Investor · Anchorage, AK · Member since 2018 · 73 posts · 75 votes
Hello everyone...
I just sat down with a potential CPA to discuss my taxes and potential real estate issues. She told me that she had plenty of experience with real estate and that many of her other clients have investment property, but a few things that she said stuck out to me as contrary to what I was expecting to hear. Wondering if some of the CPAs who specialize in real estate can chime in. (For reference, I currently own one single family home as a rental in addition to the condo that I live in. My wife and I are looking at investing in medium size multi-family properties in the near future but don't own any yet)...
1- Cost segregation. She said that you have to hire a specially certified company to do a cost segregation analysis. This can run upwards of $25,000 and so she's never seen a situation where it's worth it.
2- 1031 exchanges. She said that she doesn't typically like them. They're rarely good for her clients. She will run an analysis and they usually end up deciding to pay the taxes now rather than defer them to later. Her main point with this is that capital gains taxes are extremely low right now and no one knows what they'll be in the distant future whenever we decide to pay the taxes on the final sale of whatever property we are holding.
I understand a lot of this "depends", but I appreciate your thoughts!
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
7y
Wow yeah I normally try to defend CPAs but not in this instance.
Cost seg studies will usually range from $3k to $8k. The higher end being large multi-million dollar properties. @Yonah Weiss.
I am sure $25k cost seg studies exist but I’ve never seen one and we work with some pretty big syndicates.
I can get behind the 1031 being a bad idea for certain reasons but definitely 100% not because capital gain taxes are “low.” I mean are you kidding? Obamacare jacked the rate up by 3.8% if MAGI is over $250k.
So yes, you have cause to be concerned. Honestly I would avoid this person at all costs. They are providing a large amount of misinformation on relatively common (for CPAs) tax topics.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
7y
Wow yeah I normally try to defend CPAs but not in this instance.
Cost seg studies will usually range from $3k to $8k. The higher end being large multi-million dollar properties. @Yonah Weiss.
I am sure $25k cost seg studies exist but I’ve never seen one and we work with some pretty big syndicates.
I can get behind the 1031 being a bad idea for certain reasons but definitely 100% not because capital gain taxes are “low.” I mean are you kidding? Obamacare jacked the rate up by 3.8% if MAGI is over $250k.
So yes, you have cause to be concerned. Honestly I would avoid this person at all costs. They are providing a large amount of misinformation on relatively common (for CPAs) tax topics.
@Allen S. I agree with Brandon. I once had a client that told me that he was quoted $30K for a cost seg, so when we quoted him $5K he was shocked. The truth is, about 10+ years ago, most firms were charging 5 figures, but times have changed.
The best would be to reach out to a cost segregation firm, and get a free feasibility analysis, and see what the projected cost, and tax benefits would be, and make an educated decision for your personal tax situation.
I rarely see situations where it's not worth it, especially if the property was purchased for upwards of $500K.
Finance 101, my friend, a dollar today is worth more than a dollar tomorrow. Unless you truly believe that Uncle Sam will use your money better than you would yourself, why on earth give it to them, when you legally don't have to?!
Investor · Anchorage, AK · Member since 2018 · 73 posts · 75 votes
7y
Thanks for the input @Yonah Weiss an @Brandon Hall!
Currently, our only investment property is in the Midwest, and is worth ~$200k. I can’t write off the losses on my yearly taxes, but we don’t plan to own that house for 27.5 years so I do want to depreciate it as much as I can while we have it. Looking forward though I definitely want to find someone who is well versed in real estate issues like this. I’m sure cost segregation is just one of a thousand topics we could go over, and I am even more concernd about the questions i dont k ow to ask than the ones I know to ask.
On another note, how important do you think it is to have a local CPA? We have no state income taxes unless I set up a C-corp and we’re a long way from that point.
Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 977 votes
7y
@Allen S. , you do not need a local CPA. Most of the accountants on this site have clients in multiple states. Technology makes having an out of state accountant the same as a local accountant. Good luck.
I am not shocked that the accountant you interviewed mentioned that he is capable of doing your tax return and has many clients with similar profiles as you. That is what most "jack of all trade" accountants will say because no one wants to lose business; especially if it means potentially getting hundreds of money forever(assuming you would be his client forever).
Ultimately, you asked some appropriate questions but he gave incorrect answers. I would continue to interview other CPA's. Luckily, there are many CPA's on this board who regularly post and respond to inquiries on this website. You should interview a couple and see who you connect with the most.
Investor · Anchorage, AK · Member since 2018 · 73 posts · 75 votes
7y
Thanks @Basit Siddiqi!
