Every investor wants to keep as much of their hard-earned money as they can. This is where cost segregation and other wealth and capital preservation methods are important. In this episode, Sam Wilson discusses the mechanics of preserving wealth with Joseph Viery, Principal of the US Tax Advisors Group, Inc. Joseph discusses the methods you can take to reduce income taxes and why energy efficiency is an important part of his approach. Tune in and learn more.
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Reducing Income Taxes Using Cost Segregation With Joseph Viery
Joe Viery is the Principal at US Tax Advisors Group, Inc. As a Cost Segregation Professional, he has helped property owners defer or eliminate millions of dollars in income taxes by leveraging IRS compliant cost segregation studies.
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Joe, welcome to the show.
Thank you, Sam.
The pleasure is mine. The same three questions I ask every guest who comes on the show. Can you quickly tell us where you started, where you are now, and how you got there?
I have been an entrepreneur all my life. Basically, I owned another type of business, travel. After I sold my travel business, I segued into working with the California Association of Realtors as a Financial Planner, and somebody kept coming to me in 2007 and saying, “I have got this idea you should tell your people who own real estate about. It was called Cost Segregation.” I blew them off for a year, thinking it was a sales technique. After a year, we sat down, and I went, “That is powerful. I have got some clients who are paying income taxes. They need to do this.”
I talked to my clients. I got involved with them, saved them lots of money, and then the depression hit. My role with the California Association of Realtors evaporated overnight. The guy that owned the cost segregation company said, “Joe, you are good at this. Why don’t you segue into cost segregation?” I have not stopped since 2007.
I would think that would be good timing from a business standpoint and people are still going to need cost segregation studies done regardless of where the market is.
The Feds don’t want you not to pay your income taxes, especially when the economy is down. They need as much money as they can, so they were going after a lot of my clients, saying, “I don’t care what the economy is doing. You need to pay us your income taxes.”
Is there a difference, Joe, between passive losses and cost segregation depreciation benefits? I have understood that you can only take against passive income in passive losses. Is the same true with cost seg or is that part of it? Can you help break some of that confusion down in my own mind?
Universally, the circumstance of using and kneading cost segregation and the acceleration of depreciation is very valuable, but the one question I always talk first with my clients is, “Are you a passive or an active investor?” If you are passive, I give you passive losses. If you are active, I give you active losses. To be honest with you, sometimes, if you are passive, you don’t need passive losses, so I try and nip that straight away and say, “We were an engineering firm, not an accounting firm. Check with your accountant to make sure that if I give you passive losses, you can use them.” Most of the time, passive investors still can use cost segregation, but not all.
That is the catch. I hear this advertised a lot in pitch decks and things like that where it is 100% bonus depreciation this year or whatever it is. I’m like, “That is only beneficial to the point that it is a passive loss.” You are telling me that this is not going to help in certain situations.
If you are talking about a multi-million dollar building and I’m giving you hundreds of thousands of dollars in passive losses, there is a cap on passive losses. It is $25,000 per year. Obviously, I would tell them, “If you are passive, don’t do it.” However, there is some workaround, which you are valuable. Number two, a lot of my clients now have a new methodology that we have had for 5 to 6 years and basically, that is for a single-family home. For those people, $25,000 is significant for one home. If I give them $25,000, that will wipe out their income taxes for that year or maybe a couple of years down the road because the way the losses work is they follow you until you use them up.
I have heard that and that is something I never got into, which is a little late now because I’m no longer buying single-family residences. I have owned lots of them for many years, but I never did a single cost segregation study on any of them.
Most of the time, passive investors can use cost segregation, but not all.
It wouldn’t because it costs so much money because to do a detailed engineering study, I have to send somebody out to that property, and we play by the rules. If the rules say you’ve got a document, measure everything, all the personal property in the real property. No one is going to pay $4,000 to send me out to, let’s say, Memphis.
How does somebody get around that? I have heard of certain companies that will allow you to do your own self-cost segregation study. How does that even work?
To me, that is a little bit dangerous to try and do it yourself because IRS makes no bones about it. Cost segregation is an engineering-based study on the top level. The bottom line is, can you do another type? Yes, you could, but how we get around it is we have developed what is called Modeling. We don’t need to go to the property. We use our database of thousands of similar properties around the country. We use an analytical, statistical study, and we can give the owner of the property of a single-family home with a building basis of $500,000 or less. We can do the modeling study for hundreds of dollars, so now it is worth it.
It makes all the sense in the world. Why would you not do it would be the question.
There are very few companies that do what we do. It would not surprise me if their accountant were going like, “I have no idea what Joe is talking about.” We have never lost or been told by the IRS to reverse our findings. If they have had questions, we have answered their questions, and they say, “You are good to go.”
I didn’t expect to learn about it. We were learning something on the single-family side. It is one of the things that maybe somebody if they are reading this, hasn’t thought about. Let’s say they are looking to sell their property in the near future or are under contract to sell it. Is it still worth getting a cost segregation study done?
