The Science of Flipping - How Investors Legally Avoid Taxes with Cost Segregation | Jeff Hiatt

Episode Date: November 8, 2024

Today I sits down with cost segregation expert Jeff Hiatt to reveal a powerful tax-saving strategy every real estate investor should know. With over 25 years of experience and 25,000+ cost seg studies completed, Jeff has helped clients save billions by accelerating depreciation and keeping more cash in their pockets. We discuss how cost segregation works, who it benefits most, and how even small property owners can take advantage of it. From single-family homes to multi-unit apartments and commercial buildings, learn how this strategy can help you reduce or even eliminate your tax bill. Plus, Jeff explains bonus depreciation and offers insights for high-income earners looking to optimize tax savings through real estate.     Connect with Jeff Hyatt: Instagram: @depreciationdoctor Facebook: @depreciationdoctor Website: costsegs.com     The #1 training and coaching system to launch, grow, and scale your investing business! 𝐋𝐞𝐚𝐫𝐧 𝐌𝐨𝐫𝐞: http://www.thescienceofflipping.com Turn cold real estate leads into engaged motivated sellers on auto-pilot using the power of A.I! 𝐋𝐞𝐚𝐫𝐧 𝐌𝐨𝐫𝐞: https://www.rocketly.ai/ Have a question? Ask me anything at https://www.askjustin.ai/ 𝐀𝐛𝐨𝐮𝐭 𝐉𝐮𝐬𝐭𝐢𝐧: After investing in real estate for over 17 years and almost 3000 deals done, Justin has created a business that generates 7 figures in active income through wholesaling and fix and flipping as well as accumulating millions of dollars of rental properties including 5 apartment buildings, 50+ single family homes, and 1 storage facility Justins longevity in real estate is due to his ability to look around the corners, adapt to changing markets, perfecting Raising private capital, and focusing on lead generation which allows him to not just wholesale and fix & flip, but also accumulate wealth through long term holds. His success in real estate led him to start The Entrepreneur DNA podcast and The Science Of Flipping podcast and education company, where he has coached and mentored thousands of aspiring and active investors over the last decade. He is a nationally recognized speaker and is on a mission to educate as many people as possible on becoming a successful dynamic real estate investor. 𝑾𝒉𝒂𝒕 𝒕𝒉𝒆 𝑷𝒓𝒐𝒔 𝑯𝒂𝒗𝒆 𝑻𝒐 𝑺𝒂𝒚 𝑨𝒃𝒐𝒖𝒕 𝑱𝒖𝒔𝒕𝒊𝒏:  “Justin is one of the best trainers in this space. He really gives everything to his tribe.” – Brent Daniels (TTP) “Justin’s ability to connect with people and help them understand what he is teaching, is unparallelled” – Kent Clothier (REWW) “We have been in the trenches flipping homes in Phoenix for over a decade, he is one of the best to do it.” – Sean Terry (Flip2Freedom) Subscribe To Justin Colby: http://youtube.com/justincolby View All My Videos: https://www.youtube.com/c/JustinColby

That's a big concern for people as I don't want to amend the returns and all of that. Well, you can technically go back to 86 when the tax law changed. No kidding. With the 3115. Now, typically you won't go back that far the real window of opportunity for people where it makes financial sense because the accountants will often say, Justin, what are you going to do this for? It's just a timing difference.

Yeah. That's what they say. They go, oh, it's just a timing difference. Well, it is a timing difference yeah that's what they say they go oh it's just a timing difference well it is a timing difference but if I give you the opportunity Justin to take a deduction today versus 27 and a half or 39 years would you rather have it today or would you rather wait what is that besides the flipping this might be my favorite episode year today because it's all about paying no taxes ever again. This episode is one that you are gonna want to stick with because I have

a dear friend of mine who has done 25,000 cost seg studies in the last 25 years and have saved people over four billion dollars. Jeff Hyatt, what is up brother? Hey thank you very much for having me here Justin I'm thrilled to be here. I've seen some of your prior episodes and they're amazing and the folks you bring in. So thank you for allowing me to darken your doorway here. So thank you for letting me be here.

