What is cost segregation, and how does it work? If you’re knowledgeable of the tax code and understand what you’re able to do, you will put money in your pocket.
Today, I am talking to Kim Lochridge, Executive Vice-President at Engineered Tax Services. The company started with about six employees and has grown to 130 to do 150-200 cost segregation studies a month. Kim loves talking about taxes. She’s here to help make sense of it all!
You’ll Learn…
[03:10] Investment Depreciation Concept: What you get when you have an investment property. It’s a tax deduction.
[05:15] Depreciation is everything and anything, including buildings, carpet, walls, paint, countertops, and cabinets that depreciate over 27.5 years (unrealistic).
[07:17] Cost Segregation Metamorphosis: IRS allows building professional/engineer that understands property and tax laws to segment each component of a building.
[10:30] Does Kim use cost segregation? No matter how big or small, she doesn’t do a deal without cost seg.
[11:53] Cost Segregation Studies: How long are you going to own the property? What are you going to be doing with the property?
[12:03] Justify Numbers: Don’t do a cost seg study unless it makes sense financially to pay less in taxes for more money to reinvest.
[15:10] Audit Defense: Engineered Tax Services covers questions from IRS about cost seg performed by internal engineers.
[16:00] Tax Strategy: Know how to use it and when to use it. Too many people don’t understand taxes and let their professionals handle it.
[16:21] Motto: We do believe that everyone should pay tax, but there’s nothing in the code that says you have to leave a tip.
[16:55] When and when not to do cost seg? Ask questions. If something doesn’t make sense, make it make sense.
[21:35] Bonus Depreciation: Too good to be true? Or, leaving money on the table by not doing cost seg? Probaby 80-90% of real estate agents are missing out.
[29:30] Depreciating Bonus Depreciation: Do it now before it decreases from 100% to 20% in 2026.
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Transcript
Jason: Welcome, DoorGrow Hackers, to the DoorGrow Show. If you are a property management entrepreneur that wants to add doors, make a difference, increase revenue, help others, impact lives, and you are interested in growing your business and life, and you are open to doing things a bit differently, then you are a DoorGrow Hacker.
DoorGrow Hackers love the opportunities, daily variety, unique challenges, and freedom that property management brings. Many in real estate think you’re crazy for doing it, you think they’re crazy for not, because you realize that property management is the ultimate high-trust gateway to real estate deals, relationships, and residual income.
At DoorGrow, we are on a mission to transform property management businesses and their owners. We want to transform the industry, eliminate the BS, build awareness, change the perception, expand the market, and help the best property management entrepreneurs win. I’m your host, property management growth expert, Jason Hull, the founder and CEO of DoorGrow. Now, let’s get into the show.
My guest today is Kim Lochridge. Kim, welcome to the show.
Kim: Thank you, Jason. Thanks for having me.
Jason: Kim is here with Engineered Tax Services. We’re going to be chatting a little bit today about cost segregation and how it works. Those of you that don’t really geek out on accounting, that’s okay because I pay people to help me with that stuff. I don’t either, so I’m going to ask all the questions. We’re going to figure this out and make sure it’ll all make sense.
Kim, give us a little bit of background on you, and how you got started with Engineered Tax Services.
Kim: Thank you for the internal question. I’ve been with Engineered Tax Services. I’m the Executive Vice-President, and I’ve been with them for about 10 years. I started out as an associate. I was on the board of a manufacturing company, and they were looking into some energy-efficient tax credits. It was just a brand new program that came out and tax rules. I found this company because they were doing that early on. That was really my beginning and how I met them. I just thought I came on board.
We’ve been growing the company since we started about five or six employees. Now we have about 130 across the country. We’re doing about 150-200 studies a month across the country. It’s pretty impressive.
Jason: All right. We will get into what those studies are in just a minute. Let’s get into the subject at hand. Maybe we start in the preshow, in the Green Room, we were chatting for just a little bit. It was like, “When is this stuff?” “Maybe I should explain it a little bit to you, Jason.” You did which is very gracious of you.
Why don’t we start with the concept of depreciation on an investment? Just to make sure those that are not yet investors, or they’re just new in the space, and they’re starting to deal with real estate investors, understand this concept.
Kim: Okay. Depreciation is something that you get when you have an investment property. It’s a tax deduction, essentially. On top of the mortgage interest or any of that expenditures that you spend on that property, you also get depreciation.
