Aileen: [00:00:00] Thank you for joining today’s episode of the, how did they do it? Real estate podcast. We are your hosts Seyla and Aileen and today’s guest, we have Yonah Weiss. Yona is a cost segregation expert, investor, and the host of the popular podcast. Weiss advice. He has a background in teaching and is passionate about real estate and helping others by educating them on tax savings strategies like cost segregation.

As a business director at Madison Specs in national cost segregation leader, he has assisted clients in saving tens of millions of dollars in taxes through cost segregation. We’re so glad to have you today. Yonah Weiss.

 Yonah: [00:00:34] It’s my pleasure. Thank you guys. Seyla that Aileen. It’s really a pleasure to join you.

Aileen: [00:00:37] Thank you so much. Before we get started, can you tell us a little bit more about your background and, um, just a little bit about how you got started with real estate.

Yonah: [00:00:44] Sure. Background is actually in teaching. So I spent about 15 years as a teacher and it’s really my passion. I love helping people.

I love teaching and I have six kids myself. So I definitely know what it means to teach kids of all sizes and ages and even adults. So  that’s really what it’s all about. About five years ago, I’d say, I, I really just started fresh in real estate. And to me it was more about that. Just trying to find something to help, grow my wealth, grow, have a little more income and more freedom.

And I found incredible people along the way. And so I was in commercial mortgages for a little while, did some residential brokerage and just getting my feet wet and everything involved in real estate. And, one thing led to another, just through the people that I met and the connections that I made and networking, I wound up working for this company, Madison commercial real estate services, an incredible company, incredible people.

Just a wonderful place to work. And they’re, they’re the leaders, one of the companies they have is Madison specs, which is the national leader in cost segregation. We’re the biggest national company doing it worked in all 50 States. So it really just gave me an outlet. To continue doing what I love, which is, teaching and I’m working in the business development.

So I’m not an accountant or an engineer, but I understand really well. And I probably know more about the subject than probably 99% of accountants out there. So it’s really just giving me a way to give back and to help people and teaching, this is what we’re doing. And just explaining this concept, right?

Seyla: [00:02:11] Yeah, that’s a really great background and very passionate about education. We appreciate you coming on the show.  What is a cost segregation?

Yonah: [00:02:21] So it’s a really funny name, right? It’s weird name. what is that mean? And just break down what the name weight means.

It’s segregating the costs. Of a property. So it’s breaking down the costs of a property, two different tax categories. So let’s take a step back. Really what it is just an advanced form of depreciation. depreciation is a tax deduction. You get, when you buy a property, the IRS says, Oh, you bought this property.

Great. Now you get to take a tax, write off. Oh, the entire value of the building you just bought, over a long period of time. So the first thing you do is you have to. Figure out. how much is the building costs? How much is to land? Doesn’t it to appreciate? And then how much is left over? How much can I write off?

That’s fine. That’s great. That’s wonderful. just because you bought a property to get, to take tax deductions, right? Income tax, write offs, which is awesome. So immediately you’re not paying taxes on your entire income. You’re reducing your income by whatever deductions. Those are that’s regular depreciation, which already is so cool.

But there’s an advanced form, which is cost segregation, which essentially what we’re doing is we’re breaking down the property into different categories that certain assets within a building actually depreciate faster, which translates to bigger tax deductions in the earlier years of ownership.

So what we’re doing is front-loading a certain percentage of that entire cost into the first five years, for example,

  Seyla: [00:03:43] Wow.  so what are the requirements needed in order to conduct a cost segregation study?

  Yonah: [00:03:48] It’s pretty straight forward. Like I said, what a, what our company does.

We’re a team of engineers and accountants and, operations team. Then we’ll send an engineer to the property. And basically take an accounting and assessment of everything that’s in it. And then according to the tax code, create this study that shows what falls into these different categories.

There’s two main categories besides the building itself, which is the structural components. That’s really what’s appreciates on a 27 and a half year schedule, or a 39 year schedule for depreciation for commercial properties. But we can reallocate a certain percentage of those to five-year property, which is personal property and 15 year property, which is land improvements.  So think about the stuff that’s in your building, in your property.  You can even look around your house and see, Oh, these things. I didn’t realize that you can actually take a tax write off faster.  It doesn’t apply to your personal residents, but I’m just giving you an example, like fixtures, and even like the millwork and the doors of the closets and all kinds of things that are structural furniture and appliances and electrical outlets and things like that.