Well, I appreciate it. You are my very own cost segregation specialist. So if you need anybody to do your cost segregation studies, I'm telling you, this man does it for me. He's done it for 25,000 other people he has helped save four billion dollars of income taxes Or maybe I'm saying that a little wrong before billion dollars of no that's taxable income Guys, this is your man. So first of all go follow him at depreciation at depreciation doctor on Instagram Facebook I think he says Jeff Depreciation

Doctor. You got it. Costsegs.com is the website, Costsegsplural.com. This is my guy, so he's good enough for you guys. So with that out of the way, let's talk about what the hell is a cost seg and why is it so important. So cost segregation studies are the way the IRS allows you to accelerate depreciation. So a cost seg per se doesn't give you more depreciation, but it allows you to take the

depreciation you would get over 27 and a half or 39 years. It allows you to take some of it earlier. And by taking it earlier, what that does for the buyer of the property, the owner of the property is allow them to reduce their current income tax so instead of sending money to Washington DC they get to redeploy that money in their own world and buy their next property more quickly or they can you know buy you know they can improve the building so that thereby they can charge maybe a higher rent without having to go to the bank for more mortgage money. Yeah, the simplicity is you don't have to cut a check to the IRS.

You can actually keep the money and either improve your property or buy another property, et cetera. I mean, that's the simplicity of it. This is why it's brilliant. Now, the key that I want to make a major distinction because I come from the single family space, where's the argument where it's worth it to do a cost segregation study on a single-family home? More often than not now that I'm also in the apartment space and more in the commercial side and all these other

things, that is the obvious and we'll get there but for all my single-family lovers that have rentals or maybe in fix and flips or whatever, where's the fine line for you that you advise like it's worth it to do a cost-seg study or it's not? Way back in the day when we first started, we might have said, you need to be at about a million dollars. Now, that was 25 years ago. Because we didn't have the same database, we didn't have the same technology,

we didn't have the same team that we have now. Because we have about 10 accountant types and about 27 engineer types, we can now push that number down to somewhere around 300 grand of depreciable basis. And that could be in one property or it could be across multiple properties. So ultimately what happens is it may not make sense financially for $100,000 property, but if we can aggregate a bunch of them together, that can start to make sense

if we can get to a certain threshold. But it can be a really low number. Yeah, so for example, I'm doing a bulk loan, I'm taking five of my rentals and I'm wrapping into one loan. So I could go take those five and do a cost seg study against those five. I'm making up the number, let's just say

all five combined are worth 800 grand, I'm making up the number. Let's just say they're all five combined are worth 800 grand. I'm making up the number. Then it would make sense. Where independently they're worth 150 grand and that could be a challenge because it just won't it won't look exciting to you. You'll look at it and go whatever. Yeah. But if you're talking about an $800,000 basis then we can start to make it look good. Okay, so well then I'm gonna call you after this episode again, we'll put that into my next round of things to do. Perfect, and on that note, when I said make it look good,

typically what we find is that the metric that most clients look at is, hey, if I spend a dollar, how many dollars am I gonna get back in tax deferral? That's right. So you spend a buck, you save four or five bucks, most people will say, hey, that's a good deal, let's do it. That's right. We hit that threshold kind of at a minimum around 300 grand,

especially bonus, depreciation helps turbocharge that number. Right. So that can be really good. So this is where me and my accountant go Head to head a lot of times right? What is depreciable? What is in what's gonna count? What's not gonna count? So let's talk a lot about the the grainy alert. There's not a lot of people that are Nearly as familiar as obviously you or even myself right you are infinitely more

Experienced but I know enough. What is depreciable? And how does that look? Let's just use a single family home. Let's stick with that for the time being. If I buy a home, I renovate the home and then I rent it. The classic burr model. Sure. What's depreciable? What is the bonus depreciation? Is it qualified for it? Let's kind of walk through all that. If you're like me in the real estate game, you know how wild things can get. Managing leads, marketing, sales, operation. It's a constant hustle. But let me tell you about something that has been a game changer for thousands of investors out there. ReSimply. It's an all in one software that truly is

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Great, no problem. So I'll say the tax code says to you, hey, Justin, your building to be a building has to have certain things. And it doesn't matter if it's a single family residential home or like rental home, or if it's a 30 story building, a building is going to have certain components, okay, without getting into all the detail and all the specific designations, but when you boil it down, it's walls, windows, doors, roof, HVAC, plumbing for a bathroom, and electrical for lighting. Those are the building components, those pieces.

