How profitable is it to be a real estate professional? Is it true that the higher your income and sales, the higher the tax you’ll be paying?
Justin welcomes Yonah not only to talk about his company, Madison SPECS, but also the bonuses and taxes that come with real estate investing. He discussed using depreciation from one property to offset income to the other. They also discuss using passive losses against active income if you’re registered as a Real Estate Professional in your tax return and more about the depreciation recapture tax.
Listen to more episodes and subscribe to the podcast on Apple.
- A little background: Madison SPECS? – 1:57
- With the change in the tax code, what are the other things that can have an impact? – 4:51
- Real estate has been mainstream. – 6:53
- Cost segregation: The awareness problem. – 9:00
- Running a feasibility study on a property. – 16:50
- Factoring the years into the holding and repositioning strategies. – 19:47
- What is Year One Bonus and why do we have it? – 24:18
- States which don’t recognize it. – 27:50
- If you write down Real Estate Professional as your profession on your tax return, you’ll have a special designation in the eyes of the IRS. This allows you to use the passive losses against active income. – 28:29
- When you do an exchange, what’s considered personal and how does it affect your exchange? – 31:00
- The depreciation recapture tax. – 35:00
- Factoring in your tax return. – 36:16
- Where to find Yonah? – 37:33
Connect with Yonah Weiss
Connect with Justin Smith
Justin Smith: Hey Yonah.
Yonah Weiss: What’s going on. How are you doing?
Justin Smith: I’m doing all right. I appreciate you joining me today. If you were saying, how many episodes you have hosted or been a guest on? What would you guess that answer to be?
Yonah Weiss: Well, as a host of my podcast, we are publishing 170 episodes, recorded quite a few more than that as a guest. I’ve probably been a guest on more than that, I’d say close to 200 or more.
Justin Smith: Oh, my goodness you’re a celebrity, you’re famous.
Yonah Weiss: I’ve done it a few times. So it just makes sharpening the saw just all that much more.
Justin Smith: And I love the learning that goes along the way with formatting and with being a host and understanding what’s good for guests. I love all that. There’s definitely plenty of learning in there that refining that is great. Thank you for joining. Cost segregation that king of cost SEG. I figured what we would do is walk through this example that are two of the properties that I own. We can just be as specific as it’s helpful for people like the lessons learned and the concerns and things we’d need to look for.
So when a time, like the present of needing one myself, to then use that to educate the world on at the same time. I figured that’s a great real life example and the questions and concerns I will have, I imagine are very universal to a lot of investors and specific to industrial. Or we do that though Yonah and you’re firm Madison SPECS. Maybe you can give us a little background to how long you’ve been doing this and then scope of services that we provide the marketplace.
Yonah Weiss: So Madison SPECS, SPECS is actually an acronym for specialized property engineering cost segregation, but obviously it has that double entendre of building specs. It’s been around for about 17 years. We’re the largest national cost segregation company. Although it’s part of a larger, conglomerate of commercial real estate services, Madison Commercial Real Estate Services. We’re also a very large national title agent. You may have heard of Madison title, mostly work in commercial properties, but again, in all 50 states as well. We do 1031 exchanges, Madison 1031 again, and that brand we have a few other very interesting services that are specific to commercial real estate. Lease abstracting, which again, is something more for retail or office properties and things like that. But yeah, SPECS I’ve been with Madison SPECS for about four years, a little more than four years now. My background has nothing to do with accounting or engineering whatsoever, but we have a whole team. We have about 60 people on the team currently that are accountants and engineers and the operations team that get this done, that we push out about 3000 properties studies a year. So a pretty large volume, very grateful.
What I do is what I’m good at, which is talking and teaching. I was a teacher for about 15 years. And so I just use that skills. I love real estate and I’m happy to network with tons of people. Networking is one of my skillsets as well and it just comes naturally to me. So I’d like to take these complex subjects and simplify it so that everyone can.
