Episode 56: Capitalizing on Bonus Depreciation and Cost Segregation with Isaac Weinberger

Thank you for tuning in to the New York City Multi-Family Podcast. If you're a fan of the show, please support us by reading it on Spotify or Apple podcasts and sharing it with your friends. Enjoy the episode. Welcome back to the New York City Multi-Family Podcast. I'm Seth Glasser. Today we're joined by Isaac Weinberger from Madison Specks. We are talking about bonus depreciation and cost segregation studies. Isaac has been doing this for quite some time. I think the first time I ran into him, we shared a cab from the airport to a conference down in Miami and then we did it coincidentally again the next year. So I'm looking forward to hanging out with you and talking about this. We're going to talk about the big beautiful bill. We're sitting here at the end of October. So everyone is thinking about depreciation, tax write-offs and year-end deals. So this is perfect timing actually for you and bonus depreciation. So Isaac, welcome to the show. Thank you for joining us. Let's just kick it off. Like what is a cost segregation study and talk to us a little bit about bonus depreciation, which is back in the big beautiful bill? I love it. First of all, Seth, thank you so much for having me on. I've always respected you as a businessman, great broker, highly recommended broker. It does nice deals in NYC and we all know that when it comes to NYC real estate, people are brutal. It's brutal out there and I see your wins on LinkedIn and you have a great reputation. So for anybody listening, I know this wasn't part of the schedule, definitely. But yeah, you definitely have done some tremendous and tremendous strides in the space. So thank you so much for having me on. It's a tremendous opportunity and honor to be on this podcast. I know there's many listeners. Your team has done a tremendous amount of work in this space and you knocked out this podcast and I've listened to many of them and it's just it's incredible. Cost segregation, bonus depreciation. I always tell people that cost segregation is one of the most misunderstood, misconcepted, valuable items out there that people don't leverage and take enough advantage of it. And that being said is that people focus so much on the deal, on the financing, getting a good deal, the cash flows that maybe doesn't, it has a good opportunity down the line, value-ad strategy, whatever it may be, raising equity. And these things are very important. I like to call it the actual main course, the entree. But I wouldn't say that cost segregation is the dessert. Sometimes you're in the mood of you get and sometimes you don't. I say it's a very important appetizer. You're not going to go to a stake house and not get an appetizer. You got to start off with something nice and cost segregation, if used correctly and leverage the right way, has a tremendous amount of power, a tremendous amount of power and we'll get to it, I guess further in the podcast in the show and how that works to raise equity to potentially offer higher bids. But just to start off for the regular layman, I guess, Cossack for dummies. And don't worry guys, you guys are not dummies, but I'm just referencing. I'll be the first to raise my hands. Nobody feels alone. Yeah. And believe it or not, I actually have owners of sometimes a thousands of units will call me up and they're like, Isaac, I know everything about real estate. I don't know Cossack. Teach me as if I'm a second grader. Okay, so let's pause for a second here because you can, the best part about real estate aside from the cash flow and the appreciation of it is the depreciation. This is a big aspect for real estate professionals. Not everyone gets to take losses against their income, right? If you're a, if you're a dentist or a teacher, whatever, any 1099 type employee, like you don't have a lot of losses to offset your income. The best part about being a real estate professional and owning real estate, maybe not the best for everyone, but like a huge component of it is the paper losses, the depreciation. Okay, so talk to us, a cost segregation study is this, this is basically like you don't get to just appreciate an asset because your accountant said so you got to document this a little bit, right? So if I buy a property, how does it work? Do I, I don't do the, the, the losses myself and tell my accountant, this is where you come in. I mean, you prepare this type of study so you can accelerate the depreciation rather than depreciate something against what is it? 39 years or 27 and a half years, you can condense the depreciation either to year one or maybe over five years. So talk what is a cost segregation study? Absolutely. Tell us what it is. I was just getting into this and I think it's important to know exactly the background. So every time you buy a property, it doesn't matter of its residential commercial, it depreci, it has a lifespan. The IRS has given it a lifespan. A residential depreciates over 27 and a half years and that includes multifamily, all multifamily and commercial depreciates over 39 years. It's anything outside of multifamily and single family. And mobile home parks is its own category, but usually it's treated as 27 and a half years. But that's like the given. That's the baseline. But you can do better. Which is why you have a job and we just why you're here. So let's find out how that works. Exactly. So that's