Investment Property Tax

Depending on the state where you live and also the state where you are investing, the amount of money you will have wrapped up in real estate investing taxes can significantly vary. As the US tax code continues to change and develop every day, there are also many different laws and regulations surrounding investment taxes that will continue to change as well. Part of the best real estate investment strategies includes a plan for dealing with this.

Cut Through the Jargon

Taxes are inevitable, which is why it is so important to understand all of the financial implications of a real estate investment before making a purchase or getting started in the business. You need to know how investment property taxes work in the states where you want to invest. There are also a variety of loopholes and tax breaks that you may be able to benefit from, depending on your specific situation. Doing your research and regularly keeping up with tax laws will help you to stay informed and make better investment decisions.

With years of experience managing a successful real estate business and handling property taxes, I know what it takes to properly manage these rules and regulations. Save thousands using the advice in the following posts.

A Closer Look At The Protection Of The Deferred Sales Trust Funds

Own Nothing, But Control Everything. A Closer Look At The Protection Of The Deferred Sales Trust Funds

With the all-time highs in the marketplace, highly appreciated asset owners are thinking more about diversifying their equity using The Deferred Sales Trust™ (“DST”) because who knows how long this bull market will last.  I remember the 2008 great economic crash like yesterday. I wish someone had told my friends, family, and clients about the Deferred Sales Trust (DST) earlier. That doesn’t have to happen again if you know and understand what the Deferred Sales Trust is and how the funds are protected.

Are Deferred Sales Trust Funds Protected?

The answer is yes.

In a previous article, we discussed Why You Should Consider Using the Deferred Sales Trust (DST) Now More Than Ever and does the IRS Allow The Deferred Sales Trust? So far, the answer is yes. Once the legal confidence of the structure has been established, the next logical question is on the continued operation of the DST and how and where the funds are invested to pay you back per the terms of the secured installment note. In the context of the DST, “secured” is defined as all of the assets in the DST serving as collateral. Examples of this would be private or syndicated real estate, business ventures, hard money lending, investment real estate development(s), mutual funds, ETFs, REITs, stocks, bonds, managed accounts, annuities, life insurance, etc. These assets are the security for repayment of the cash to you per the terms of the promissory note. Remember, you are now the lender to the DST and the DST owes you back the money it borrowed when it purchased the asset from you plus a rate of return, typically 8% compounding, over a specific period of time (usually 10 years). This term of 10-years, however, can be renewed every 10 years for 10 more years and passed in your living trust to your heirs.

How are Deferred Sales Trust Funds and Investments Protected?

The answer is securely with some of the largest investment banks in the world. Investments and movement of cash take your written authorization. As a secured lender, nothing moves without your prior approval. What else goes into this? This starts with the transaction itself when a third-party controlled bank account is set up to receive and secure the proceeds from the sale of your appreciated asset(s). Once the funds are secured, the next likely destination is to transfer the DST funds to an institutional investment custodian such as TD Ameritrade, Charles Schwab, Asset Mark, Bank of New York, etc. Before investments are made, a risk tolerance questionnaire is filled out by you. This becomes the foundation for how and where the funds are invested. It’s important to understand, and necessary for tax deferral, that Capital Gains Tax Solutions (CGTS) serves as a DST Trustee and makes all DST investments on your behalf based on the risk tolerance questionnaire; however, CGTS cannot do this without your prior written approval. The bank acts as a de facto escrow agent to verify the signed instructions and then carry out the instructions. CGTS works with experienced and vetted financial investment advisors and investment real estate syndicators to help make suitable and prudent recommendations. The final approval with regard to those recommendations rests with the secured lender, which is you.

Vetted Financial Investment Advisor Option

Diversification Protection & Dollar Cost Averaging Advantage Over 1031 Exchange 

A significant benefit of using a Deferred Sales Trust™ is that there are a broad variety of investments that can be selected to secure the principal and the return specified in the note, as opposed to a 1031 exchange where only compliant, like‐kind property (generally real estate) can be acquired with the pre‐tax proceeds. The 1031 exchange also has strict time restrictions of 45 days to identify a like-kind replacement property and 180 days to close escrow. The Deferred Sales Trust has zero time restrictions meaning you can sell high and buy low and dollar cost average into investments methodically which can lower your risk. 

Why Not Use a Traditional Installment Sale Instead of a Deferred Sales Trust? 

In a traditional installment sale, the only asset that has the ability to pay you back is the asset you sold. The challenge is you no longer control it. In most cases these short-term notes (usually 3-5 years) are secured against real estate or a business that is illiquid, meaning that it is a slow process and can take years to foreclose on the asset should the borrower stop paying you. Compare this to the Deferred Sales Trust (DST) options for investments where your collateral can be investing into liquid and diversified investments that you must approve. 

Own nothing, but control everything; Judgment and Creditor Protection

John D. Rockefeller once stated, “Own nothing, but control everything.” In summary, he meant ‘what you don’t own can’t be taken from you.’ This is the number one fundamental rule of asset protection that many people forget about and is one of the most commonly undervalued or overlooked advantages of the Deferred Sales Trust (DST). For example, let’s say someone sues you and obtains a judgment against you. The bad news is you are legally obligated to pay the judgment, however, the good news is the principal and earnings held by the Trust are generally out of reach since the DST owns the assets in it and not you. Remember, you are the secured lender. An important point to make here is the judgment holder might be able to access the distributions the DST is paying you. The reverse also works in your favor in case you’re wondering, “What if someone obtains a judgment against the Trustee (CGTS)?” In this scenario, the DST fund protection here is stronger than before since the Trustee is a fiduciary who manages and disburses the trust assets for the trust secured creditor (you) and by structure has no ownership in or claim to either the trust assets or the monies distributed to you per the installment sale agreement.

Our Vision to Help You Make a Great Decision 

The (DST) has a proven track record and can give you debt freedom, liquidity, diversification, ability to move funds outside of your taxable estate all while not using a 1031 exchange. We don’t want you or your clients to have to feel trapped by capital gains tax or a 1031 exchange ever again. Here’s to feeling safe and secure with the management of the Deferred Sales Trust funds and to making the best decision for you, your family, and your estate, no matter if and when this bull market finally takes a dive. 

