JF1571: Pay Less Taxes & Perform Proper Cost Segregation Studies with Alan Goldstein
For those that don’t know, cost segregation is a way of deferring taxes, usually reserved for larger, multi-million dollar properties. However, Alan and his firm perform the studies on smaller properties – even single family homes, if it makes sense for the investor. Find out why and when a cost segregation study would make sense for you. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Alan Goldstein Real Estate Background:
- CPA and has been working with cost segregation studies for over 20 years
- Also a GC, mortgage broker, real estate broker, and an IRS enrolled agent
- Based in Miami, FL
- Say hi to him at http://www.cashflow179.com/
- Best Ever Book: The Millionaire Real Estate Investor
Best Ever Tweet:
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Alan Goldstein. How are you doing, Alan?
Alan Goldstein: Fantastic. And yourself?
Joe Fairless: I am fantastic as well, and welcome to the show. A little bit about Alan – he is a CPA and also has been working with cost segregation studies for over 20 years. He’s also a general contractor, a mortgage broker, a real estate broker and an IRS enrolled agent. He is based in Miami, Florida. With that being said, Alan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Alan Goldstein: Sure, absolutely. My background is in real estate, as a real estate investor, as a real estate broker, and representing taxpayers that have problems with the IRS, and state taxing authorities… And during the course of my work, I stumbled upon cost segregation for one of my clients, and here we are.
I live in Miami, Florida, with my family, and I do business all over the U.S.
Joe Fairless: What is an IRS enrolled agent exactly?
Alan Goldstein: An IRS enrolled agent is an individual that has taken certain exams from the IRS, and then they’re allowed to represent taxpayers in front of the IRS – tax returns, administrative hearings, audits, appeals, that type of stuff.
Joe Fairless: Okay. So if someone is a CPA, do they in addition, in order to do what you’ve just said, have to do additional tests in order to represent people in front of the IRS?
Alan Goldstein: Absolutely not, because the IRS is federal law, it’s not subject to state law. What that means is that if you’re a CPA in Georgia, you can represent someone in California. But most CPA’s end up getting both licenses, that way there’s no confusion, there’s no issue, because a CPA license is state-issued, so some people get very confused. An enrolled agent license is a federal license.
Joe Fairless: What are some typical issues that your clients have with the IRS, where you have to represent them?
Alan Goldstein: 1099 earners are notorious, I would say. That is the bulk of the work. What I mean by that is, for instance, real estate agents and brokers, if you get paid on a 1099, you end up having cashflow issues because you might not have a lot of closings in the pipeline, so by the time something closes, you’re out of cash already, you decide not to pay your quarterly estimated tax payments, and then you end up in trouble with the IRS at the end of the year because you’re gonna owe all of this money, and you don’t have the money to pay it, and then you might get audited, or a lien, or whatever the case may be.
Joe Fairless: In that case — and clearly, if someone is not doing their quarterly estimated tax payments and then you have to represent them, how much can you really help them during the representation?
Alan Goldstein: Well, it depends on the issues involved, obviously. In a situation like this, it depends on the compliance history of the taxpayer, meaning are they doing this every year? Are they ignoring letters? Are they making fun of the IRS? If you have a good profile, then what you can do is obviously the penalty removals if you have a good profile, and enter into some sort of installment agreement where you don’t have to pay all of that money back. A lot of people get worried because they think you have to pay it back.
On the topic of installment agreement, that is the one place where the majority of people mess it up. They say “Well, I can do it myself.” No, you can’t, because a standard form – sure, you can fill out, but there’s additional benefits that are afforded to you that you don’t make use of. So you always wanna have a professional, whoever you decide, to complete the form accurately, because the better the form is completed the better financial picture you have for the IRS.
Most of our clients we end up either not paying anything, or we end up with very low monthly payments, even if they have the money to pay back the IRS, and that’s a form of like a loan with low interest rate for the taxpayer, because they didn’t get to pay that money.
Joe Fairless: What are some of those additional benefits that you mention?
Alan Goldstein: Additional benefits is for instance a full deduction of your property expenses. A lot of people forget things like pest control, pool maintenance, things like that.
As far as an investor is concerned, they have all sorts of things that they can deduct as expenses that they do not list. You have your property insurance, you have all your maintenance, you have everything… And the key is to show the IRS that you’re paper-broke, so that way you pay the least possible or you pay nothing at all.
Joe Fairless: A lot of your focus – correct me if I’m wrong – is on cost segregation; is that accurate?
Alan Goldstein: That’s 100% accurate. We had a major, major accounting firm, and we sold off the part of the accounting work and the tax returns and all that, so we solely specialize in cost segregation and investment advice for real estate, and anything to do with that. If we have to do the return because of the cost segregation, because a lot of professionals do not have an accountant to help them with that, then we will gladly do that also.
