On this episode of The Mobile Home Park Lawyer, Ferd chats to cost segregation expert Yonah Weiss. Yonah explains what cost segregation is and how it can save you thousands of dollars in taxes every year.
“That’s really what cost segregation is. It’s taking that cost and segregating it into different categories, things that depreciate on a five-year schedule, 15-year schedule, etc. That way you can take those tax deductions or tax write-offs upfront.”
HIGHLIGHTS:
0:00 – Intro and background on Yonah
3:16 – Yonah explains what cost segregation is
5:23 – Yonah explains that there are four categories when dealing with cost segregation; land, buildings, land improvements and 5-year property
9:43 – A cost segregation study costs around $4,000-$5,000
11:06 – Depreciation recapture is a tax you have to pay upon the sale of a property
12:16 – The most common strategy is a 1031 exchange, but there are other concepts to understand and use to lower your tax
14:40 – You or your spouse need to spend the majority of your time working to be considered a real estate professional
15:34 – Ferd was able to take a massive write off after buying a property late in the year due to bonus depreciation
18:50 – Yonah talks about the worst parts of his job
19:50 – Yonah reveals to us something to keep in mind with mobile home parks, which he learned in the past
FULL TRANSCRIPTION:
Ferd Niemann: Welcome back mobile home park nation. Here again today with another episode Ferd Niemann, The Mobile Home Park Lawyer. Our guest today, a special treat for you guys. This is going to help you save money, save a lot some on your taxes. This guy’s a cost segregation expert. If you’re on LinkedIn, I’m sure you know who he is. He’s everywhere, he’s a LinkedIn guru. He’s a major people connecter, networker. He’s got a great background, great presenter. He’s probably been on more podcasts than about anybody, but please help me welcome Yonah Weiss from Weiss Advice. I really early botched this. You got me, man. That was good. Yonah thanks for coming on. Appreciate it.
Yonah Weiss: Oh yeah. It’s a pleasure. Thanks so much for having me. This is going to be a lot of fun.
Ferd Niemann: Yeah. Well, great. Thanks again. Well tell us a little bit about your background and then how you got into the MHP space. I mean, I know you don’t do MHP only, but you clearly, you’ve helped me on some of my projects on cost segregation, but obviously, a nationwide company. Tell us a little about yourself.
Yonah Weiss: My background is really in education, in teaching. So, I was really a teacher for about 15 years. My passion still is I’m having a have a big family, six kids. So, I’m always in that mode, regardless of whether it’s in a classroom setting or not. But about five years ago, I got involved in real estate and that journey itself is still progressing and it’s taken different forms over the past several years. But one of the, one thing I kind of just wound up a few years ago with this company, Madison Commercial Real Estate Services. So they do a number of things, one of which is cost segregation and it kind of fit with what I do best, which is teaching because I ended up spending the majority of my time, just educating people about this concept. So I spent a good deal of time learning from the experts at our company who were doing this for decades, you know, engineers, accountants, and just dug in really, really deep and try to simplify for the masses. But I did a lot of random things within real estate and, commercial mortgage brokering, did some fix and flips, did a little residential brokering. Now I’m actually working on my first deal as we speak. Maybe by the time this airs, multi-family, like a big multi-family property. So that’s exciting. But as you see, if you’re involved in real estate and you’re in the world, you know, things can kind of develop and pivot as time goes on.
Ferd Niemann: Great. Now I know you mentioned there’s other folks at the firm, engineers, architects, engineers, accountants. So clearly there’s, they work together in cost segregation. Can you give us a reader’s digest version of what cost segregation is for people that are not familiar with the concept?
Yonah Weiss: Absolutely. It’s a pretty advanced form of depreciation. That’s really all the cost segregation is. So, you have a tax deduction. I know this is very popular in the news now, right? Big tax deductions that the IRS allows you to take because you bought a commercial property because you bought an investment property. You’re now allowed to actually take the entire value of that billing and write that off. Albeit over a long period of time, over a 27-and-a-half-year period or a 39-year period, that’s called depreciation. And it’s based on the concept that things are going down in value as time goes on, but what they don’t tell you, you have to actually know a little more to dig deeper. In the tax code it says, and there are certain things in a property you buy actually depreciate at a faster rate, meaning you can write off the value of those things at a much faster at a much faster rate. So, for example, and that’s really what cost segregation is. It’s taking that cost and segregating it into different categories, things that depreciate on a five-year schedule, 15-year schedule, etc. That you can actually now take those tax deductions or tax write-offs upfront.