the baseline. And your accountant is doing it for you. What you do with a cost-ex study is that you're accelerating those benefits. I am not getting you extra benefits. What I'm doing for you is I'm getting you more dollars of depreciation today versus over time. And the question you have to ask yourself is how much money, how worth it is it for me to have this extra depreciation today versus over time? Because if you think about it, if you accelerate on a five million dollar asset, you're able to accelerate a million bucks in benefits versus the traditional, let's say, 150 grand in depreciation per year. That's $850,000 swing. You offset your taxes. You have an additional 200 grand in your bank account that you would have given to the IRS. You put that down as a down payment on a building. You're in it. You had access to that cash. Now you're going to get your return on investment cash flow and more depreciation and appreciation because I had that extra cash in my pocket today. I see a guy on the street and say, "Hey, pay me $5,000, $6,000 to give you extra an interest-free loan for a few years." That's really what it is. You're taking out an interest-free loan. You're paying a few thousand dollars for that. But by accelerating those benefits, we come into the property. How does the cost segregation work? We come into the property. We identify all the non-structural items. So we're sitting in this room right now. I see the carpet. I see some lighting. I see some walls that are non-structural. They're more like the attached type of walls. You attach them yourself. Those are all items that are non-structural. We come into property. We identify those. Those are items that are always thrown into the structural bucket because an accountant doesn't know how to do a proper cost tag. It's not a licensed engineer that knows that I identify every single lipo. So he throws it under the long-term depreciation bucket. Essentially, there are items in there that you can accelerate. We're not talking about magic. Those are items that technically are allowed to be taken on a faster time track. The average I want to just pause here because you mentioned the accountant. So if the average real estate investor does not do a cost-seg and they give their K-1s and whatnot to their accountant, does their accountant just most of the time, obviously, intuitively do their own straight line depreciation? Do they tell you, "Hey, why don't you get a cost-seg? Do they do it?" Does the accountant do that themselves? How do you, I don't want to say compete, but maybe interact or differentiate your services between what the average investor can get from their accountant? That's a fabulous question. There's a so important for everybody to hear. CPAs to hear, investors to hear. I would say 50% of accountants just do straight line to call it a day. They're always going to do it for you. I would say the other 40% are real estate savvy CPAs are like, "Hey, go do a cost-seg." They'll refer out to people like me or other cost-seg guys. I will do the cost-seg, they'll see the numbers, they'll plug it in to the tax return to the K-1s, beautiful. Then you have another 10%. I would say, you know what? 5% of accountants that will do their many own guesstimate cost-seg. It's not audit-protected and backup and they won't be too aggressive because they don't really have some sort of methodology to back it up. They'll just say, "Hey, generally this and this type of property would get 18% of the purchase price and that of land. We're going to take 18%, maybe if we get audited, we'll quickly do a cost-seg study." Then I would say that the last 5% are accountants, let's say, at citybiz, Mark, Eisner Amper, they have a built-in cost-seg shop and they'll just do it themselves. Now sometimes their clients will meet me by a conference and be like, "Hey, Eisner Amper is my accountants. They also have a cost-seg shop. They don't specialize in it. They do a great job." But you guys specialize in cost-seg. I'm down to have a conversation with you. "An Eisner Amper mark them." They're all fine with that. You bring their cost-seg report to them and they'll file it for you. That's the way I would break it down. But I do want to make a point over here and I think it's probably the point that I make the most on average day. If you're in real estate, you on real estate, get yourself a real estate savvy CPA because you need a guy that's going to make sure you're doing a cost-seg. Make sure that you're playing your 1031s the right way. There's so many tax breaks in real estate and if you snooze on them, you're leaving so much green cash on the table. Yeah. Okay. Can you tell, we'll get into the math in a second because I want, we'll do like a simple math equation on how it works. But what's the difference between bonus depreciation and accelerated depreciation? Okay. This is a hot topic and because we are in NYC right now, we're in New York. For New York, people, this is very important to hear. Prior to September of 2017, before bonus was ever introduced, you were always able to accelerate certain components from the 27.5 or 39-year bucket, which is called the structural bucket, the structure bucket. You could accelerate them certain items to the 5 and 15-year bucket. Five-year items include carpet, flooring, chandeliers, all that stuff, non-structural, accelerated to that bucket, get it over a period of five years as opposed to a period of 27 and