accountants or CPAs or lawyers or cost segregation folks, and they're going to teach us stuff at these, but you're getting to sit in those seats too and learn all this stuff. So I think it's a great environment to meet people, which is, I'm sure, one of the reasons you're going there, as well as to educate, but two, you're able to siphon off the knowledge and start your own business. Real estate investing journey, which maybe wasn't even your plan at the time until you got into that world. Maybe you can tell me a little more about that.

[00:08:32] Erik Oliver: Yeah. No, I think you hit it on the head. It definitely was not part of the plan. You mentioned an accidental landlord. The first investment property I have was just an accidental landlord. We were moving into a place where we were renting. We didn't need to sell our home at the time because we weren't buying another home. So hey, let's just do the appreciation play on this. This thing's going to go up in value over the next couple of years. We actually, like you said, we didn't go into it as an investment property. So it was, we weren't really cash flowing. We were making a couple hundred dollars each month that covered some of the repairs that needed to be done, but it wasn't really for, for the cashflow was more or less, we needed to get to New York. We didn't have time to sell it. Hey, why not rent it out? And we'll sell it in a few years. And ended up owning it for five or renting it for about five years before we moved back to Salt lake. But,it was definitely by accident that I got into this business. When I came on to cost an egg, that was my only rental experience. and then as I got into this world of real estate, I've always been somewhat interested in it, but I've always had, my degree was in accounting. I always, I was always in a business development sales role with my jobs for one K real. I don't know, my dad raised me to be real super conservative. I blame it on my dad. He was a police officer and blamed it on him. He never wanted to take risks, but always just did the 401k thing. I said, I'm going to have a little bit of money when I retire, if I can just keep building this 401k. And then, I started to get into this cost seg world and work with these investors. I'm like, damn, I should have. What am I doing? Like I should have started this real estate thing a long time ago. And I kicked myself that I didn't start it, when I was a lot younger. And because I do think there's so much, there's so much value and so much opportunity, to create, not just, it's not just about the money and it's not just about, but long term flexibility, the ability to, my ultimate goal. Obviously to have enough passive income that I can retire at a fairly early age when I was in sales, working for other companies, my goal was just to retire at 65, 70, and do that thing. Now my goal is to retire at 50, 55. I want to be able to enjoy retirement. And so hopefully. By investing in some of these properties. 1, I've been able to learn a lot about tax that I didn't know before. and we can get into that here in a 2nd. But, part of the reason I own a short term rental is simply for the tax play. I had a tax liability that I was going to have to pay and I said, I don't want to pay that, but I'm a W2 employee. And so I knew that, Going and buying a long term rental wasn't going to help me in the tax world that I was in. I needed to go invest in a short term rental. And so I was strategic about my investment. So I was either going to pay the government 80, 000 or go put that 80, 000 down on an investment property. And I was able to work it to where I was able to put that down on an investment property and save about 60, 000 in taxes, which. Almost covered my down payment, but I would have never known that had I not gone to conferences that I did not learn about the short term rental loophole. Had I not been in this cost segregation business? So I lucked into it. I don't want to say, I guess it is luck. I lucked into my real estate,Investment career, because that's the short term rental side. And then I mentioned the micro apartments. That was something that we actually found out here doing Cossack. So we got called to do a Cossack study on some micro apartments up in Seattle. I say, we, it was my boss at the time, the founder of our company. And he thought, wow, what a great idea. We could use these micro apartments here in the Salt Lake valley. And so we're, they've done three or four different things. Projects and opportunity zones where they've bought the land. They've been able to develop these micro apartments. They're anywhere from 400 to 600 square feet. Usually, the rent is fairly low compared to what it is in the market because they are small. We put them by train stations, track stations so that they've got, we haven't had to have any parking. It's great for students. It's great for people who work downtown, who just want to be downtown. They don't need to have access to a car. Anyways, it's been, it's turned out great and being able to learn about opportunity zones. I would have never known about opportunity zones had I not come across this job. And so that's another way to build some long term wealth. And so it's been a great career. I've loved every minute of it. the cost seg side of what I do day to day, I love that, but I think more so I've loved. Being able to educate myself on taxes, which is a big thing. where I think a lot of people don't know that much about, and they just put that in the trust of their CPA or tax preparer. And I think sometimes that can be a problem if they aren't real estate focused or real estate driven. Sometimes we're leaving a lot of money on the table. And so I've been able to learn a lot about taxes and then also just. a lot about real estate and investing in general. So it's been a great ride so far and, look forward to continuing down that path.