Ferd Niemann: Right. So, for example, like in a mobile home park, there are a number of components. So, land for example is not depreciable because they’re not making any more of it. So, from an income tax perspective, it would be ideal to have a lower allocation on the land. And then you’ve got things like mobile homes that are residential property, 27-and-a-half-year class life. But then you’ve got other stuff that are like land improvements. Like what utility lines, roads, fencing. How does the cost segregation work with those? And what process does your team go through to come up with a reasonable estimate? And obviously for our listeners too, is most business owners we want to pay as little tax as you can, but legally you don’t want to get in trouble. You want to the jail. So, you need to have, you need to be audit-proof. I know you guys, I’ve talked to you on some of my projects where you’ve helped with that, and you guys kind of have some of that audit-proof strategies. What can you, can you expand on that item for our guest?
Yonah Weiss: Sure. So, a lot of different things going on there, but yeah, let’s, break down and then you say mobile home parks are specifically land. You basically have four categories when dealing with cost segregation, you have land, which does not appreciate, you have a building, which if you have park owned homes, those structures even though they’re kind of flimsy, right? Sometimes they’re considered, sometimes they can be. Nevertheless, they’re considered 27-and-a-half-year property. You also have land improvements, as you mentioned, which are landscaping heaven. And this is really very, very important when you’re dealing with parks that have no park owned homes or little park owned homes, and you’re dealing with tenant homes, which means you just own the land and the land improvements. So those land improvements to appreciate on a 15-year schedule. And that allows you to take all of the value of the concrete under each home, right? And that’s usually a majority of what you own essentially. And all of that can depreciate on a 15-year schedule. We’re, front-loading that. The fourth and final category is five-year property, which is personal property. And again, this will only be relevant if you have homes and inside those homes, you may have appliances, you have furnishings, you have carpeting, things like that. Anything that’s movable or potentially move-on, even though the homes themselves, but from a tax perspective, these are the useful lives so to speak that they call on. So that being said, when we’re dealing with mobile home parks, oftentimes, I guess if you will, not this strategy, but more, the actual procedure that we go through is having an engineer. So, this is someone who is not just well-versed in construction, building engineering, but also in the tax code, come and identify everything in a property. How much square footage of concrete, how much square footage of fencing, what type of fencing. And there may be different types of concrete, asphalt, pavement that are, you know, different values. Now We’re going to identify what all those are, how much is in each property. And what’s now what’s the value of those. There’s a very complex calculation, which I’m not going to get into, but it has to do with, you know, not just the real value, but also when it was built, when it was placed in service, how much time is the real useful life versus the tax useful life. And so, there’s a premium sometimes or discount rate based on those differentiations. Now we’re going to take the value come up, you know, that comes out from each of those individual assets and find the tax life. And that will allow you to now take a faster depreciation and essentially get faster tax deductions upfront. And you mentioned audit protection. Everything that we do is a hundred percent aligned with the costs that arrogation audit techniques guide. So, this is put out by the IRS. We do everything a hundred percent compliant with that, which includes a whole, you know, study with a numbering system and nomenclature and a whole, you know law, right? You have to jump through all these hoops and make sure you dot all your I’s and cross all your t’s. Then you can produce this report, which has this updated depreciation schedule. Essentially that’s all you need to now go and apply that to your taxes.
Ferd Niemann: That’s great. Yeah. As you mentioned, this is complicated stuff. That’s why you hire the pros, engineers, accountants, lawyers, all working on this together. I actually read those audit technique guys, because I was kind of paranoid about it. Don’t get audited or don’t get audited if that’s going to lose an audit. If you get audited, but you’re doing it right. No big deal. And I was pleased to find out everything you just said is accurate. And I remember some of the other strategies to defend them on it, to be things like the buyer and the seller agree in a purchase contract with the allocation is or things like that. But the best line of defense is the study you’re talking about, which when I own single-family and duplex properties for years, and I never paid for the study one because they were, I had assets, but I thought these studies were going to cost you $25,000 and it wasn’t going to be worth it. You know that the juice wasn’t worth the squeeze, but really these aren’t that expensive. And they obviously pay for themselves many times. What kind of range does it cost segregation study on a mobile home park cost somebody?