Justin Smith: I am not an accountant nor an engineer. So you’re in a safe space where you can talk about all of that. I did not know that SPECS had all those other services and I could see how they would all work well together. And on lease abstracting I do need on occasion because we work with corporate customers that have multiple locations that are also industrial users. That’s great to have that be in the family. Is there anything on the cost SEG horizon going into this specific example? I know when I talk with people, we’ve got people fearing change in the tax code. The 1031 and what does the future of it look like and capital gains taxes. What are you seeing out there? Is there other things that people are like causing them to take a second look at cost SEG and exchanges or things that you see on that horizon? Are there any parts of those two that you find we’ll have an outsize impact on what people do moving forward with the properties that they own?
Yonah Weiss: Yeah. So really interesting to know that there has been a lot of discussion, obviously, whenever there’s a new administration, there’s talk about tax changes. And 1031 ones has been on the chopping block this time around. There was some sort of notion of, as soon as I get in office, we’re going to do away with the tax cuts and jobs act entirely. Which had tremendous amount of benefits for businesses. Real estate specifically had some great benefits in terms of the bonus depreciation. However, it has not been brought up whatsoever. Obviously the increase of capital gains increased the income tax rates those are going to affect everyone and especially people who are earning loss, real estate investors and the 1031 may or may not go away. We still don’t know until something actually passes. We’ve done a tremendous amount of lobbying obviously to try to keep that in because it’s a great thing. Cost segregation and depreciation in general has not been a subject of any changes on the horizon as far as I’m aware.
Justin Smith: It seems like what the exchanges, that’s a big one, but if it’s limited to a certain dollar amount. Transaction volume is so high right now. Is it high because this is all out there. Is it high because this is where we’re at in the market? Like these past two years and people having enough confidence to make changes. It sure is an interesting environment of figuring out like trying to just work with good people that aren’t bogged down or finding out what happens when people are maxed out. And you’re now at the bottom of the pile, and they’re trying to just get whatever’s important to you with the team. It’s certainly challenging right now .
Yonah Weiss: It’s really interesting. I don’t have a crystal ball to know what’s going to happen in terms of in the future, but the market is crazy. It has been increasingly crazy for the past couple of years. I think one of the reasons, I don’t know all the reasons, but one reason is certain because real estate has become more mainstream. I think for many years or a long time, real estate has always been thought of as like an alternative investment for wall street. Okay. So yes, there have been reads and things like that. And there are obviously corporate investment companies, but it’s always been thought of as a “alternative investment”, but because of the stability that a lot of real estate has seen and the growth, especially with industrial, specifically with the growth of e-commerce and all kinds of things like that. People have seen the stability inflation or recession resistance of real estate as an asset class. To hold more people, more institutional investors have become aware of this or I guess to the point where family offices and institutional investors, whereas traditionally would investing in somewhere between 10 to 15% or so into alternative investments. And now, I’ve spoken to family offices where now they’re looking at increasing that to 50%. So that means that there’s a tremendous amount of money that has flooded the marketplace that was not there before. And so that’s contributed to the increase, obviously the appreciation, the increase of prices across the board as we’ve seen. People have been talking about it’s a bubble. It’s about it’s going to crash but it just keeps going and it keeps expanding. And I don’t really see at any point right now that anything popping or anything crashing.
Justin Smith: Cost segregation, it seems like people discover it and people have a problem and then this becomes a solution. You guys have an awareness problem. Why isn’t it just the way that we do and then maybe there’s an exception? Do you have any take on that? I’ve sure found that seems to be a, when I talk with people they’re not always aware until they’ve played the game a couple of times.
Yonah Weiss: It’s interesting. I’m always fascinated how few people know really about this tax strategy. And it is something that has been around for a very long time. But like you said, unless you’ve played the game, unless you’re have gone, it’s been relevant to you. You may not be aware of it. And so your accountants aren’t necessarily proactive enough to tell them about it and people have to take the reins into their own hands. That’s what I’ve been adamant and I guess prolific about. Just spreading the word, I’ve been on hundreds of podcasts, just giving webinars around the clock, just telling people about this because people need to be aware. And it’s something that most people can benefit from. I think there are cases obviously where it’s not going to be beneficial for certain people, certain investment types, et cetera but most people who are real estate owners can benefit from this.
Justin Smith: And maybe it’s CPA school, they’re missing a course offering. And that’s something where you would think all CPAs would be like, oh, you bought a piece of investment property, super we’re doing cost segregation on it. That’s what is generally accepted principle and no exceptions.