Brett is the Founder of Capital Gains Tax Solutions and host of the Capital Gains Tax Solutions podcast. Each year, he equips hundreds of high-net-worth individuals and business professionals with the Deferred Sales Trust strategy to help their high net worth clients solve capital gains tax deferral limitations. Brett was formerly an associate at one of the largest CRE Brokerage firms in the country (Marcus & Millichap), and is also a Sacramento Multifamily Broker with eXp Realty. Brett lives in Roseville California, with his wife, Melanie, and their 5 children.

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Two Potential President Biden Tax Changes and What They Mean for Real Estate Investors

Two Potential President Biden Tax Changes and What They Mean for Real Estate Investors

The Biden Administration is signaling that it will start efforts to overhaul the Tax Code in such a way as to increase taxes and unwind the Trump Administration’s Tax Cuts and Jobs Act. Without belaboring the details of the entire tax plan and discussing matters not relevant here, I want to focus on two targets of the Biden proposals: the 1031 Exchange and Capital Gains.

The 1031 Exchange

Real estate, especially in the multi-family and commercial space, relies heavily on the ability to defer capital gains from the sale of property. This is done by allowing the seller to swap one piece of real estate for another and reduce or obviate that capital gain on the sold property. To say this tax provision is popular would be an understatement. Recent IRS regulations outline what constitutes real property for 1031 eligibility — these regulations would now become moot. (Currently, Section 1031 requirements are: 1) real property must be exchanged for like-kind real property, and 2) the property relinquished in the exchange and the replacement property received in the exchange must both be held for business or investment purposes.)

The Biden Administration also is looking to terminate the step-up in basis that alleviates beneficiaries of large tax liabilities on inherited assets that have increased in value. Those inherited assets sold by the beneficiary would require capital gains to be paid on the original basis at the time of purchase as opposed to the fair market value at the time of inheritance. Thus, inherited assets that have been part of a 1031 exchange would have a minimal tax basis given the capital gains tax deferral on gain recognition. Eliminating the step-up in basis would trigger deferred gain liability.

Capital Gains

In conjunction with the 1031 exchange being eliminated, the Biden administration’s tax proposals are taking aim at capital gains rates, too. This means, that instead of paying the 20% capital gains rates (23.8% for high earners) for the sale of property held for investment for a year or more, the administration is going to increase that rate. The proposal being floated by this administration is to raise the capital gains rate to 39.6%, which is the top tax bracket under the Biden tax plan for individuals. Thus, capital gains rates have been eliminated and all gains are now ordinary gains.

What Does This Mean for Real Estate?

To be blunt, this is a BIG problem for real estate investors. The tax benefits that encourage investment in real estate are being eliminated. Moreover, the far-reaching impact of these two tax provisions would chill real estate investment. This is something many of us in the investment community need to monitor. Nothing has happened yet, but with the policies being pushed through Congress and the Senate along partisan lines, real estate is in the crosshairs at the moment.

Author: Brian T. Boyd, JD, LLM,

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How a Passive Apartment Investor Interprets a Schedule K-1 Tax Report


Apartment syndications remain an appealing investment for passive investors due to the myriad of tax benefits—the foremost being depreciation.

Fixed asset items (a long-term tangible piece of property or equipment that is used in operations to generate income and is not expected to be consumed or converted into cash within a year) at an apartment community reduce in value over time due to usage and normal wear and tear.  Depreciation is the amount that can be deducted from income each year to reflect this reduction in value.  The IRS classifies each depreciable item according to the number of years of its useful life.  It is over this period that the fixed asset can be fully depreciated.

A cost segregation study identifies building assets that can be depreciated at an accelerated rate using a shorter depreciation life.  These assets are the interior and exterior components of a building in addition to its structure. They may be part of newly constructed buildings or existing buildings that have been purchased or renovated.  Approximately 20% to 40% of these components can be depreciated at a much faster rate than the building structure itself.  A cost segregation study dissects the purchase/construction price of a property that would normally be depreciated over 27 ½ years—and identifies all property-related costs that can be depreciated over 5, 7, and 15 years.

If the expense of the construction, purchase or renovation was in a previous year, favorable IRS rulings allow taxpayers to complete a cost segregation study on a past acquisition or improvement and take the current year’s deduction for the resulting accelerated depreciation not claimed in prior years.

You can learn more about how depreciation is calculated, as well as the other tax factors when passively investing in apartment syndications, by clicking here.

Each year, the general partner’s accountant creates a Schedule K-1 for the limited partners for each apartment syndicate deal. The passive investors file the K-1 with their tax returns to report their share of the investment’s profits, losses, deductions and credits to the IRS, including any depreciation expense that was passed through to them.

Click here for a sample Schedule K-1.

There are three boxes on the K-1 that passive investors care about the most.

Box 2. Net rental real estate income (loss). This is the net of revenues less expenses, including depreciation expense passed through to the LPs. For most operating properties, the resulting loss is primarily due to accelerated deprecation. On the example K-1, the depreciation deduction passed through to the Limited Partner is $50,507, thereby resulting in an overall loss (negative taxable income).

Box 19. Distributions. This is the amount of equity that was returned to the limited partner. On the example K-1, the limited partner received $1,400 in cash distributions from their preferred return of distribution and profits.

Just because the LP realizes a loss on paper does not mean the property isn’t performing well.  The loss is generally from the accelerated depreciation, not from loss of income or capital.

Section L. Partner’s capital account analysis. On the sample K-1, the ending capital account is $48,093. However, this lower amount doesn’t reflect the capital balance that the limited partner’s preferred return is based on. The $48,094 is a tax basis, not a capital account balance. Thus, this limited partner wouldn’t receive a lowered preferred return distribution based on a capital balance of $48,094. From the operator’s perspective, depreciation doesn’t reduce the passive investor’s capital account balance.

The capital balance is technically reduced by the distribution amount above the preferred return (i.e., the distribution from the profit split), which is a portion of the $1,400 in the “withdrawals & distributions” box. However, operator’s deals are structured in a way so that the LPs continue to receive a preferred return based on their original equity investment amount, with the difference made up at sale.

The majority of the other accounting items on the K-1 are reported on and flow through to your Qualified Business Income worksheet.  The net effect of these items will be unique to each investor based on their specific situation and other holdings.