Depreciation is calculated depending on the type of property that you have. If it’s a single family home or some type of residence like a multifamily and then in capacity, you’re required to depreciate that property over 27½ years. If it’s any other type of property like an office, retail, or anything commercial, that is 39 years. For today, I think almost everybody in the audience is more of a single family-owned, we’ll target more at 27½. Just know that that’s interchangeable with 39 if it’s commercial.
Essentially, if you have (say) a $300,000 single family home, you’re going to be able to depreciate according to the IRS. You’re going to divide that by 27½ and you end up getting $10,909 every year, that you can help use that to offset the income that you made on that property and then not pay tax on it.
Sometimes, if it’s a smaller home, that might cover it, that and any expenses, and you won’t have to pay any tax on the income (which is nice). But sometimes, if your cash flow’s pretty good, once you’re high right now, mortgage rates are low, you might’ve owned it for a while, then this could be something that could help you. If you have that, your income is more than the depreciation, then you’re going to want to make sure to do something else. This is where cost segregation comes in.
Also, if you end up having multiple properties, and one is cash flowing much more than another, then you can basically take that cash flow, and you can do from one to another if it’s in the excess. We’ll go over some of those details a little bit more.
Essentially, the depreciation is just that. You have depreciation. You’re required to depreciate a building if it’s on a Schedule E or if it’s a rental income. If it’s a second home, you’re not going to depreciate it. It has to be a Schedule E or some sort of an income revenue-generating project.
Jason: The idea with depreciation is that everything in the property is going to depreciate at the same way?
Kim: Yeah, everything. It contains the whole building, whatever you bought. That means carpet, walls, paint, countertops, cabinets, anything that you bought in that purchase is going to be depreciated over 27½ years.
Jason: […] lasts about 27½ years, right?
Kim: That’s what the IRS says.
Jason: Okay, that’s not reality. How do we solve this problem there?
Kim: Yeah, it’s not reality. For decades since the 40s, cost segregation as a whole, what we’re going to talk about today, has been around since the 40s when it began in court cases. That’s because property owners went and argued the fact that, “This is what I’m doing. This isn’t really fair because assets that I’m depreciating over 27½ years or 39 years are not going to last that long. I’m replacing them, in some cases, multiple times over the course of ownership. I want different rules. I want to be able to depreciate those separately.”
It made it very difficult for a CPA to say how much is the carpet or how much is the building when you just bought up a building. You didn’t put it in. You don’t have receipts. You don’t know how much the roof, the HVAC, the water heater and all that were. They can’t break it down. The CPA doesn’t have the ability to do that.
The IRS came back and over years of morphing cost segregation, they said, “We’re going to give you the ability to do cost segregation, which means you have to have a building professional or an engineer, somebody who understands property and tax laws to come into the building, and segment (hence, the segregation) out each of the component of your building.”
As a result of segmenting those out, you can depreciate them in different time zones, or different buckets. For instance—these are just some examples, depending on the purpose on some of those components—carpeting is always going to land in a five-year bucket. You’re going to be able to depreciate all of your carpet in five years, not 27½.
Things like all of your landscaping, your driveways, curbing, gutter, landscape bushes, trees, all of Rockwell expenses, all of that stuff, gets to be depreciated over 15 years. That’s more realistic. Things are going to be overgrown. You’re going to have to rip things out. You’re going to have to replace fences, all those types of things. They’ll give you that bucket as well.
The law also says that you can break down certain components like mechanical, electrical, and plumbing, as long as it’s for specific purpose for the building, and not necessarily for the building itself. It has to be for the business.
It gets pretty complicated and these rules have morphed since the 40s. There have been massive amounts of court cases that give us these rules today. As an example, something traditional out of today, if you have that same $300,000 single family home, percentage-wise, we’re going to be able to take (conservatively) about 40% of the cost of that building or $120,000, and we’re going to be able to shift that into faster class lives for you. You won’t have to depreciate all of it over 27½ years, but we can break it out.
Essentially with that, that would be $180,000 gets depreciated over 27½ years, and about $120,000 gets split up between five and 15 years. Those are the good rules of thumb numbers to use. Following so far?
Jason: I’m with you.
Kim: I have to tell you, I love tax. I know it’s really geeky, but it’s okay. I can help you through it.
Jason: That’s why people hire you. You’re weird.