Yonah Weiss: And again, to your point, if it’s not relevant, like they may have learned about it in accounting school or whatever. But if it wasn’t relevant, they didn’t have any clients that necessarily had. I literally spoke to an accountant yesterday, who’s been in practice for close to 20 years. And he called me for the first time. He’s never done a cost segregation for any of his clients ever. And he only came to me because his family owns a piece of real estate and it was like, okay now it’s actually practical for me. How can we utilize this? And then maybe, okay, now that I’ll understand it on a personal level, I maybe I can pass it along to my clients. So that was really fascinating.
Justin Smith: That’s just how it is. I have a very modest property holdings, but it’s relevant to me. I went to Yonah because he’s who you talk with when you have these problems. So I said, Hey, Yonah, I used to have some single families and much like the game of monopoly. I turned them into a small multifamily and then I turned a small multifamily into a warehouse and then I turned to warehouse into multiple warehouses. And with single family rentals, there’s enough depreciation where those are not throwing net positive tax liabilities. Where with these warehouses, they are throwing a operating income where they are generating tax liabilities greater than the depreciation schedule. And so that’s where this can be a help. So I went to Yonah and I said, Hey, what do I need to give you and how do we look at this? What you need from someone that’s looking at that are the depreciation schedules from their tax returns and so that’s so you know how much depreciation we’ve already been paying into assets that have rolled up into what we own today. And then what else would you need to now?
Yonah Weiss: So yeah, it can be done on a new acquisition or in your case, like for example, it can be done on a property that you’ve owned for a number of years and want to go back and try to catch up some depreciation that you could have taken that you missed. Because what we’re doing is we’re accelerating certain components of the property, accelerated a depreciate. Certain things depreciate instead of just the whole building depreciating on a 39 year schedule. And I don’t know if you want me to jump in and talk about it a little bit, how this works the mechanics of cost seg in general. It’s really important to know that could you appreciation you hear about real estate investing and tax benefits that come along with it. The tax benefit that is the biggest that comes along with real estate investing is called depreciation, which is a tax deduction that you get based on the principle that things go down in value. So your property is not going down in value but you get to take a tax write off as if it was. And you can now take that tax deduction each year based on the original purchase price. And you’re going to take it on if it’s a commercial property over a 39 year schedule, if it’s a residential property over 27 and a half year schedule. So essentially that means you take that purchase price, take a little bit off for land, which does not depreciate and then divide that by 39, that’s going to be your tax deduction each year. Which is going to go to offset your income. And Justin, you mentioned on a single family, smaller properties usually the net income is not that high and the depreciation deduction is usually going to be enough or close to that to offset the majority of that income. And so it’s not necessarily gonna be so advantageous to get all these extra tax benefits because you don’t need them. You can’t necessarily use them. There are a couple of caveats there, which I’ll maybe touch on later if you’re a real estate professional, but for larger commercial properties where you’re actually making net profits, you want to be able to utilize the depreciation. And so what we do is basically an advanced form of depreciation instead of putting the whole property on a 39 year schedule and just taking a little bit every single year, like two to 3% of that total value every single year. You can actually by identifying different components in the property that depreciate on a faster schedule, for example, what’s called personal property, things that are inside a building that are non-structural, that’s depreciated on a five-year schedule. So you can take the value of those items as a tax write-off over a five-year period. So that’s much larger. You can Front-load a chunk of that and basically get larger tax write-offs in the earlier. So it’s a strategy that we’re able to front-load deductions instead of waiting 39 years to take everything. We’ll just front load a portion of them, maybe 5%, 10%, 30%, it really depends on the type of property and you can get bigger deductions earlier on.
Justin Smith: It was a sad day when I sold the three unit apartment and looked at the new depreciation schedule. And I was like everybody says commercial real estate is better than residential, but I’m not feeling that right here at this moment, because that’s surprising to have that difference be there were a lot of investors probably don’t think too much about that, but I would think this is a great equalizer of that.
Yonah Weiss: It certainly is. It’s a great strategy to be able to just have more deductions, have greater cashflow, especially for someone who is in the business of trying to acquire more and trying to scale. This is a great strategy to help do that, to help facilitate that.