after 39. Same as 15-year, 15-year land improvement. So an NYC building doesn't really have land improvements. It's parking lot landscaping. But when you buy a property out of town, you have garden-style properties. You have parking lots, you have pickle ball cords, you have basketball courts. Those are all items that are considered a 15-year component. You could accelerate it to over a 15-year lifespan versus 27 or 39. That was an effect for years up until 2017. Trump comes into office. He's a real estate guy. We're going to make it more advantageous for real estate guys and incentivize them even more to buy more real estate and fuel the economy, fuel loans, interest and stuff like that. What happens? He says bonus depreciation is here to we're going to introduce bonus appreciation. Bonus appreciation is basically activated once cost-seg is done. Engineer comes into the property. We identify 25% of the asset net of land as a purchase price as components that can be accelerated to five in 15-year bucket. Trump says once it's activated, once it's accelerated, boom, activated bonus depreciation, take that all on year one. That's what happened. It's a domino effect. Okay, so you went from accelerated to bonus. First, you got to identify it as items that can be accelerated. What does that mean? That means I come into the property and we see that we identify 25% of the purchase price net of land of the asset that could be accelerated through all these items, parking lot, flooring, vinyl flooring. Once you activate it and you identify those items as items that can be accelerated, bonus kicks in and you can take that on year one. Bonus cannot be kicked in before a cost-seg study is done because we don't know which items in the property are. So you physically have to part of this sounds like you actually have to physically go and document, hey, I've looked around. There's the boiler. There's the LED lights, whatever it is. You actually have to visit. So you're visiting the property. You're doing a property tour. I mean, let's say you go whatever you see an apartment building over here. How long are you in the property for? How long does this inspection so to speak taken? What do you typically look for if you're doing a cost-seg on a New York multi-family building? I love it. Yeah, absolutely. So either we go physically or virtually. What happened was until COVID, everything was physical. We couldn't get it. The flights during COVID and IRS actually let us know that we could do virtual tours essentially a property manager walks us around the entire property. With a zoom camera zoom zoom session, we just walk around everywhere. But where do we look? Because we do have top-of-the-line engineers, they know exactly where to look. They would come into a building like this and really just go into every single room, every common area and say, hey, this is furniture, this is fixtures, this is equipment, this is non-structural tables, shan the layers, non-structural walls. Everything. Do they have to go into apartments? Apartment generally, let's say you buy a multi-family property and there's two different unit types. You have a two bedroom and a one bedroom. We're allowed because of the same types. We're allowed to go into two units of each type. You don't have to go into all 400 units of yourself, 400 unit property in NYC. NYC is a little different because there's no parking lots and stuff. Generally, you don't have that outside parking lot sometimes inside. You'll have an indoor one. That's actually considered structural as opposed to an outdoor parking lot. Consider non-structural. Okay. Okay. Okay. But okay. So you mentioned parking lots, which is interesting. And then you mentioned land. So you can't depreciate land. Number one. Land never goes bad. Land never goes bad. But it's interesting that land is different than a parking lot because I just instinctively, it's not dirt, but you can depreciate a parking lot. Okay. My question is how do you figure out how much the land value is? It's a great question. That's probably going to be different in New York City versus the middle of nowhere USA. Exactly. It's a great point. It's something also that I'm on the call. I'm on calls all day with clients about land values. So just address what you said. I also used to think I'm like parking lot. That's land. And the answer is parking lot is it's paved with either asphalt or cement. And that goes bad after 15 years per the IRS. So if you're going to spend a few million dollars on a parking lot and that depreciates the Tori, it's right. Let me get value out of that. I have a depreciating asset. Ground never goes bad, but pavement goes bad. You got to redo it. The salt in the winter, right? It kills it. So that's why you get parking lot as a trend is in so much NYC real estate versus you buy a 400 unit in, I don't have to go 400, you buy a 100 unit, a multi-family deal in New York versus 100 unit in Texas. You're going to get 10, 12, 13% more of the purchase price in that of land as a tax deduction year one because there's so much that we can allocate towards the parking lot in Texas. Exactly. And any garden stuff in New York City, there's just, there's no parking. So it's harder to get, okay, so now let's hone in on what asset classes and or locations maybe is kind of what you're touching on because of the asset class out of the geography are most applicable or most commonly utilized for bonus depreciation. For