Kim: I get excited about it. Just to kind of give you an idea, I’m also a real estate investor myself. I have my day job, but I’m also an investor. I have invested in about 800 doors in multifamily in Texas. We have cannabis warehouses, we have a mobile home park, just my husband and I. We manage them all ourselves (which is pretty incredible) plus a full-time job.
Jason: Do you use this? Do you use cost segregation?
Kim: Of course. I don’t do a deal without cost seg. It doesn’t matter how big or how small.
Jason: That’s the cool phrase for it, it’s cost seg.
Kim: Yes, short for cost segregation.
Jason: Guys, get yourselves some cost seg. Pretty dope. Explain how your company helps with this. Obviously, accountants can do these. The property manager isn’t doing this. The investor doesn’t know when they will buy this property. How do we solve this problem?
Kim: Engineered Tax Services, this is our specialty. This is one of the main service lines that we offer as cost segregation. This is where I was saying that we do about 150-200 studies per month across the country, whether it’s a single family residence all the way up to something like the AI Building in Chicago—big, high-rise, office buildings. We do cost segregations. We’re very good at it. It’s cost effective.
Most CPAs, if it’s not over $2,000,000 then it’s going to be too expensive. We have single family home rates. We have different levels of studies that we can do according to how long you are going to own the property, what you are going to be doing with the property and those types of things. Maybe we should go in and talk about some numbers, Jason, just to tell everybody (the listeners and the viewers) what it would mean for them.
Jason: Yeah. I don’t know if this is where you’re headed but if you’re saying that a lot of people say, “Oh, that’s for the big properties. That’s too expensive to do for my clients on this single family home or my investment property.” Help them justify the cost of doing this study. Nobody would ever do it with you ever unless it made sense financially.
Kim: I haven’t since a project that isn’t at minimum like a 50-to-1 return. It’s going to be better than any improvement you can do in the house, any tenant change over, addition, or whatever you’re going to do, your returns on this are going to be […].
Jason: By doing this, by getting the cost seg study, working with you guys, and with their accountant to make this all happen, what has this allowed the investor then to do that they wouldn’t have been able to do otherwise?
Kim: They’re going to be able to depreciate more in the first years rather than just the $10,900 on the $300,000 property that we talked about.
Jason: Which means they’re just reducing their tax liability? Paying less taxes? Which maybe means they have more money to reinvest?
Kim: Exactly. I want to preface this with the fact that there’s a lot of investors that this is passive income for them. If you don’t know whether your income from your investment property is passive or active, you want to talk to your CPA because sometimes this gets locked up. We’re only talking about if you’re a non-real estate professional, how to offset the income from the property so you’re not going to have to pay tax on that.
This isn’t a loophole. This is nothing that is illegal. This has been around for decades. This isn’t something that I’m going to get in trouble if I do this. This is simply just a different method of accounting and it requires a professional to come in. Just like an inspector or an appraiser would come in to tell you more specific about a building that you’re building. This is basically more of a professional coming in to explain more of the accounting side of it.
Jason: Okay. What do you call these experts that come out to the property to do a cost seg?
Kim: They’re engineers.
Jason: Engineers?
Kim: Yeah. Engineers come out. They’re either structural professionals or mechanical engineers that understand building mechanics. They understand how to break down different components in the building. They’re our own employees across the country. They come out to do those studies to document everything.
Just keep in mind that the IRS says that if you have the building professional onsite, then that is required by the IRS. A CPA can do some sort of cost seg if they’re knowledgeable about it, but many of them aren’t going to be able to tell you how much the […] costs. If they do, they’re just going to do it from a square foot allocation. It’s not going to be able to stand up in the event of an audit.
We offer audit defense, so if the IRS does come back and question this, we’re going to cover all of that for you. We’re going to defend that for you. Our reports are going to be solid. We’re going to be here and that’s what this covers. We’re going to stay behind the product.
Jason: Okay. What else should people know about cost segregation or about your company that they may ask?
Kim: I think we need to talk about tax strategy because I think this is really important for people to understand. So many people (and I think in my opinion, too many people) don’t understand taxes, and they let their professional handle it. That’s exactly what you said in the very beginning, Jason.
Jason: Yeah, that’s what I do.
Kim: Yeah. We have a motto at Engineered Tax Services. The motto is we do believe that everyone should pay tax, but there’s nothing in the code that says you have to leave a tip.
Jason: I love it.