So those are either going to be 27 and a half year for a residential rental or 39 years if it's commercial or short-term rental. Okay? So that's kind of the baseline. So what we need to do and what a cost-sext study does is identify the pieces that are not in those categories and in your mind and probably our listeners' minds, they're going, oh my gosh, he just said everything in the building, what's left? But you typically get into things like the wiring

and the floor coverings, whether it's carpet or a particular type of vinyl flooring or laminate, that kind of thing. You get oftentimes into the kitchen space or the plumbing for the kitchen, like for the disposal and the pipes. And you're gonna have an ice water line to the refrigerator and the electrical for the disposal and the pipes, and you're gonna have an ice water line to the refrigerator and the electrical for the refrigerator

and the electrical for the dishwasher and the microwaves and the cabinetry is oftentimes considered in that accelerated cataloguing. So when you stack all that up, you could be somewhere between 15 and 25% legitimately in a faster life. Now when you say 15 or 20%, you're saying 15 or 20% of the value of the home. Of the purchase price of the home.

Of the purchase price of the home. Excuse me, less land. So purchase price, less land. Because unfortunately, the tax code doesn't let us work off of what it's valued at. And us real estate guys, because I am also in the real estate side of the house too, us real estate guys all go, well, it's worth this. Well, unfortunately that doesn't help us with the tax code.

That's right. The tax code says, what is your basis in the building? Less land. So what did you pay for the building? Less land is the correct way to figure this out. And then if you do renovate it and turn it into a burr, buy or remodel, rent and refinance. And repeat.

And repeat. I kind of did that last time. Money you spent on the additions and forced appreciation, does it really factor into this. You are just saying if you bought the home for 100 grand minus the value of the land, 25,000, you have $75,000 that is workable. Regardless if you spent another 50 on the remodel, that's a little bit easier. Depending on what you spent it on.

That's right. So let's say I did the new kitchens, new wiring for the kitchens. All that good stuff. So that stuff would likely fall into a five-year life. Okay five-year life five-year life Yeah, that's great. Yeah, cuz that speeds it up from twenty seven and a half So I'm gonna try to simplify this because I'm getting it. I want It's almost like talking to an accountant right because it's so detailed it is but your traditional home It's twenty seven and a half years of depreciating value

Okay, minus the land correct, but that's not very fast for me. I want this stuff faster So what you're saying is if I go remodel? Yeah, the kitchen on a said property then I can go take that same level of depreciation Whatever that value is let's call it start 250. There's land value of 50 and we're gonna put in 50 okay so bottom line is in that case we're talking about $200,000 depreciable basis let's say we're calling it 20% that we can reallocate into a faster life so that's gonna be call it 40 grand so 40 grand is gonna go into that five year and 15 year life now if some of that a good chunk of that is gonna go, let's say towards the kitchen space,

and that's gonna give you bonus depreciation. If it's a 24 purchase, it's 60% of the five year and the 15 year that you get to take immediately. That's right. Okay. If you had bought it in 23, it would be 80% bonus. If you had bought it from 17 to end of 22, it would be 100% bonus. So bonus depreci it from 17 to end of 22, it would be a hundred percent bonus so bonus Depreciation depending on the year that was either a supercharger for the car guys out there or a turbo charger

Yep, so I would say if you're buying it in 24, it's a turbocharger It it makes it better but not as good as a supercharger. So I properties bought back in 17 to 22, 100% bonus. 23 was 80%. And so at this point, it's 60% in 24. Next year, it'll be a 40% bonus. Meaning anything pulled out of that slow 27 and a half year life, you get to take either 100%, 80%, 60% in the current year. And it doesn't matter when you do the cost seg, the year you bought the property is the driver. So even though you may have three properties you bought

in 22 at 100% bonus eligibility, but you didn't do the cost seg then, doesn't matter. You're still gonna be able to do them now. You can go retroactive and file a 31.15 along with your tax return, which means you get to step back in time, grab the 100% bonus depreciation you could've taken, but haven't yet taken, you get to grab it in this tax year.