At what point would you need two (or more) specialists for your situation? We will be starting a family farm this year, so I am interested in finding someone who specializes in ag. With our ambitions in owning rental and investment property, a real estate CPA is also desirable. I really don’t think that our situation is terribly complicated, and these are all good problems to have, but at some point a CPA can’t specialize in everything or he’s back to being the jack of all trades you mentioned ...
What’s the point of paying for a cost segregation so you can depreciate faster if you are already at an income that doesn’t allow you to deduct the real estate losses? (You wrote that you can’t wrote off your property’s losses on your taxes in your post.) Paying to get more losses you can’t use doesn’t seem to make too much sense. Especially on a $200k (including undepreciable land I assume.) property.
Ps. I just re-read your post and you said it’s worth $200k, which of course doesn’t matter for depreciation or segregation. All that matters if what you paid for the building.
Pps. If you were simply planning for future purchases (although you mentioned you didn’t plan to own the current rental for 27 years which is why I assume you were talking about it.) ignore everything I typed above and good luck. But I wouldn’t look too far in to segregation until you get to at least $500k worth of buildings not including land.
Investor · Anchorage, AK · Member since 2018 · 73 posts · 75 votes
7y
@Bill Brandt
Your questions are exactly the kind of discussion I had expected to have on this topic with a CPA. Needless to say that I was surprised when the idea was summarily dismissed. The cost segregation might not be a big deal now with only one relatively inexpensive property, but as we grow our portfolio I want to make sure that we are making smart tax decisions alongside our investment decisions. Finding the right CPA for our situation is the first of these decisions...
We're reading your interpretation of what your CPA said, so maybe she actually phrased it better than how it sounds. But if we take it literally, then I'm with @Brandon Hall: look elsewhere. As you stated yourself, everyone's circumstances are different, but summarily dismissing a common tax planning idea is bad.
Cost seg does make a lot of sense when you have room for more deductions from your rentals. Especially on multi-family properties. The new tax law provided additional opportunities to benefit from cost seg. The cost of cost seg has to be considered, but $25k is certainly not normal. $2k-$5k is common. BP has several cost seg experts, including @Yonah Weiss and @Paul Caputo.
1031s have helped thousands of investors to accelerate their wealth building. Yes, there are situations when 1031s do not help much, and paying tax can be a preferred option. For example, when you have a lot of accumulated losses. I have also seen too many investors acquiring bad investments in a 1031 rush when they were preoccupied with tax savings over the long-term investment planning. So yes, 1031s are not always the way to go, but more often than not they are. Again, we have BP experts such as @Bill Exeter and @Dave Foster.
Combining cost seg with 1031 traditionally amplified their power, however the new tax law created complications in combining those two strategies. Make sure to use a real tax expert specializing in REI, not just someone who claims to have investor clients.
At what point would you need two (or more) specialists for your situation? We will be starting a family farm this year, so I am interested in finding someone who specializes in ag. With our ambitions in owning rental and investment property, a real estate CPA is also desirable. I really don’t think that our situation is terribly complicated, and these are all good problems to have, but at some point a CPA can’t specialize in everything or he’s back to being the jack of all trades you mentioned ...
Excellent question. It is very hard to find a CPA who is a true expert in two different industries. All of us here on BP are REI specialists. In my firm, we periodically meet investors who have farms on the side. We tell them upfront that we're not experts in farming, which means that we're not keeping up to date with the specific tax laws and loopholes and whatnot.
Your choices are basically these:
Find a larger multi-industry CPA firm that have accountants specializing in both areas and hope that they have internal systems to engage multiple specialists in your project. This will be the most expensive route.
Hire a REI expert (I would recommend from our BP community) and take the small risk of missing out on something specific to farming. If your farming operation is small and straightforward, this may be the best route.
Hire a REI expert for the main job and also hire a second CPA, a farming specialist, to only prepare the farming part. Then have the first CPA integrate it in the tax return. This is a good idea if your farming operation is complex or large.
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@Allen S. Well you’ve heard it from investors, cpas, cost seg specialists, so here’s the 1031 guys opinion: any blanket statement about a process without significant experience in the process and in depth knowledge of the clients specific situation is reckless and irresponsible.
Cost segment, 1031, having a second helping of turkey, taking an afternoon nap and a million other things are never always going to the right thing to do. But those generalities of that cpa do fly in the face of the approximately 500,000 folks who will do 1031s in 2018.