If you want to learn more about each of the individual sections and boxes, click here to review IRS instructions for the Schedule K-1.

To better understand your own tax implications on any investment, it is important to consult a professional who has an understanding of your overall finances so that they may give full tax advice.  Therefore, always speak with a CPA or financial advisor before making an investment decision.

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Why You Should Consider Using the Deferred Sales Trust (DST) Now More Than Ever

Sorting out capital gains tax deferral strategies can be confusing. Also, finding a proven tax deferral strategy that gives you debt freedom, liquidity, diversification, and the ability to move funds outside of your taxable estate all while not using a 1031 exchange at the same time, is hard to find. That is why we’ve started Capital Gains Tax Solutions and offer The Deferred Sales Trust™ (“DST”).

With the new Biden Administration taking office, investment real estate and tax strategists are thinking more about Deferred Sales Trusts since the 1031 exchange appears to be in danger.

What if President Biden Repeals Section 1031?

The Biden Administration is considering eliminating or limiting the 1031 exchange and stepped-up basis, making now a great time for you to plan for an alternative to defer capital gains tax on the sale of highly appreciated assets. In the past the 1031 exchange has survived for real estate investors, however, the last time Congress met to overhaul the tax code, the 1031 exchange was under fire, and each attempt has been narrowing who qualifies.

Does the IRS Allow The Deferred Sales Trust? 

So far, the answer is yes. The Deferred Sales Trust has a long track record of success and has withstood scrutiny from both the IRS and FINRA since 1996. Since it is a tax strategy based on IRC §453, which allows the deferment of capital gains realization on assets sold using the installment method prescribed in IRC §453.

In simple words, if you sell an asset for $10 million using an installment sale contract, and finance the sale, you as the seller may not have received full constructive receipt of the cash. You have become the lender. You do not pay tax on what you have not received if you follow IRC §453 since it allows you to pay tax as you receive payments. The buyer you lent money to will typically pay an agreed-upon amount of down payment to you upfront (you would pay tax on this) and then pay the rest of the purchase price to you plus interest in installments over a specific term of time. The deferral takes place as you wait to receive payment, which is typically 3-5 years.

According to the Oklahoma Bar Association, IRC §453 was designed to, “eliminate the hardship of immediately paying the tax due on a transaction since the sale did not produce immediate cash. Furthermore, if the purchaser defaulted on the installment note, the seller may have paid tax on money he never actually received.”

Why You Should Consider Using It Now More Than Ever.

Lower risk by diversifying your equity and buying with no time restrictions:

A significant benefit of using a Deferred Sales Trust™ is that there are a broad variety of investments that can be selected to secure the principal and the return specified in the note, as opposed to a 1031 exchange where only compliant, like‐kind property (generally real estate) can be acquired with the pre‐tax proceeds. The 1031 exchange also has strict time restrictions of 45 days to identify a like-kind replacement property and 180 days to close escrow. The Deferred Sales Trust has no time restrictions meaning you can sell high and buy low. Learn more here about how the Deferred Sales Trust is like a time machine.

Consolidation of multiple assets:

Who does this work for? Virtually any individual or entity can utilize a DST to defer capital gains taxes on the disposition of a qualifying asset including primary residence owners, investment real estate, businesses, stock including public or private, cryptocurrency, artwork, and collectibles. Gather the sale of multiple assets into one DST trust for making your estate plan simple and clear. Here is a video with Kevin Harrington from Shark Tank discussing the selling of stock and using the Deferred Sales Trust with me. See these and read about more Advantages of The Deferred Sales Trust™ (“DST”) in a recent article here.

Recent Sacramento Multifamily Owner Pushes Through Skepticism To Sell His Property and Save His 1031 Exchange Using a Deferred Sales Trust

Let’s use a recently closed deal of Capital Gains Tax Solutions, LLC (CGTS). This client of CGTS sold his $1,700,000 multifamily property in Sacramento, CA. He grew up in a real estate investment ownership and brokerage family in Napa, CA. He and his family had used a 1031 exchange to purchase properties since he was a kid. “I remember sitting at the dinner table and discussing 1031 exchanges.” Now in his 40’s, he has a property of his own that he bought near the bottom of the market in 2009.  He and his partner were ready to sell and unlock the sleeping equity (their return on equity was too low for them) and invest it into the next deal since their property had appreciated over $1,000,000.

He had the following motivations and challenges:

  1. He needed to purchase something of equal or greater value and replace his debt.
  2. He wanted to defer his capital gains tax and find a deal with a cap rate and cash-on-cash return which yielded as much or more in cash flow as the property he was selling.
  3. He was cautious to not go into too much debt and overpay for a property via a 1031 exchange. He found a 21-unit property to purchase, however, his partner had a family emergency and decided to back out, leaving him with no time, and not enough money to purchase the property. So the deal fell apart.

Which is what brought up these next four questions:

  1. Can he accomplish his goal of capital gains tax deferral by using a Deferred Sales Trust and not purchasing investment real estate today and going into too much debt?
  2. Can he eliminate the need for a 1031 exchange, and can his partner go his separate way?
  3. Can he buy real estate with no timing restrictions all tax-deferred in the future?
  4. Will he be able to retire from real estate forever if he wants to?

The answer to all four of these questions is yes. To learn about this specific deal or go here and watch the video to hear from the owner himself.

“The Deferred Sales Trust helped me not just be an active commercial real estate investor, but it helped me become a passive investor as well. CA real estate values were too high, and I can now double my cash-on-cash return in other states, diversify into other CRE product types, all with zero management responsibilities.” Steve P. Sacramento, CA

Can it do the same for you? What are the steps? 

Sorting out capital gains tax deferral strategies can be confusing. Also, finding a proven track record tax deferral strategy that gives you debt freedom, liquidity, diversification, and the ability to move funds outside of your taxable estate all while not using a 1031 exchange at the same time, is hard to find. That’s why we’ve started Capital Gains Tax Solutions and offer The Deferred Sales Trust™ (“DST”). So you or your clients never have to feel trapped by capital gains tax or a 1031 exchange ever again. Get clarity today on the differences between each tax deferral strategy you are considering including the Delaware Statutory Trust, Charitable Remainder Trust, Monetized Installment Sale, 1031 exchange, Opportunity Zones and learn more about The Deferred Sales Trust™ (“DST”) today by downloading a free e-book, Sell Your Business Or Real Estate Smarter here at

Here’s to making the best decision for you, your family, and your estate, no matter what the final decision will be for the Biden Administration on the 1031 exchange.

