00:00:17:10 - 00:00:33:25

Kevin Schneider

Welcome to this episode of the Hidden Money podcast. We are doing episode four of our real estate series, and today we're going to be covering concepts and purchase price allocations. Now, I know we've drilled cost segregations into the ground on this podcast because it is a tremendous tax benefit.

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00:00:33:27 - 00:00:41:42

Kevin Schneider

We have not covered purchase price allocation. So this is a new term for you. Stick around because we're going to have some really, really cool real estate tax strategies.

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00:00:41:42 - 00:00:42:18

Mike Pine

Really

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00:00:42:18 - 00:00:44:08

Mike Pine

cool tax strategies. I mean, it

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00:00:44:08 - 00:00:45:44

Kevin Schneider

it's amazing.

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00:00:45:44 - 00:01:02:18

Kevin Schneider

Yeah. But first, let's just lay the groundwork on kind of our past episodes. Short term real estate. Long term real estate. The whole goal is, you know, when you buy real estate, it defaults to passive. And we're going to try to move those passive properties to active because most of the time our clients have an active tax problem.

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00:01:02:18 - 00:01:12:13

Kevin Schneider

Their W-2 or self-employed income. So why do I want to move it from passive to active. Well, we're going to drive a bunch of loss in these rental properties that we're purchasing.

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00:01:12:13 - 00:01:13:30

Mike Pine

Tax loss not cash

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00:01:13:30 - 00:01:33:42

Kevin Schneider

Cat tax loss. And we're going to offset our W-2 and our self-employed income with this tax loss we're doing in the tax losses mainly generated not only but mainly generated through cost segregation. This is where we're going to start, explaining what it costs I guess. So, Mike, take it away. What does it cost? SEG.

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00:01:33:49 - 00:01:34:10

Mike Pine

Well.

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00:01:34:24 - 00:01:35:35

Mike Pine

the buzzword

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00:01:35:50 - 00:01:56:52

Mike Pine

Cost. It sounds very, very smart, right? But everyone uses it. Most people don't know what it means. I'm going to get out of the real estate world just for purposes of illustration, to try to make this make sense. The tax law says that anytime you buy an asset that's going to be used in a trade or business, and it has a useful life of more than one year.

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00:01:56:56 - 00:02:17:35

Mike Pine

You're not allowed to deduct it. You're supposed to capitalize it, capitalize it means you don't take the whole expense right then and there. You actually put an asset on your balance sheet, and you take some expense over the useful life of the asset. For example, let's say I'm a taxi cab driver. I go and I buy a $10,000 taxi.

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00:02:17:48 - 00:02:37:38

Mike Pine

Under normal rules, we're going to get the most depreciation. Second on the normal rules. I can't just go expense that $10,000. I have to. The IRS says a vehicle has a useful life of five years. So I have to take that $10,000 that I just spent. I don't get to deduct it on my tax return. I have to put it on the balance sheet.

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00:02:37:38 - 00:02:59:49

Mike Pine

I have a $10,000 taxicab. And then over the next five years, I get to depreciate it. Now, this isn't exactly how it works, but we're going to roll with this for purposes of the illustration. You would basically get $2,000 a year for five years, and then you would recover your entire cost of the taxicab in real estate.

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00:02:59:51 - 00:03:18:32

Mike Pine

You're also buying an asset that's going to be used for traded business, not if it's just an investment property, but if you're buying a piece of property that you're going to rent or use as a trade or business, you're required to capitalize it. You don't just get to deduct it. So when you go by, let's just say a single family long term rental.

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00:03:18:37 - 00:03:49:15

Mike Pine

The IRS says that house has a useful life. It's residential real property different for short term rental. But if it's a long term rental, it's residential real property. And that house has a useful life of 27.5 years. And this drives me crazy. Whenever we get clients that have these rental houses and they're just being depreciated straight line over 200 27.5 years, that's not as beneficial as it could be when you consider the time, value, money and the power of tax deductions.

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00:03:49:20 - 00:04:16:10

Mike Pine

The IRS actually says in the Internal Revenue Code it says, I'm not supposed to depreciate that whole house over 27.5 years. It says I'm supposed to depreciate the structure, the building, the roof, the foundation, the sticks that are holding it up and the siding over 27.5 years. It says if I bought it and I had a flooring in there or appliances in there, or countertops or cabinetry, which they all have, those have shorter, useful lives.