And they don’t take into account the strategic client specific analysis that goes far beyond a simple calculation of gain.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
7y
With a 1031 exchange it's not just capital gains. There is currently Medicare tax, depreciation recapture, and state income tax in certain situations. So I have some CA clients where if they did not exchange they could have up to about 50% of their equity gain taken for taxes!
It is generally true that you need to plan for 1031 exchanges in advance. I have multiple clients going right now for commercial properties with them. Biggest mistake I see is people sell their property and think the 45 day ID period is plenty of time. They get a euphoria from the sale and go on vacation etc. Then they come back with maybe 3 weeks left. Poor planning has them dumping into something non-optimal. Sellers love these poor planners for 1031 especially if all cash buyers as they can stick it to them and have them pay below market cap rates with no appraisal.
Proper planning is critical to the success of a 1031 exchange. We like to see due diligence early in 1031 ID period before locking it as one of the 3 options. If a seller withholds until you go under PSA agreement then you can find something bad out and have to go to the next option.
I have also seen people say they will shoot for some really high cap rate like an 8 and then mess around and in the end settle for a 6 cap. Instead if they would have been more realistic they might have landed a high quality property in the high 6's for cap rate.
One of my clients just finished a cost seg on a retail center about 6 million and the new evaluation has given them about another 1,000,000 in depreciation value to write down over time.
Real estate and taxes are highly situational. If for instance a CPA is dealing with lower net worth clients then yes there is a possibility that the taxes they pay for not doing a 1031 exchange are more nominal compared to what they make for incomes etc. When a 1031 is deferring 6 and 7 figures then the amount can get much more substantial.
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Michael Plaks "In my firm, we periodically meet investors who have farms on the side. We tell them upfront that we're not experts in farming, which means that we're not keeping up to date with the specific tax laws and loopholes and whatnot."
Farming? That's just digging in the dirt right? ; )
Cost Segregation Specialist · Naperville, IL · Member since 2016 · 204 posts · 168 votes
7y
@Allen S. I'd agree with the rest of the chorus here and recommend you keep searching. With only having one property you have a lot of time to figure things out, but having solid advisors early on can be the difference between having 20 properties 5 years from now and having 3 properties 5 years from now. This particular CPA sounds very much like a jack-of-all and master-of-none which may work for some people but is terrible for real estate.
Cost segregation is my area of expertise so I can say this CPA may have a rudimentary understanding, but obviously doesn't really get it. Many years ago the only way to get a cost segregation study done was to engage a large accounting firm that has an engineering department. Back then cost seg would be minimum $25,000, but was generally closer to $100,000 so it did only make sense with large commercial properties. A lot has changed over the past 15-20 years in the cost seg space. Perhaps the most important development was the publishing of the IRS Cost Segregation Audit Techniques Guide in 2004. That made it possible for smaller firms focusing on cost segregation to form which has lowered the cost significantly. Without the huge overhead costs of a large accounting firm, independent cost seg firms can get the same work done (often done better) at a fraction of the cost of the big accounting firms.
So to be fair there was a time when this CPA was correct about the $25k cost seg (You can still find big accounting firms that will charge this) but today there are many cost seg firms that can get this done at a much lower cost.
Since you're already at a taxable loss on the property cost seg doesn't really matter until you start showing some passive income. Nice thing is you can get passive income from other sources and use the losses from cost seg on this property in the future. As long as the rules stay the same you'll be able to do cost seg in the future and get the benefits when you can actually use them.
It's a bit shocking to hear a CPA who "has plenty of experience with real estate" claim 1031 exchanges are not good for her clients. Of course nothing is guaranteed when we're talking about future tax law, but claiming it's better to pay capital gains now at "this low rate" than taking advantage of time-value of money and deferring the tax possibly forever just doesn't make sense. If you can not pay taxes it's better than paying taxes basically all the time. Again, it sounds like this CPA just doesn't get it.
A lot of the CPAs who chimed in here would be a good place to start in finding someone who actually specializes in real estate @Michael Plaks@Brandon Hall@Basit Siddiqi and several others on BP would be able to help you with this and probably point you in the direction of someone who specializes in agriculture. It's always better to have several experts that each handle one thing very well than one person who says they can handle everything but really can't, because no one can!
@Michael Plaks "In my firm, we periodically meet investors who have farms on the side. We tell them upfront that we're not experts in farming, which means that we're not keeping up to date with the specific tax laws and loopholes and whatnot."
Farming? That's just digging in the dirt right? ; )
@Allen S. Well you’ve heard it from investors, cpas, cost seg specialists, so here’s the 1031 guys opinion: any blanket statement about a process without significant experience in the process and in depth knowledge of the clients specific situation is reckless and irresponsible.