So you have to amend that tax. No, you don't have to. That's the whole key. That's the key. That's the good news. you get to grab it in this tax year. So you have to amend that tax. No, you don't have to. You don't have to amend it. That's the whole key. That's the good news. 3115 is, I'll say, a really nice tool that can be used instead of amending because typically nobody, especially accountants,

want to amend. That's right. And you can only go back by amending to open years, which is typically three years. So if you bought the property back in 15 you'd be out of luck if you had to amend but you don't have to amend. You use a 3115 which is a complicated form which is why our firm always does the 3115s for our clients so that there are no errors made on it because if that eight page form has errors on it, it typically will trigger an audit.

So nobody wants that. So our firm always completes the 3115. I probably have another 14, 15, 16 homes that I bought in 2020. 100% bullies. I gotta call you on that too. This is my guy. You guys gotta make sure you get

the depreciation doctor on Instagram and costsegs.com. But so I think for people who aren't used to hearing this talk, and I am, because me and my accountant go round and round and I talk to you plenty and whatever, I want to try to boil this down with simplicity sake. But in the example we just gave, what does that mean? So you said roughly out of the $250,000 home, 50 that going to land, I'm putting 50 grand in, you said roughly there was $40,000 that was gonna be. On the original. On the purchase.

On the purchase, yeah. Purchase was 250. As opposed to your new spend on the 50. That's right. Okay. But when you say $40,000 is gonna fit into that five year bonus appreciation model. Yep. What does

that mean to the consumer? What does that mean to me? So if I bought this deal and you said Justin I'm gonna get you $40,000 of this value and give it to you in bonus appreciation, what kind of savings am I getting there? What does that actually tangibly mean? So what that's gonna translate to the the $40,000 let's say of accelerated depreciation times your tax rate, whatever that is. So let's assume somebody's in a, not maybe the highest tax bracket, but let's say. In Florida, I'm in the 36% tax bracket.

36, and Florida doesn't have income tax, right? So then it would be, you would take the 40K times 36, which would be maybe 12 to $14,000-ish. And I'd be able to write it off on my income? Well, no, the 40K would be a deduction against NOI. Okay. Okay. So whatever you've got as taxable income or NOI, you would sub out the 40. Yep.

And whatever your tax rate is, that's what it would yield for you. In my head, I'm doing it, which may not be safe. Give or take about. Give or take 12 take 12 to 14,000 is my bet. That's real money. Yeah. But then you mentioned, oh, hey, wait a minute, what about the 50K you spent on the new spend? So that's going to fall into the bonus eligibility as well, depending on what you're spending it on. Now, if you're spending it on, let's say, a new deck and landscaping and all kinds of other stuff,

maybe the landscaping is gonna be an expense, but depending on what you're putting in, it might need to be capitalized. So if it's outside of your physical building, so it's from your physical building to the property line, and it needs, it's not, let's say, I know in Miami, you won't have snow plowing, but those things are just expenses, so it's not talking about that stuff. So if you put in an irrigation system or You know planting beds and stuff typically

That would be a capitalized item, but you're gonna put it in at 15 years So whatever you spent to improve the look of the property or fences or... So that goes to a 15 year versus 27 and a half. Correct. And it's bonus eligible. So you're getting to grab 60% of that if it's 24 or whenever it was back in the day. What about a pool? A pool would typically go into 15 years.

Yeah, which is still better than 27 and a half. Maybe you're not as excited about five year, but it's better than 27 and a half. You got it. And keep in mind from 96 when our firm started I joined the firm in 99, but from 96 to 2017 bonus depreciation Never applied to an existing building bonus came along in a one right after 9-eleven as an incentive to get the economy Going in but it only applied to new construction. So it never applied to an existing building.

So if you bought an existing building, you would not get bonus from 96 to 2017. But then in 2017, they ended up looking to say, hey, wait a minute, Justin, you're buying buildings. Why would you wanna wait five or seven or 15 years? Why don't you grab it now? And so they expanded bonus depreciation under the Tax Cuts and Jobs Act to make it eligible buying existing buildings the five seven fifteen year stuff got included and bonus the

One caveat we haven't talked about if you're a doctor and you do real estate part-time, very part-time, does that change how you're able to take bonus depreciation? Depending on how you're doing it and what you're doing, what properties you're buying. Okay. Okay. So let's say you've got a doctor, whether it's a dentist, an MD, a chiropractor, whomever it might be. I'm going to give kind of two scenarios here and I may pivot to three as I'm walking through this.