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00:04:16:15 - 00:04:37:04

Mike Pine

And the IRS laws under the depreciation part of the tax code says you're supposed to depreciate those over five years or seven years, or my driveway is supposed to depreciate over 15 years. The IRS says you're supposed to depreciate, that you're actually not following tax law. If you depreciate the whole thing for 27.5 years. I've never seen anyone get hit by the IRS for that, though.

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00:04:37:19 - 00:05:03:08

Mike Pine

They don't care because you're not taking as much deductions as you could take. IRS doesn't seem to mind that. They just mind when you take more deductions and you're allowed. So you go buy a house. You pay $1 million for that sales contract you have that your realtor put together for you does not break out how much you paid for the flooring, the appliances, the countertops, the lighting fixtures, that driveway just as you bought a house.

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00:05:03:12 - 00:05:24:12

Mike Pine

And most lazy CPAs go put that 27.5 year asset. Or if it's short term rental, 39 year asset, how do you know how much you can depreciate faster? Well, you have to get something called a cost segregation study. And that's what they do. They take your cost and they segregate it using IRS, IRS prescribed methods. They segregate it out into these different components.

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00:05:24:16 - 00:05:27:42

Mike Pine

And why do we care about segregating them out to these components, Kevin.

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00:05:27:50 - 00:05:52:27

Kevin Schneider

Well, the more we can push out of the 39 year or 27 year life and to 5 or 7, 15 or 20 year life, then it's eligible for bonus depreciation, which is the one big beautiful bill act put in to into place. And July. So you any any cost. So on this million dollars property an engineer would actually perform a study.

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00:05:52:41 - 00:06:15:16

Kevin Schneider

And you're going to get a report that's going to actually detail out. And value those assets inside of that house. And let's say there's a pool and personal property and countertops and flooring that's eligible for bonus. It's going to be in this report. And your CPA takes this report and says of this million dollar house, 300,000 of it is allocated to five, seven and 15 year class life.

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00:06:15:21 - 00:06:39:37

Kevin Schneider

So what does the CPA do with that? Well, thanks to the one big Beautiful Bill act I can expense depreciate bonus depreciate that $300,000 in one year. Not over its useful life of 39 years or 27.5 years. You're getting a $300,000 immediate write off because we've segregated the costs out of the structure into different class lives.

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00:06:39:43 - 00:06:52:55

Mike Pine

Really quick, though, it's just accelerating 27.5 for 39 years worth of deductions into the first year, which means you're actually going to have less depreciation deduction for the next 26.5 or 38 years.

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00:06:52:55 - 00:06:53:20

Kevin Schneider

That's correct.

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00:06:53:20 - 00:07:08:01

Mike Pine

understand this is a one time deal. Why would you want to do that. It's called the time value of money. Would you rather keep more money in your pocket today, or get a little bit from the government over the next 27 or 39 years?

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00:07:08:06 - 00:07:23:25

Mike Pine

Think about it. Having that money work for you instead of disappearing with the federal government is a big deal. You're deferring your taxes. It makes a big difference as you grow your portfolio. So let's cost

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00:07:23:25 - 00:07:24:01

Mike Pine

segregation.

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00:07:24:04 - 00:07:47:25

Kevin Schneider

Yeah. And and it always bites on the, on the back end. Because not always but generally speaking, let's just say you write off $300,000 of this million dollar house. Let's say that $300,000 saved you 100,000 in tax. So you had $100,000 come back to you in withholding, or you did not remit $100,000 to the government if you're self-employed.

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00:07:47:34 - 00:08:07:52

Kevin Schneider

So you saved a hundred grand. What are we doing with that 100 grand that we either got refunded or we're going to pay to the government. We're going to invest that and grow it. Because when we sell this rental property and this is oversimplifying it, but let's just go with this. When we sell that rental property in year five or year ten, we're going to pay back that tax savings we got.

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00:08:07:57 - 00:08:27:30

Kevin Schneider

We're going to pay it back in ten years. But if you've invested it and done what you should have done, the on the start and invested that 100, maybe you grew that 100 to 200 or 300. Okay. In year ten I'll pay the government 100 K, I'll pay them their tax savings back. But I've got an interest free loan from the government on the tables have turned.