Joe Fairless: And from a business standpoint for you all, why focus your efforts on cost segregation?
Alan Goldstein: That’s a very good question. Cost segregation is not used by many people because they either don’t know about it, or it’s reserved to the rich. During the course of our work, I said “Wait a minute, the majority of our clients are not aware of this”, and doing a cost segregation report is a black and white, tangible way to extend your cashflow for your properties… So we said “This we’ve gotta bring to people, because you mostly hear cost segregation with big commercial projects, a 100 million dollar building”, and yeah, it applies to that, but it also applies to the single-family residence. It also applies to a four-unit, a five-unit, a ten-unit, and a lot of people do not understand that.
Joe Fairless: So how does it apply to the smaller properties? Or, perhaps a better question is why do you think people believe it doesn’t apply to smaller properties, compared to larger ones?
Alan Goldstein: Because most of the research that’s done — when you go online and you search, most people that do cost segregation, they focus on the commercial side of it, because there’s more money involved, so a lot of people do not understand that. Or, for instance they’ll contact a company and then the company would say “Oh, it’s single-family, it’s not worth it.” That’s not true. The problem is that that particular firm charges so much that when you do the numbers, it does not make sense. So that’s why you do a cost-benefit analysis, which says “What is the basis of your property? What year did you buy it?” and then you do a report and you determine if it’s worth you doing the cost segregation report or not.
Joe Fairless: So what’s the basis of the property, what year did you buy it, and then when that report is conducted or completed, what is the determining factor on if it should be moved forward or not?
Alan Goldstein: The amount of taxation that you save, and the amount of depreciation that you accelerate. For instance, I’ll give you an example – if you do a 2018 cost segregation report, but you bought the property in 2010 (this is an actual case, by the way), you have an additional (for 2018) $683,000. This is on a 1.6 million dollar property… You have an additional $600,000 that you claim in 2018 for the previous depreciation you didn’t claim, plus $240,000 for 2018.
As you can see, that’s a huge amount of money that you take in depreciation. You don’t pay taxes, or if you pay taxes, it’s very little, and then you can use it against other type of income that you have.
Joe Fairless: And when reviewing that — first off, who conducts that study, and then from a layman’s standpoint… Perhaps someone who has a couple smaller properties, how should they go about assessing that report, so that someone who doesn’t have as much experience can figure out if it’s a go or a no go?
Alan Goldstein: Sure. On our website you have a free calculator that gives you the basic breakdown of it, and then a list by property – whether you have a farm, whether you have a commercial property, single-family, multifamily… And you click on that particular calculator and you enter your basis, and then it gives you the breakdown. It would tell you “For this year, you’re gonna claim x amount of money on deduction.” That way, the person knows if it’s worth it or not. That’s the first step.
Then the second step is where we do a more detailed cost-benefit analysis, at no cost – most companies offer that at no cost – and then it will give you a further breakdown of exactly per-year what the amount is of depreciation, and then you make a decision, how much are you gonna spend versus how much are you gonna save, and if it’s aligned with your goal for whatever you’re gonna do.
Joe Fairless: I’ve talked to some investors about this; they have their own portfolio, and they say essentially that cost segregation and 1031 exchanges – it’s fine, but it’s like kicking a can down the road. You’re just delaying the inevitable. What’s your response to that?
Alan Goldstein: That’s not completely accurate. One area that people miss – the misconception out there is that most accountants do not understand what is asset retirement and partial asset dispositions. What that means is that a typical asset class, based on the IRS table – for instance, let’s say a satellite installed on a house (something simple) has what is called a class life, versus the years that you can depreciate. Let’s say you get ready to sell your building or your property or whatever – once that’s done, and has there been any changes or anything, your accountant has to do a partial disposition calculation, which would tell the IRS exactly what that asset (that satellite dish) is worth at that particular moment in time. What does that mean? That means that maybe it cost you $500, but when you dispose of the property it’s only worth $5. So you use that difference, adjust your basis, and you end up either not paying any taxes, or paying very little taxes. That’s called a partial asset disposition, or asset retirement; different people call it different things. And that’s linked to the PPI (Producers Price Index) for the moment in time that we do the report.
Joe Fairless: Got it. So in that example it’s not kicking the can down the road, because you’re actually saving money when you sell, based on the asset’s value at that point in time, according to the tax code.
Alan Goldstein: Absolutely. And then you also have the additional strategies, which is — for cost segregation you have two ways of doing it. You can deduct everything in the year that you do the report, or you can go back and amend your returns and get all of that money back. So either way, whatever money you save or the money you get back, what most investors do is reinvest that money into properties. That way you don’t end up paying taxes, or you pay very little taxes, because you reinvested that money.
What I mean by that is let’s assume that you invest in a property that the return is greater than whatever you would have paid to the IRS, then you end up paying no taxes in those transactions.