Carpeting. Wall coverings, the list goes on and on. And so all these things, when all is said and done,  usually what you represent, can be up to 20, 30, 40% of your actual property is in those categories, which means you can take a tax write off a big chunk over those first five years.

Seyla: [00:05:08] Are there any risks that we should be aware of when doing a cost segregation? And how long does the entire process usually take?

Yonah: [00:05:17] Sure. So the IRS made up the rules to cost segregation and basically laid out all the rules, invented it. And so if you’re doing it within compliance of the concentration audit techniques guide, which is printed, and you can check out the IRS website, go ahead and read that.

It tells everything you want to know. Yeah if this podcast, if this interview isn’t exciting enough for you, then you want to definitely check that out. The truth of matter is you have nothing to worry. If you’re using a reputable firm, if they’re doing it, according to the guidelines set forth in that guide, there’s really no risk.

It’s not an audit risk whatsoever, to do a cost segregation, even though you’re taking huge, massive tax deductions, there are seasons of depression and that’s allowable, right? So you’re not setting off any red flags by, by doing such a thing.  The only thing you would be worried about and the risk to be involved is if you’re doing it not according to that guidebook. So if you’re just doing it and accountant is just roughly coming up with those numbers without actually using the engineering approach. So that’s risky because if you’re able to be audited, you’re busted basically. So you want to make sure that you have it audit proof and you’re doing it according to the guidelines.

How long does it take? You asked the second question. It can take, about a week to really do it from beginning to end.  just because of operations and whatnot. We generally complete the whole thing in about four to six weeks. So we’ve done, in 2019 alone, our company did over 2,800 cost segregation studies across the country.

So it’s really just a matter of, how long is it?  The volume of getting things done.

Seyla: [00:06:48] if someone who is the apartment owners who just purchased a multifamily apartment, so when would be the appropriate time to contact a cost segregation expert?

Yonah: [00:06:59] the best time I genuinely believe is even before you bought the property, because you want to already know ahead of time what your tax benefits could be.

And so what we do is we prepare a free, right? No cost. Feasibility analysis. So that analysis will show you upfront how much tax savings I’m looking to get. If I do a full cost segregation study, how much is it going to cost me. And it’s not a lot. It’s really pennies, according to what your tax savings are.

So you want to make sure you get that ahead of time. Obviously you don’t need to do it immediately upon the first year of purchase, but a lot of people get it done, as soon as they close, they want to just get it done. Get it set up from the beginning. 

 Seyla: [00:07:37] if someone who is a passive investor, how can cost segregation benefit them?

Yonah: [00:07:44] It benefits them in really two, two ways. one way is how it benefits everyone equally. The second way is a special way which can apply to them, not to every facet investor. So the first way is that applies to everyone is what we’re doing with cost segregation is we’re creating so many deductions in those early years of ownership or the first five years that most likely there’s not going to be any tax liability.

On the returns of investment. Okay. So what we’re doing is let’s say you buy a million dollar property and you have, let’s say $50,000 of net operating income, on the year for that property. if you have, 60,000 or $70,000 of depreciation each year, which is very likely when you have a conservation study done, you’re getting so much more you’re actually going to have for those first five years.

No. No taxable income, which means that on any other investment vehicle out there, you’re going to make money. Maybe you’re going to get returns on that, not investment, but that investment, those income. He’s going to be taxed. So it’s appreciation. It creates that loss, which means you’re offsetting that income with those deductions.

So that’s the first way that it benefits everyone active, passive investors alike, which is huge because people don’t consider, real estate. They don’t even take that into consideration when we’re talking about the returns. Okay, I’ll get these returns then that’s when I’ll get that returns. But real estate, when you looking at it, you have to play, with the equal playing field.

You’ll see what, okay. I’m getting these returns, but it’s not going to be taxable. That’s huge. Cause I can reinvest that money compound interest of doing that is incredible. The second way, which can benefit some people is what’s called a real estate professional. Okay. And this is a tax terminology.

This is a term that, it was coined by the IRS is used on your tax returns if one spouse. Okay. So you have a couple, and one of them qualifies as a real estate professional, which essentially means they’re just spending the majority of their time involved in the real estate trader business. Okay.

So if they’re a broker or they’re operating your own properties yourself, but you’re also investing passively in other deals to operations or construction or managing, or, buying properties, et cetera. Once you have this status, what happens is like incredible. And this applies to passive or active investors alike.