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00:08:27:34 - 00:08:38:04

Kevin Schneider

You are getting money from the government to invest that you're going to pay them back interest free in the year of sale and even in the year of sale. You can mitigate the tax and depreciation recapture. If you're smart,

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00:08:38:04 - 00:08:52:51

Mike Pine

You absolutely can mitigate it and you should mitigate it. And that's why proactive, constant tax planning and tax strategies are so important. If you're going to buy a property and you know you're going to sell it next year, maybe you don't want to cost

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00:08:52:59 - 00:09:10:46

Kevin Schneider

You can run the numbers. I think we teeter totter back and forth and depending on the client, if it makes sense to cost seg and sell, I mean, how much margin are we talking? Are your income up or down. Because your depreciation recapture is typically at ordinary tax rates. And if your ordinary tax rates are low, then you could be paying less depreciation recapture.

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00:09:10:46 - 00:09:26:35

Kevin Schneider

But there is some depreciation recapture that is is subject to 25% flat tax rate. So you just it's all part of the strategy. Every situation is different. You have to speak to a professional before doing any of this. Because we can only give broad advice on this on the podcast because we don't know you.

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00:09:27:28 - 00:09:53:32

Mike Pine

And just so you know, we didn't have bonus depreciation before 911 actually was in 2002 that we had our first year of bonus depreciation, but we were doing cost before them. Why? Because people would go out and buy these rental properties or an apartment complex, not know anything about it. Their CPAs did not educate their clients, they weren't advocates for them and they were depreciating these things over 27 years, 27 half years.

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00:09:53:37 - 00:10:17:13

Mike Pine

Well, it turns out most of what you cost segregate out in a cost segregation. And Kevin's example, if it's if you get 300,000 on $1 million house segregated out, most of that is actually going to come out as five year assets. Well, let's say bonus depreciation doesn't exist today. I bought this property five years ago. Six years ago I didn't know about cost segregation.

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00:10:17:18 - 00:10:37:30

Mike Pine

And now it's year six and I'm in a high tax year and somehow I could use that depreciation. Well, because you were supposed to segregate it out in the beginning. The IRS gives you an automatic way to recoup that to change your county method. It's called changing your county method from an impermissible method to a permissible method.

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00:10:37:30 - 00:11:01:21

Mike Pine

That's an auto change. You go through that and we've done that. We did that so many times, not so much now with bonus depreciation, because most people are more people know about cost savings now. But if I was in year six and I had just taken my normal 27.5 year depreciation, I could do that cost seg, do a change in accounting principle and get that five years of depreciation I should have gotten back that year, that year right then.

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00:11:01:35 - 00:11:21:07

Mike Pine

So you don't have to do a cost seg in the year that you place in business. As a matter of fact, in some cases, you shouldn't do it in the year that you actually buy the asset. You should do it with a big overall all encompassing tax strategy. When does it make the most sense? If you're going to materially participate in two years, but not in the first year, cost SEG in the second year?

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00:11:21:14 - 00:11:36:08

Kevin Schneider

Or if you're going to RSU restricted stock units are a big thing. If you're working for a software company or something, you're like, hey, I'm going to have some vesting or I'm going to have some big income hit next tax year. This year I'm kind of light, but I bought a rental property or I have this rental property asset sitting here.

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00:11:36:12 - 00:11:43:54

Kevin Schneider

We're going to plan to cost, segregate and accelerate those expenses in the year that your income's higher, because we can eat up more of that 37% bracket.

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00:11:43:54 - 00:11:44:07

Mike Pine

Yeah.

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00:11:44:07 - 00:12:07:12

Mike Pine

Please understand Kevin and I are talking. Generally speaking, I have seen so many different circumstances with different clients, have different facts and circumstances where it makes sense to cost SEG three properties in one year, another one where it makes sense to not cost SEG any. Sometimes you do one a year. It just depends. Sometimes we want to cost seg when they're passive because we mean passive losses.

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00:12:07:17 - 00:12:14:07

Mike Pine

There's a lot of details that go into making the decision when the cost seg. But generally there's always a time to cost.

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00:12:14:40 - 00:12:37:30

Kevin Schneider

Yeah. And I want I want you to get into people's. But I just want one more caveat because we're super excited about purchase price allocating. And we'll explain that. But in case you have to get a qualified engineer, I can't stress this enough is because the IRS is going after those DIY cost eggs. If you Google cost segregation, you're going to probably come along some websites that say do it yourself.