[00:13:13] Tim Little: Yeah, that's awesome. It sounds like you've been able to learn a lot about a lot of different types of assets and investments. All right, so let's switch over to the cost segregation piece because I know some people listening are probably very familiar with it if they're relatively active. they're owners of apartment buildings, stuff like that. But for the folks who may be new to it, Please just explain what a cost segregation analysis is and generally how it can save you money and slash taxes, however you want to look at it.

[00:13:45] Erik Oliver: Yeah, no, great question. So cost segregation really is just accelerated depreciation. on your real estate investments. So for those of you that don't know what depreciation is, the government allows us to take a depreciation expense every year on our investment properties. Normally that depreciation expense is spread out over either 27 and a half years for residential units or 39 years for commercial units. So to make the math easy, let's say I buy a 275, 000 single family home. Essentially I take that 275, divide it by 27 and a half years. I'm going to get a 10, 000 write off every year against my income. So it's a 2000, excuse me, a 10, 000 non cash. write off against my income. That's called straight line depreciation. I probably oversimplified that a little bit. Land is non depreciable, but just to make the math easy, you always have to back out the land value. So remember that land is not depreciable, but the idea is you get this deduction. The government says, Hey, that piece of property, that building is deteriorating over time. And so we're going to let you expense that over time. a lot of us don't own our properties for 27. 5 years or 39 years for commercial properties. And the idea behind cost segregation is how we can accelerate or take that deduction at a much faster rate. There's a time value of money element, there's an inflation element where a dollar today is worth way more than a dollar 39 years from now. give me my deductions today versus letting the IRS hold on to those. The way we can do that is through an engineering based study where we go in and let's say you buy a single family rental for 275, 000. When you buy that property, you're buying more than just the land and the walls. You're also buying some appliances that are in that property. You're buying some carpet. You're buying a ceiling fan or two. You're buying some cabinets or shelving or countertops. All those things I mentioned. should be, according to the IRS, depreciated at a much faster rate, which makes sense. Carpet doesn't last 27 and a half years. So when you actually go read the tax code says carpet should be depreciated over five years. Now, the problem is that most tax preparers don't know that you have carpet in your building, let alone how much, let alone what the value of that carpet is the time you buy it. you hand them a closing statement that says, Hey, tax preparer. I bought this long term rental for 275. What typically happens is they take that, they put it on the books as a 27 and a half year asset, and you get your 1 27th of a deduction. So a cost seg study comes in, instead of putting one line item that says building on the depreciation schedule, you're now going to have a line item that says flooring, cabinets, countertops, appliances.trees, bushes and shrubs, landscaping, land improvements, and by doing that and depreciating the value of your carpet, let's say that we determined that the carpet was valued at, 15, 000 worth of carpet in your rental property, that 15, 000 now gets depreciated over five years versus 27 and a half years. So you're getting a much larger deduction up front. Which allows you to take advantage of that and create cash flow up front So we're getting our tax savings now versus in the future And so that's really what cost segregation is. It's just accelerated depreciation on your real estate assets