sure. And that's something that everybody wants to know, but I do want to just go back for a second. Land values are important because like you said, I knocked down this building and sell this piece of land right here. It's going to go for way higher than if I'm knocked down a building and I want to go over there. So usually we check the tax assessor's website. They have some sort of way of evaluating that. A lot of times it is pretty high in certain areas and I always suggest to clients that might spend a few thousand dollars on a land of brazil because you could always bring it down. What's the default estimate? Default at we always use a benchmark of 15%. But anytime we deal with California or New York City properties, we always raise it to 25 30% as a benchmark because it's always that much higher. Just to be a little more important. California is notorious for having crazy land values and New York is pretty bad too. In areas like this, understandably because it's great realistic. But I always tell my clients challenge the land value. Okay, so you're getting into a part of the conversation where you're massaging stuff. It's not necessarily black and white. So how much of your business is black and white and you're just looking at the manual and seeing what you can actually get and there's no question about it. And how much of it is in a gray area and you're adjusting the speculation based on the client's comfort level information available, stuff like that. How do you work that balance and is there a balance? So first and foremost, I will say on the hot mic that everything that we do is completely in line with the IRS. We will not play games. And I lose business sometimes because of that because other people sometimes are willing to play games like they want to put. But I will tell you, due to the fact that we have been around for 20 plus years and we have top of the line CPAs and engineers, we know where to squeeze in a legal way as much as humanly possible. It was funny. I just want to say I have a quick story. So I was dealing with a guy, a hotel guy and that was a $20 million hotel and land value is at 50%. And he had just switched over to me and I said, we became good friends and I said, would your other guy have suggested getting a land appraisal here to bring it down? He said, no, he was just called the day. I said, you're getting a land appraisal. I said, you're spending the money and you're doing it. I said, if it doesn't come through, I'll pay for it. Okay. $3,000 with this land appraisal, he brought it down to 20%. He ended up getting a few million dollars more in depreciation because he got the land appraisal. So my point is you ask a question. Of course, I have a good group knowing how to squeeze in a legal way is very important. And yes, this is not title insurance. This is not an item that everybody's doing the same job. This is a very nuanced type of item that have done and used right. You could go ahead and get a lot more benefits from it than if it's not done right. Is this your sales picture? This is my, but I'm passionate about this and I tell people all the time, they're like, hey, Isaac, we're going to do this DIY study. Do it yourself. I said, I promise you, I want to do business for you. But even if you're not going to use me, do me a favor, do yourself a favor. Use somebody that's an engineered-based shop. Get yourself a legit study. And this is not manipulation. This is straight up because a DIY study, do it yourself. You could just actually do it yourself without paying $1,000. Just guess them at the numbers. It's so important to be able to challenge the land values. Make sure that you're keeping as much meat in the bonus possible. We are coming into the property and dissecting it down and squeezing. You give me a 10-pound cow. I want to squeeze 10 pounds of meat out of that. I don't want you to give me a 10-pound cow and I squeeze four pounds of meat out of that. My point is that we don't want to leave money on the table. And I will do everything in my ability. My team will do everything in my buttons. A lot of shops out there. And I will say it again on the hot mic that there's a lot of shops out there, reputable shops that will do the same work as us. You got to get yourself a reputable shop that knows how to make sure the land values are completely in line. They're not being just you're sleeping on it. You got to make sure you're squeezing out every single last lipo piece of carpet. There's differences. You got tile flooring versus vinyl flooring. That's a huge difference. Tile structural, vinyl is not. You got to make sure everybody knows the intricacies of, hey, what's considered this? The boil of special electrical. Do people do this in New York City? No one that we talk to clients. It just doesn't come up. I don't know if it's because it's not ingrained in our business as the broker like selling the building. No one says to me, hey, Seth, can I get my cost set guy into the building? It's can I get my engineer my boiler guy? Whatever. Is this something that just happens after they buy the building and we don't talk about what's your sense of? Is that people do this? Yeah, so it's a great question. So a lot of time that counting team takes care of it. So you're not dealing with that counting team. You're dealing with actual owners. Right. So when you deal with bigger guys, there's CFO, there are accountants, director of finance, they're taking care of it. So you don't hear about it. Now I will say that there is a solid 25% of owners in NYC who are not properly taking an advantage of this. They have a total misconception. They think I bought a property in 2020 and I ready started taking straight line too late. That is so untrue. 