Kim: If you’re knowledgeable of that tax code and you understand what you are able to do, you will literally put money in your pocket. That’s what this strategy does. That’s what these studies do for you. You have to know how to use it and when to use it. That’s what I can help with.
We help with realizing when is the good time to do cost seg and when it may not be a good time. When it would not be a good time to do a cost seg study is if you just flip. You’re going to buy and you’re going to renovate it. You’re going to get rid of it. You will probably not want to accelerate depreciation. It’s just not smart because you’re essentially taking more depreciation upfront because you’re going to hold on to those assets like the carpet, and you’re depreciating it over five years. You’re not going to get all that money and keep it if you sell the building.
Jason: Right. You don’t want to pay for the future owner of the place’s carpet.
Kim: Right. Unless you’re doing substantial rehab—that’s a different story—and if you’re actually going to depreciate the property on a flip, you usually don’t depreciate it because you’re never placing it in service, if that makes sense. You’re never really putting in service because it’s all going to be under renovation. You’re not going to depreciate it.
This does not include flippers, but it does include people who are renting their property. If you have this passive income, let’s just take our $300,000 example from the beginning, you’re giving the $10,900 in the depreciation every year. If your cash flow is bigger than that, more than that, and you’re still paying some tax on that income, you might have to figure that out because you might have a job in your W-2, and you’re not really sure what part of this is what you owed in tax because of the house and the income, and what’s on your W2.
It’s really important for you to see where this is coming from. “How much of my paying tax is from my rental property?” Ask those questions to your CPA, or we can work with you on that. We’re looking at tax returns and can help you there. That’s the first thing. Just ask some questions. If it doesn’t make sense, let’s make it make sense. Let’s make sure that the common sense is there. At least, you trigger certain things in the brain.
When you get into that and you start realizing that you are paying tax on the income, that $10,000 isn’t enough, then you’re going to want to do some sort of cost segregation, so you can accelerate the depreciation faster especially if you’re going to do renovations.
Many times we buy property, and then we’re doing renovations, either immediately or very soon after or even just repairs and maintenance, and we have to capitalize that in many cases. Now, you’re actually depreciating two assets. Let’s say you bought a building that had a roof, then the roof gets replaced in five years, now you can’t write off the roof. You have to capitalize it which means you have to depreciate it. You don’t just get an expense for the cost of the roof. You have to capitalize it and depreciate it. Now you have two roofs. You’re depreciating one in the purchase and you’re depreciating one you just bought. That’s where we really want to come back from that and say, “I don’t want to depreciate two roofs. When I sell this property, I’m going to get killed in the accumulated depreciation on both of those assets. I only have one in the building. Why am I depreciating two?”
If you do a cost seg study on the original purchase, then you replace the roof, not only do you have to capitalize the new roof, but you can write off the remaining depreciation of the old roof. Traditionally, CPAs can’t do that because they don’t know how to value the roof if you don’t have a cost segregation study.
Not only are we going to help you with your depreciation, but you’re now going to have a very detailed fixed asset report that’s going to outline every single aspect, every component of that building, and it’s going to have a number attached to it. Every light switch plate cover on the wall, every baseboard, every layer of the roof, HVACs, and hot water heater. Now, you have this really great report that every time you do any improvement, it has to be capitalized. You’re going to write off the remaining depreciation of the old.
Let’s think about this for a minute. Let’s say you buy a property. You have it for three years and the hot water heater goes out. It’s a significant dollar amount, you have to replace it. You can now take that hot water heater if it’s not expensable. You capitalize it and write off the old hot water heater. If you have it in a straight-line depreciation, that water is being depreciated over 27½ years. That means you’re going to have 24½ years left of depreciation on the old one. Now, you’re depreciating two of them. Why not get that money right now and help cover the cost of the new water heater? That’s the beauty of cost segregation.
Jason: Nice. You mentioned real estate agents. Are they not allowed to do cost segregation on their properties if they’re an agent?
Kim: No. It actually gets better for them. If you’re a real estate professional, this is a whole different conversation.
Jason: A lot of our listeners, they’re property management business owners, but they’re also brokers, real estate agents, and are licensed, most of them.
Kim: Yeah. That’s where we really want to get into. This is part of the tax strategy that I was talking about. If you are a real estate professional in any capacity, whether you’re self-proclaimed real estate professional and you’re managing your own property, or if you’re actually a real estate professional, an agent, or a manager.