But if your doctor person is buying investment property like the single families and they're renting them out, then that's called a passive income stream. That doctor is not an active real estate professional. So that means that doctor is getting the income from the property as what they call passive income. Cost seg creates a passive loss. So the passive loss for that person, that doctor, will only work to offset passive income.

That's right. Okay? So it won't flow over to his W-2 or 1099. Yep. Okay, so, but that was him buying, let's say, a single family long-term rental, an apartment, a residential rental, as opposed to him buying a short-term rental. Okay, so if that doctor is somehow,

someway actively involved in the management, in the maintenance and the upkeep, let's say, of that property, the short-term rental, that short-term rental now is not treated like a 27 and a half year, I'll call it apartment, but it's treated like a hotel. So it's going to have a 39 year life, but that doctor is going to get two additional benefits out of it. Anything that they spend on improvements is going to have another category called qualified improvement property, QIP is what it's referred to as. So for that 15-year property, so they're going to spend stuff, spend money on items

within the property that's short-term rental and they get to claim 15-year qualified improvement property which means they get bonus on that whereas residential folks spending new money don't get to claim QIP. So even if there was a long-term rental that was a high price point? Yep. Okay. Yep. It's called a million dollars. Okay great. And he's. Okay. Yep. It's called a million dollars. Okay great. And he's a doctor. Yeah. He's gonna do a long-term rental for it. Yep. Right. And the cost seg study happens. Yep. Does he get any ability to put it put the tax right off towards his doctor income at all based around the performance of

that cost seg study being out to outweigh the income monthly is there any way that he can because the price of the home changes how much the cost seg study does that make sense yeah yeah so from the scenario you just gave me my understanding is that that doctor is still gonna have passive income. This is still a passive loss. So that in and of itself, the way you framed it, he's gonna be getting higher rents in that property

for a mill versus 200,000. So any loss that he can't use, the passive loss we create for him, and he can't use it this year, so let's say his NOI is a hundred grand, let's say. So Cossette comes in and we give him a deduction of call it 200 grand, let's say. So now he's got a hundred grand of income the first year from the property and the Cossette gives him a $200,000 ride off against the NOI. So now he's only going to be taxed on a hundred.

He wouldn't be taxed first year on anything. It wiped it out. Correct. He's got a hundred grand, what they call loss carry forward. So he's got that in his back pocket for the next year. So now it wiped out two years of taxable income from that property, which is pretty good. I'll change, remember I said, so I got residential property, we got short term rental there. And the third possibility for him might be for that doctor, if he's

buying a property that he can house his practice in, okay? So as opposed to renting from Joe Blow down the street, he's now going to buy his own practice building. Now, there's a part of the tax code that is called a single economic unit grouping election. For the tax code, that's short for a name. It's insane. But single economic unit grouping election. So what that means is that doctor can say, hey, wait a minute. Yes, I run my practice, but I also own this building and they should be considered together. And so now the doctor can use the grouping election so that it will be treated as active income.

So now he owns the building, he's got his own rental income, he might have other tenants in there. So for the other tenants, maybe we've got to carve that off and set that aside as passive income. But for his own practice, that grouping election will allow him to use the increased losses against his taxable income as W2 or 1099. So that's a good tool. And it may not be in the science of flipping group, but you might have one of your followers

who is a doctor who would be interested in that part of the conversation. Well, and that's why I'm trying to make this, because it's very complex, and like you just said, you're citing the laws of all this, but I wanna make it as simple as possible, because what everyone needs to understand is, if you're buying real estate in any way to keep, this is the best thing that you could possibly do,

regardless of whether it's 27 and a half years, your one pivot because I've gone down this rabbit hole buying a cheap home and you start to just say is the cost of doing the cost seg dollar for dollar create the value that actually makes sense for me if you're buying a cheap home and it's 80 grand it probably just doesn't and just take your 27 and a half years and take it for what it is and let's go now what I Think you really have highlighted well, which is and I didn't know this so we're gonna talk after but like I could go take 15 of those lower price point homes grouping together. I think I said I have 15 Let's say the average price is you know 150 grand so three million dollars worth of assets

Now I can give them to you say hey, let's do one big cost seg on this entire thing. And they're all burst. I bought them all, I remodeled them all, so it would be your traditional stuff. And so that's huge. So I want the listeners to understand as detailed as Jeff can get, really no matter how you're doing this, I would encourage anyone out there, you need to be buying assets. I love wholesaling. I love fix and flipping, but you need to be buying assets I love wholesaling I love fix and flipping but you need to be buying assets and then

what I would say is if you can get into the multi unit space even better right correct I mean that's where you really want to play and I mean even use my own examples and you know because I've told you we bought four apartments we have a four plex we have like a bunch of different stuff. What is the benefit to my 16 door apartment versus single family homes, packaging my 15 single family homes? Is there a benefit for one roof, 16 doors versus 16 single family homes?