About Brett Swarts:

Brett Swarts is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers on the west coast. His audiences are challenged to create and develop a tax-deferred transformational exit wealth plan using The Deferred Sales Trust™ (“DST”)  so they can create and preserve more wealth. Brett is the Founder of Capital Gains Tax Solutions and host of the Capital Gains Tax Solutions podcast. Each year, he equips hundreds of high-net-worth business professionals with the DST tool to help their high net worth clients solve capital gains tax deferral limitations.

Mr. Swarts is passionate about educating high net worth individuals in capital gains tax deferral with a Deferred Sales Trust, how to divest from a business, cryptocurrency, highly appreciated stock, primary residence, or investment real estate to gain freedom from feeling hostage to capital gains tax or a 1031 exchange, then invest back into a new business venture or investment real estate at any time [all capital gains tax deferred] which he calls optimal timing.

His experience includes numerous Deferred Sales Trusts, Delaware Statutory Trusts, 1031 exchanges, and $190,000,000 in closed commercial real estate brokerage and Deferred Sales Trust transactions. He’s an active commercial real estate broker and investor with brokerage experience and ownership in multifamily, senior housing, retail, medical office, and mixed-use properties. He is a licensed California Real Estate Broker who has held series 22 and 63 licenses.

Brett was formerly an associate at one of the largest CRE Brokerage firms in the country (Marcus & Millichap), is now a Sacramento Multifamily Broker with eXp Realty. Brett lives in Roseville California, with his wife, Melanie, and their 5 children.

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How to Do a 1031 Exchange on an Apartment Syndication

DISCLAIMER: This blog post is written for educational purposes only. We are not providing tax, legal, or accounting advice. Therefore, we strongly recommend that you speak with a tax advisor, CPA, and/or financial advisor for more details on the federal, state, and local tax consequences associated with doing and/or participating in a 1031 exchange.

Generally, as a real estate syndicator, the two common approaches to a disposition is to either 1) liquidate and distribute the sales proceeds to yourself, other general partners, and the limit partners, or 2) roll the sales proceeds into a new deal.

The latter is referred to as a 1031 exchange.

There are two main, potential benefits to the 1031 exchange. By participating in a 1031 exchange, your passive investors may be able to defer capital gains taxes on the profits from sale. It will also allow your passive investors to continue to collect distributions, and the new preferred return will be based on the higher proceeds from the sale instead of the original investment.

In this blog post, I want to provide an overview of the 1031 exchange process from the perspective of the apartment syndicator.

1031 Exchange Requirements

The requirements for a 1031 exchange are laid out in the United States Internal Revenue Code 26 U.S.C. § 1031.

Here are the current requirements in order to qualify for a 1031 exchange:

  1. The relinquished property (i.e., the property you are selling) must be an investment property
  2. The purchased property must be of “like kind”
  3. The purchase property must be at least the same value as the relinquished property or more
  4. The purchased property must be purchased by the same name or entity that owned the relinquished property
  5. Sales proceeds must be held in an escrow account
  6. Purchased property must be identified within 45 days after closing on the relinquished property
  7. Purchase property must be closed on within 180 days after closing on the relinquished property

We go into more details on these rules in a blog post here.

1031 Exchange Process

If you want to implement a 1031 exchange, you need to work with a 1031 consultant. These are companies who are qualified intermediaries who specialize in the 1031 exchange.

Like most team members, the best way to find a 1031 exchange consultant is through referrals. However, a quick Google search will generate hundreds of potential candidates. The main requirement is that they specialize in 1031 exchanges and in apartments (or whatever asset class you focus on).

Once you’ve selected a company, they will send you a letter of engagement that outlines the 1031 exchange process and will ask the person or entity on the property title to fill out a Form W-9.

In order to start the 1031 exchange process, the consulting firm will also request the following:

  • Name of person(s) or entity in title: If entity, who will sign on behalf of it and what is their title? What type of entity is it? Single member LLC, partnership, corporation?
  • Social security or Tax ID number of person(s) or entity in the title
  • Mailing address
  • Copy of driver’s license or valid ID
  • Copy of the purchase and sale agreement
  • Address of property(ies) being sold
  • Name of purchaser(s)
  • Tentative closing date
  • Name and contact information of title company or closing attorney handling the sale

Notify Investors

After you are under contract on the relinquished property and engaged the 1031 exchange consultant, you will need to notify your passive investors about the disposition. Additionally, you will want to explain the potential benefits of a 1031 exchange and ask whether they want to participate in the 1031 exchange. A simple way to do this is to ask investors to reply to the email with “A” if they want to participate and “B” if they don’t want to participate. Another option is to create a Google Form to collect contact information and responses.

I recommend setting a “let us know by” date that is at least 7 days prior to closing. For example, if the scheduled closing date is May 8th, ask your investors to let you know whether they want to participate in the 1031 exchange by May 1st at the latest. To ensure they reply on time, let them know that if they do not submit a response by that date, their distribution will be delayed.

In general, it is a best practice to set “let us know by” dates. The earlier you have replies, the more efficient the process is for you as a general partner.

As replies come in from your investors, you will create two lists: investors who are participating and investors who are not participating. Send separate email updates to each list.

For the investors who are participating in the 1031 exchange, make sure that you send them status updates after closing. Let them know once you’ve identified the new deal, including the same information that you would include in a new investment offering email (deal information, projected returns, conference call information, etc.), as well as how much their investment will be in the new deal (for example, if you initially invested $100,000 into the first deal, your investment into this deal will be approximately $120,000 – $100,000 initial investment + $20,000 profit from sale). From there, you can add the 1031 exchange investors to the email list for the new deal and send them the regular closing updates.

For the investors who are not participating in the 1031 exchange, make sure the you send them status updates after closing too. In the closing email of the first deal, let them know the process for receiving their final distribution (i.e., when will they receive it, how will they receive it, and what the amount will be). Additionally, like the sale of any deal, the investors that are not participating in the 1031 exchange will need to sign a document that states that they have no further obligations in the original deal. Your attorney can help you prepare this document.