Yonah Weiss: Typically, on the lower range of types of property that we work in. And we work in all asset classes, you know, from office to residential, to retail, you name it. But typically around $4000, to $5,000, that’s what a study, you know, on a single property is going to cost, which again, if you’re dealing with a property that you purchased for over a half, a million dollars, you’re already looking at least a 10 times, of your investment of that, on that fee for the study is what you’re going to get back from the tax benefit at least 10 times.
Ferd Niemann: Right. I bought a property in Missouri on December 21. So, this is one of the key points that I want to get across on these. I only owned it for 10 days that year. We bought it for 1.3 million. We hired your company to do a cost segregation study. And I think we wrote off something like $800,000 of value for 10 days of ownership. So, if I’m in the 25% tax bracket, that’s the equivalent of $200,000 in tax savings. It costs $4,000 per study. So that’s just was mind-blowing and amazing. One, I say critique people have, or really a lack of understanding would be cost recovery, recapture, or depreciation recapture. Can you touch on what that is and how that impacts your bottom line upon disposition or sale?
Yonah Weiss: Absolutely. And then I want to go back and touch on something you said before. But the cost recovery, the depreciation recapture is a tax that you have to pay upon the sale of a property. Whether you did consternation or not, you have a tax on top of your capital gains tax. If you made any profit on the sale, you have to pay that capital gains tax. On top of that, you have a depreciation recapture tax, which requires you to pay a tax on the amount of depreciation. So, if you’re taking a lot more depreciation upfront, with the cost segregation, you’re obviously going to have to deal with and I say deal with, because it doesn’t necessarily mean pay. Because there are many strategies around that as well. But you have to deal with the tax that going to come upon the sale of the property whenever you do sell that.
Ferd Niemann: Right. And one of the strategies I’m sure you’re alluding to is a 1031 exchange where when you sell the property, if you buy a property of greater value with greater debt, greater equity, you can kind of kick the can down the road. Are there some, I think a lot of people are familiar with that. Are there some other strategies them besides the 1031 to defer that recapture and or the capital gain that you can share?
Yonah Weiss: Yeah. I mean, that’s obviously the most common one. As you mentioned, you are further deferring your depreciation recapture tax, but there’s just a simple, not necessarily a specific strategy, but something that you have to take into consideration is that the way that conservation has the most benefit for an individual is when you are not just a one-trick pony, but you’re not just one property guy and that’s it. If you’re just one property guy, you buy one, and then maybe five years later, you sell it and you buy another one. It’s going to be more difficult to get the maximum benefit from a cost segregation study. It’s a strategy that works best with an active real estate investor. And the strategy is to continually pay down, pay little to no taxes, use more money, reinvest it. So one of the things that comes along with that is that by creating these extra losses, like you said, if you have $800,000 off tax deductions, likely you will not have that amount of income from your properties, which if you’re a real estate professional, you can use those, you know, the income or your spouses’, you can use those deductions to offset your other income as well. But what happens is you have these actual losses, well, what can you do with those extra losses? One thing you can do with them is if you have a gain or you have a tax during that year, you can use those extra losses to offset gains from another acquisition or another disposition. So that’s something, again, it’s not like another strategy per se, but it is something that you can definitely use in order to lower your tax bill at the end of the year.
Ferd Niemann: Good points. I think those kind of net operating losses to carry them and carry them forward also, so you get some of the future year’s income, whether they’re capital gain or ordinary income, if you’re a real estate professional. I know when I used to work at a big law firm, I was a W2 employee. So, I didn’t qualify as a real estate professional despite being a real estate attorney. So, once I became self-employed in development and in mobile home parks, it gave me the opportunity to be classified as a real estate professional. Do you know, offhand, I don’t want to put you on spot, but do you know, offhand the criteria, the material, I think it’s material plus material to participate and it’s 750 hours a year that you have to do and not have a regular W2 to become a real estate professional. Is that the main criteria is?
