- Introduction to Erik Oliver
- Cost Segregation breakdown
- Discussing depreciation
- What the Consolidated Appropriations Act is
- Erik’s advice for beginning investors
- Factoring in tax benefits of property
- Email:erik@costsegauthority.com
- Website: https://costsegauthority.com/
- Contact Number: 843-619-3005
- Instagram: https://www.instagram.com/exitstrategiesradioshow/
- FB Page: https://www.facebook.com/exitstrategiessc/
- Youtube: https://www.youtube.com/channel/UCxoSuynJd5c4qQ_eDXLJaZA
- Website: https://www.exitstrategiesradioshow.com
- Linkedin: https://www.linkedin.com/in/cmelette/
- Email @: corwyn@corwynmelette.com
Episode 74: Cost Segregation Talk with Erik Oliver
CORWYN: Good morning. Good morning and good morning guys. Welcome to another fabulous episode of Exit Strategies Radio Show. Guys, I am your host, Corwyn J Melette. [inaudible] in beautiful, beautiful guys, North Charleston, South Carolina. So, if this is your first time listening to this show, you Sir or Ma’am, are in for a treat. Because our mission here is very simple, that is to empower our community through financial literacy and real estate education guys, we are legacy building, that is what we do. So guys, look, today is another fabulous episode. All right, if you’ve been tuning in, you see where we’re going, we’re taking you guys to higher heights to higher levels, so we can do higher things. All right, so that’s what this thing here is all about. And today is no different. Guys, we have with us today. Look here. Let’s give a drumroll. Erik Oliver with Cost Segregation Authority. So, guys, I want to give you a smidgen of an introduction to Erik, what he brings, and the information he’s going to be dropping on us, guys. So I’m gonna prepare you during this time. Please make sure you go grab a pen and a pad because you want to start making some notes on some of the things that he’s going to be talking about today. Because it is going to blow, I mean, blow your mind. All right. So Erik Oliver holds a Bachelor of Applied Science Degree in Accounting. All right, so prior to joining where he is, the company where he is now– Cost Segregation Authority, he was an operations manager for a multimillion-dollar landscaping design firm, guys in Long Island, New York. So he’s up in cold weather. So hopefully he won’t bring that wherever you are. All right, so look, his talking points, guys, what we’re going to be touching on today, guys, is some high level stuff. And we want you to make sure that you get your pen, and your pad and start making some notes. So Erik, guy, thank you so much for being with us today on the show. How are you doing?
ERIK: Oh, good. Thank you for having me. I’m glad to be here and looking forward to it.
CORWYN: So if you don’t mind, tell our listeners what you do?
ERIK: That’s a great question. My kids all the time:” They’re like Dad, what is it that you do? You’re gone all the time. I have no idea what you do.” So I’ll try and break it down as simply as I can. Okay, what we do is we’re kind of a niche accounting firm, here at Cost Segregation Authority. We work with CPAs and building owners across the country to reduce their tax liability through engineering-based studies called Cost Segregation and what Cost Segregation is. It really is just accelerated depreciation. So depreciation is a non-cash expense, which is a great non-cash expense, right? So if you buy real estate, you are allowed to write off a little bit of that real estate every year, over the course of either 27 and a half years or 39 years depending on the type of asset you purchase. So 39 years for commercial buildings, and 27 and a half years for residential units. Instead of taking 1/39 of a deduction over 39 years. I’m not going to own my building in 39 years. Hell, I might not even be alive in 39 years, I hope I am, I might not be, so I want my deductions now. So give me my deductions now versus in the future. So the way that’s done is, by doing the cost segregation study, when you buy a building you don’t just buy the land and the walls, you also buy a little bit of carpet, you buy a parking lot, you buy some window coverings, you buy a conference room, some cabinets, some different components. The IRS, for example, says carpet should be depreciated over 5 years, not 39 years. Which makes sense, the carpet doesn’t last 39 years, your structure does, your building does but you’re–
CORWYN: Hopefully.
ERIK: Yeah, hopefully! [inaudible] on the part of the country and the weather patterns. But yes, hopefully, it does last 39 years but by allocating the sales price or– Excuse me, by allocating the cost of your building into these different buckets, it allows you to accelerate the depreciation so you’re not spreading it out evenly over 39 years. You’re getting a look at it in the early year level, or in the early ownership of that property. As you know, Corwyn, there’s a number of reasons why we would want to do that, you know, time value of money, inflation. I want, again, I want my dollars today versus letting the IRS hold on to these for future use. I want mine now so I can go pay down debt, so I can go buy a new property, give me my money now. And so that’s why people oftentimes will utilize Cost Segregation when they own real estate.