What You Need to Know About Seeing Up a 1031 Exchange

The two potential benefits of the 1031 exchange are deferred taxes and a preferred return based on a higher investment amount.

The IRS regulates who and what qualifies for a 1031 exchange.

When you are selling an apartment, notify your investors about the sales and determine who wants to participate in the 1031 exchange. Send separate updates to investors who do and don’t want to participate. Investors who do want to participate will have their proceeds rolled into a new deal. Investors who do not want to participate will receive their proceeds and have no further obligations.

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Depreciation and Bonus Depreciation: Everything You Need to Know

When I speak with clients about their real estate investments, this topic is always on my list to discuss in depth with them. Depreciation and Bonus Depreciation are hands down one of the best tax advantages to owning real estate for investment. Typically, that conversation starts with the threshold question: “What is Depreciation?”

What is depreciation?

Depreciation is a process utilized by accountants, CPAs, and Tax Lawyers to determine how much of the costs for buying and improving the property can be deducted. This deduction is spread across several years, 27.5 for residential real estate and 39 years for commercial real estate. Those years represent the useful life of the property.

Per the IRS, there are requirements to depreciate rental property. Those requirements are:

  • You must own the property (this doesn’t mean you can not have mortgage or other financing arrangement- simply that the property is titled in your name or your entity’s name);
  • That property is income producing or used in your business (hopefully that means you are in real estate investing);
  • Your property has a useful life, i.e, it loses its value from natural causes; and
  • This asset is expected to last for more than a year.

One exception to depreciation is land. Land does not get used up. It is part of your property but not the depreciable part. Keep that in mind as you depreciate your properties.

You can start depreciating your properties as soon as you place them into service or, in non-lawyer language, when they are ready to rent. At the end of the year, your accountant, CPA, or Tax Lawyer will take the following steps to evaluate the deduction for depreciation of your property:

  1. Determine the basis of the property: This is simplified by considering this number as the price you paid for the property;
  2. Separate the cost of the land and buildings: As stated above, land is not depreciable so each part of the real estate has to be valued and separated;
  3. Determine the basis in the house;
  4. Determine the adjusted basis, if: Sometimes increases and decreases in your basis are necessary. This happens when you improve the property and those improvements have a useful life of at least 1 year before the property was placed into service, you spent money to repair a damaged property, adding utilities, and certain legal fees will add to your basis. Things that detract from basis are insurance payments received as a result of damage or theft, casualty losses not covered by insurance that you took a deduction for and grant money for an easement.

Once all these steps are taken, your rental income is reduced by the Depreciation Expense on your Schedule E of your 1040 tax return. Thus, your income is offset or reduced by this deduction. Depending on your real estate holdings, the deduction for Depreciation could be hundreds of dollars or thousands. It adds up quickly and you will come to figure depreciation into your valuation of potential investments for real estate.

What is bonus depreciation?

Now, imagine taking Depreciation and putting it on steroids. That is exactly what Bonus Depreciation is and it is a game changer in every sense of the term.

But first, it needs to be understood that Bonus Depreciation is not for the Real Estate itself, the land and structure. Bonus Depreciation is for Capital Assets with a life of less than 20 years. What does this actually mean?

Glad you asked because I was going to tell you anyway. Let’s take something simple like an oven or other appliances. Bonus Depreciation allows you to take the entire cost of that asset in one year. So that $900.00 oven you just put into that house is now a 100% deduction. Moreover, you don’t have to buy a new oven. It just has to be new to you and you cannot obtain it from a related party.

Bonus Depreciation allows you take the entire cost of specific capital investments in one year. This reduces your federal income taxes in the year you place those assets into service.

Talk with your CPA, Accountant or Tax Attorney about both of these. There is no better tax advantage than these two concepts. Good luck out there!

Bio: Brian is a licensed attorney in Tennessee who handles commercial, real estate, construction, and business issues for clients. He and his wife also invest in real estate. To learn more about Brian, visit

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End of Year Real Estate Mindfulness

2021 is just around the corner.  With all the magic of the holidays, sometimes it is easy to let things slip that you need to button up before January 1, 2021.

We reached out to Karlton Dennis, one of our select speakers for BEC 2021 and a Licensed Tax Accountant. He is the Youngest Forbes Tax Accountant in the US and fully passionate about the tax codes and leveraging it with Real Estate Investors and Business Owners to provide them the strategies that lowers their taxes legally.

Let’s see what Karlton has to say to give us a heads up on what we need to be looking out for now, before our past catches up to us.


As we approach 2021, we are reminded of the importance of our end-of-year wealth habits and routines to avoid any unexpected tax scares. This year posed many challenges to investors and small business owners, however, there were many winners that managed to expand during a time of economic contraction.  

Whether taxpayers earned more income or less, one thing will always remain the same, our  taxes will be our biggest burden. So let’s discuss some year-end strategies that can help us  position small based business owners and rental investors to pay less taxes in preparation for  this upcoming tax season.  

Before we go over strategies, let’s address the most overlooked habit and routine, our  bookkeeping! Please be sure your bookkeeping has been executed upon, and is in good standing before you discuss tax strategies with your CPA. In order to leverage tax strategies  before year end, you will need to have your up-to-date bookkeeping numbers in order to  make decisions in real time. Most tax providers provide bookkeeping services that will allow  for you to have a basic profit and loss statement and balance sheet to better help your  accountant determine your potential tax savings based on potential tax strategies. 

Now, for many rental real estate investors, certain strategies can be implemented all the way  until the tax return is filed on April 15th. However some strategies, such as establishing an entity structure, may require you to have implemented prior to December 31st.  

One strategy that can be leveraged all year long, and even past the tax year is the cost  segregation study. You may have heard of depreciation before, but were aware of the ability to  accelerate depreciation? A cost segregation is a tax strategy used by savvy real estate  investors to accelerate depreciation on a rental property to reduce tax upfront, to allow for  additional investing. Sounding good so far?  

Implementing a cost segregation study to accelerate depreciation on a rental property has the  ability to dramatically reduce a taxpayer’s taxable income, and may even reduce all of their tax  liability. Typically this strategy is most effective on residential rental real estate purchased  within the last 10 years, and for commercial real estate purchased within the last 15 years. This  powerful strategy is one of many ways investors can avoid the taxes associated with their  passive income even if they are late on doing their tax planning.  