Yonah Weiss: Correct. Yeah. So, either one of a couple. So, if you have either you or your spouse needs to have, what you said. Spend the majority of your time materially participating in real estate trader business, which can include, you know, operating, managing as well as brokering. So, if you’re a broker, those hours spent are actually counted towards your real estate professional status. And then the 750 hours a year is, it’s basically easy to do if you’re working full time.
Ferd Niemann: Right. Okay. That makes sense. We’re obviously getting into the technical, let me get out of the weeds for a minute cause you and I will dork out on this stuff forever.
Yonah Weiss: Well, I do want to go back to one thing mentioned earlier that you bought a property on December 21st, and we’re able to take a huge tax write-off that year. And the way that you did that is something called bonus depreciation. Because normal depreciation is prorated to the day of the year that you purchased the property. So normally you would have only been able to take, you know, a tiny amount of depreciation had you done, whether you did straight-line regular depreciation, or even if you did a regular cost segregation study, only be able to get a certain amount for those 10 days, however, with bonus depreciation, which this is a new tax law passed a couple of years ago allows you to take all of the accelerated depreciation. And this is huge with mobile home parks. And I want to emphasize this because more than any other asset class that I have found out there, and I deal with these a lot, I mean, say for RV parks, or golf courses, which have the same, the same you know, point of them that the same aspect or attribute if you will, that has the majority of land improvements. That’s what mobile home parks have is those, again, you’re not owning the homes and even the homes they’re a small amount attributed to the actual overall purchase. It’s the land improvements, the concrete, the slabs, the landscaping, everything, and that’s what you really own. That’s why you’re able to take, because all of that’s 15-year property, it’s accelerated. You could take that entire amount in year number one. So that’s all the bonus depreciation.
Ferd Niemann: That I think is the special sauce. I mean, mobile home parks, because you can take this, I could have bought that property at 11.59 on New Year’s Eve and taken a massive tax write-off because of the combination of cost segregation, depreciation and bonus depreciation. I believe the bonus depreciation is now a hundred percent, I think since 2017 Trump tax law. And is it only, I think it goes through the end of 2025 before you can really utilize. So my goal in life, so to speak is to build up as many passive net operating as I can through 2025 and not pay tax and then 2026, okay, I’ll start taking more fee income, focus more on legal fees than ownership or some combination where right now I’m not as motivated to have fees. I’m motivated to do ownership because of some of these strategies we’re talking about. I think it’s just a great combination. And I had an accounting background and knew some of this, but really through your LinkedIn, your podcast, getting to know you, it really just has driven me to spend more and more time in the tax field. And I think it’s amazing. And I think it’s going to be huge for me, for my clients, for everybody listening to this. And that’s why you’re so successful. I can tell you’re an educator. And I know, my question for you, what’s the best part of your job? I think I already know the answer, it’s teaching people how to fish, right. And that’s what you’re doing.
Yonah Weiss: Yeah. I love this. I mean, just even having these conversations, which I have, you know, every day, but on the podcast and it is my favorite thing to do, I really enjoy it. And for me also, the more I talk about it, the more I explained to the more people ask questions, it kind of sharpens, you know, sharpens the saw. It allows me to sharpen that more. And if I ask a question that I don’t really know, I have a whole team of experts that I go to with all my questions and they would just clue me in. And I learn a little more, a little more deeper.
Ferd Niemann: Got it. Now I know the best part of your job. Well, you have anything that’s the worst part of your job. Hopefully not this podcast.
Yonah Weiss: Not at all. This is my favorite. I guess the worst part is, you know, with every job comes like paperwork and stuff like that. I was never really good with that. Those kinds of things. So, I guess that, I mean, I do have an assistant now who takes care of a lot of that for me. But still whenever I can get around, I try to pass that along.
Ferd Niemann: You are definitely doing a good job at it. It’s interesting. I see your educational background as a history and Judaic studies and now you’re a national cost SEG expert is like, that was an interesting transition, but I obviously it’s working out for you, so that’s great.
Yonah Weiss: Right. It’s really the passion more than anything else, you know, the subjects, those were things that I enjoyed at that time period. But if there’s something I’m passionate about, I’d love to teach it.