CORWYN: So that’s interesting. So, you know, for our listeners, guys, you know, what we’re talking about is just kind of breaking it up. So taking the building, taking the components of, and this was interesting as it’s a full schedule. So what I just heard you say, Erik man, it’s a full schedule with the IRS that says, For this, you can depreciate over this time period, this time period, so forth and so on, which may be, will be, should be considerably less than depreciating the entire asset. And most, I’m assuming most CPAs, do just straight-line depreciation.
ERIK: That’s correct. Yeah, you think about CPAs. CPAs– and you brought up a good point, I’ll get back to that. But there’s actually a book that’s like 1700 pages long, that tells you how to depreciate everything that you could possibly ever want to depreciate, it has a schedule, it says carpet lasts this long, cabinets last this long. So CPAs, when I buy a building, and I spend a million dollars on a four-plex, and I go give my closing statement to my CPA. My CPA has no clue what the parking lot’s value is. All they know is I bought that building for a million bucks. But they don’t have any special training, they don’t have a background in construction to be able to go in and say: ‘Okay, well, of that million, you know, 100,000 of that was for a parking lot. 40,000 of that is for the carpet that’s in there.” And so that’s where our Cost Segregation study comes in handy, is we do– we break out that one line item that normally just says building on the depreciation schedule, we break it up into a number of different parts, which allows you to front-load those deductions and, and take them sooner.
CORWYN: Hold on guys, look here guys, look, if y’all see me, the top of my head is slowly raising. There’s smoke, there’s steam coming out, and this thing is about to blow. So, you know, let me ask you this. So let me take you around Erik to the CARES Act. So, if you don’t mind, I know, that’s something that you know that you guys are well versed on, how to, you know, find opportunities for investors– within there. So if you don’t mind, number one, tell our listeners what the CARES Act is, you know, some people don’t even realize what in the ham sandwich it is.
ERIK: Sure, so the Cares Act is the Consolidation and Appropriations Act. And it was basically the COVID package that was passed. So there were some laws, the government said: “Hey, there’s some obvious, economical issues that are associated with COVID” And so they passed some legislation and a few things happened. One is, they extended the 179D deduction. So I’m going to talk about two deductions and credits that are important for your listeners to understand. One is 179 D, now what that is, that’s a deduction if you are constructing commercial real estate, and it’s new construction, you may be eligible for a deduction if your commercial real estate is energy efficient. And so that was one thing that was extended, that had been around before the Consolidations and Appropriations Act, but that was extended indefinitely as a part of that act. So that’s something to be very much aware of, because a lot, it’s one of the most underutilized real estate deductions that I’m aware of. Nobody seems to know about it, even CPAs don’t know about it. And so if you’re building new construction, and you have a third party come in and deemed that new construction is energy efficient, according to the IRS standards, you’re eligible for $1.88 per square foot of a deduction for 2022. And they actually increase that number for 2023 to $2.50, but for 2022, it’s $1.88 per square foot, new construction, commercial property. That’s the first thing. The second thing you want to be aware of is something called the 45-hour energy credit. Now this energy credit is specifically for residential units. So remember, the 179D is for commercial, the 45L is for residential units, and it’s a credit, not a deduction. So let me just, for your listeners, who may not know the difference, a credit comes right off your tax bill. So if I go to my CPA and they say, Erik, you owe 20,000 in taxes, if I have a $6,000 credit, I now only have to pay 14,000 but 179 D is a deduction which means that comes off your taxable income. Yeah, exactly. So if I make $100,000 a year, but I got a $60,000 deduction, instead of being taxed on 100,000. I’m now only taxed on 40. So that’s the big difference between the 179 and the 45L, is the one for the 45L is a credit, which is great, and that is for any residential units, new construction that meet or exceed the energy qualifications, again, established by the IRS, they have to be certified by a third party. But it’s a $2,000 credit per dwelling unit that you’re eligible for. And those go, I can’t tell you Corwyn how many times I’ve met with large home builders across the country, developers who have never heard of it, never taken advantage of it. And they’ve got hundreds of thousands of dollars of credit sitting out there that they’re going to lose if they don’t take advantage of it by a certain timeframe. So, again, that’s really for your clients, or your listeners who are building either new construction, commercial or new construction residential.
CORWYN: That look here, you just blew my mind with that. You know, because you know, Erik, because I mean, you’re talking I mean, that’s substantial savings. In up to, you said $2,000 per unit?