If you are paying tax, if you are a W-2 employee or if it’s a 1099, if you’re paying tax, and you’re a real estate professional, you have had some misinformation. This industry right now, we have a real estate president, like him or hate him, it doesn’t matter. He’s a real estate president. He walked in and just literally handed the real estate industry a gift with a big red bow. It’s called bonus depreciation.
Remember what when we said the $300,000, you’d have over 27½ years. You’d have $10,900. Then if we did a cost segregation, we would be able to accelerate the depreciation. That would be a lot better, actually. Now, with the Tax Cuts and Jobs Act of 2018, President Trump passed the bill for bonus depreciation. Let me go back a little bit in history. Bonus depreciation has been around since 2006. It was 50% bonus depreciation (and I’ll cover what that 50% of what in a minute) on new construction or renovations. You’re essentially able to really expense a lot of stuff to a certain point—at least half of it—for a long time from 2006 until through 2017.
In 2018, President Trump passed this Tax Cuts and Jobs Act. Not only increasing the bonus depreciation to 100% from 50%, they also expanded it to allow purchases not just new construction. What this means is that, say you’re a real estate professional. Let’s say you’re making $200,000 a year. Maybe it’s tons more, but let’s just call it that. Let’s say you’re making $200,000 a year, and at that level you’re probably paying 33% tax rate or something like that. Maybe a little bit less. Let’s call it 35% just to be generous.
Each year you’re paying about $70,000 in income taxes. If you are a real estate professional and you go buy a property, let’s just say you go buy this $300,000 house, and you’re going to start renting it out. We have the cash flow, we have the income from that which is also a factor, but let’s just talk about the tax for a minute. When and if you do buy a $300,000 property and you’re a real estate professional, then you do a cost seg study on that building. Essentially, we’re going to be able to write off about 40% of it. That’s $120,000. Normally, if you’re not a real estate professional, that’s locked up in your passive income and it cannot offset your W-2 wages. It has to just stick with the income from the property or other properties that you owned.
If it goes in your Schedule E, if you own 10 properties, then that $120,000 will house all the other properties. But it is still stuck on the passive side because it’s passive income. When you’re a real estate professional, it’s an active income. This is active depreciation, which also covers all of your regular W-2 or 1099 income when you’re in the real estate industry.
Remember when I said that the $120,000 will be shifted over five or 15 years. We have to prorate that all out over these buckets. What’s really cool about bonus depreciation, that means 100%, not 50% anymore on purchases, but 100% of your purchase price that is allocated to a class life less than 20 years. You heard me talk about the 5-year buckets and the 15-year buckets. Anything in a cost seg study that you reclassify that’s less than 20 years which would be about 40% of this building, you’re going to take as a writeoff in year one.
Now you get this $120,000 in the year that you purchase it. You can go buy a property on December 31st and it closes before the end of the year. You can offset your taxes by the amount of your results of cost seg study. In this case, $120,000 that you get to offset, all of your $200,000. You’ve made $200,000, you’re going to depreciate $120,000. Now you’re only paying tax on $80,000. But if you buy two houses, you basically just wrote it off, and you can pocket that $70,000 that you would’ve paid in taxes.
Let’s just run the numbers real quick. If you have $300,000 and you’re saying you’re going to put 30% down, that’s $90,000. Let’s just say the $120,000 times the tax rate of 33%, so $40,000. Basically, what the $120,000 would equate to is about $40,000 in cash. Instead of coming up with your down payment of 30%, if you have to come up with 30%, you’ve got to come up with the $90,000 down payment to buy that $300,000 house. But you’re going to get $40,000 back in your pocket. Immediately. As soon you file your tax return. You get to write that off. Buy two properties and you just write off your entire tax liability for the year.
Jason: Okay. This sounds almost too good to be true. Help me understand. How many agents do you think are doing this type of stuff, that they’re not doing cost seg, and they’re just leaving tens or hundreds of thousands of dollars on the table.
Kim: Probaby 80%-90%.
Jason: This is a pretty big problem.
Kim: That’s why I’m on the show because I want to raise awareness. I will tell you personally, I’m an executive, my husband’s an executive, we have high incomes, and when they came out with this bill, the first thing that I told my husband was, “We have to go and buy some properties.” I am a real estate professional by trade because of what I do anyway, so I’m a professional. We are under contract to buy a mobile home park. We’re closing on December 31st. We have good income and I bought it, but I actually am going to have about $400,000-$500,000 write-off this year for my taxes.