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00:12:37:30 - 00:12:41:54

Kevin Schneider

You put in the property value, put in the address, and it's going to give you an allocation of assets.

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00:12:41:54 - 00:12:45:23

Mike Pine

classes and they even say they provide audit defense, and it cost

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00:12:45:43 - 00:12:47:05

Kevin Schneider

Yeah, don't do that.

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00:12:47:05 - 00:12:47:35

Mike Pine

3

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00:12:47:35 - 00:12:48:28

Kevin Schneider

Or if you know a hundred

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00:12:48:28 - 00:12:49:17

Mike Pine

engineer. Yeah.

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00:12:49:29 - 00:13:04:32

Kevin Schneider

don't do it. Where are we. There. The IRS is aware of those. And typically we remit on the tax return. We put the classic we show our work. We're like here you go IRS. Here's our new permissible, depreciation method. Here's our here's our substantiation for it.

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00:13:04:32 - 00:13:06:00

Kevin Schneider

We show our work because it's

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00:13:06:00 - 00:13:07:07

Kevin Schneider

we're not scared of anything.

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00:13:07:07 - 00:13:09:47

Mike Pine

supposed to do that. They don't want they don't ask you to attach it. But

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00:13:09:47 - 00:13:26:34

Kevin Schneider

But our audit rates are low. So. But if you find out that you've been doing these dies in the IRS gets their their teeth in it, it's going to be hard to claw out. Now we're helping a client do this exact same thing. We're trying to re-engineer this DIY cost seg with an actual engineering study. And we do all this work in-house.

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00:13:26:34 - 00:13:36:14

Kevin Schneider

We got an engineer on our team in-house that we perform engineering studies. So he's qualified, been doing it for with us for at least six, six years plus.

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00:13:36:14 - 00:13:45:25

Mike Pine

Yeah. In the case that Kevin's alluding to, we're using our engineer to defend a cost seg that he didn't do, and it's not going as well as it should be. I mean, it's going well.

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00:13:45:25 - 00:13:48:08

Kevin Schneider

It's going better than what the original call was.

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00:13:48:08 - 00:13:54:08

Mike Pine

But I wish they would have just come to us in the first place. But but they didn't. One other thing.

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00:13:54:08 - 00:14:07:45

Mike Pine

I just want to I hear this, false assertion made all the time. Unless my house or property is worth more than $1 million or $2 million, cost savings are not worth it. I hear that all the

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00:14:07:45 - 00:14:08:11

Mike Pine

Yeah.

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00:14:08:11 - 00:14:17:24

Mike Pine

is baloney. Yes. If you're going to go to the big national firms that charge $25,000 for a cost seg, you don't want to get $100,000 house costs out.

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00:14:17:38 - 00:14:32:27

Mike Pine

But we see clients with $100,000 properties, even one with $80,000 property that benefited greatly by doing a cost segregation study. So don't think it has to be some huge, expensive property. And if you're hearing someone say that,

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00:14:32:27 - 00:14:34:53

Mike Pine

the wrong sorry

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00:14:34:53 - 00:14:35:10

Kevin Schneider

Yeah

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00:14:35:58 - 00:14:36:40

Kevin Schneider

they are.

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00:14:36:40 - 00:14:37:16

Mike Pine

empirically wrong.

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00:14:37:16 - 00:14:53:13

Kevin Schneider

Yep. So that's the foundation of how real estate taxation can really drive losses. Cost segregation. It's a very good strategy that you, as the owner of the property, are 100% in control of whether you can do it or not.

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00:14:53:31 - 00:15:22:50

Kevin Schneider

Paying more tax then you're legally obligated to pay is a crime. And here at Revo Taxpayer Advocacy, we are here to fight for you. We want to make sure that you don't pay that dollar more in tax than you're legally obligated. Mike and I want to meet with you personally. And if you go to our website Revo taxpayer.com and you click the button to schedule a consultation, we want to offer a free consultation for you where we talk about your situation and get to know you.

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00:15:22:55 - 00:15:37:10

Kevin Schneider

And then we can advise the best next step. So doesn't matter what's happened in the past, you can change your facts today and have a better tax outcome in the future. So Revo taxpayer.com. We'd love to hear from you. All right back to the episode.

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00:15:37:10 - 00:15:48:53

Kevin Schneider

Now, let's pivot into purchase price allocation. So purchase price allocations is you take a cost seg and you get a needle of steroids and you inject the cost seg with steroids.