[00:17:05] Tim Little: Yeah, and the way I like to think about it, it's really breaking up a property down to its components. Like we don't have the, most of us don't have the time expertise, or, energy to, or desire for that matter, to go down on a spreadsheet and break down everything that's in a property, especially once you get into the larger properties. And so I think that's The value that a cost segregation analysis person brings to the table, right? they're doing these things that you wouldn't otherwise be able to do which is to accelerate it because otherwise you're stuck like you said with that baseline depreciation the irs tells you can go with and that's the path of least resistance for most people So they're like, okay, same thing for the cpa they don't know any better and they're probably not going to ask because again this is somewhat specialized and they may not have the resources or know how to do that themselves so they might just tell you to go find someone else to conduct that analysis and then apply it to your taxes they'll be happy to do that most of them won't know how to do it themselves haha

[00:18:17] Erik Oliver: on the head. This is a specialized service and it's interesting That the audit guide so the IRS puts out an audit guide for their agents on how to audit these cost sake studies And in that audit guide You It specifically states that there's no, you don't have to have any type of credential to do cost segregation. So a CPA could essentially do it. However, it does state specifically that you've got to have an experience and expertise in both tax law, so taxes, as well as construction. And so it's very rare that you find a CPA slash tax preparer who has a construction background or a constructional engineering background to be able to break these buildings apart. Because, and I've seen CPAs try, and I'll give you an example. We've got a CPA who called me who said I inherited a client. And the old CPA did a casual cost segregation study. And I'm like, John, I don't know what the hell you're talking about. What's a casual cost segregation study? And he goes here, let me send you the depreciation schedule, Erik. And I think you'll, it'll make sense. So I got the depreciation schedule and on the depreciation schedule, I think if I'm not mistaken, it was either an eight plex or a 16 plex. I can't remember, but it had the line item that said building. And then there were three line items underneath that one said parking lot, 80, 000. Appliances, 75, 000 and flooring 12, 000. So what the tax preparer did, the CPA was like, Hey, I need, my client needs some additional deduction. I know there's a parking lot. I'm going to pull a number out of that million dollar purchase price and apply it to the parking lot so that my client gets an extra deduction. So they thought they were doing their client a favor by breaking these three pieces out. And creating these extra deductions.what they were actually doing was leaving money on the tax table one and creating a possible liability too. So we ended up doing the cut. Yeah. Red flag, right? First thing is don't use whole numbers. If you're going to say the parking lot's worth 80, 000, say it's worth 81, 472 because 80, 000 would be a red flag if I was an agent, but what they did is a tax preparer as a CPA or tax prepared, they don't know if that asphalt in the parking lot is four inch asphalt, six inch asphalt, and there's a very big difference in cost for that. So long story short, when we looked at the numbers, they only segregated a small percentage of the total that could be segregated. So we actually ended up doing a cost seg study and we found out that the parking lot was not worth, in fact, 80, 000, but it was worth 120, 000. And so that, what is that, a 60, 000 difference just on the parking lot, 60, 000 of additional depreciation, if you're in a 30 percent tax bracket. That was 18, 000 of tax savings left on the table. And so again, you don't have to have any kind of credential. There's no certification that we go through. There's no governing body, but you do have to have the experience. And so in that instance, we were able to create a significantly larger tax savings by doing this study. Now it costs the client a couple thousand dollars for us to do the study. But if we're able to create an extra 200, 000 of depreciation, again, if you're in a 30 percent tax bracket, 200, 000, that's a 60, 000 tax saving. Additional tax savings. And yeah, you don't have to have any specialty credentials. There are none, but you do have to have some knowledge of construction because it's not just, and I'll elaborate a little, it's not just going in and counting the appliances. So sometimes CPAs will say, I know that's a washer and a dryer. They're about 500 pieces. So I'm going to put on the depreciation schedule, a thousand dollars for appliances. That's good. That's better than putting nothing on the depreciation schedule for the appliances. But when we go in and do our engineering based study, we actually get to take not just the washer and dryer. We get to take the electrical that goes to the washer and dryer and put a value to that plug because you've got a special plug in your laundry room for your dryer. The only reason that plug is there is specific to that dryer. So the IRS says, Hey, that electrical component is part of that dryer. And so we'll put a value to the electrical work all the way back to the circuit breaker and say, okay, The washer was, or excuse me, the dryer was 500. The electrical work for that dryer was another 300. And then the plumbing for the washer, because you've got to have the drain for the washer, that was another 600 worth of plumbing. And so now we've just created a much larger deduction than just taking the washer and dryer. We get to take all the different components that go with those washers and dryers. And so when you think about multifamily specifically, how much of the electrical work goes into a multifamily building. Is specific for short term assets, washers, dryers, range hoods, garbage disposal, ceiling fans. Sometimes it can be as much as 50 percent of the electrical work going into a multifamily building is specific for short term assets. And so we get to put a value to that electrical work and say, okay. Let's depreciate that portion of the electrical work over five years versus 27 and a half. So it is a very specialized kind of niche accounting service that we offer. And that's why most tax preparers don't offer it because they don't know how to do it either. They don't want to take on the liability. And so they'll usually outsource that work to a firm like ours. Because we've got that expertise.