50% of the work that we do are lookback studies. We don't have to amend your tax return at all. We file a form called 3115. It's a change in accounting method. Boom, we take the depreciation you could get from a 2020 acquisition and use it for 2025. You're so many. You get the bonus bonus. Yes. That's the most people have so many miss. Well, if you took a little bit of depreciation over those, we just minus that off. You just subtracted off. Exactly. Okay. So you can go back retroactively and get the benefits for a 2020 purchase on your 2025 tax return. People are so misconceptive. And that's why I tell people just have to be honest. So even if the law didn't apply in 2020, the law was then the law. Okay. Well, as long as 2017 dollars, exactly. I will sell people. I said anything before 2017, we can look at but you're not going to get bonus. It probably won't be enough. Me and the won't to warrant a study. But anything from a purchase from September of 2017 and on or by the way, even you purchase something in 2013, we didn't extensive a Renault. You a big renovation and that finished after 2017 after September 2016, we could do a cost. What's the rough cost for your services? And the average study, I would say average is out to $5,600, maybe $6,500 something like that. Okay. So you're talking about $5,600, maybe $7,000. Drop in the bucket. Yeah. These are we're talking about like humongous real estate transactions. Like millions of dollars are potentially on the line. And then okay. So with the $5,6,7000, what happens if I get audited? Do you support me? Are you talking to my accountant? Are you licensed? Like we're licensed. We're actually one of the companies I'm going to sell myself again that has a legal team in house to fight audits. We fought many audits. There's no additional expense for you. The IRS and the government knows about cost. They instituted it. So it's not having a red flag. They know real estate companies do cost. And they did it to incentivize buyers to buy more. Yeah. So it's a no brainer. This is how I want to tell you. I want to say something. Okay. We're at NYC. Everybody loves Trump. And that's a little bit too big of a blanket statement. But Trump is doing some good stuff out there. Trump paid $750,000 in taxes a few years ago. And everybody's like, oh, another Trump scandal. And you know what I asked myself? I said, why would you pay $750,000? And the reason he paid only $750,000 is because of cost I can 1031. There's no reason for a guy that buys real estate to be paying federal income tax. State is a different conversation. Federal, which is the big bulk. Yeah. You could get out of it. And you'll leave him money out. And just so the audience knows the depreciation you could only use to offset your federal taxes. You can state as well. New work is complicated with state. But for New York, for New York, yeah. For example, that's the big one. That's the big chunk. For sure. Okay. Let's get into a little bit about LP's syndicators. You have all these people raising money. They're putting in 5% of the equity. And maybe they own 20% of the building. Nobody talks to me about depreciation. No real estate values for a lot of apartment buildings in New York City have not gone up all of a sudden because bonus depreciation is back. But we do a lot of work on triple net leases. And specifically those that are applicable for bonus depreciation. And people get really excited about that. And cap rates dipped a little bit when bonus depreciation came back for triple net leases like car washes and oil change stations and stuff like that. So let's talk. Let's start by talking about the New York City folks that raise money and are sitting in a GP position. But their LP's might not be able to take depreciation because maybe their doctors dentists lawyers and they don't qualify as real estate professionals so they can't actually use the depreciation. Let's can we talk a little bit about about that? I'll let you pre-flow those. So this is one of my favorite topics in the cost of the world. And this is something that I try to bring to my clients that this added value. I had a structure depreciation the right way to really leverage it. Raise more equity. Nobody's going to get out of deal because cost ag. Now you will have sometimes I need write offs. It's worth it. Even if it's a bad deal. I might as well just get it. Most people got to look at the deal. But once that's a good deal. I bring the guy deal. Another guy brings a guy deal. Both great sponsors and great deals. But one has higher depreciation. Why not? So if GP's structure it the right way they go to market. They go to market. They go on the contract and a deal. 100 unit multi family deal. And they're raising especially in NYC and such a deal. I probably cost if I had to guess 50 million bucks for such a deal. Whatever it is. Let's give a 50 million dollar price tag on it. 70% LTV. So they're raising. What is that? What's the math over there? They're raising here. Just do 10 million bucks. $7 million loan. Okay. 3 million dollar raise. Let's work with them. Let's say with bonus depreciation. Let's be very conservative. We're