Cost segment, 1031, having a second helping of turkey, taking an afternoon nap and a million other things are never always going to the right thing to do. But those generalities of that cpa do fly in the face of the approximately 500,000 folks who will do 1031s in 2018.
I rarely disagree with Dave, but I have to on this one. An afternoon nap is always the right thing to do. Always.
Investor · Anchorage, AK · Member since 2018 · 73 posts · 75 votes
7y
Wow! Many thanks to all of the replies and opinions today. This is exactly why I joined BP! The turkey was good, the second slice of pie was not a mistake, and I’ve gleaned more substance and additional things to think about and plan for from this discussion than from the orig8nal CPA. The search continues!
Specialist · McKinney, TX · Member since 2012 · 14 posts · 4 votes
7y
Hello Allen,
Happy "post-Thanksgiving!" @Paul Caputo along with @Michael Plaks and others with similar input are correct. As a 22-year cost segregation Architect and veteran in this industry, I would like to share a few insights.
Accelerated depreciation is NOT the only consideration for cost segregation. While you may not "need" additional depreciation to add to your NOLs, it does not mean that you should not employ it. One, cost segregation allows you to meet the Tangible Property Regulations as required by the IRS. Take special note of the first section - Do the final tangibles regulations apply to you? In essence, in order for you to meet the TPR under the de minimis safe harbor deduction threshold, cost segregation is necessary. Two, if you are an investor meeting the 750 hours threshold you are not subject to the passive loss limitations. This doesn't mean you can use the accelerated depreciation, but it does mean that as your income grows from your investment portfolio that your available/usable "write-offs" will grow commensurate with your income. Included in that consideration is the decision about electing 100% bonus depreciation. A CSS today doesn't have to include bonus treatment. If your income and portfolio have grown to the point you can use the bonus depreciation in, say, 3 years, you can file Form 3115 and take a 481(a) adjustment of the 100% bonus depreciation in that current year (2021). No amended returns would be required as it is granted automatic consent. Three, MACRS depreciation is required when there are contemporaneous records available (a fixed asset schedule and HUD statement).
I want to address one more point about fees before I part. I read all of the replies in this post and have a somewhat "contrary" opinion. While the $25,000 figure that was mentioned by the CPA you spoke to is high as an "esoteric" figure, it isn't necessarily "high." That is relative to the size, scope and complexity of the project - not to mention availability of pertinent documents (drawings, AIAs, GLS, bid documents, appraisal, etc.). Time is money in any industry. An engineer with 3 to 5 years of experience in cost segregation (including time with a quality tax accounting firm) is about $50/hour. Those with at least 10 to 15 years' experience are $100 to $150/hour. For small projects under $2M in cost-basis, virtually any cost seg engineer with that "5-year" mark met can engineer a quality study with about 40 to 50 hours invested. This does not include the field survey and it's associated travel costs, nor does it include an internal review by the engineering director/team or O&P for the firm. So, let's do the math. $50/hour with 50 hours invested, that's $2,500 engineering cost. Add travel (airfare, rental car, hotel, food, and per diem) - this number will vary, but it's safe to say this is a grand. Now we're at $3,500. The engineering director is $150/hour and about 2 hours is required to verify the original calculations (~$300). Finally, depending on the size of the cost segregation firm, O&P is calculated at 2x to 3x the "hard cost." So, $3,800 x2 is $7,600 or, x3 is $11,400. These costs include the full study and all substantiating reports, and normally full IRS audit protection. If a Form 3115 is required, some firms include that in their deliverable and some do not. Always ask. If the project is larger than $2M, then the fee will escalate from there.
Here's why I am sharing this. Cost segregation is NOT just running a few simple calculations, entering it into a calculator or Excel spreadsheet and having a set of numbers spit out. That's insane and dangerous to believe it is possible. It's a bastardization of the industry. Cost segregation IS a time-intensive application of highly-detailed and specialized knowledge of building construction in addition to a full and vast understanding of the Internal Revenue Code. Does anybody in their right mind really believe that something this technical can be accomplished in any manner short of what I described? Beware of that person if you are persuaded to believe otherwise.
Make no mistake about it. There are hundreds, if not thousands, claiming cost segregation experience and credentials. It doesn't make it so. Do your research. Look for a firm with at least a decade of experience employing only credentialed engineering/architectural staff. What is their IRS audit history? How many studies performed? What is included in their deliverable? What is their threshold for conducting a study and still deliver at least a 2:1 ROI? Look, when you look for an Oncologist for your child, do you seek out just anyone or do you seek out the best? Why settle for second best in a cost seg firm either?