Justin Smith: Could you walk through a little bit of what your deliverable is. So I said, you and I got a problem. You said, okay, what kind of properties are they, where are they located? Let’s look at a brochure to see how much a office there is, the unit sizes, the types of tenants that may be there and to get a feel for how much is a building or lot, or a landscape or asphalt or concrete and or air conditioning unit for that matter. And then what you came back with was this report that has the address, the dollars for the purchase price, the depreciable value, and then you start breaking down into with and without cost segregation and the difference. And then as time goes by, and then along with a schedule, can you just walk through that a little bit?
Yonah Weiss: Sure. So what we do for any properties, we’ll run a free feasibility analysis like you just described. Where we’re able to tell you and before going to the property, even before our engineers look at the actual details inside. We’ll look at some data points in your case, we looked at the OEM, we looked at the details, what the square footage, the year it was built, et cetera. And we’ll take that and base it on the thousands of other studies that we’ve done. And come to a number, a projection of what the potential tax savings would be. So what we’re going to do is figure out how much we project that we can reclassify of the total property into the, like I said, the five-year property, which again, is going to be like personal property non-structural components and then the 15 year property, which is landscaping land improves, concrete pavement. Which on industrial properties happens to be a lot more. Whereas the five-year property is usually a very small amount when it comes to industrial properties, certainly air conditioning, things like that those will apply no climate control, stuff like that, security, if you have shelving things like that. But typically industrial happens to be on the lower end of the spectrum when it comes to the benefits for cost segregation in the asset classes.
Justin Smith: I got a question for your office space, where does that land?
Yonah Weiss: Yeah, so the office space is also going to be looked at, and we’re going to check out the office space and see what kind of furniture is in there. What kind of fixtures, the windows.
Justin Smith: Literally the walls, the glass. All that is in with the 15 year or with the five?
Yonah Weiss: That’s going to be either in the five-year or in the structural, the 39 year cause the majority is still going to be considered in the structural components of any property. Certain things like windows and doors are considered structural they’re integral to the property, but things that are non integral or non-structural, that can be shelving, that can be light fixtures, that can be flooring in many cases, wall coverings or security, other types of special purpose electric exempt furniture fixtures. Those are the easy ones, but there are man other things that can go in there that can actually be depreciated at a faster five-year schedule.
Justin Smith: After going through the total dollars is where you go through this over time, where you lay out the value of the items that are on the five-year schedule versus 15 versus 39, so that you can look at what a difference it has over time. Great analysis, by the way, I appreciate you sharing that. That’s a great, like illustrative way to understand it right where people usually won’t mind that up for themselves. After you reach year six and after you reach your 16 and then no one reaches year 40, most of the time with how long they held proper. How do you factor that into your holding strategy and your repositioning strategy?
Yonah Weiss: So like you mentioned over a five-year period, you’re going to be front-loading a certain portion. And in your example, I think it was a small amount, maybe like close to 15% that can be depreciated on a faster rate. By doing that you’re still going to be taking. And this is where a lot of people get confused. You still have depreciation every single year. Okay. But all you’re going to be depreciating after we run out of the five-year and 15 year property is what’s remaining in the structural 39 year asset class. So in this example, let’s say we take 15%. In the earlier years, you’re still depreciating taking that deduction of the 85%. So if it was a hundred thousand dollars of deduction that you could have taken each year with a, let’s see about a $3.9 million building divide that by 39, you have a hundred thousand dollars each year of deduction. If you front-load 15%. Into the first few years then the remaining year, instead of the a hundred thousand, you’d be getting 85,000 each year.
Justin Smith: I love using $3.9 million example. That’s a great one. Which is totally a illustrated, but yeah, 85% of the depreciation remains the same, at least in this example where it’s an industrial multitenant park that has a less improvements where there is warehouse space that has less to be captured on the five and 15 year schedule. In my mind, the knee-jerk reaction is year five we got to sell. And I think what you’re saying is that all take a moment. Think through it of like really, what is the change in your tax liability going from year five to year six, it’s probably not as great as you would think it to be.