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00:15:48:53 - 00:15:53:58

Kevin Schneider

And all of a sudden now we have a purchase price allocation, same method, same same

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00:15:53:58 - 00:16:13:34

Kevin Schneider

thought process, accelerating depreciation. The difference is you're not going to be in control of this as much because a buyer and seller are going to have to agree on this allocation before closing on the property, before contracts are signed. So there's a degree of unpredictability of doing this.

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00:16:13:34 - 00:16:15:40

Kevin Schneider

But when the stars align and it works,

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00:16:15:40 - 00:16:16:22

Mike Pine

Oh it's

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00:16:16:22 - 00:16:20:28

Kevin Schneider

it is beautiful. So let's get into purchase price, allocating what it is. And are

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00:16:20:28 - 00:16:44:05

Mike Pine

before I get into the nuts and bolts let's just we have a client two months ago like normally in a cost segregation example, you're going to get on a standard typical single family home, somewhere between 25% and 35% of your total purchase price. Segregate it out. Eligible for bonus depreciation. General rule of thumb again, there's different facets.

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00:16:44:05 - 00:17:11:20

Mike Pine

Circumstances can change that greatly, but generally 25 to 35. So Kevin used a $300,000 on $1 million property. We have a client that got 89% of his purchase price allocated to bonus depreciable property. He didn't spend a million on it, but if he had spent a million, that meant he got $890,000 of bonus depreciation. And he didn't have the cost, didn't have to get a cost segregation didn't shouldn't have gotten a cost segregation.

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00:17:11:25 - 00:17:54:29

Mike Pine

So what is it? How do you do this? Is it legal? Yes, as a matter of fact, it's also required. It's just no one practices it in the real estate business side. Baffles me why? But that's what we do at Renovo. And a hidden money is we uncover these amazing opportunities. I ask 1061 060 requires doesn't necessary acquire it recommends highly recommends it and it provides how you should allocate a purchase price of a business says any time you are buying or selling a business, a trade or business, you are supposed to determine between the buyer and the seller and an arm's length transaction.

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00:17:54:29 - 00:18:13:00

Mike Pine

They are supposed to be unrelated. Neither of them can be, under any undue influence. You can't hold a gun to someone's head and found a sign it won't qualify, but they're supposed to decide how much each of the component they're spending or selling. It for. This really came up big time in the 80s, and that's when they started working on 1060 a lot.

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00:18:13:15 - 00:18:41:32

Mike Pine

And that was when you normally buy or sell a business, you're selling maybe your assets, you're selling, and sometimes it's a stock sale. But if you're doing an asset sale, you're selling an asset. And generally the seller doesn't want to allocate, has purchased, has sales price to the fixed assets because of depreciation recapture, because of ordinary income, or because of hot assets, they'd rather be allocated to something called intangible property, which always gets long term capital gain treatment.

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00:18:41:32 - 00:19:14:22

Mike Pine

That's goodwill going concern value. And there was a lot of money business being played by taxpayers saying, oh, I sold $1 billion business and 980,000 was intangible. So IRS wrote URC 1060. They came up with methods on how you allocate it. But case law also shows if you have a willing buyer and willing seller engage in an arm's length transaction, meaning they're not related and they're willing to do this, they want to do this.

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00:19:14:27 - 00:19:33:38

Mike Pine

They determine what they're paying or buying or selling, what the price is, what the fair market value is. That is the definition of fair market value, what a willing buyer and willing seller are willing to pay or sell these items for. For instance, let's say go back to the taxicab example. Let's say I buy a $20,000 taxicab.

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00:19:33:39 - 00:19:45:35

Mike Pine

I'm driving around for a couple months. I got to depreciate 20,000. Kevin comes up to me and says, hey, I like your taxicab. I'll give you $100,000 for it for my $20,000 taxi. First of all, you can have it.

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00:19:45:35 - 00:19:47:44

Kevin Schneider

Okay? If you have. What a great deal for me.

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00:19:47:44 - 00:19:52:03

Mike Pine

yeah. For me, definitely. But if Kevin truly paid that to me,

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00:19:52:03 - 00:19:55:01

Kevin Schneider

And we're independent, we're arm's length. We're not related.

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00:19:55:01 - 00:19:55:36

Mike Pine

right?