Now, managing your real estate may not seem fun, but it could lead to a massive tax benefit.  If you are managing your real estate, you are a business owner. By speaking with a tax strategist,  it might make sense to hire yourself, or family members, such as children, as additional employees under your management business. This strategy is a crowd favorite, as many  taxpayers are looking for ways to leverage their investments while involving their children early.  Make sure to speak with your strategist on how to leverage this strategy under the correct  entity structure so you may avoid any additional tax that could arise from hiring your children.

And Last, but surely not least, is the charitable contributions. As a part of the Cares Act  initiative of 2020, eligible taxpayers in 2020 are able to deduct 100% of their charitable contributions on the individual tax returns for the year 2020. So, if you were planning to be  philanthropic this year, understand that the sky’s the limit on your charitable contributions for a deduction in 2020. This has been an unpredictable year to say the least, so be sure to consult  with your tax strategist on any potential changes as you lead up to filing your tax return.  

Good luck Tax Savers!  


Karlton Dennis 

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BEC 2021 Goes Virtual During Pandemic

Well folks, we have to acknowledge that COVID-19 isn’t going anywhere…at least not anytime soon. As a result (and as you may have noticed), BEC 2021 will be held virtually, for the first time, due to COVID-19. And, while we are disappointed not to be together in person, we are excited to funnel all our efforts into a virtual networking experience like no other. Seriously. As soon as you sign up, you will start reaping the benefits.

What do I mean? We really had to think out of the box on this one. The big question was: How can we make a networking event successful in a virtual environment? The Best Ever Real Estate Conferences are great because they provide attendees with the opportunity to network with fellow investors and industry influencers from around the world. That is it’s greatest benefit and we know how critical that is to you and your business.

In order to offer all attendees the opportunity to share business strategies, meet high net-worth individuals, and learn something new, we came up with a solution, several in fact, that I think you will love.

We’ll have video conferencing and chat rooms dedicated to hundreds of different networking topics. If you want to meet like-minded folks from around the country, if you want to find a partner, deal, or money from the comfort of your home office, or if you just want some good old fashioned new conversations in a world devoid of connections, then this virtual event is a can’t miss.

Exclusive to this year’s virtual event, when you sign up you will be thoughtfully placed into a Mini Mastermind group with your fellow attendees of groups no bigger than 8 people. No other conference provides you the opportunity to connect so intimately and learn as thoughtfully from your fellow attendees this far in advance from the actual date of the event. We’re making the virtual networking easy for you this year. The Mini Mastermind groups start as soon as you sign up, so make it count and register now.

Additionally, in the months leading up the conference, we’re offering all of our ticket buyers free access to exclusive monthly webinars discussing topics such as the current political climate and how the incoming Biden administration‘s decisions on a range of issues could impact the commercial real estate market and industry directly.

So, while 2021 has presented us with challenges from uniting in person, we are going to continue building the essential dialogues and connections in the world of real estate. We are looking at this as an opportunity to expand our network to include those that normally would be unable to attend and offer exciting new elements made possible by the virtual environment.

To find out more about BEC2021, visit

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Residential Lenders Tighten Their Lending Standards – Why This Is Good News for Multifamily Investors

A little more than a year before the onset of the coronavirus pandemic, I wrote a blog post entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction” (which you can read here).

The economy was experiencing a record long expansion and showed no signs of stopping. However, like most economic expansions, various economic and real estate experts were warning about an impending recession.

“The stock market is inflated” and “real estate prices and rents will not increase forever” they said. 

However, whether the economy continued chugging along or experienced a minor or massive correction, I was confident is multifamily real estate’s ability to continue to perform. 

My confidence was not emotionally driven or biased because I am a multifamily investor. It was based on my analysis of the facts. The most telling fact was the change in renter population

Historically, more people rent during recessions (which is one of the reasons why I was attracted to multifamily in the first place) and more people buy during economic expansions. The former held true for the 2008 recession as more people began to rent. However, during the post-2008 economic expansion, the portion of renters continued to increase (more US households were renting in 2016 than at any point in 50 years). 

Therefore, I predicted that the portion of renters would increase or, at minimum, remain the same during and after the next correction. 

Then, coronavirus hit and induced an economic correction (or a temporary slowdown, depending on who you ask).

But, sure enough, a study published on June 17th, 2020 projected a decline in homeownership and concluded that  “the demand for rental housing will increase somewhere between 33% and 49%” between 2020 and 2025.

In both my January 2019 article and the June 2020 study, one of the reasons why more people are renting is due to tightened lending standards (other reasons were student loan debt, inability to make a down payment, poor credit, and people starting families later).

A metric that is used to measure lending standards is the Mortgage Credit Availability Index (MCAI). The MCAI is based on a benchmark of 100 set in March of 2012 and is the only standardized quantitative index that solely focuses on mortgage credit. A decline in the MCAI indicates that lending standards are tightening while an increase in the index are indicative of loosening credit.

Between December 2012 and November 2019, the MCAI was steadily trending in the positive direction, increasing from the high-80s to the high-180s.


However, starting in December 2019, the MCAI began to decline. The three largest drops were in March 2020 (decline of 16.1% to 152.1), April 2020 (decline of 12.2% to 133.5), and August 2020 (decline of 4.7% to 120.9, the lowest since March 2014).

Joel Kan, Mortgage Bankers Association’s Associate Vice President of Economic and Industry Forecasting said in the August 2020 report, “credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales shows a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

People will always need a place to live. Their only two options are to rent or to own. As indicated by the massive MCAI declines since the end of 2019, less and less people will be able to qualify for residential mortgages. The programs available to people with low credit or who cannot afford a high down payment have disappeared. 

Therefore, by default, more people will be forced to rent.

One last interesting thing to point out is how the MCAI during the current economic predicament compares to the 2008 recession. 

Here is an expanded MCAI graph that shows credit availability back to 2004. The pre-2011 data was generated biannually, making it less accurate than the post-2011 monthly generated data. However, the graph still highlights an important point. At least as it relates to the availability of credit at the time of this blog post, the current economic recession is nowhere near as severe as the 2008 recession.