 

[00:24:13] Tim Little: yeah, and that all makes sense and you alluded to this,a little bit when you started talking about say you're paying a couple of thousand dollars for the service but you wind up saving this much on the tax side talk a little bit more about When this service makes sense for someone just from that cost benefit analysis, right? Like it's not gonna make sense for everyone if I have a hundred thousand dollar, single family home I'm gonna assume it won't make sense, but you can correct me if I'm wrong But that's a hugely different scenario than someone who has like that 16 unit apartment building, talk a little bit about when it makes sense. And, what the, I don't know, pricing is for the services. Yeah.

[00:25:01] Erik Oliver: And that is a, it's a tough question to answer because there are a lot of variables, depending on your tax rate, depending on how long you've owned it, what the tax law was when you first bought it and put it into service, but a general rule of thumb. If your buildings, what we call depreciable basis. So a depreciable basis is your purchase price minus the land value that gives you your depreciable basis. If that depreciable basis is above 200, 000, it's probably worth having a cost state company run some initial numbers. Now, it doesn't always mean it's going to make sense. It depends on what your tax bracket is, depends on how long you've owned it. So if I bought a 200, 000 home back in 1985, And I've been depreciating it since 1985. That building is fully depreciated and there's no value in doing a cost seg. same scenario, let's say I bought a 200, 000 home in 2020 when there was something called bonus depreciation of 100%. That 200, 000 single family home could create anywhere from a 50, 000 to 60, 000 deduction. So a 60, 000 deduction, if I can reduce my taxable income by 60, 000, and I'm in a 35 percent tax bracket, those are hard numbers to do in my head, that is about a 20, 000 tax savings, give or take, don't quote me exactly on that, but it's about a 20, 000 tax savings. So if I have to pay 3, 000 to have a study done, But I get 20, 000 tax savings that might make sense. And so I would say anything around 200, 000 is worth looking at. The fees on these studies, they've come down significantly. So there was something we should probably jump into now. I imagine now's as good as any, but there's something called bonus depreciation, which kind of changed the landscape for cost segregation. So prior to the tax cuts and jobs act, that was the tax overhaul that was instituted by Donald Trump back in 2017. So prior to that, bonus depreciation was at 50%. And let me explain what bonus depreciation is. Bonus depreciation is a tool the government uses to stimulate the economy. So if the economy is not doing well, they'll say, Hey, we're going to increase bonus percentages to 80%. If the economy is doing well, they're saying, Hey, we'll decrease it to 20%. But basically it's an incentive for you to go out and buy stuff. And interestingly enough, I don't know that it was ever thought of as being used in terms of real estate because when they created the bonus laws, they said bonus depreciation only applies to assets that have a useful life of 20 years or less. So remember real estate has a useful life of 27 and a half or 39. And so I don't think that they even applied it to real estate for a number of years. And then there was some sophisticated CPAs who said, wait, what if I break my 27 and a half year building. Down into these smaller pieces, we've got a bunch of carpet in there and we know carpets a five year asset Therefore now we can apply that bonus So bonus depreciation has been around a number of years the 2017 tax cuts and jobs act Put it on steroids and they came up the two things changed one is Bonus went from 50 percent at the time to a hundred percent. So any assets placed into service between nine 27 of 17 and 1231 of 2022, we're all eligible for a hundred percent bonus, which was huge. That was the first big change. The second change, which I think was more important. I actually think a lot of the Congress folks didn't even realize what they were voting for when they instituted this, but they added five words to the tax code that made all the difference in the world. They added the words new to you, the taxpayer. So prior to that bonus only applied to brand new products. I had to go buy a brand new bulldozer. I had to go buy a brand new work truck. I couldn't buy a used work truck. It had to be brand new right off the assembly line.