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00:19:55:41 - 00:20:22:43

Mike Pine

And I'm not putting a gun to his head. Kevin can now take that $100,000 vehicle, but I was only allowed to depreciate at 20,000. He can depreciate it for $100,000. It's it's law. It's tried and true. That's what fair market value is. So we apply section 1060 to the purchase of real property trades or businesses. If you're buying a short term rental that's a real property trader business apartment complex.

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00:20:22:43 - 00:20:40:10

Mike Pine

That's a real property trader business long term rental rental, maybe so, maybe not. It gets a lot more murky in the detail facts, but you're buying a property and you go and buy $1 million property, and you say to the willing seller, let's say this is just their primary residence, but you're going to use a short term rental.

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00:20:40:15 - 00:20:48:24

Mike Pine

They never depreciated it. They don't have depreciation recapture. You say and I'm going to crazy example I'm gonna use your example. I heard you telling a client the other day,

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00:20:48:24 - 00:20:48:50

Mike Pine

okay,

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00:20:48:50 - 00:20:50:38

Mike Pine

the magic refrigerator.

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00:20:50:38 - 00:20:52:20

Kevin Schneider

Yes. The magic fridge. Yep.

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00:20:52:20 - 00:21:02:35

Mike Pine

the magic fridge. So I say I'm buying your million dollar house that you're selling. But I want you to agree with me as part of our contract, we're going to do a purchase price allocation.

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00:21:02:40 - 00:21:17:02

Mike Pine

I'm giving you $50,000 for the building, the land, everything else there. But that frigerator is awesome. And I want you to sell it to me for $950,000. We have just created a purchase price allocation. Don't do that one, by the

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00:21:17:02 - 00:21:18:07

Kevin Schneider

way. Yes. Don't do this

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00:21:18:07 - 00:21:24:27

Mike Pine

this is for example, we just create a purchase price allocation. And now I have paid 950,000 for refrigerator.

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00:21:24:27 - 00:21:34:49

Mike Pine

That's 100% eligible for bonus depreciation, 50,000 for other stuff that has 27.5 year or 39 year and seven year and 15 year. That's a purchase price allocation.

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00:21:35:00 - 00:21:53:37

Kevin Schneider

Yep. That's it in a nutshell. Now the seller, is going to kind of balk at this unless it's their primary residence. And we advise our clients that, hey, we can advise the seller and you can do a purchase price allocation on the sell side, too. We'll get into that. But let's say on right now we're doing the buy side.

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00:21:53:37 - 00:22:11:26

Kevin Schneider

So if you're buying, you're going to go to that seller and ask for this purchase price allocation. That seller needs to hopefully have some sort of tax counsel in their corner. And then it becomes a negotiation, where like you're working one right now to where you're getting what the seller CPA trying to figure out, okay, how much more in tax are they paying with this allocation.

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00:22:11:31 - 00:22:32:22

Kevin Schneider

Our buyer is actually going to kick in more cash to the deal to cover, because let's say the seller incurs $40,000 of additional tax. Our buyer our client is saving $500,000 in tax. So we're going to say we'll pay the 40 grand. We'll up our sales price to cover this. The additional tax that you're taking if you agree to this.

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00:22:32:22 - 00:22:54:57

Kevin Schneider

Because now I'm still saving 460,000 net at the end of it. Both parties win. So you can see where it's a negotiation between the two. But where the star is really in line is really in 1 or 2 ways. The seller on the buy side, the seller is primary residence, like you already said, under section 121, if they've lived there for 2 or 5 years, they are not recognizing a tax up to 500 K of gain.

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00:22:55:02 - 00:23:04:59

Kevin Schneider

Now, the second one is maybe the seller is doing a 1031 exchange. They're still going to track depreciation recapture still tracking gain, but they're not going to pay tax on it. Then. Instead they're going to defer it.

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00:23:05:11 - 00:23:15:33

Mike Pine

You're throwing a lot of tax code out there. So it if the seller has not used the property they're selling on a trader business, they're not subject to depreciation recapture.

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00:23:15:33 - 00:23:16:04

Mike Pine

correct.

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00:23:16:04 - 00:23:25:45

Mike Pine

If they have used it in the trader business and taken depreciation on it, they might be subject to depreciation recapture. If you do a 1031 that means he's doing like an exchange.