Yonah Weiss: Yeah. That, and coupled with the fact that this is a strategy and depreciation and income on rental properties all get lumped together. So as long as you buy another property within that timeframe, you can use the depreciation from one property to offset income from the others. And so therefore, yes, you may have less depreciation from one property as time goes on. But if you just keep buying, you’re gonna keep buying a new property and keep getting this strategy done. You can make sure to keep your income tax liability as low as possible, basically as long as you can. And then maybe 1031 exchange on a sale and keep exchanging that and deferring those times.
Justin Smith: The idea you gave me, then you may not have to exchange, right? So if we’re talking about two multi-tenant parks and we buy a third one, and every new one you add to the mix and do cost segregation on, can make up for the year six through 15 perhaps of what you’d lost on the other two. Something along those lines and you can still exchange, and that’s probably the path that most go but it’s not like it forces you to, or that there’s not a second or third way that you could continue to benefit by the cost segregation and by the accelerated depreciation.
Yonah Weiss: Exactly.
Justin Smith: When I looked at this without having you in my corner, I thought oh man, I don’t dictate when I sell. Like when the market says to be a seller, I sell. When my cost seg NPV calculation tells me I need to be a seller and I want to be in control of when I’m a seller. But I find that was my knee-jerk reaction where that’s a unfounded fear. And so you look at this and then recognize like how much of your depreciation is really going in to your five-year component or is classified in that five-year timeframe. And when you say, oh gosh, it’s only 5%. Okay. It’s not my whole financial world comes down from year six to 15 and that’s helpful. And I think that’s where I would imagine out of people, don’t take that second pass to then say, Hey Yonah can we really look at mine? And can we really look through this to then drill down into the specifics?
Year one and bonus depreciation and thinking through a existing versus a new. What I brought to you was an existing and a new purchase, right? So we got to look at both of these examples. What is year one bonus? Why do we have it? What is that all about?
Yonah Weiss: With the tax cuts and jobs act that passed a few years ago, they introduced a new law, which was called 100% bonus depreciation. It’s essentially what we described before, where you’re able to front load depreciation into these faster tax categories. Basically these lives certain things are going to depreciate on a five-year schedule, some on a 15. The new rule came in and said, Hey, if you bought a new property or if you bought an old property, doesn’t matter, you can now take all of that accelerated depreciation upfront 100% of it in the first year. So instead of that 15% that we’re now going to spread over a five-year period or 15 year hearing and get larger tax deductions then I would have normally gotten each of those years. You have the option to once you’ve done a cost segregation study and recognized what those percentages are, what those assets are, that can be accelerated. You have the option to take that entire amount in the first year as a tax write off. So that’s a huge bonus.
Justin Smith: And that’s on an existing or on a new purchase or on both? It doesn’t matter.
Yonah Weiss: So it has to be on a new acquisition, but it can be, or a new development. Basically the cutoff point was any property purchased after there was some date. Totally arbitrary date is September 28th, 2017. I think that’s when Donald Trump bought a property or something. So anything after that date, you was now eligible for this one bonus depreciation. And it’s still in the books through next year. So through 2022, any property purchased is now eligible for this tax deduction. After that point in 2023, it’s going to start to phase out. It’s going to start to go down to 80% than to 60 until it’s going to go down to zero, meaning you can still use cost segregation but you’re not gonna be able to front load the entire mount into the first year.
Justin Smith: If you’ve got a huge tax liability, you pull down lever, but you don’t pull it unless you have some big gain that you’re trying to shelter. That’s when it’s appropriate or everybody should choose it pretty much all the time.
Yonah Weiss: It’s a great point you’re making because getting extra deductions, getting extra losses is not going to trigger a refund. It’s going to just be a passive loss. Now that passive loss, if you can’t use it, it will just carry forward. Meaning if you only make, let’s say you make $50,000 in net income and you get like a $200,000 bonus depreciation. The 50,000 you made is going to be totally not taxable because you’ve reduced your tax liability to zero and you have an extra $150,000 of losses. If you can’t use that, it will just carry forward. Meaning you could use it next year and the year after it will keep carrying forward until you use it up or until you sell the property. However, You don’t necessarily need to get the cost seg done or use the bonus depreciation in this current year. Maybe wait next year, it’s a strategic move that if you can use it, then it’s going to be beneficial.