To receive the monthly MCAI report, click here.

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What Happens When You Die After 1031 Exchanging Your Whole Life

Imagine this: you acquire your first real estate investment – a value-add duplex for $100,000. After $50,000 in renovations, the new value of the property is $200,000. One year after acquisition, you sell the property for $200,000 with a gain at sale of $50,000. Rather than pay capital gains tax on $50,000, you execute a 1031 exchange into a $200,000 value-add fourplex. 50 years and numerous 1031 exchanges later, you’ve worked your way up to a $20 million apartment complex. Then, you pass away and the $20 million apartment complex is inherited by your children.

Now the question is: will your children be required to pay a capital gains tax upon the sale of the $20 million apartment complex if they elect to not execute a 1031 exchange?

The majority of real estate investors know about the benefits of executing the 1031 exchange strategy. As long as the 1031 exchange requirements are met, you can defer capital gains tax upon the sale of a property. As a result, you have more capital to leverage to acquire more or larger properties.

However, one potential major long-term drawback of the 1031 exchange is the large, lump-sum tax payment at the sale of an exchanged property that isn’t 1031’ed into a new deal. One way to effectively eliminate the requirement to pay taxes on your deferred gains is to continue to 1031 until your death.

Suppose, like the “imagine this” story, that you implement the 1031 exchange strategy until you pass away and the property is inherited by your heir. If the property is a replacement property (i.e., a property acquired with a 1031 exchange) that is inherited from your estate, the replacement property will have a stepped-up basis equal to the property’s fair market value. As a result, the deferred gains are effectively eliminated.

Let’s say you sell your first investment for $200,000 with a $50,000 gain at sale. After a handful of 1031 exchanges, you own a property worth $2 million. If you were to pass away prior to selling the $2 million exchanged property and it is inherited by your heir, the basis is stepped-up to the fair market value, which is $2 million. If your heir decides to sell the property at the fair market value, rather than paying a capital gains tax on over $1.8 million, they won’t have to pay capital gains tax at all.

Therefore, the 1031 exchange strategy is a great legacy building tool. As long as you continue to implement the 1031 exchange strategy until your death, you are allowed to pass on all of your capital gains to your heirs tax-free!

Get organized for tax time with Stessa’s free Rental Property Tax Checklist. Make sure you have everything you need to maximize your deductions and file your return on time. Click here to download for free.


Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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Trump’s Tax Reform: Current vs. New Tax Law Chart

On Friday, December 22, 2017, tax reform legislation was signed into law by President Trump.


After the tax plan was signed, my business partner and I had a meeting with our CPA to discuss tax strategies for both the remainder of 2017 and for the upcoming year. They also provided us with the chart below, which summarizes the key provisions of the new law. I recommend meeting with your CPA to determine how the tax reform will impact your business and what tax strategies to implement to maximize your benefits.


2018 tax law


Credit: John Werlhof, CLA Roseville


Disclaimer: The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit


How do you think real estate entrepreneurs will be impacted by the new tax reform?

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Four Strategies to Reduce Your Largest Business Expense – TAXES


As real estate entrepreneurs, do you know what is our biggest expense? It’s not resident related expenses. It’s not interest on our mortgage. It’s TAXES.


We can strategize to decrease other expenses all we want, but if we really want to make the biggest dent in our costs, we must start focusing on minimizing our taxes.


Diane Gardner, a certified tax coach, launched a business with the specific focus of providing tax advice and offering tax planning for real estate investors of all sizes and experience levels. In our recent conversation, she provided four legal ways to reduce our tax bill.


Related: How to Save Thousands of Dollars on Your Taxes Via Cost Segregation


#1 – Right entity type


The first thing you need to do to decrease your tax bill is make sure you are in the right entity type. Many investors, especially beginners, will hold property in their personal names. Not only does this open you up to potential liability issues down the road, but it also opens you up to paying unnecessary taxes.


Diane said, “by being able to move [properties] over possibly into a different type of entity, whether it be an LLC, an S Corp, a C Corp, or something along those line, they were able to do some tax planning with that, because we have more to work with at that point.” For example, she said, “we can look into setting up a management company and hiring maybe a spouse to work in that company, and then being able to write off potentially 100% of all your out-of-pocket medical costs.”


By being in the right entity, there are a lot of nice tax strategies that will decrease your tax bill, which you wouldn’t have been able to take advantage of by keeping the properties in your personal name.


#2 – Automobile deductions


Another basic tax deduction are automobile related expenses, which Diane said are often overlooked. “Make sure that they’re taking advantage of all their auto deductions, whether they’re taking standard mileage or they’re actually tracking actual costs.”


#3 – Meals and entertainment


A third, and also often overlooked tax deduction are meals and entertainment. “How many times are they meeting with potential investors, potential seller, buyers, whatever it might be? Make sure that they’re taking full advantage of that write-off as well.”


This includes meals when interviewing potential team members, meeting with passive investors, hosting an annual real estate conference or monthly meetup group, etc. Just make sure you have a conversation with your CPA to determine what is considered meals and entertainment.


These first three strategies – right entity type, automobile deductions, and meals and entertainment –  are simple and should be implemented immediately to decrease your tax bill this year.


#4 – Hiring family, both children, spouses, AND parents


A more complicated, but lucrative tax strategy is hiring family members to work in your business. You may know that you can hire your children to work in your business, but did you know you can hire your parents as well? Diane’s mom has been working in her business for years. It helps lessen her tax burden, but secondarily, it benefits her mother by providing her with extra income while her “dignity remains intact because now [she’s] feeling worthwhile and important again.”


Diane said, my mom “needs just that extra little bit each month to make ends meet, so I have hired her to work in my business. She fills out a time sheet, just like all my other staff do. She gets paid an hourly rate. We have her do various things around the office, and in the end, I would be helping her whether it came out of my personal pocket or it came out of my business pocket. But by hiring her to work in my business, I’m able to write off that many, versus I just cut her a check out of my personal account. That’s not a write-off for me.”


This strategy is slightly more complicated than the previous three because there is a little more effort and work required. Diane said, “you do want to have a job description and you want to have and keep a time sheet. And you actually have to set them up on payroll. You can’t just give them money and then at the end of the year to do a journal entry and drop this into my books so I can take it off my taxes. You actually have to pay them payroll and withhold the appropriate taxes, and just really make the point that they are a bonified employee, and that you are paying them a reasonable salary or a reasonable hourly wage.”