It, what you're gonna find is that on, so it goes back to that ROI conversation. Somebody might look at one of our proposals and go, wow, three to one, I'm thrilled, let's go. But most people want it to be four or five to one when they're starting to look at it. Like I spend a dollar, save four or five, then I'm good to go. Where you're talking about a bigger property, theoretically with a bigger purchase price, you know 16 doors versus one door, right? You know, you might be looking at an 8 or a 10 or a 20 to 1. That's right

Some of my clients have a hundred and fifty to one Some of them are eight hundred to one, but those are bigger obviously much bigger buildings so I'm not trying to go there but It just depends on what is the depreciable basis and how can we make that work for you guys and we'll do everything we can to help your clients. You know, it's funny is so Grant and I, Grant Cardone and I have gotten pretty close

and you know, I've always kind of loved the single family space and he keeps just poking me. By poking, he calls me out a lot about it. But I mean, it really makes more sense the bigger you get in this space of real estate, the more you should really be in the commercial side of it, right is there's some level of like brain damage that you don't need to be going through having 15 single family homes 15 subroutines, 15 roofs, 15 electricals, 15 HVACs, or you

have one roof, you have 15 doors, you have, you know, three ACs versus 15 ACs, etc. Right? There's an argument to be made. And the biggest one tends to be right now for me, as an income maker, right, like I do very well, I need your services. And it makes a lot more sense to go buy a three million dollar apartment Than did one by one by single-family homes one after another well as you as you called it possibly brain damage You know 15 transactions 15 leases that might be late payments. I'm totally good

But when you've got one situation going that that can be better you mentioned one roof and what I be better. You mentioned one roof. And what I'll go back to is one of the things that differentiate our firm from many of the other folks out there in the Cossack space is that we always identify all of the assets in the building, not just the accelerated items. Meaning many folks out there in the space that I'm in would only give you the five-year and the 15-year detail. And you would go, yeah, that's cool.

That's what I want. Well, what we're doing is giving details on the 27 and a half-year stuff as well so that when that roof fails, maybe you guys have a big storm down here and the roof is just trash finally. You spent years patching it. Can't do that anymore. It's going in a dumpster well now all of a sudden you're able to when you put the new roof on since you have the detail of the original roof you're able to take a

write-off or an abandonment loss on that original roof when it hits the dumpster so that can help you take another bite at the tax apple with a report that's properly completed so if you had to give advice, I have a good friend, he's a lawyer, high income earner, and he's playing around the single family space, he keeps buying these single family homes, and I love that because I want him to be more in real estate and so I'm not opposed to him. What advice would you give him? High income earner, I mean he does very well financially and he keeps buying these single family homes, which I encourage him to do because I would rather him being real estate than not.

Sure. But what advice would you give him from your side of the world? Would you say get into apartments, you know, at least start getting five doors or more, start getting at higher price points? Like, what would be your perspective for that person? If, if... To take most advantage of what you offer, right? To say, hey, I know the laws. Here's how you win by following the rules of the laws so okay so if if at all possible for your

friend the attorney person if that person's let's say significant other or spouse were to get in the real estate business themselves and manage all of the leases and manage the properties and do everything that was needed to become what they call a real estate professional, then the whole conversation about passive loss, passive income goes away. That's right. That changes. That changes.