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00:23:25:45 - 00:23:30:07

Mike Pine

You don't have to recognize a depreciation recapture although it will follow them into a future sale if

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00:23:30:07 - 00:23:30:33

Mike Pine

Yeah

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00:23:30:33 - 00:23:48:21

Mike Pine

actually have a taxable sale. So there are ways to mitigate it for the for the buyer and seller. But again it's not an equal sum game like this. This current client I'm working with and their seller who I hope to get on the phone with the CPA today, please.

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00:23:48:26 - 00:24:12:35

Mike Pine

A worst case scenario. I haven't seen his details yet, but I suspect he has taken some bonus depreciation. He did something similar to a cost segregation. He's going to recognize depreciation recapture, but I think he's only going to pay an extra 40, 30 or $40,000 in tax if he will do what we're trying to get done for our client, the buyer, they're going to save for $500,000.

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00:24:12:35 - 00:24:27:10

Mike Pine

So again, it's not an equal sum game. I, like Kevin said, finally explain that to the CPA. Let the seller CPA double check your math and say, yeah, you're going to pay an extra 39,000 tax if you do this. Him a check for for 39, for 40, for 50,

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00:24:27:10 - 00:24:47:18

Kevin Schneider

Yeah, whatever. You're saving more tax and it's a it's this all all this work. We represent our client on the buy side. And we'll get into the sell side here in a second. On the buy side, we we draft the language to put in the contract. We perform the allocation alongside our engineer. We have Internal Revenue Code sightings and defense.

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00:24:47:18 - 00:24:57:06

Kevin Schneider

If the selling CPA needs it will work with them. So there's a lot of work involved with this and it needs to be done all before you sign any paperwork

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00:24:57:06 - 00:24:57:16

Speaker 3

Yes.

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00:24:57:16 - 00:25:06:47

Kevin Schneider

get into a contingency before you get into any sort of option period on these rental properties, you need to say, I am going to remit an offer to on this rental property.

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00:25:06:52 - 00:25:28:07

Kevin Schneider

Here's my offer. You can let's say they're selling a $500,000 house. You could say, I'm going to offer you $500,000, and we're not going to do a purchase price, or I'm going to give you $515,000, so long as it's contingent on us allocating the purchase price, you could do two, two kind of offers on the front end and let the seller choose or just have a conversation with them as their primary residence.

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00:25:28:07 - 00:25:32:15

Kevin Schneider

You don't need to kick in the extra. So this is all part of what we do on the buy side.

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00:25:32:15 - 00:25:48:50

Mike Pine

And the truth is, like, you had a client last week who was buying a primary or something and there wasn't any tax impact, but that that seller went to the their CPA and was like, I'm scared. I don't know what this is. Kevin was sending them the tax code and trying to educate that CPA, and they didn't necessarily do

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00:25:48:50 - 00:25:49:06

Mike Pine

Yeah

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00:25:49:06 - 00:25:51:27

Mike Pine

it wasn't part of the original offer.

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00:25:51:31 - 00:26:02:04

Mike Pine

So if you make it part of the original offer, great. The one I'm working with right now, he didn't know about a purchase price allocation, but he called me the day after he submitted his offer was under contract. I was like,

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00:26:02:04 - 00:26:04:17

Mike Pine

so close. He was like.

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00:26:04:17 - 00:26:05:44

Kevin Schneider

No, we're.

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00:26:06:00 - 00:26:08:54

Mike Pine

trying to negotiate it. And Lord willing, we'll we'll get through it.

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00:26:08:54 - 00:26:11:42

Mike Pine

You can do it. But in a perfect world, it's part of the original offer.

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00:26:12:38 - 00:26:33:46

Kevin Schneider

So there's three ways to depreciate a property. One is just the straight line 27, 39 years. You be a good little taxpayer and you just deduct it over time. A better option is going to be cost segregation to where we're actually pulling the the values and putting them on the qualified improvement property, your five year property and taking bonus depreciation on that.

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00:26:33:50 - 00:26:43:51

Kevin Schneider

The best way to do this is the PPA. It's just you're not in control of it. You can't just say, yeah, I'm gonna do a PPA. You got to have two parties agree on it. So there's some more hoops to jump through, but it's well worth it.

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00:26:43:51 - 00:26:48:08

Mike Pine

And don't just go out and do a PPA on your own. You can do that.