No. There is a component of the Tax Law called Depreciation Recapture. My team and my talent have come to the agreement that if you are not going to hold a property for at least a year and a half to two years, by the time you pay me, you go through all the pain, and you get your accountant involved. I would tell the client, “Don’t do it.” Don’t bother if it is a flip or a year and a half to two years less.
That is a fascinating point you make because even in multifamily, we saw a lot of things that have 5 to 7-year business plans, and they are trading hands like, “I’m part of a deal now straighten hands eighteen months later.”
Here is the deal. You are not going to get hurt by doing it. If somebody came to me and they knew they were going to sell their property in eighteen months, I would say, “Why? Don’t do it?” However, if you think I have a five-year plan, then somebody came up with this offer. I couldn’t refuse to sell them my property. I would say, “Don’t worry about it. You are not going to get hurt and not going to lose money. You are just not going to have the powerful advantage of accelerating your depreciation.”
What about acquisitions? How far can you go back on an acquisition?
A lot of accountants and a lot of clients don’t understand that we can go back. Now, I’m going to take you to about the maximum. I have to do a calculation to see what the actual date is but for many years. That is my experience. I have gone back and made it work for several years. We were talking about going back to when you acquired the property because the depreciation countdown starts when somebody buys the property, not how old the property is. If George Washington slept at that property, but somebody bought it now, the depreciation clock starts now. I can go back for about fifteen years and we do this at no cost. We do an analysis, and then I’ll tell the client, I’ll say, “It’s worth it, but if I were you, I wouldn’t do it. It is not worth it.”
Does that fifteen years of re-filing taxes or can you figure all that out in one year?
Here is what’s going to happen. This is important because a lot of people have the word amendment baked in. I will tell you now. I do not use the word amendment because, in my industry, cost segregation, you do not amend your tax return. The IRS has allowed you to simply file a change of accounting form.
The only use of that form, cost segregation, where the IRS guarantees it, no questions asked, is you file the form and you tell the IRS, “This is the depreciation I have taken. This is what Joe has given me, an accelerated depreciation, and this is the net benefit. I’m now applying this in my current tax return.” If you are filing your 2021 tax return and you bought a property ten years ago, you would change the accounting method form and tell the IRS what I told you. “Here is the benefit and the depreciation I’m going to take because I’m taking advantage of acceleration.”
Do you get to claim all ten years of depreciation? I know in cost seg, the beauty of that is it compresses some of those timelines, and you get more depreciation earlier on. How does that play out?
Basically, what it does is there’s an adjustment on that form. The adjustment is relatively synced, simple not to calculate but to think about. All you are doing is you are telling the IRS, “This is how much depreciation I have already taken. I have taken ten years of straight line and now, I’m going to do the accelerated method, and here is the difference between the two.” You can’t double-dip. The acceleration, even ten years down the road, is powerful enough. That is called The Look-Back Study. Most clients will do a look-back study because it makes sense.
The depreciation countdown starts when somebody buys the property, not how old the property is.
That is a fascinating point. I have never talked with anyone doing a look-back study on a cost seg situation. Is that something even we were doing on the single-family side?
Yes, because obviously, we were talking hundreds of dollars. If the property were bought ten years ago for $20,000, then I would say, don’t waste your time, but if you are talking about $50,000 to $100,000, which going back ten years, property dockets were low. I would do this at no charge. I would estimate it and say, “Yes or no?” If it is a no, I tell them, “Don’t bother.”
I read from you that if you owe federal income tax, it was to call you guys and see how you can keep that money in your bank account rather than paying the IRS. What does that mean?
Would you rather write a check out to the IRS for $50,000 or would you rather take the $50,000 and go out and buy more real estate or improve your real estate?
I feel like this is a guru lead in pitch all of a sudden like, “Would you rather have a sharp stick in the eye or would you rather have a fist full of money?”
That is why this is such a pleasurable show to talk about because we were doing it. We were giving people money, and it is like, “You don’t want it?” Now, here is the deal. I mentioned one circumstance passive-active while I drill down. The other one is, are you paying income taxes? You don’t need Joe if you are not paying income taxes. Don’t call me, but you know if your IRS comes to you and says, “You got to write a check out for X.” I don’t care if it is $10,000. A lot of my clients are multimillion-dollar. I do the single-family, but I also do the $500 million buildings. It was $100,000 in tax savings.
That is a large number. Explain that to me where you say if you owe federal income tax, call you because there may be a way to use the property. I’m assuming you are using cost segregation to give them a tax write-off. If you already owe the tax, is there a way to go back and rework that? What do you mean when you say that?
You can do that, but we were not an accounting firm, so I don’t get involved too much in that aspect but to answer your question. If I give you losses this year, you can go back. I believe it is five years and get a refund for the tax that you’ve paid. We don’t apply it. We will give you the answer. You have to apply the answer we give you and you get the money from the IRS. It is part of the tax code. If you paid taxes two years ago and I gave you losses this year, you could use those losses to get your money back.