Justin Smith: Yeah, it’s available to you but you don’t use it until you need it. So you went into passive losses a little bit. I’m in the state of California. You’re in New York. Does New York, recognized cost seg on tax returns? I think California does not. So that’s one way where it’s maybe less effective than we would hope it to be.
Yonah Weiss: Yeah. On a state tax level, there are a few states that don’t recognize the 100% bonus depreciation. California is one of them. New York is not. I think Pennsylvania is another one. I think there’s three states that don’t recognize the 100% bonus depreciation.
Justin Smith: They got us on that one. They were like, Hey, we have too many high rises to, to close this one down. We’re going to have to do something here.
Yonah Weiss: The one thing, I mean on that note, we’re talking about the passive losses. There is something that for yourself who is a real estate professional, when you’re a broker, you’re also owner, but your full-time job is in brokering. As a real estate professional, if you write that down as your profession on your tax return, now you have a special designation in the ICRs, which allows you to use those passive losses against active income. So I want to just take a step back because this is huge. If you’re a real estate broker or your full-time job is in real estate, owning, managing, doing construction, you know of your properties. You have this special benefit and I want to just describe this because it’s so important and overlooked by a lot of brokers out there because normally speaking depreciation is considered a passive deduction and is used against passive. And what’s called passive income is rental income. Anything for real estate is called passive income, even though it may not be very passive, it may be very involved. It’s still classified as that. If you’re a real estate professional, you are not limited to that. Meaning the deductions from depreciation normally would only go to offset any rental income that you have. But in our example, before, if you have an extra $150,000 of losses, considering your rental, and what happens if you are a broker and you made a lot of money on commissions or whatever, that’s treated as active income. And normally you wouldn’t be able to use your passive losses against active income. It’s just in two different categories, but if you’re a real estate professional, you can, you or your spouse, only one of you needs to qualify as a real estate professional. And that’s why I see a lot of people who are very high W2 income earners, and one spouse is a real estate professional. You can now use these extra losses against your active W2.
Justin Smith: Yeah, that’s a huge point, right? That makes all the difference in the world. Yeah. Rarely do you have two people that are both a 1099 and both in real estate. That said we got to have some stability in the house somewhere. It’s interesting to play that in and then play state versus federal in, and then start to spend some time with your accountant and our financial advisor. And then look through that. Last I think is the next new problem I haven’t yet solved is when we do exchange and what’s considered personal and how that affects your exchange. So if we have changed the depreciation schedule and how we’ve written off certain improvements to the property. And then we go to exchange our exchanges and a hundred percent the way it would ordinarily be what changes and how does that affect things and how does one account for that then make their move?
Yonah Weiss: Yeah, one another thing that happened with the tax cuts and jobs act was they did away with exchanging personal property. So it used to be right if you had a boat or car or guitar or, anything that was non real estate. You could exchange that you can do a 1031 kind exchange, meaning you could sell one boat and buy another boat. You can sell one airplane, buy another airplane.
Justin Smith: Have you done one of those Yonah? Have you done a guitar exchange?
Yonah Weiss: We actually used to do a lot of personal property exchanges. It’s pretty, pretty crazy. Our 1031 company. I haven’t personally, no. I have not sold a guitar to defer the capital gains, but that used to be a thing. Now came the taxes and jobs act then did away with personal property. But it became a little bit confusing and for a little while, it actually took like about a year and a half until they came out with final regulations for a problem that came up. Which was you can only do 1031 exchanges now on real estate. Okay. On real property. But in real property, there actually is some personal property as well. And if you’re doing a cost segregation, what you’re doing essentially is separating the real property from the personal. Now that became a big point of contention and confusion because the definition of personal property was never defined. It became very clear and the final regulations made it very clear that there is a difference between the personal quote unquote personal property. It’s called section 1245 property that is separated through a cost segregation study. And that is really part of real estate and the personal property that has nothing to do with really. So therefore what they came to as a conclusion was the majority of things that are actually found in cost segregation study that are quote unquote personal property are not personal property that would be excluded from a 1031 exchange. The only things that would be are literally things that are like tangible, like appliances or furniture. But like I mentioned before, the majority of
Justin Smith: What you and I would think of it as personal property.