getting $1.5 million a year one. Essentially what happens is for every 50 cents for every dollar you invest. You're getting 50 cents on the dollar and depreciations. You invest a hundred grand. You're getting a $50,000 loss. You're not really all in for a hundred grand. If 50 grand to that average rich guy easily means times 35 37%. So we're talking about LP position. You're talking about. Yeah. From an LP standpoint. But from an L. But my understanding from talking to my own personal account is that if you're not a realist 100% we'll get you that we'll get to that 100% you're just in a thousand percent. We will get to that in a second. So just again let's put it out there. That can easily be worth 50 grand times 35%. Whatever that number is let's say that's I don't know 18 grand or something like that 20 grand. You're not all in for a hundred. You're all in for 80. So you're asking a great question. Real estate professional status reps. This is so true in every single person. If you're investing for depreciation purposes or the GP's telling you make sure that either you or your wife can qualify. So even if you're a physician sometimes if the wife is not working spouse is not working take it somehow qualify if they're putting the investments in their name they're looking at the deals to invest in they could qualify it's easier said than done but it's possible. But also keep in mind you can a passive guy can always offset passive. So any real estate proceeds just putting stuff in your wife's tape. A lot of people will do that because you file jointly you're allowed to do it. So if she's enough involved she's involved enough there are CPAs that will feel comfortable doing that. But again if you don't feel comfortable with that keep in mind that passive could always offset passive. So if you have a doctor that's making a million bucks a year and he's investing hundred two hundred thousand dollars a year. What's happening is he's making money off the real estate that he's investing in he might own some duplexes and stuff like that that he's cash flowing on that money. And by the way some CPAs will say capital gains is considered passive. It's a big argument in the world. But let's say according to the CPAs that consider capital gains passive you can always offset passive granted you can't offset your physician's income. But again if you have a two hundred thousand dollar tax liability on a passive let's call it a passive level. Let me at least not pay taxes on that that you can always do. But again so true and every single person has to notice when you're investing in a deal if you're not a real estate professional you don't have passive income you won't be able to use those losses. But again if you can use them and in every deal you do have guys that do qualify when they're limited partners as real estate professionals usually half half. A lot of guys doing other sponsors invest in other sponsors deals and they want to get depreciation. This happens all the time family offices they want depreciation a hundred thousand dollars invested on this deal that we just gave this example is fifty cents a dollar and by the way there's many deals that you can get higher than fifty cents on the dollar seventy five cents on the dollar eighty cents there's waste especially allocate depreciation where the GP really wants this family office to invest I'll give you my portion of depreciation to make it more to incentivize you even more to invest with you on my deal. My point is you could allocate depreciation. If you structure the OA a certain way there's waste to the operating room. Yeah I'm ready to do my exactly. Well and so if I put in ten percent of the equity for a deal and it's power pursue I get ten percent of the cash flow but you could take some of my depreciation or vice versa I can get twenty percent of the depreciation. There are ways to do that now officially the other person is giving you has to get something back again I'm out an attorney not a CPA but I will say not tax or leave that you can do it and have the conversation with our CPA team with your CPA team. Yeah but the point is that if a leverage I want to I know that we're short on time I think this is a very important showcase this example. I had a client buying a deal in Louisville in Tucket okay he was under contract on the deal for a while he finally raised the equity he got the deal close he was about to get the deal closed and he couldn't raise the last 200,000 I don't he couldn't come up with it I don't know what happened he calls me he knows I'm like connected I know people he's Isaac help me out I'm a client you know anybody and I said I have a guy for you but you're giving dollar for dollar so if you invest 200 grand you're going to give him 200 grand depreciation he wants 300 grand depreciation is the way to do it he's hey I'm investing my own money in the deal I it's important enough for me to close this deal I'll give him I'll give away my depreciation he did it this investor came in $200,000 check boom close the deal would the deal of close without this maybe leveraging depreciation the right way got this deal closed the investment sales broker made money the debt broker made money because of my smart idea this is not to to my horn but my point is that leverage the right way depreciation of a huge and again I will say it loud and clear if you're not a real estate professional you don't have passive income as a