Ferd Niemann: Great. Great. Do you have any horror stories or, you know, school of hard knocks lessons that you’ve learned either from your mistakes or from one of your client’s mistakes that you can share so that I don’t make the same mistake or our listeners don’t make the same mistake?
Yonah Weiss: I will mention one mistake that, not necessarily a mistake, but something you definitely to keep in mind, especially with mobile home parks. It’s very common that you’ll have something called, who’d will in a mobile home park. And oftentimes that is attributed to the business or whatever. And that will even show up in your operating agreement or your purchase sales agreement, that shows up in the contract with a certain amount of the purchase is attributed to that amount. Sometimes there’s some, sometimes not. I still haven’t figured it out. And maybe you can shed a little lighter on it. You know, why it’s more or less. But one thing I will say, just from a tax perspective, even though Goodwill is depreciated, that amount is depreciate on a 15-year schedule. However, it’s not a depreciable asset, like the building and therefore cannot be cost segregated, meaning you can’t get the bonus depreciation from that amount. So, when taking advantage of your tax benefits, it would be ideal not to have from the buyer’s perspective or it’d be ideal not to have any Goodwill in the contract.
Ferd Niemann: That’s good. I actually used to include Goodwill in my contract before 2017 Trump tax law, where this bonus depreciation became so valuable. I’d like to have some Goodwill because one as a 15-year amortized or depreciable life as opposed to dirt zero or improvements, you know, 15 to 27 and a half or 39 for commercial. But the real reason that I like to include it back then as it doesn’t show up on your transfer, which means the County appraiser my background. I used to be Jackson County here in Kansas, the Jackson County tax appraiser. In some states, when you disclose your state, you have to report the sale to the County tax assessor. Well, if I could buy a million-dollar piece of property and in claim five, reasonably claim 500,000 with Goodwill. That means that 500 is not included in the real estate transfer and my property taxes are not as likely to go up or not to go up as much. So that was the rationale to do it previously. So now I tell people, you have to weigh the benefits of, well, one what’s reasonable from a 10-property tax. What’s reasonable from an income tax audit, but then how much do you want to risk your property taxes going up versus how much you want to maximize your income tax savings. Because the two now conflict where they didn’t as much in the past, but the reality is there, I think the risk with Goodwill on mobile home parks. I know I bought a mobile home park. It was like 1.2 Million, and it was 10 acres of dirt. And this was in mid-Westwood, you know, good corn ground, good corn grounds, 10, 11,000 an acre. Okay, 10 acres of corn is a hundred thousand. I’m paying a million too. I’m either the dumbest guy in town, or I’m buying something different than dirt. I’m buying an operating business. I’m buying clientele, I’m buying, going concern, Goodwill, a permit, which is crucially important mobile home parks. You can’t get any more of them. So, I’m buying an operation, just like if I was to buy McDonald’s franchise, I’m not buying a 6,000-foot building. I am buying the franchise, Goodwill, the systems, all that you’re paying a premium for the operation. So, it’s real. I think it’s defensible to either a County appraiser or doing an income tax audit, but there’s often a subjective nature to the allocation in a negotiation to it. So anyway, I glad you brought that up. Cause I definitely see where that’s a mistake from an income tax perspective, but globally, you know, it all depends, right. It depends on the fact that, so that’s definitely next-level advice. So, thank you for the Weiss advice comment that only you can provide.
Yonah is there anything else before we break you want to talk about, and I want you to tell everybody where they can find you as if it’s not obvious that you’re everywhere, but how do we get ahold of you? Where can we find your podcast? And then any other words of wisdom before we part?
Yonah Weiss: Like you said, I’m probably the most active person on LinkedIn besides for you know, LinkedIn themselves, but you can find me there. You can go to www.yonahweiss.com. You can check link to my podcast there, or anywhere you listen to podcasts. And Madison Specks is our company. We’re the largest national cost segregation company servicing all 50 states. So happy to you know, help anyone with that. If anyone wants a free estimate on any property, that’s a great way to educate yourself a little more to see if it even makes sense for your situation.
Ferd Niemann: All right. Great. Yonah, appreciate it. Thank you.
Yonah Weiss: My pleasure. Thanks, so much Ferd.
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