ERIK: Per unit. Yeah. So, if I’m a developer, and I build an eight-plex, that’s a $16,000 credit, if I meet certain criteria, and I must say that, just because most counties and the material that we use now in construction, plus, most counties have pretty strict guidelines on how efficient the materials are that you use in construction. So it’s pretty easy to qualify for these credits. And so again, if you’re building if you’re a developer or home builder, even an investor. If I’m an investor, and I pay you to build me an eight-plex, I’m the one that’s eligible for those credits. And so for your investor clients out there who have new construction, it’s definitely something worth looking into.
CORWYN: Boom! Gone. Wow, wow. So this is something that you guys, you know, obviously, you study. You know, Erik, you know, you guys are extremely versed in. So, let’s talk about other places if you don’t mind, that, you know, you run into where people are, quote-unquote, “leaving money on the table.” I mean, we’re in quote unquote, you know, we’re, you know, for New Years to, you know, about mid-April is, quote-unquote, “tax season”, even though most investors and other people, you know, extend and may do this later in the year. But where are some other places where people in these types of scenarios are leaving money on the table?
ERIK: Yeah, I think we’ll go back. The biggest one, I think is Cost Segregation and that depreciation. So, if you meet with your tax advisor or your tax preparer, and they say, okay, Corwyn, you owe $100,000 in taxes this year, if you own real estate, I would get a second opinion, because right now, the tax law is so favorable. For real estate investors, you should be paying very little, if any taxes as a real estate investor, assuming you’ve got a portfolio of properties or even just one property. And to give you an example, if you take, actually I’ve got my calculator here, if you take 1/39 of a deduction, your standard deduction, you’re gonna get about a 2% of your building value as a write-off in the first year, 2.5%. If you do cost segregation, you can get as much as a 30% write-off in the first year. So you’re getting 15 times the write-off. Now, again, you know, on a million-dollar building, if I take a million dollars, divided by 39 years, I’m getting a $25,000 write-off every year, if I do a cost study on that million-dollar building, I could get as much as a $300,000 write off versus a $25,000 write off. And so, again, some CPAs are unaware of, CPAs, look at CPAs, kind of as general practitioners, they know a little bit about a whole bunch of different topics, they get to know about the audit, they got to know about child tax credits, they got to know about real estate. They just don’t have the bandwidth to dive deep into depreciation. And so that’s why they’ll usually partner with a firm like ours because they don’t know how to do these studies. And so and they don’t know a lot about, they’ve heard about cost segregation, they don’t know how it applies. And so getting with a CPA who understands this, and again, if you own real estate, and you’re paying taxes, I would have somebody take a second look at your tax return. Because, if you’re not doing cost segregation, and you own real estate, and you’re paying taxes, I think there’s an opportunity there for you to save significant tax dollars.
CORWYN: That is– So, you know, you touched on something that, you know, general practice. So, you know, typically your tax professional, as you said, is very, you know, high broadband, like, you know, like going to a doctor versus you got, you know, issues with your feet, you go to a podiatrist, you know, that kind of thing. So, this is getting deeper into, well, if you’re a real estate investor and you are continuing to invest in, you know, one question and one conversation that I have oftentimes with, you know, the investors and staff who we work with, Okay, well, hey, who’s doing your taxes? And are you using someone who is specialized and understands and knows real estate and what you did, is just took you just, you know, quote-unquote, you know, we peeling an onion over here, takin’ layers off this thing. And as we get deeper and deeper, cut towards the core. You are, I mean, you man, Erik man, you dropped some jewels and some nuggets. So, what… if you were a beginning investor? Let’s start at the beginning investor. Um you know, first of all, you know, should they engage with you first before they engage with a CPA? Is that what you would advise?
ERIK: You know, that’s a great question. And I think it goes back to your relationship with your CPA. If you’ve got a CPA who specializes in real estate, which I would advise all the listeners if you’re buying real estate or owning real estate, find a CPA who understands real estate, there’s a difference Corwyn between a tax preparer and a tax strategist, oh, tax preparer takes all your W2s, all your K1s, all the documents, they process them through their machine, and they spit out say this is your tax return, right? They don’t look for different ways to reduce that tax liability. They’re just taking the input, creating an output, those are tax preparers, you can go to Walmart, go to H&R block, and they’ll do that for you for a small fee. A tax strategist or a tax planner says, okay, Erik, you own real estate, you made this much money, what deductions do we have available to us? What options do we have? Do we need to go out and buy another property before the end of the year to get some additional deductions? Or maybe we don’t sell a property this year, maybe we sell a property next year, when you’re in a lower tax, there are all these different strategies to lowering that tax bill. So that’s the first thing as a new investor, you probably can get away with doing your own taxes, or maybe getting– having a CPA who doesn’t specialize in real estate when you maybe have one or two properties. But as you start to build your portfolio, it’s very important to get a CPA who truly understands this stuff. And I would say if you’re a real estate investor, and you’re paying taxes, and your CPA hasn’t mentioned Cost Segregation, it’s probably time to start looking for a new CPA because that should be, you know, one of the most commonly utilized strategies to reducing your tax liability. And so, I don’t know if that answers your question. But yeah, I would start with your CPA, we work with CPAs and building owners. And if a building owner does reach out to us directly, we always get their CPA involved, because we don’t know everything about your tax return. We think we might be able to save you money, but maybe you’ve got some losses that carried forward from last year. And so you don’t need an additional loss this year, then let’s talk about that with your CPA, but we always want to partner with the CPA, as early in the process as possible.