limited partner it's not going to help you so much so in New York City New York state there's something called the state adback be very careful when you're investing with a GP well you're investing with a sponsor if they do a cost second you don't you can't take the benefits you will still have a state adback so we'll actually come back to bite you make sure they don't do a cost ag or if they're going to do a cost ag there are ways to structure the cost ag where you don't take bonus depreciation where you won't get the state adback but if you take standard bonus you'll get a state adback and a will hurt to LPS okay so now let's talk about the downside because we've been talking about all the benefits on all that stuff about bonus depreciation the downside is your basis is zero you bought the property your basis is zero if you sell it the next day you have a humongous capital gain humongous capital gains exposure and your basis travels with you so you have to 1031 or you pay the capital gains taxes which is effectively the same thing is what you didn't pay from the bonus roughly so what is the downside of taking the bonus or accelerate depreciation why would people not do it right i'm sure you're out there all day like pitching clients like trying to earn business and stuff like that and some of them might say thanks but no thanks what is their typical reason for turning down your services so i have in my inbox over 10 emails over the years from clients that hey Isaac send the doc to sign and said hey Seth it doesn't make sense for you to do it over here and they're like what i just asked for the guy my yeah i don't think it makes sense i will never trick a client into doing something that doesn't make sense and they appreciate that and sometimes it doesn't make sense because of what you're saying if it's a short term hold hey i'm gonna get hit with this depreciation recapture the next year right is it worth it for me to have this write-off and have that extra cash unpack it for a few months i would have paid the taxes in april and now i have it for a few months no if you're holding it for a year or two i would say probably don't do it but again think about it this way you will get hit with recapture if you don't 10 31 and you're not forced to 10 31 you would want to 10 31 because you'll get you'll be able to negate it and then roll it in but again if i would see you in the street and say hey pay me five six thousand dollars i'll kick your tax liability down the road by four years five years you're right capital gain will come back to you first of all just disclaimer some of the recapture is captured at a lower rate than what you initially could use the cost egg against so cost egg you could use the entire thing against your federal income tax on the highest bracket 37-1% not everything way some of the recapture is maxed out of the 20-1% bracket just something to know FYI like it's just it's important to know that now even if you want to make an argument that hey whatever it is what's going to happen i'll kick the can down the road by four years very nice what can i do with this extra cash for four years the profits that i made over these four years are so much more than the downside of having to pay my tax liability then so when you combine getting debt and the and the accelerator to bonus depreciation it's really amazing so let's walk through the math with a simple example you can buy you buy a million dollar property let's allocate 20% to the land so you have you do a bonus you have 800,000 of losses so you can now take that 800,000 of losses and offset it against your you're not going to get 800,000 unless it's that's a gas station or car wash where you can get the whole thing so let's just gas station or car wash do the let's knock it out no by the way i made a linkedin post about this a few days ago and people were going crazy it got 25,000 views people are like this is nuts yeah mo this is why we're talking yeah but i'm just saying many people don't buy gas station car washers and it's still worth it you might only get 30% or 25% or 20% of the purchase price and the land is opposed to car washers and gas stations where you can get 90% but it's still worth it even when you don't get as much as a gas station car wash it's the only argument i make it okay fine and why see building multi-family you're selling every single day you can still do it and get tremendous benefit right okay so you have you buy the property for a million bucks you allocate 20% to land so you got it 800,000 dollar bonus depreciation that you could use to offset your income so if you made 800 grand that year you tell the federal government you actually made zero so you pay no federal income taxes okay that's part one true so far true okay next step is you get a loan on the property so you bought the property for a million dollars let's say you got a 70% loan so you come out of pocket with 300 grand and you get the full benefit because it's the depreciation is calculated not on your equity check but your purchase price right minus the land value so you could invest the 300,000 dollars in buying the property and presumably there's some type of return there maybe five six seven percent whatever so you're getting monthly distributions now if you did not do the if you did not buy this property and get the bonus depreciation you would not have had 800,000 dollars of losses so you would have paid 35% of 800 grand