You can use any additional depreciation to offset and your active income or your spouse’s active income as well. So let me just repeat that and reframe that, to understand what that means. Depreciation is a passive deduction, which means it’s first and foremost used against rental property income.  Rental property income is considered passive income for whatever reason, even though you’re involved in it. But whether you’re an active investor, a passive investor rental property income is considered passive income from a tax perspective. Depreciation is used to offset that. It means if you have a $50,000 of income and you have $30,000 of tax deductions, you offset that you only have to pay taxes on $20,000. That’s simply if you have $70,000 of income and 50 of tax deductions against that $50,000 of income, you have created no taxable income. Okay. And now you have $20,000 of extra, what’s considered a passive loss. Now those passive losses usually just carry forward.

They can’t be used against your active income. They’re carried forward. You can use them next year. However, if you’re a real estate professional, this is like the golden ticket. That you can now use this extra losses to offset other income in the current year as well.

Aileen: [00:11:08] so what happens at the, at the sale of the, uh, the property or the investment?

Yonah: [00:11:13] What happens at the sale is you made a lot of money hopefully, right? No, but also what happens is there’s two taxes. And I assume this is what you’re referring to. There’s two taxes that happen at the time of the sale of a property. There is capital gains tax, which is, if you made money on that investment, you have to pay a tax on the amount of, Profit that you made on the sale.

The second tax is called depreciation recapture tax. So it’s not like a huge, it’s not all fun and games. Yeah. Because appreciation is just lets huge gift, but  you have to pay a tax on the amount of depreciation that you’ve took.  So when you’re taking a huge amount of depreciation in those earlier years, you do have to, realize that it may come back to you later on.

When you sell the property, you’re going to have to factor in and I’m going to have to pay tax on that amount. Now there’s really two things that are great about this depreciation recapture tax, even though it’s looked down upon and people think, Oh, why should I take depreciation? If I’m not gonna, I’m just going to have to pay it back later.

It’s not true. First of all, you’re not paying it back. Okay. You’re paying a tax on the amount that you took. So anyways, that’s tax raise you’re going to be less than what you would’ve paid up front, if you just paid taxes. So anyways, you have that arbitrage, right? But you have the time value of money more than anything else.

So taking the deduction, it was earlier on. It’s really what it’s all about using your income to produce more income, to create more income. But like I said, there’s two great things about depreciation, recapture tax one is that time value of money you’re using it now.  The second thing is that, just like your regular ordinary income tax, we just talked about that, there’s ways to have deductions to offset that. So it’s not like a end all sale. There are actually ways to get around that. Okay. So that’s a whole, another chapter, maybe like the second podcast, but no, for real, there’s a 10 31. Yeah. Exchange. First of all, which you can use to defer your capital gains and defer depreciation, recapture tax.

That’s huge. There are other ways that if you have more losses from other property, so you’re not just investing in one property buying, selling, but you actually have maybe more investments. More properties and you’re getting more deductions. You can use those losses to offset those taxes as well, those gains.

So you have to understand it. You have to know, how to go about doing it and you have to create a business plan to understand what am I going to do on the exit.

Seyla: [00:13:26] Thank you, Yonah for going through the details of the explanation. So how much does it usually cost to conduct a cost segregation?

Yonah: [00:13:36] It depends on the size and type of property, but it’s not a contingent whatsoever to your tax savings. So that’s the great news about it, which is why it really makes sense on bigger properties more than the smaller properties cause the savings, the fee maybe similar or the same for a small building versus a big building because the scope of work might be the same, but what, when you are, having more money spending on a property, that means the percentage of tax benefit is going to be even greater. So usually, our fees for properties are generally somewhere between four to $6,000. That’s typically the cost. If it’s a million dollar building, you’re looking at probably $150 – $200,000 of tax benefit, right?

If it’s a $10 million building, you’re looking at, $1.5/$2 million with tax benefit. So to pay $5,000 for that, I think it’s a no brainer, right? When you’re getting on smaller properties, under a half a million dollar purchase price, it’s going to be talking about, okay, I’m going to spend $4,000 and get, $40,000 of tax benefit, pushing it.

And it’s not a lot suddenly to write home about, right? There are certain situations where it’s going to make sense. So that’s why I always recommend getting the feasibility to look at the numbers and see if it makes sense for you or not. Then you can make an educated decision like that.

 Seyla: [00:14:50] Yonah besides of cost segregation, what is your current focus now?

Yonah: [00:14:54] My current focus is always just trying to help people and creating more ways to do that. So I got my podcast Weiss Advice, which you so graciously mentioned in the introduction. I’m doing a real estate meetup once a week where I invite a speaker, a virtual meetup, right?