CORWYN: And that makes perfect sense. I mean, because at the end of the day, you know, you have to provide a service, you get to help people. And in order for you to be upheld, you got to understand the situation, you know, somebody who was, you know, floundering in the water, you know, flapping in the water, you know, maybe standing up in the water, maybe they make a noise, right? Maybe they’re trying to make bubbles or waves or something, who knows? Sometimes, we jump in the water, trying to come to the aid of someone who doesn’t need your help. So, that’s a perfect situation right there. So, you know, Erik, you know, so let me take you back a little bit. So you’ve been, you know, in this field for a while? So and I think I kind of asked you the question already, like, you know, there are other places that people are leaving money on the table. And we’ve also kind of come around and said, Okay, look, you know, engaging, you know, you guys on the front end, you know, and then bringing in your CPA to kind of make sure everybody’s on the same page is always a very, very, very good idea. And a very good strategy. But let’s say this is you. Alright, so this is you, and tell our listeners, what you will be doing this season. So right now, we got a market. That is, you know, what, if you’re looking at an asset or looking to acquire the asset, is that something that may be as a look at it from a future’s tax strategy that you guys could engage in, in the beginning before they even look to pursue it. So maybe I’m going to develop this property or maybe I’m going to, I’m looking to acquire this property. I want to know about the potential taxes, taxation, and tax savings. Is that something that you guys do as well?
ERIK: Yeah, absolutely. So I would always encourage any investor before they purchase an asset as part of their due diligence when they’re trying to figure out, okay, what’s my return on this asset going to be always factor in the tax liability or the tax benefits of that property. Because sometimes they’re significant, like I shared in that example, with the million dollars building if we created a $300,000 deduction versus a $25,000 deduction, that $300,000 deduction at a 30% conservative tax bracket, that’s a hundredth– well, 90,000, almost $100,000 in tax savings. What does that do to the bottom line? I know investors, for example, who will look at a property and go: “Yeah, it’s not cash flowing a whole lot, but, this particular asset-light or asset class, I can get huge deductions, which creates huge tax savings. And so maybe I take it on a smaller return, I might not get the big return that I wanted in terms of cash flow. But guess what, I just saved 100,000 on my taxes this year”; or 200,000; or 300,000, or whatever the number is. And so most Cost Segregation companies will always do a free analysis before you ever purchase a property or before you even acquire the property. So have the numbers run. So you can say: “Okay, if I purchased this property, yeah, I might have a little bit of cash flow, but look what this does on my tax side. Oh, wow, it’s gonna save me significant tax dollars, I might be okay, just breaking even on this property. Because you know, what, I just saved $300,000 in taxes.” And so it does kind of change the conversation when you understand how the tax implications work on any given property.
CORWYN: And, you know, what you just mentioned up there is huge, because, you know, oftentimes, you know, we focus on the investment is about the return, sometimes we want a return to be cashflow. But sometimes it is actual tax savings, right? The way in, you know, for, you know, in some instances, you know, I mean, to be blunt, that’s always a good thing. I mean, if you’re self-employed, or you’re living from investment income, then your income and with as you know, from investment is taxed differently, then, you know, the income that you work for, if you can cultivate building, if you will, some tax savings, that then lowers your tax liability, and creates a margin that you otherwise wouldn’t have. That’s a win-win all day.
ERIK: Right. No, absolutely. And again, that’s a different way to look at it. But make sure you’ve played that, or looked at the tax cards in terms of saying. What is my tax application? How this factor into my overall return on my investment is very important. And it could be lowering your taxes. A lot of investors right now are looking for cash flow. And so one thing they’re doing is, hey, I’m gonna have to pay $80,000 come April 15, I can give that to the IRS or I can do a cost seg study, save that 80,000, take that 80,000 and go put it down on a new property. You know, where do you want to give your money? And so, you know, it’s a great way to generate cash flow by reducing your tax liability, it in turn creates cash flow.