[00:28:52] Tim Little: Yep.

[00:28:52] Erik Oliver: When they added those words to you, the taxpayer. And when you apply that to real estate, all of a sudden, I don't have to go build a brand new multifamily building. I can go buy an existing multifamily building that was built in 1980. It's new to me, the taxpayer, and all of a sudden I get a hundred percent bonus depreciation on the assets. They have a useful life of 20 years or less. So this was the best news in the world as a cost seg provider is, Hey, we've got this bonus depreciation, but it only applies to assets that are five, seven or 15 years, because now when you buy that multifamily, Tim, that's a 30 or 27 and a half year asset, but you want to apply bonus, you've got to call us to come in and say, okay, of that 27 year. What of that stuff is five, seven or 15. And so it was a great bonus. depreciation has been great for the cost seg industry, because you basically have to pay for a cost seg study in order to utilize bonus. Because again, bonus can't be used on a 27 and a half year asset. So the reason I'm telling you all this about bonus, going back to your original question is. When they passed these bonus laws, it made cost segregation applicable to a lot smaller investors prior to 2017. You had to have about a million dollar property in order for it to make sense because the benefit was lower because you couldn't, there was no bonus. There was a bonus, but it was a lot smaller. And it was only for new construction. So the bonus amounts were smaller and the fees were significantly higher. When they passed the tax law, cost segregation became more and more prevalent. There was more and more competition within our industry. So the fees came down yet. The benefit was going up significantly because of these bonus depreciation amounts, and because of that, it now made sense on a 200, 000 single family rental, because again, if I can save. 25, 000 in taxes, and it's only gonna cost me 3000 to do it. I'll take that all day long. And I would say anything north of 200, 000 is worth looking at. Again. It doesn't always make sense. There's other factors. You need to consider passive versus active income.

[00:30:59] Tim Little: Yep.

[00:31:00] Erik Oliver: you want to talk to your tax preparer about that, but anything worth anything with a depreciable basis of 200, 000 is worth looking at.

[00:31:06] Tim Little: Yeah. And I think that's very helpful to think about cause there's all these different scenarios, right? Where it may or may not make sense. And I think one of the things that we get caught in is.he almost over selling and I say we not you, like I say we, as a, operators who are, raising money for these deals, sometimes folks get a little too overzealous in talking about bonus depreciation and the benefit it can bring, because I want people to understand that, hey, they might be thinking as they're listening to this, yeah, that's great for, some millionaire who's buying, a big apartment building or something. But this also is applicable to those who are passively investing in these syndication deals, because what we do as the operators is we say, Hey, we're getting all this awesome, depreciation, bonus depreciation, but we're passing it down. To the passive investors because you guys are the ones who gave us the money to buy this deal. So that's the benefit gained from the passive investor perspective. And what that looks like is they're, they'll receive a K one, which says, Hey, you didn't actually make any money on this deal. You actually, lost. 10, 000, and did they lose 10, 000? No,it's a paper loss, right? Because of that depreciation that we got and then passed down to them. So they may have gotten a lot more depreciation than they actually did, distributions from that deal. So this is where we get into the, it may or may not benefit them. If they have other investments that had taxable events, say one of their investments just went full cycle and they got a lump sum of,a hundred thousand dollars in profit from that deal. they have a lot that they need to try to bump down from a taxable income basis. So that's where this can really be helpful. Otherwise it just certainly doesn't hurt, but they may just start like banking up this depreciation. and that does roll over. So talk to your tax professional. I'm not a tax professional in any way, but that does roll over So maybe you can use it next year when you have a big taxable event or something But this is where you know, I always encourage people to have a tax strategy Not just do their taxes, if you especially if you have multiple and complicated investments, you can get very strategic in the timing of these things in order to offset them, right? If I know a deal is coming full cycle next year, then maybe that's a good time to invest in a new deal, get that huge depreciation in that first year. And then they cancel each other out. All of a sudden, I'm getting basically tax free profit from some of my deals. So I just wanted to give people an idea that this is not just for those who own the properties, but there are also benefits for those passive investors as well.