Joe Fairless: And what about the same comment, kicking the can down the road, so not worth doing, on 1031 exchanges? What are your thoughts on that?
Alan Goldstein: A lot of investors use 1031; in fact, sophisticated investors, and by that I mean 20 million, 50 million, 100 million transactions. They actually use the cost segregation, and then the disposition studies, of course, and then the 1031 exchange in order to avoid paying taxes. So it works out really nice. There’s a lot of samples online, sample case studies, and things like that.
Joe Fairless: That’s in order to avoid paying taxes today, but the argument for someone would be “But I’ll eventually have to pay it, so I’m just delaying the inevitable.” Any comment to that?
Alan Goldstein: Well, no, it’s not completely accurate. The reason is because of the study of the disposition. And it’s not that, for instance, you save $100,000 in taxes today, but you sell the property five years and you’ve gotta pay those $100,000. That’s not correct at all, and that’s a common misconception. What people do is when they decide to sell, they go ahead and they do these disposition studies, and based on the assets at that moment in time, you end up paying nothing. And even if you do, it’s ordinary income, which is a way lower tax bracket, so it’s really not a point.
I mean, who wouldn’t this be good for? I guess that’s a good question… It’s someone that just loves to flip houses. If you come to me, for instance, and you say “I flip houses for a living”, well, that’s kind of an issue, because if you flip houses, you’re not long enough in it to take advantage of it, and besides that, the accounting work involved is humongous. So that wouldn’t be a good fit for a flipper.
But if you’re an investor and you have a certain exit strategy, you can actually incorporate all of the calculations into your exit strategy and see what it would look like ten years from now, or five years, or whatever your exit strategy is.
Joe Fairless: Based on your experience working in the industry, what is your best advice ever for real estate investors?
Alan Goldstein: To educate yourself and to partner with someone that has already gone through the steps. I have a saying, I always say “Birds of a feather flock together.” When you start investing, or anything you do in life, you usually end up hanging around your own kind. So what you wanna do is you wanna start accessing where you wanna go, not where you’re at. What I mean by that is let’s say your end goal is a 50 million property, or whatever amount. You wanna start dealing with people that are at that level, because they will cut your time to get to that level and they will show you things that you’re not aware of. For instance, cost segregation… There’s just so many things that you do.
For instance, one problem that I see all the time is that if you go to an unprepared professional that does not know about real estate and they do your returns, a lot of times they put these properties under schedule C, which subjects you to self-employment tax, which does not apply when you’re an investor.
In those cases, you have to amend, put them on schedule E, and all of these things. So you wanna go to someone that that’s all they do. It’s like a doctor… You go to the doctor, your general practitioner – sure, they studied anatomy and physiology, but they’re not specialists let’s say in the heart, so you wanna go to a cardiologist. The same applies to real estate – you wanna be in a team that that’s all they do.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Alan Goldstein: Absolutely.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve recently read?
Alan Goldstein: Millionaire Mindset for Investors.
Joe Fairless: Is there a book that addresses cost segregation that you would recommend?
Alan Goldstein: No. What I would recommend is an actual print-out on the IRS website, which covers cost segregation in great detail, better than any book that touches on the subjects.
Joe Fairless: How quickly does that put someone to sleep?
Alan Goldstein: I would say by the second paragraph. [laughter]
Joe Fairless: What’s a mistake you’ve seen an investor make in your business that we haven’t talked about already?
Alan Goldstein: I would say mostly the deduction on schedule C versus schedule E, or any of the other forms.
Joe Fairless: And if you were to summarize your strategy, or really your expertise in how you help investors, how would you summarize that?
Alan Goldstein: Well, obviously the cost segregation, but then they also need to look at other sources, such as cashflow from rent, cashflow from rent increases, other sources like storage, laundry, parking upgrades, strategies to buy below market, and the upgrades and how is that gonna play into the appreciation of the property, and the mortgage amortizations issue. Those are areas that really need to be covered.
Joe Fairless: Best ever way you like to give back to the community?
Alan Goldstein: I donate a lot of money and a lot of time, representing for the local pro bono area here, where we have cases for the IRS and the people do not have any money… So we go ahead and represent them on behalf of the legal aid and get things resolved for them.
Joe Fairless: Best way the Best Ever listeners can learn more about what you’re doing?
Alan Goldstein: Best way is by contacting our website, cashflow179.com, or doing research on the IRS website regarding cost segregation.
Joe Fairless: If you don’t know what partial asset disposition is – well, now you know, and you can go learn more at Alan’s website, which is in the show notes page.
Alan, thank you so much for talking to us about cost segregation, talking to us about 1031 exchanges a bit, and then overall strategies for how to approach it as a real estate investor to minimize the greatest expense that we have, which is taxes… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Alan Goldstein: Thank you, it’s an honor. Take care.