Then that attorney who's bought 10 or 15 properties and maybe they're potentially outsourcing property management or something else, but now if that attorney is spending his time or Spouse's time doing the management and they're legitimately called a real estate professional that Would be a big deal. Yeah, and and that could Legitimately be called a game changer for that person Yeah, I think that's probably the smartest thing. I mean, that's why you suggested it. But now, then it does, again, it doesn't really manage. It doesn't really matter what he buys, because at that point, they're a full blown real estate professional, they get the same stuff that I get, they get the rapid appreciation for active income, etc. You got it. I mean that that could work in typically the attorney could also have that grouping election. This is actually an actual question that I don't know the answer so I'm gonna ask it could the attorney ever be a real estate professional? So if he's buying enough of these at what point do you say

well I bought 30 homes so I'm a professional at this. There's a 750 hour a year requirement for spending time in the space and it really does have to be your primary business. So if that attorney, friend of yours, is making 200 grand a year in being an attorney, but he's making 300 or 400 grand a year in real estate stuff. You can make an argument. And again, this would have to be passed through his accountant, CPA, to make sure that all the other little nuances are met.

But then that could be justified, seemingly, with the limited information you've given me there. And they could spend their time doing that then. But if he's making $4 million a year as the attorney person and he's making $200 or $300, that's going to be a bigger stretch to get over that real estate professional designation. Because $4 million a year of income as an attorney, and it's gonna be hard for him to tell the IRS oh I'm a real estate professional making you know 200 grand a year in real estate and 4 million a year in my...

Do you... so I guess like what about loan brokers, realtors? Realtors are probably the obvious yes. They can be if they're somehow some way managing real estate. So my understanding is that a plain old real estate broker that doesn't have any ownership, you know, and doesn't manage their properties and things like that may not per se qualify. Interesting.

I wonder what they would, cause wouldn't that be a real estate professional? Well, it will typically be listed as real estate agent, I think, but again, it depends on the accountant and if they... And whether they're willing to play the game. Well, it's not the game. It's within the code. I mean, if they're... So if they're buying property, so if it's a real estate agent, so if it's just a real estate agent that's just doing real estate transactions, that's different than a real estate agent who's also an investor who's also managing property.

Which might be, you've got five or seven or 10 properties and that real estate person is managing those and maintaining the leases and negotiating with the landscaping company and the various other services that need to go along, if that person is amassing the 750 hours, then that would probably be okay. But again, I deal with CPAs and the tax code all the time, so I've got to kind of stay in the guardrails that I know of for sure. Of course. And the CPAs, we teach all the time and they're- Do you guys, when you say that, do you teach, like, is there somewhere, your website obviously,

but in your Instagram, can someone be taught more of this? Do you guys have some level of education on this? We teach many, of the the nation's accounting societies we teach for them okay so we do continuing ed credit for CPEs depending on the state as well we can do continuing ed credit for real estate folks as a CPE for their real estate license depending on the state so we do that all the time and depending depending on how long you wanna go, so for some of the state societies for CPAs,

we'll do an eight hour course, which is painful if you're not a CPA. But if you're a CPA and you really wanna drill down on this, we've got eight hours of content. But then typically we're doing one or two hours, and we do them via zoom or we do them live I would even just tell everyone here as you have questions I'm sure you guys are thinking like reach out to him on Instagram ask him. He's very easygoing, right?

He's the one that does all my cost seg stuff. And so again, I Think that's probably the path of ease for them to reach out to you would be Instagram probably the path of ease for them to reach out to would be Instagram, depreciationdoctor.com or at depreciationdoctor on Instagram. But I think as you guys were sitting here like what about this, what about this, maybe I'm not asking the right questions for you, that's okay. Go to depreciationdoctor on Instagram and just start asking Jeff questions and the question I'll kind of lead with now will be is If you are a w-2 employee there's essentially how I heard it there's no

world That you can get the bonus depreciation in the same way I do as a real estate professional Short-term rentals. So okay what you just said wasn't exactly correct. Okay So to clarify if they're doing short-term rentals. Because you can get 15 year as a short-term rental. 15 and 5. So you get the same thing. It's just, where is it going to apply? So what you're getting is the ability

as a short-term rental manager. Yeah. You're getting to claim that more against your W-2. Yep. Because you're actively involved. You're actively involved, yeah, yeah, that's right. So kind of like that grouping election, kind of, this isn't exactly correct,

but it's kind of like the grouping election for the dentist or the attorney that runs their own practice out of the building they rent, or that they own, I should say. But when you're doing short-term rental, that could work for them. But a W-2 employee, that would be the play for the W-2 employees to be doing short-term rental, that could work for them. But a W-2 employee, that would be the play for the W-2 employees to be doing short-term rental

in this scenario. Yeah, I mean, that's what people wanna know is how can I take advantage of these laws that were written for me, and I love real estate, and I'm here listening to Justin every week, and so I want them to know that. And again, I may not be asking every question that they have, right?