[00:34:15] Erik Oliver: Yeah, that's a great point. And just to add to that, in that example, where you might be going full cycle on a property, you're going to sell a property. You may not even have to go buy a property. You may just have properties in your portfolio where you've never done cost seg. So the IRS actually allows us to go back and look at properties that have already been placed in service. So let's say I sell one of my buildings this year and I've got a large capital gain of it, but I've got these other buildings in my portfolio where I never did cost segregation. I can go back and do cost segregation on those buildings. Take all that missed appreciation that I should have been taking over these years, bring it all forward, drop it on my current tax return without having to amend. There's an additional tax form that's required. It's a 3115, but it basically tells the IRS, Hey, I've been depreciating these older assets using my standard 127th of a deduction. I now want to accelerate or front load those. And I get to drop all that on my current tax return, which then in turn. Knocks down or offsets that capital gain event. And I basically pay no tax. And so cost segregation and you touched on something and I'll reiterate this, cause I think this is the most important thing that I've heard or that I hear, or that I like to share with people is there's a huge difference between a tax preparer and a tax strategist. A tax preparer is the H&R block, within the Walmart lobbies where you go in there, they take a stack of papers, they process it through their system, and it spits out and tells you how much you owe. And they actually get paid on how many of those they can process on a daily basis. A tax strategist, Will stop and sit down and they should be meeting with you multiple times throughout the year to say hey What are you buying? What are you selling? What are your expenses looking like? What are your tax liabilities looking because sometimes you can't do that when you go meet with them April 15th or april 14th because the year is gone And so you've got to have a tax strategy, especially as you guys start to build your real estate portfolios Tax strategists, they cost a lot more money than a tax preparer, but they are worth their money tenfold. Oftentimes a good tax strategist, you might pay them 5, 000 to do your return, but they're going to be able to strategize and find these cost segregation. They're going to find additional deductions, tax credits, tax, deductions in one form or another, where they can reduce your tax liability. The way you set up your entities makes a huge difference on how. So having a tax strategist who understands real estate is very important. don't go cheap in the tax preparation, tax strategy department, always find somebody who understands real estate. Who's going to work with you, not just. Process your return, spit out a number and tell you, here's what you owe. Because of that, it could save. I see it all the time where we meet with people and they're like, okay, I've got all these properties. I just heard about cost saying, what do you think you can do? And we give them numbers and they're like, wait, last year I wrote a check for 200, 000 to the IRS. Are you telling me I could have done this last year? And we're like, it's sensitive. It's a rough talk to have with their CPA, but we try to always talk up the CPA because CPAs don't specialize in this. It's like going to your general practitioner to get brain surgery. You wouldn't do that. And then it's not their fault that they don't know how to do brain surgery. It's just not what they specialize in your typical tax preparer CPA. They are like your general practitioner. They know a little bit about a lot of subjects, but once you start to build that portfolio of real estate. It's usually time at that point to find yourself somebody who specializes in real estate, who's going to strategize with you, because if not, you can be leaving tens, if not hundreds of thousands of dollars of tax savings on the table.