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00:26:48:08 - 00:26:48:43

Mike Pine

But

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00:26:48:43 - 00:26:49:19

Mike Pine

be very,

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00:26:49:19 - 00:26:49:57

Mike Pine

very

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00:26:49:57 - 00:27:02:26

Mike Pine

careful. And there's a lot there's, there's just a lot of eyes to dot and t's to cross. So just be careful if you do one. Technically, if you do one, it might hold up but also might not.

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00:27:02:26 - 00:27:24:06

Mike Pine

And there's other there's compliance requirements. Right. Filing the right form on the buyer and sellers tax return. But that's to how to, to to potentially triple or quadruple your depreciation on an asset you go by. So with a client this specific example clients buying $1.4 million short term rental. He's going to get about 400,000 bonus if you do the cost.

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00:27:24:20 - 00:27:37:49

Mike Pine

If we get the PPA, I think we're gonna get about 1.2 million, three times the amount of depreciation this guy makes, about just under a million a year. He's going to pay zero tax for one year and only pay half the normal tax the following year.

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00:27:37:55 - 00:27:38:47

Kevin Schneider

It's a two year tax.

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00:27:38:47 - 00:27:39:14

Mike Pine

Plan

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00:27:39:14 - 00:27:43:04

Mike Pine

his down payment and giving him a big old bonus to boot.

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00:27:43:04 - 00:27:51:32

Kevin Schneider

and let's get on the sell side since we're running short on time because this is all been you purchasing. Now, if you're selling a rental property and it's a trade or business property

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00:27:51:32 - 00:27:58:46

Kevin Schneider

at that point, then we can actually be it a little bit more in the driver's seat as the seller, because you can accept offers from buyers.

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00:27:58:51 - 00:28:23:20

Kevin Schneider

And if you're not in a rush and you're not underwater and trying to release this property real quick, you can go to the people submitting offers and be like, I'll accept your offer. So long as you do a purchase price, you say, no, I'm going to the next offer. So now we're more in the driver's seat, but now we can allocate instead of allocating the purchase price to the magic fridge, where we're going to say, hey, this fridge is awesome and we're going to accelerate depreciation, we're going to take this purchase price allocation.

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00:28:23:20 - 00:28:35:18

Kevin Schneider

And I'm going to allocate, let's say I sell this rental property for $1 million. I'm going to allocate $950,000 to the brick mortar and roof. The actual structure, which is capital gain then 50 grand to land.

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00:28:36:04 - 00:28:36:23

Speaker 3

Yeah.

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00:28:36:23 - 00:28:46:30

Kevin Schneider

And then at that point everything's long term capital gain, even though maybe I got all the write off on the front end, I'm not going to allocate any of my sales price to the actual zero basis tangible personal

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00:28:46:30 - 00:28:46:53

Kevin Schneider

property.

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00:28:46:53 - 00:28:47:35

Speaker 3

boom.

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00:28:47:35 - 00:29:08:10

Mike Pine

No depreciation recapture. So not only did you get a whole lot of depreciation in the beginning when you turn around, sold it, you don't have to recognize ordinary income. You can get all capital gain. Again the examples we're using here are extreme. Don't go do them. They probably wouldn't hold up on an IRS audit. But you can do this and do it in a way where it will hold up an IRS audit.

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00:29:08:24 - 00:29:28:42

Mike Pine

So please, it's called a purchase price allocation PPA. If you are planning on buying a property, real estate or a business, any trade or business, consider it. Reach out to your tax advisor or your tax attorney or us before you make your offers and rock your world, man.

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00:29:28:42 - 00:29:49:43

Kevin Schneider

Yeah, it's huge ROI, huge ROI on it. If you go to Revo taxpayer.com, that's our website. You can schedule a consultation with Mike or I. We do free consultations. If you're in real estate and you're about to buy or sell your next rental property fairly soon, reach out to us. Let's see if it's a good candidate. Let's see if we can't network with the other party and get this purchase price allocation done.

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00:29:49:48 - 00:30:09:36

Kevin Schneider

But if you don't, well at least do a cost segregation and still structure your real estate transactions to be most tax advantageous product, for your tax plan. Oh yeah. Especially with 100% bonus depreciation cost. Eggs are tried and true. We've been doing them forever. But it's just this new one's really exciting. So thank you so much for listening to today's episode.

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00:30:09:36 - 00:30:14:47

Kevin Schneider

Again check out Revo Tax taxpayer.com or hidden Monday.com and we'll see you on the next episode.

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