Yonah Weiss: And so those things are moveable, right? You can take them out. They’re not have nothing really to do with the property itself. They just happen to be inside. And when you buy a property and they’re included in the sale, it’s all together and so it’s depreciated and you can separate it out. But the majority of things that we’re separating from the building structure to a five year personal property level on the cost segregation are things that are not moveable necessarily like Wallcoverings, like cabinets, like countertops, extra light fixtures and carpeting or flooring and things like that. Those are really part of the property. They just happen to have a different useful life in terms of depreciation. So therefore there are some things that are going to be excluded when the long answer to your question is when you do a 1031 exchange and you did a cost seg, there are a couple items that may not be able to be included in that defer of capital gain for example, the furniture or, appliances.
Justin Smith: Yeah. Which I can’t even imagine any of that’s included in these industrial properties that we’re using as an example. Where there’s cabinetry and stuff, but yeah, I wouldn’t imagine. Anything that’s the tenant’s property that would be included in there. Understood. So that means that largely is a non-issue. This may be riffing off the last question, if we don’t exchange at all, and we just pay uncle Sam, put it in our pocket and go live to play the game in a different way. I imagine there’s also its own ramification there.
Yonah Weiss: That’s right. There’s something called the depreciation recapture tax, which would be subject to. Again, if you don’t do it, we’re going to have to defer that you’re subject to what’s called depreciation recapture tax. It means any amount of the appreciation that you took during the whole period, you now are subject to attacks on the sale. Took a hundred thousand dollars a depreciation over the life of ownership. Now you’re going to be taxed at a 25% rate on that amount. And so there’s going to be different ways, not like an end all be all. There’s some people that think, okay if I took the depreciation, recapture means I have to pay it all back. That’s not true. I hear that going around a lot is it’s just simply not true. You don’t pay back the depreciation. You now are taxed on that as a sale, it’s considered an unrealized gain, similar to capital gains. And that’s why it’s taxed at a lower rate than income tax.
Justin Smith: So it’s October 7th. We need this, everyone’s slammed. April 15th is coming and the calendar year is almost over. How do you factor time and when we got to do this, Yonah? It says no time, like the present, it takes 60 days. It’s gotta be done in the calendar year. It’s gotta be done before our next tax return. How do we factor that all in?
Yonah Weiss: You gotta do this before you file your taxes. So you have some time. It does not need to be done in the calendar year but I would not recommend waiting till the last minute. We get extremely busy come December, January time. So just keep that in mind. It does take us approximately six to eight weeks just because of our volume. That’s just our processing time to complete a study from beginning to end. So just have that in mind, if it is something you are looking to get. Be aware that, come January, come February, it’s going to be pushing it a little too late to get it done by your March 15th or April 15th deadline.
Justin Smith: Because it’s not just people behind a spreadsheet. We need to get people to the property. That needed to walk each unit and they need to see what they’re on eyes and verify. So that you can tweak it and make sure it says accurate as possible and be so passes muster with the IRS I imagine
Yonah Weiss: Exactly and there’s a lot of work that goes into creating that study itself as well.
Justin Smith: We can debrief once I see the work that’s done and then that will be a show number two. Yonah you’re the man. I appreciate you taking your time and people want to reach out to you and how do they find you?
Yonah Weiss: Best way is linkedIn, obviously. That’s where he find me. That’s where I am. I answer that faster than email, but you can go to Yonahweiss.com. That’s my website, a lot of resources there as well as our company, Madison SPECS, check that out. Madisonspecs.com. But again, if you did listen to this, reach out to me, send me a connection request on LinkedIn. Tell me I listened to Justin’s podcasts and this was just mindblowing. I appreciate that.
Justin Smith: Got to give you prompts for Weiss advice. And when you’re in the name game, I had, the name of book is terribly difficult to really nail it. I feel like you really crushed that one.
Yonah Weiss: It was good. It was actually with the help of a LinkedIn, believe it or not, I put it out to my audience, my following, and we deliberate it for awhile and that was one of the most popular ones.
Justin Smith: I love it. I appreciate you Yonah. Thank you.
Yonah Weiss: Awesome. Thanks so much, Justin.
Justin Smith: We’ll catch you later.