So we’re doing it, on zoom and like people around the country can come.  And that’s just a way to give back through some networking. And, hopefully you, know getting involved in looking at my, to invest myself in multifamily deals. So that’s really where my focus is.

Aileen: [00:15:24] That’s the silver lining of this pandemic, right?

Where every day we’re doing everything virtually. So we’re able to connect with people all around the world, virtually where we wouldn’t have been in the past.

Yonah: [00:15:34] Exactly. And it’s pushing us to do that because we, and it’s easier in a lot of ways. Cause it’s much easier to get on a zoom call with someone and talk to someone like here than to go up to someone at a conference.

Some people have that kind of feel introvert, that feeling. You’re like, Oh, should I talk to them? Should I not? But when I do these breakout rooms on zoom, where you’re just like thrown in a room in a zoom with three other people and just have to talk.

Aileen: [00:15:58] So yes, definitely. And I feel like you can make a little bit better connections too, or depending on how you utilize the platform.

So how are you utilizing social media platforms, such as LinkedIn and Facebook, to build  your network and establish more meaningful connections?

Yonah: [00:16:15] It’s huge. LinkedIn is so underrated. It’s huge. I have been very active on that platform, specifically, other resources I’m using, but not as much.

Facebook and Instagram, it just started with, but LinkedIn, I’ve been very active for probably about two and a half years, every single day, literally, excluding weekends and holidays and stuff like that. But what I’m finding through that is number one. It’s an incredible tool to create original content.

So not just like sharing news articles, it became that okay. It’s no longer, just like this place to post your resume and to try to find a job or for recruiters.  It’s really become a social networking kind of, I look at it like a bit networking event 24-7, so you can literally meet anyone. In any position, anywhere in the world, connect with her, you can meet people, you can and create the content, which that’s really, the main thing is you’re creating this brand that people just come to know you from just posting and just, being engaged on the platform.

Everyone can know who you are. So it’s an incredible tool. I highly recommend, if you’re listening to this and you’re not connected to me, reach out, do it here. You won’t be disappointed.

Seyla: [00:17:25] What is one thing that said successful people are in the real estate business?

 Yonah: [00:17:30] there are a lot of things that set people apart.

One thing that I’ve seen that set people apart the most, which is why I love the multifamily kind of community that’s out there is that people are number one, very giving. Of their time and giving of their knowledge and just sharing, not really expecting anything in return because that just  creates a community, It really what it does. It creates this environment where people want to, work with each other and we’ll see that’s the first thing. And that comes with a lot of humility because you realize that, okay, whatever I know. Okay. I got, I didn’t start from, from up here. I started from scratch.

So there’s a lot of other people like me. Who are just trying to begin to share that and give back that’s something that I love.

Aileen: [00:18:08] Absolutely. The multifamily space is definitely a team sport.

Seyla: [00:18:10] What has been the highlight of your real estate career so far?

 Yonah: [00:18:14] I think it’s really just like meeting people like you, like, you can go on these podcasts.

This is just incredible. I’ve been a guest star at this point on probably like 120 podcasts. It’s  fun. I really love it more than just being able to sharpen the saw. The more you talk about it, the better you become at that, but it’s you just meeting people, And you connect with the, have that personal connection, like you’re saying on the zoom, you wouldn’t never have done that. Have you not had that podcast or have that kind of thing. So I think it’s a great way to not only learn, but a great way to connect through to other people.

Seyla: [00:18:48] What tools or techniques have you used to improve the efficiency of your business or your personal life?

 Yonah: [00:18:54] Efficiency when it comes to efficiency, I think Calendly has been a very great tool for my efficiency. So that’s just the first thing that comes to mind.

Aileen: [00:19:04] Awesome. And so if our listeners wanted to find more about you, where can they go?

Yonah: [00:19:09] Best place to find me is on LinkedIn. As I said, you can go to yonahweiss.com.  So that’s my website, a lot about what I’m doing. Podcasts. You can find there as well as you can enter a free feasibility analysis, enter information to get one through that. Or you can go to our company website, the same Madisonspecs.com. but yeah, feel free. Please reach out and happy to help.

Aileen: [00:19:27] Awesome. We’ll definitely put that in the show notes so people can know where to reach you.

Seyla: [00:19:31] Thank you so much Yonah for coming on to our show is today. We really appreciate your time and we really learned a lot about cost segregation and go in deep dive into very details of how it works and how it can benefit our passive investors and active investor as well.

So we really appreciate your time to come on the show today.

Yonah: [00:19:50] My pleasure. Thank you.

Seyla: [00:19:52] Thank you.