Related: Three Tax Strategies You Didn’t Know About to Save You Thousands




Taxes are our single greatest expense as real estate entrepreneurs. To decrease your tax bill for this year, implement the following four strategies:


  • Make sure you are in the right entity type
  • Take advantage of all automobile related deductions
  • Start logging and writing-off meals and entertainment
  • Hire family members


For more Best Ever Blog posts on taxes, click here.


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Three Tax Strategies You Didn’t Know About to Save You Thousands


When was the last time your accountant brought you an idea that saved you thousands of dollars in taxes?


That was the question that pushed Travis Jennings, who has educated the wealthy on better techniques to improve their finances, investments, and taxes for over a decade, to launch an automated online platform to share the solutions of the top 1 percent with beginner investors. In our recent conversation, he provided three techniques to save thousands of dollars on this year’s taxes.


Technique #1 – Rent your house to your business


If you create a LLC, then by definition, you are a business owner. As a business owner, there are many different ways to decrease your tax bill. One well known example is deducting the square footage of your home office. However, what most investors don’t know is that they can rent their entire house for business events.


Travis said, “let’s say that I threw a pool party and I invited a friend of mine that was potentially going to become a client. Well, as long as we discuss business and we take notes, I get to rent my home to my business for that day.”


To determine how much in rent you can deduct, go to a site like, look up your homes estimated monthly rent, divide by 30, and that is how much you can write off for each event. For example, let’s say Zillow says your home could potentially be rented for $3,000 a month. That’s $100 per day. If you host a business event once a month, that’s a $1200 savings.


Travis said, “there’s some structure to that. You want to take notes. You want to have [meeting] minutes. You kind of want to briefly write down what you discussed that was business, and just in case one day you ever get audited, you’ll have some proof as to what you did.”


I host a monthly poker event with some friends and investors, so I plan on implementing this strategy immediately, and you should too!


Technique #2 – Hire your kids


Do you have kids? Put them to work and realize even more tax savings. Travis has three kids, and he puts all three to work at his home office. Once your kids turn seven, which is the age of Travis’s youngest, you can hire them.


Travis said, “you may have heard of this, but I’m going to give you a twist that’s even more fun. So what if we hired our kids at the 0% tax rate? What if we paid them $6,300 a year? Well, then effectively what we would be doing is shifting dollars off of my tax return and putting it onto their tax return. And if we’re paying them just enough to be in the 0% tax rate, if I’m in the 40% tax rate, I’ve just saved 40%. So on 3 kids at $6,300 a piece, I’ve just saved myself about $8,000 in taxes.”


Technique #3 – See if you have the right CPA


The biggest mistake a typical real estate investor makes from a tax standpoint is never upgrading accountants. “I would say that most investors – real estate included – don’t start off with the ten million dollar projects,” Travis said. “They build up to it. So then the accounting professional or your tax advisor is typically the advisor that you had in the beginning. I would say that most people don’t grow or they don’t reevaluate their trusted advisors enough. They just roll with what they’re comfortable with.”


The CPA that specializes in new development and a standard CPA, for example, have two completely different skill sets. If you have the wrong CPA for your niche, you could be missing out on huge tax savings.


A great way to determine if your CPA is the right fit, and if they are capable of getting you the most tax savings, Travis said to ask them “Can you tell me about one of the solutions in the last month or so that you implemented with a different client to save them a bunch of money in taxes?” He said, “if they stutter, if they seem unsure how to answer it, then they’re probably not doing a lot of proactive tax planning.”


Related: How to Save Thousands of Dollars on Your Taxes Via Cost Segregation



Which of these three tax strategies will you implement? Leave you answer in the comments below.


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How to Save Thousand of Dollars on Your Taxes Via Cost Segregation


In my conversation with tax expert Jeff Hobbs, he explained a little known and little understood method that is virtually guaranteed to put money in your pocket. The method is called cost segregation, and Jeff explains what it actually is and why every investor should look into the benefits.


What is Cost Segregation?


Cost segregation is the identification of building components and reclassifying the tax life on each of those components. In a cost segregation study, a building is literally broken down into all of its individual components – all the wood, studs, screws, nuts, bolts, cubic yards of concrete, square yards of carpeting, gallons of paint, etc.


Most commercial properties establish a 39-year depreciation schedule, and most residential properties establish a 26.5-year depreciation schedule. However, the IRS assigns a tax-life to each of the individual components. Most components that qualify for accelerated treatments can have their tax life reclassified to either 5, 7, or 15 years:


  • 5-year tax-life components: tangible, personal property assets (carpeting, secondary lighting, process related systems, cabinetry, ceiling fans, etc.)
  • 7-year tax-life components: all telecommunication related systems (cabling, telephone, etc.)
  • 15-year tax-life components: land improvements (parking lots, sidewalk, curbs, landscaping, site features like a flag pole or a pond, etc.)


Why Would An Investor Use Cost Segregation?


Jeff says that the best reason to apply cost segregation is because it puts money in your pocket. For example a typical $1 million asset is going to provide the owner between $50,000 and $150,000 in federal income tax savings. If the study resulted in $80,000 in tax savings and the investor owed the IRS $80,000 in federal income tax, then that just paid 100% of the tax debt!


When Jeff engages with a client, he provides a guarantee! For properties that are sub-$500,000, he guarantees a 300% ROI (return based on cost of services). For properties that are over $500,000, he guarantees a 500% ROI. His average client ROI is 1200%. With the typical $1 million building, the $80,000 tax benefit from the example above would cost between $4000 and $7000, depending on asset size, complexity of asset, where it is located, and the documents that the client has available.


Are Cost Segregations Always Beneficial?


There are only two occasions where a cost segregation study isn’t beneficial. (1) If you are a non-profit organization or (2) you aren’t profitable. In base occasions, you aren’t paying taxes, so getting a tax savings isn’t going to do anything for you.



Everyone wants to save as much as they can on their income taxes. Therefore, at the very least, it pays to look at what the benefits of cost segregation can do for you. A quick Google search of “cost segregation service in (city)” is the best place to start!


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Joe Fairless