CORWYN: That’s massive, that is massive. So Erik, you know, you dropped a lot of jewels and a lot of nuggets. So I’m going to ask you this. And as we get pretty close to the end of today’s show, what is the key takeaway, that, you know, if you had to say to our listeners, you know, quote-unquote, “one thing or series of things”, what are the key takeaways that you want to leave with our listening artists audience today?
ERIK: Yeah, and I don’t mean to sound repetitive, but I’ll say it anyways. The one thing, I think that you need to do is know your strengths and know the strengths of your CPA. And why I say that is, your CPA might be a great bookkeeper. But if they don’t understand real estate, you need to find somebody who can advise you and your CPA on real estate. And so knowing your strengths, don’t try and be the… What is that? The jack of all trades is the master of none, right? You got to know your strengths, and you got to know your weaknesses, and it’s okay and you’re gonna pay for your weaknesses, you’re gonna go out and pay somebody and you’re gonna pay him a nice fee. I would rather pay somebody $2,000 to do my tax return if it saves me 50,000 in taxes versus going and doing it myself on TurboTax for a couple of $100. Right, you got to find value. It’s not always looking at the cost. Yeah, to find a CPA– qualified CPA, I’m gonna pay more upfront, they can generate a $50,000 tax savings on the back end, it was worth all the $2,000 I paid them upfront, and probably more, right? And so just understanding that, I think is so important. I see way too many people sticking with the same CPA that they’ve used for 30 years. Well, 30 years ago, you didn’t have a portfolio of 100 properties. You need a new CPA who understands how to take that portfolio and maximize your tax savings. And so, getting a good CPA who understands real estate, I can’t emphasize the importance of that.
CORWYN: Understood, understood. And so, that’s one of the things that we really talk about, and focus on Erik here on the show is about mindset, and mentality and, as we are, with our listening audience, as we are, you know, engaging and bringing in higher level thoughts and processes, that’s all key cause as you may mention, sometimes it is necessary to evolve and maybe it’s time to introduce you to their accountant to say “Hey, look, let’s take this thing up a notch. You know, let’s start breaking this thing down and seeing where we could save more money” where we can, quote-unquote, saving us the increase in cash flow. You know, you know, I mean, the reality is, you know, if you’ve already allocated for it, so like you say you allocated this money, but this, now I don’t have to pay that, I can reinvest this money elsewhere. And then I can keep going and keep going and keep going. That is huge. That’s huge. So, Erik, I appreciate you being on with us today. If you don’t mind. And our listeners, guys, look, I’m going to advise you. Number one, I need you guys to go to our website Exit Strategies Radio Show, I want you to go there, and I want you to make sure you subscribe so when this episode is released, you’re able to get it right there. Okay, Exit Strategies Radio Show, please make sure you subscribe. I want you to make sure you take out Erik’s contact information. And I need y’all to call him, But Erik, I want you to tell our listeners right here on air, how they can get in contact with you.
ERIK: Yeah, great question. The easiest way is just through our website. So our contact information is all out on our website, our website is just: Cost, C-O-S-T, Seg, SEG, authority.com. You can get my email, my phone number, you can get the team’s email if I’m not available. But please use this as a resource, we don’t bill by the hour, and we want to answer any questions we can to help you guys better… better invest, and help grow that wealth faster. So please use this as a resource. If your CPA has a question, you can give him my contact information, happy to jump on a call with you and your CPA, to go over these different strategies. But, you know, information is key. And so to be able to get access to the information, don’t hesitate to reach out to us at all.
CORWYN: Wonderful, wonderful. So Erik, thank you so much for being on the show. Thanks for being a part of the Exit Strategies Radio Show family, guys, to our listeners, guys. Thank you all for tuning in. But y’all please, let’s take this up a notch, we cannot continue to do the same old thing, the same old way. Because if so, then we’ll get the same old results. And we got to take this all up a level. This is how we build wealth. This is how we expand and grow our legacy. This is how we, as we talked about at the very beginning of our show. This is how we, how right here, are leaving an inheritance for our children, our children’s children, so forth, and so on, guys, that’s what our word tells us. And that is what we do. So Erik, one more time, man, I greatly appreciate you being on today. Thank you for taking time out of your busy schedule to bring this knowledge, this wealth of information to our listeners right here on our show. Our listeners. Y’all know how I feel about you. Y’all know what I say. I’m gonna put all that together right now and I’m gonna say it to you this way. I’m going to tell you I love you. I’m gonna tell you I love you. I’m gonna tell you I love you. And I’m gonna tell you one final time that I’m gonna see you guys out there in those streets.