Jason: Nice. Is there anything else that people need to know about this? That was a really good point. Any other major things that we should be aware of?
Kim: Yeah. Bonus depreciation goes through 2026.
Jason: Okay, then what happens?
Kim: Then it starts to phase out starting in 2023. It goes from 100% to 80%. Then 2024, it goes down to 60%. Then 2025, it goes to 40%. Then in 2026, there’s only a 20% bonus depreciation. It doesn’t mean cost seg is not beneficial. It’s still beneficial to do that just like it would’ve been without bonus depreciation, but there’s a greater incentive to do it now. This is all brand new tax rules that just came out in 2018. If you’re saying to yourself, “Hey, why haven’t I heard of this? This has got to be a scam.” It’s not. This is a big deal. It’s huge for President Trump […].
Jason: It’s a big deal. Was this done to basically spark the economy? Is that why they’re throwing this out there? Such a big […], so to speak, then they’re depreciating their bonus depreciation over time? They’re going to be taking it down, but is that the mindset of why was it put out there?
Kim: Yeah. I’m in the tax community for the real estate roundtable in Washington, DC. When the Tax Cuts and Jobs Act was being formulated, we had long discussions about how to deal with depreciation and what to do. Everyone was worried about the real estate being in the 7th or 8th inning as far as the cycle goes. “Hey, we’re a little bit worried about this. How can I continue to be sustainable at this rate?”
The big talk of this Tax Cuts and Jobs Act on President Trump’s docket was solely to raise the GDP and just really get the economy going a little bit better. What they did to incentivize that is to offer this bonus depreciation. This was part of that incentive to buy property, exchange property. They also, in this package, were part of the opportunity zone, which I know a lot about. If you don’t know about that, we can do a whole another show on that, about purchasing property in an opportunity zone, and having essentially no tax liability on that after you held it for 10 years (as long as you do some improvements). That’s a whole another show that we can do.
All of these are part of the Tax Cuts and Jobs Act. It’s very powerful, and in my opinion, I think we probably, at that time, went from a 7th or 8th inning in real estate back down to a 5th or 6th inning. That’s where it really continued to boost and postpone any kind of real estate downturn.
Jason: Who is aware of this and is capitalizing on this? Obviously, your company and your clients. Who’s been taking advantage of this?
Kim: We do a really good job educating CPAs across the country. We try. There are a lot of CPAs out there. We cannot touch them all. We’ve got 120 people and there’s literally hundreds and thousands of CPAs. We do the best we can. We love CPAs. We want to educate them. We want to connect with them. If you are not doing this and you want to do this, it would be great for us to work together. I really want to talk to your CPA because he has more of use out there that I want to make sure he’s or she’s aware and give him or her resources to be able to let other people know that we do this. We do this very economically.
I work with a lot of property management companies, investors, and funds. I work with a lot of family offices. I work with a lot of individuals. The word is now starting to get out there. There’s a lot more individuals that are starting. We do a lot of shows like this to bring what really the wealthy has done for a long time down into mainstream. That’s really what we’ve been doing.
Jason: Random seg question, if property managers came to you, and they’ve got lots of investors, is there some sort of service that they could work with on you that they can add as a new revenue stream to push their investors towards you?
Kim: Yeah. Absolutely have them call us. We can do some sort of […] share or something like that, or just the finder’s fee or something like that. Property managers, historically, have been difficult. Property managers do the property management. They usually don’t get involved in the taxes. It’s hard for them to have those discussions because a lot of times with the owners they’ll say, “Hey, you should really do cost seg,” they’re going to go, “Oh, it’s taxes. My CPA handles that.” Now you’re dealing with two different layers.
Just like you said in the beginning, “If it has anything to do with taxes, I’ll let my CPA do it.” Those people have that mentality like, “Oh. I’m sure my CPA’s already doing this if it’s that big.” I’m telling you, please listen to me, most CPAs are not doing this. I’m telling you that right now. Most of them aren’t. Be proactive. Take your own taxes and your knowledge into your own hands and ask the appropriate question.
I will leave you with a kind of case study of a project I’ve been working on right now. This is incredible. I literally have a client that I was referred to from a CPA. The CPA brought me the client—a very good CPA client of mine. He owns tons of property all over the country. His family owns property and I’ve done all their cost seg for about five or six years. We finished the project.