Consult your accountant for those of you who are reading this because Joe and I are not accountants. I’m enjoying this. This is fun. Let’s shift gears a little bit because you guys are an engineering firm. What else do you guys do outside of cost segregation because I think this would be valuable for our audience to understand the full suite of things that is that you guys get involved in.
We also do energy studies. To make this simple, this is an engineering-based study because there are tests that have to be performed by an engineer on-site. There are three factors. One is the envelope of the building. The other one is the HVAC and the other one is electrical. The engineering of the building is your doors and your windows, then you’ve got your electrical appliances and your light fixtures. You have, of course, your HVAC. If anybody does a value add or remodel job, I guarantee you. Nowadays, Home Depot does not sell anything that is not energy compliant. It is baked in all over the United States.
If you have done any work, you are going to be energy compliant. You can tell the IRS, “I have improved by my energy by these standards.” Therefore, you will get a $2,000 per door tax credit, not a deduction. That is a valuable difference between cost segregation. I’m giving you deduction right offs, whereas you get a $2,000 per door credit. The 179(b) is for big buildings and the 45L is for small like multifamily and single-family homes. It is complicated, but again, we will do a no-cost estimate to let you know whether we think you would qualify and how much you will save.
I know you said that Home Depot and Lowe’s are going to carry all the energy-rated products, but I would assume that they are still even outside of that. If you are going through some other suppliers, there is a list of things you would say that this has to meet as I have certain stamps on it that qualify.
Nowadays, the county planners won’t approve anything unless it is done with energy-compliant standards. With that argument, we don’t need to make much anymore because you would be hard-pressed to find a contractor that would go outside and try and find some used light fixtures. It doesn’t happen.
What about when you are doing a facility that is only a half? Say the intention is only to renovate 50% to 70% of the units and leave the rest for the next buyer to finish out. How does that situation play out?
That works if you do whatever units you qualify for.
You guys will come in, do the study for it and you will say, “Here’s everything you guys did and here’s what you handle your accountant for this project,” and they will give you all the tax credits that you need.
The energy studies are a little different because we have to give them testing results, which is what the IRS wants to see. They want to see that somebody went in there and tested the doors to make sure the doors are not letting energy, heat, or air conditioning out. They want somebody to test the windows. It is a machine that we have to take too. We don’t have to do every single door, but we will go in one bedroom, one bath unit, test that, and then use that information. It is an actual test of the IRS would need to see if they were to ask questions.
Let’s say there are 1, 2, and 3-bedroom mix. You guys would go to each unit type, and that is the end of the test. That is fascinating. Joe, I have learned a lot. Thanks for getting into some of the nuances on cost seg. I knew I threw some things at you that were a little bit more in the weeds, but I certainly appreciate you breaking that down and, of course, breaking down how we can use energy-efficient studies to get tax credits as well. I have enjoyed this. Let’s jump into the final four questions. What is one tool or resource you find you can’t live without?
I love using CoStar. I think CoStar, for my clients and me, is to find the information they give on properties. The data points are valuable. I’m a big CoStar believer and we use CoStar.
The next question, is if you could help our audience avoid one mistake in real estate, what would it be and how would you avoid it?
If you ever write a check to the federal or the state treasury for taxes, I would say that is one big mistake. You always want to keep that money in your bank or in your pocket. Do not because that is why real estate is powerful. Not only do you have cost segregation, but you have so many ways to eliminate or reduce your income taxes. Take advantage of those and be smart.
Not only do you have cost segregation, but you have so many ways to eliminate or reduce your income taxes. Take advantage of those. Be smart.
When it comes to investing in the world, what is one thing you are doing now to make the world a better place?
As you probably figure it out, I’m an energy-efficient person. I’m driving an energy-efficient car. My house has solar and we have a lot of energy-efficient appliances, doors and windows. That is my contribution. I try and give back.
Joe, if our audience wants to get in touch with you or learn more about you and what you guys do. What is the best way to do that?
It is US Tax Advisors Group, Inc. To make it easy, go to USTAGI.com.
Joe, thank you so much for your time. I do appreciate it. It’s lots of fun.
Thank you, Sam. I appreciate it.
Important Links:
- US Tax Advisors Group, Inc.
- California Association of Realtors
- CoStar
- https://www.LinkedIn.com/in/joseph-viery-49b1b923
About Joseph Viery
Joseph Viery is the Principal at US Tax Advisors Group, Inc (USTAGI). As a Cost Segregation Professional, he has helped property owners defer or eliminate millions of dollars in income taxes by leveraging IRS compliant cost segregation studies. Since becoming a CSP in 2008, Joseph has performed thousands of Cost Segregation studies for clients in various industries ranging from $500,000,000 commercial properties to $50,000 single-family residences. He is a regular presenter and podcast guest as he has a natural ability to turn a complex set of guidelines into easy-to-understand topics. He has also been able to bridge the gap for independent residential real estate investors by providing an affordable modeling approach. In addition to Cost Segregation studies, Joseph is able to offer 179d and 45L energy tax credits as wells as Research and Development (R&) tax credits.