call it is probably around quote a million bucks 300 grand that's the same that you could either pay 300 grand to uncle Sam or you could take the 300 grand by a million dollar property with debt pay Isaac $5,000 to give you a cost segregation pay no federal income taxes and make a six percent return or whatever and a property that's a property that in theory is appreciating I call this buying property for free give the money to the federal government or you can give a little tiny slice to you and it is so it's that's basically the math 100 percent but again keep in mind gas stations and car washes multi-family it will look a little different but you still it still would play out in a similar fashion but it's crazy because when you buy these types of assets you could literally buy them for free and I posted this on LinkedIn this whole gas station scenario two days ago and somebody's oh this is not called buying it for free oh my dude if you play your cards right essentially you are because you would have given like you just said that 300k to the IRS and now you just bought a property with that same it's it's called playing with house house money right there yeah playing with house there's nothing illegal about this is just this is you got a real state guy in the White House like this is 100 percent 100 percent so this is a real thing we've got clients that have done it all over the place I've done this personally myself and it's great your services are super super value valuable the bang for your buck some blue bull like the fact that it's only five grand for you to give me like hundreds of thousands or even millions of dollars but of of tax spending yeah I wish we could love them crazy yeah we double from five if my fee is three four five six percent to sell the building like your fee is a pimple of that it's really amazing it's a drop in the bucket it's a drop in the bucket it really is it can easily sell an open market for $10,000 a cost like but I guess everybody's just stuck at in the five six six and a half range but eventually we'll go up and you yeah no not too much right think about it like you said even if it's a $10,000 fee that's literally a drop you buying a little duplex fine but you're buying a 10 20 30 million dollar yeah literally like yeah nothing all right what anything as we wrap up here like future focused what do you excited about nervous about you personal personal or business like whatever like anything anything that's front of mind so first of all I'm excited that in the big beautiful build bonuses here to stay so that's just at least for now unless they change that I don't think they will because it incentivizes buyers it keeps the banks giving out loans it keeps it oils the machine so I'm excited about that I'm excited for the future of cost again like I love educating and when I go to sophisticated owner and I break it down and they're floored and I could I just want to break this down for you I used to have a friend that worked in cash advance and he made a lot of money and he stopped doing it he felt for himself I'm not throwing anybody under the bus that does cash advance but and they lend out stuff on the fly suitcase a cash for 35% return but he couldn't do it anymore because he just felt like it was just a business that he was quotation marks like hurting people like they were stuck one of the things that I love about classics so much versus other things and don't get me wrong you do investment sales it's a great I feel like I'm really helping people like hey taxes I'm sorry to say I think it's an abuse of the system I'm all here to help out the government I think they miss you is a lot of the funds that's my personal opinion and there's a lot of good stuff going on but hey let me lower that a little bit when I make my paycheck and I give so much that it's like it kills you right so to help people like hey we just brought your tax liability down by so much it's like you see the smile on their face it's amazing and all the also the educational component to really teach people I love that so much so you are doing I'm it's for exactly that's what we're doing we're doing it's not going to work I'm going to give it exactly exactly all right cool thank you everyone Isaac what's the best way for people to get in touch with you if they want to reach out for it with questions or to yeah so my wife always tells me that she wants to get through to me she's in a message me on LinkedIn versus text me I'll answer they're faster but no honest here is no LinkedIn I'm very active email me text me I like to use my personal cell like no office line like I'm in a personal situation over here you call me I'll answer if I can I'll tell people your phone number 848261 130 my email is i wineburger at Madison specs you spell that i w e i n b e r g e r at Madison specs.com is m a d i s o n s p c s dot com reach out to me I love to chat we try to make costs like fun host of venn spring valued our clients and listen I'm here to revolutionize the space I love it I love it we're here to do at the very least it's fun to talk to you that's awesome Isaac thank you and we'll see everyone next time thank you guys for listening we hope you enjoyed this episode of our podcast if you think you or someone you know would make a good guest or have a topic of conversation that you'd like us to cover on a future episode please reach out once again thank you for listening and see you next time