I was in my closing call with them, explaining those studies in the last report and everything. He says to me, “I’m part owner in this mobile home park. I think we should probably do this. Do you think it will be worth it?” I said, “Absolutely. Mobile home parks are killer. They’re amazing.” They do way better than single family homes or multifamily with that matter.
They said, “Yes. It’s absolutely worth it. Get me the depreciation schedule, and we’ll go over it.” He put his partner on the phone with me, and we talked about it. Then, they finally sent me the depreciation schedule. The mobile home park was put on their depreciation schedule as land, $3.5 million as land. I looked at that and I almost gasped, that I called, and I was like, “That’s not good. You’re not depreciating this at all. Land is not depreciable. It looks like you just bought a raw piece of land.” He goes, “Well, that’s just all there is. We don’t own any of the parks.” I go, “Yeah. But you own the pads, the electrical post, you own a laundry facility and there’s a house there, there’s fencing and there are all kinds of stuff. They are land improvements. That’s all 15 year depreciation. You have to pull out the land first then depreciate what’s left.” He goes, “Oh, man.”
Long story short, we get on the phone with the CPA. They’re like, “Why didn’t you depreciate this? Why is it all on land?” He’s like, “Oh, well. I didn’t know.” The CPAs don’t know this stuff. Make sure that you’re asking questions. If you have even just the inkling, reach out to me. I try to be very responsive to my emails, text messages, and whatnot. Email me. It’s klochridge@engineeredtaxservices.com. Shoot me an email. Give me some synopsis on what’s going on. Send me your depreciation schedule and I’ll be able to tell you real quick if we can do something or not.
Most CPAs are not doing this because we don’t have the resources. They don’t even know. How was a CPA to know how much the electrical post we’re going to depreciate? How was he supposed to know how much the pads are? They don’t. You have to have a professional to go out there.
Appraisers can’t do it because they’re going to tell you what’s in there and what’s the total value is. They’re not going to break it down. Inspectors are going to tell you what’s wrong. Nobody’s going to tell you what the cost of every component is in that building. That’s where the power comes.
Jason: Awesome. This is really interesting to me. I appreciate you coming on the show, Kim. You gave out your email address, which we will have in the show notes as well, and on the website. How else can they get in touch with your company?
Kim: Our website is engineeredtaxservices.com. I’m also on the back page with our team. Just pick my profile and shoot me an email from there as well. I’m happy to help you. I have an assistant that can handle all the influx of emails that might come. We’ll be able to work through them all. I’d love to hear it from you and please just reach out, so we can at least talk about tax.
Jason: Perfect. Kim, thanks for coming out and hanging out with me here on the DoorGrow Show.
Kim: Anytime.
Jason: All right. We’ll let you go. Bye.
Kim: Okay. I’ll talk to you soon. Bye, Jason.
Jason: All right. There you have it. Really interesting topic. I didn’t know about that. It’s really fascinating. I’m sure it might be new to a lot of you. If that was helpful, make sure to reach out to them. If you are watching this on YouTube, make sure to subscribe, and catch these videos as they come out. If you are paying attention to us on iTunes and listening, make sure to subscribe on iTunes. If you can give us a little review, like this video, whatever you can do to help us about, it means a lot.
We’re putting out a lot of free content. We would love it if you would reciprocate just a little bit and help us out. It helps us get the message out. It helps us get greater awareness and help more property managers change this industry.
I’m Jason Hull of DoorGrow. This is right towards the end of the year. This may come out in 2020 on iTunes and other places. To everybody, happy holidays. I hope you have a fantastic 2020.
If you’re looking to grow your business, you’re wanting a vision for 2020, you want 20/20 vision, you have a plan, and you want to do something different, reach out to DoorGrow. I’ll say this real quick, if you didn’t get the results you wanted in 2019 or the result you wanted in 2018 or in 2017, you know exactly where you’re going to be at the end of 2020. You’re going to be at the same level of results you had every year so far. That’s your default future.
If you want to have a creative future that’s dramatically different, then I would love and be honored to help you create that. We’ve helped hundreds of companies do that. Those that listened to me, followed, do what I tell them to do, and show up to our coaching calls, they get those results. They get it. I would love that to be you.
That’s it. Bye, everyone. Until next time, to our mutual growth.
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