[00:37:53] Tim Little: Yeah, I couldn't agree more that tax strategists are worth their weight in gold. All right, we're running short on time. So we are going to transition to the turbo round. I'm going to ask you three questions that I ask every guest and I just ask for a quick, honest answer. Are you ready? All right, let's do it, Erik. What is one red flag every investor should look out for?

[00:38:12] Erik Oliver: high returns on any investment property always do your due diligence. You've got to do it, you can't take someone's word for it. Ultimately, it's your money. You're responsible to do your due diligence. So if someone tells you that they're going to get you a 90 percent return, it's probably too good to be true. And you need to do your due diligence.

[00:38:28] Tim Little: Yeah, absolutely. If it sounds too good to be true, as the adage goes, if it is, Probably is.

[00:38:33] Erik Oliver: That's right.

[00:38:33] Tim Little: All right. What is a myth about this business? You would like to set straight?

[00:38:37] Erik Oliver: I think a myth is that you've got to have a lot of money to get into real estate. There's a lot of ways, a lot of creative ways to get into real estate. and do your research, get your education, because there are a lot of, it's not, you don't have to have a lot of money to make money. Now, it helps if you've got a lot of money, and you can make a lot of money if you have a lot of money, but, I've met with investors and actually just in my seven years of doing this, I've seen people go from, Hey,I'm going to rent out my basement of my, my apartment or whatever. And they rent it out and then they move into a single family and then they go buy a duplex. And now they're investing in, they've got multiple investors and they're going out and buying 250 units at a time. And so I've seen people grow in a short period of time. You don't have to have a ton of money to get into this business.

[00:39:18] Tim Little: Yep. All right. And last question. What does success look like to you?

[00:39:23] Erik Oliver: for me. When I look at success or think of success, my goal is to retire at an age where I can support my lifestyle. I don't want to retire when I'm 75. I've had parents who have retired late in life and haven't been able to enjoy all that retirement time. So my goal success for me is one, being, having a happy, healthy family, and then two, being able to enjoy time with that family. Again, investing in real estate is a big part of that. Being able to be financially sound, so that I'm not having to work when I'm 75. So that's the goal. Not there yet. Still working, still here in the office. It's Friday at five o'clock. I'm still here at the office, but one day, the goal would be to be able to, have enough passive income to be able to, to be able to retire at an early age.

[00:40:07] Tim Little: Yeah. There you go. Work optional. I

[00:40:10] Erik Oliver: Yes. There we

[00:40:11] Tim Little: That's the phrase I like to use. cause I, I fear I might get bored if I like literally just stop working at

[00:40:18] Erik Oliver: Yes. I hear you.

[00:40:19] Tim Little: don't want to have to,

[00:40:20] Erik Oliver: You want to work terms when you want to go to work, not because you need to pay bills, right?

[00:40:25] Tim Little: Exactly. All right, Erik. I know this can be a complicated topic, so I appreciate you coming on to help clarify things a bit when it comes to cost segregation analysis, please tell our listeners how they can get ahold of you. And if there's anything else that you'd like to share.

[00:40:38] Erik Oliver: Yeah, no, I appreciate the opportunity to be here. Thank you guys for tuning in. If you have any questions, we're a niche accounting firm. We don't. Tax returns at our firm. This is all we do. and so if you have any questions, please use this as a resource. You can find our information at www.costsegauthority.com. We always will do a free benefit analysis. So if you've got a property you think might be a good candidate for cost seg, or if you've got a tax liability and you own real estate and you want us to look at your portfolio, we're happy to run some numbers free of charge. We're not going to charge you. We don't want to ever. engage a client that's not going to save significant tax dollars. So again, don't call me and ask me about earned business income or child tax credits because I don't know anything about that stuff, but if you've got depreciation questions, I'm happy to help any way I can. So again, please use this as a resource.

[00:41:25] Tim Little: All right, thanks again, Erik. We'll have all your information in the show notes. I appreciate you coming on and I look forward to continuing to do, see you do big things on your journey to multifamily millions.


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TIM LITTLE (FOUNDER/ CEO)

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