And I'm kinda doing my best to think this through but what I can go to you know depreciation doctor on Instagram or cost segs calm what what haven't I asked that maybe you would say people really should also know this well many times people want to know again kind of going back to going back what if I missed it you know and that's a big concern for people is I don't want to amend the returns and all of that. Well, you can technically go back to 86 when the tax law changed.

No kidding. With the 3115. Now typically you won't go back that far, the real window of opportunity for people where it makes financial sense because the accountants will often say, Justin, what are you gonna do this for? It's just a timing difference.

Yeah. That's what they say. They go, oh, it's just a timing difference. Well, it is a timing difference. But if I give you the opportunity, Justin, to take a deduction today versus 27 and a half or 39 years, would you rather have it today or would you rather wait? All day today. And twice on Sundays. Exactly.

Most people say that and they go, wait a minute, I don't know if I'll be alive in 27 and a half years. Don't know if I'll own the building then. Don't know what the tax code, tax rates are going to be. I'll take it today if I can. And so with that said, it is a timing difference. But if you can redeploy that money and typically my clients or our clients say they can kind of think of something better to do with it than sending it away in a tax payment they can redeploy it and improve their portfolio make it better and stronger and make their financial world better as things go so that's a kind of a question

there is that the accountants often say well hey Jess you're gonna take all your depreciation early and then what are you gonna have? Well we're not taking all of it early, we're taking 15 to 25 percent early, which means you have 75 to 85 percent on a go-forward basis. So you still have most of your depreciation. It's just... And the point that you're bringing up is so valuable to people at least like me, I can go buy another one. So... That's the treadmill. I have multiple businesses but one of my businesses has a bookkeeper slash accountant and he always talks about playing for overtime. And that's the treadmill. You keep kicking for

overtime, right? Great, give it to me today and I'll figure out next year when next year comes let's keep going as I keep kicking this field goal down the road yeah and and guys I mean this is probably my favorite subject because of someone who makes money you don't necessarily want to pay to the IRS I'm all about being a great citizen but they wrote these rules for us let's just play by the rules and it just makes sense and I know a lot of the billionaires and names will be restricted But listen Donald Trump gets a lot of hate about not paying taxes But all he's doing is playing by the guidelines of IRS gave him you're absolutely right and and another one

That's a tool that's an adjunct to cost seg And we don't do 1031 but 1031 are a great tool And that as you said kind of kicks the can down the road for the tax on the gain, but the cost seg can apply to the relinquished property, the first leg, as well as the acquired property, if the new acquired property has enough basis in it. So you can kind of potentially do a cost seg

on both ends. There are some nuances that need to be kind of followed there, but it's doable on both sides. So there's lots of good tools out there. You just have to know how they all fit together versus just kind of winging it. Well, and that's why I say reach out to Jeff. Go to Depreciation Doctor, at Depreciation Doctor

on Instagram, Jeff Depreciation Doctor on Facebook, costsegs.com. I mean, he's a world of knowledge. He will answer your questions directly. He does all this for me. So if he's good enough for me, he's good enough for all of you. I appreciate you being here on Science Flipping. Oh, I'm so glad to be here.

And on the Depreciation Doctor on Instagram, every Thursday is Thor's Day. And originally the beginning of Thursday was originally in Roman times Thor's Day. So my dog, my German Shepherd dog is Thor. So yeah, you've met him. And so Thor, every Thursday or Thor's Day, has some sort of fun little video on my Instagram channel and Facebook and LinkedIn and all that. Nice. But Thor will go find depreciation deductions for clients and it's kind of a fun play on that. So with that said just give me one second. So I'm giving you a depreciation Dr. Thor. Yeah, what's up Thor? Look at this Thor for those that can see in the camera.

Give it to all the cameras. Thor, this looks just like your dog by the way. Yes, exactly. Love it. Thank you very much. Oh yeah, I thought you might have a little fun with that. And thanks for your time today and allowing me to join you here.

Reach out to Jeff. Appreciate you guys. If you learned at least one thing and you think there's someone you know that needs to learn a little bit about cost eggs, depreciation, not paying taxes, real estate, share this episode with two of your friends. See you guys the next episode.