Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:06] Speaker B: Hey y'. All. Welcome back to another episode of the short term show. Since it's getting towards the end of the year, a lot of you guys are probably looking toward the short term rental tax strategy, maybe thinking of doing a cost segregation. So today we have a really cool guest to talk about those things. He's an expert in this subject. We have Gian Pazia and he's one of the founders of kbkg, which you guys are probably familiar with. One of the national leader, I guess, in Cost Segregation Studies. CostSegregation.com. he's one of the only people that have provided expert witness on cost segregation before the IRS was pretty cool. Definitely has a really impressive resume when it comes to cost segregations. I'll go ahead and welcome. Gian. How you doing?
[00:00:49] Speaker A: Thank you so much, Avery. Super excited to be here and talk to you and your listeners.
[00:00:54] Speaker B: Yeah, we're. I'm really excited to have you.
[00:00:58] Speaker A: Yeah, yeah.
[00:00:59] Speaker B: So do you want to just kind of introduce yourself to our listeners and give a little background on who you are and what you do, what your expertise is?
[00:01:06] Speaker A: Yeah, sure.
So, you know, my background is, is in structural engineering and I ended up falling into the world of tax. Right. So now we founded KBKG 25+ years ago, which is a tax incentives company.
It was founded on as a cost segregation firm to start with. That's how we got the domain name costsegation.com 25 years ago.
Yeah. And then we've brought into different aspects of tax both for real estate owners and businesses.
And yeah, most of our. We have about 170, 60 employees nationally across the country, do a ton of these studies. And like you said, we do full service cost exodus for really large real estate owners as well as we've created this cost segregation.com platform which is self guided software for smaller real estate owners like your listeners that are buying short term rentals. They can actually walk through, do these cost segregation studies themselves at a really affordable price.
And it's fully backed by our firm kbkg if it ever gets audited.
[00:02:28] Speaker B: Okay, love that. I know everybody. It can be very expensive to get these things done. By the time you pay a tax strategist, then you go to do your cost segregation. So that's definitely something that I think our listeners are interested in. And for those of our listeners who might be new here who aren't as familiar with the short term rental tax strategy and with cost segregations, you can you just give us a brief overview of what segregation analysis is and what it does for an investor.
[00:02:55] Speaker A: Yeah.
So, you know, normally when you buy a piece of real estate, you're supposed to.
You get to write it off because it wears down over time. It depreciates. So the tax law says you buy an asset that wears down over time, you get to. You don't get to write it all off right away, but you get to write it off over time, over the normal life of the property. And so for real estate, it's either 27 and a half years or 39 years, depending on the type of building it is. So that means if you bought, let's say a $500,000 or let's say a $400,000 rental property, you. Step one is you're supposed to figure out how much the land is worth, Right? You're not supposed to write off land, but whatever's left, the building value, let's say that's all building value.
If your building is supposed to be written off over 39 years, you'd get about a $10,000 deduction each year for 39 years for real estate.
But with cost segregation, the tax law allows you to go in and look at the building, all the different components that essentially fit into a different category other than the building. So it's called personal property and land improvements. Things like the ceiling fans or appliances or maybe the electrical to the refrigerator and stove in your unit, those things can be written off right away under the current tax rules.
And so if you take a step back, you know, without a cost segregation study just writing it off a little bit every year, you get about 10,000 each year. With a cost segregation study, you're able to write off as much as 25 or 30% of the building value.
And so comparing those two scenarios, you might be able to write off $100,000 in year one after you do the cost segregation study versus 10,000 in year one. And so that huge change in the amount of depreciation that you get to take as a deduction creates huge value for the real estate owner.
[00:05:27] Speaker B: And guys, just to clarify, because some of y' all are going to run off and get a little too crazy on this. So $100,000 deduction is a reduction in your taxable income. You're not saving a hundred thousand in actual tax payments. It's whatever your tax bracket is of that 100,000, right, John?
[00:05:47] Speaker A: Yeah, yeah, yeah, exactly. So if you're.
If your tax rate is 30% and you get a hundred thousand dollars deduction, you're saving $30,000 in taxes.
[00:06:00] Speaker B: Awesome. So just a Little clarification for those of you who might be new. Still a really, really great strategy, but it's, you know, not the full 100. Don't get crazy.
So who can use these studies in order to get these tax benefits?
[00:06:16] Speaker A: Yeah, so short term rental owners kind of are unique in that, in the tax world.
And so I'm gonna kind of start with that and I'm gonna step back and talk about, you know, normally when you buy a piece of real estate, let's say you're, you know, you, you have a job as a software engineer and you're making $300,000 a year.
If you go out by a rental property and you create all these deductions that we just talked about, you're not allowed to use those deductions against the tax that you pay as a software engineer. Right. It's called, in that case, it's considered a passive activity.
And so, you know, if, if you're a passive investor in real estate, you're not allowed to use those deductions against your, what you call, what I would call active income.
But if, if you were, let's say passive and you had multiple properties and some of those properties were actually kicking off taxable income, you could net all of that together, all of that passive activity together.
Where it gets interesting for short term rental property owners is that the rules are a little bit different because a short term rental property is not considered necessarily a passive activity. If you're spending time providing services to the, you know, to the tenants, which they look at short term rentals more similar to a hotel operator than they do somebody buying an apartment building for long term tenants. Right.
And so because it's, it falls into that same category as hotels and hotel operators, you can actually, if you meet certain criteria and you're active, you're, you're active in the business of a short term rental owner, you can use those deductions from the cost segregation study against your other income. So if you're a software engineer making $300,000 and paying whatever $100,000 in tax from that income, you may be able to use the deductions from the cost sig study against that income.
And so that, the way you do that is through what's commonly known, if you Google it, it's called the short term rental loophole, which some of your listeners may have heard of.
And the way the rule works is that you have to participate, you have to materially participate in that activity. And the rule says that if you're spending 100 hours at least 100 hours a year on the short term rental, and nobody else is spending more time than you on that short term rental, then you meet the criteria. You're considered materially participating in that activity.
I know that's a, that was a mouthful, Avery. So I'll kind of like let you some questions on that.
[00:09:40] Speaker B: All the background we can get. So you have to spend a minimum of 100 hours and more time than anyone else materially participating in the management of this property, right?
[00:09:50] Speaker A: That's correct, yes.
[00:09:53] Speaker B: And this, buying a short term rental for someone who has a W2 job doing something else is the only asset class that you can use this tax benefit to offset your W2 income and not just your other passive income. Right?
[00:10:08] Speaker A: Yeah. When it comes to real estate.
[00:10:11] Speaker B: Gotcha, gotcha. So I see a lot of people, and I want to ask you about this, and I'm sure you've seen it too. A lot of influencers, they're the new hook that every single short term rental influencer uses, is something like.
Or tax influencers too, is something like your greatest tax weapon is a stay at home spouse who can then get real estate professional status so that you can use this cost segregation. But the hang up there is you still have to spend in order to have real estate professional status, something like 750 hours on only real estate, which a stay at home spouse is not doing by default. So I see a lot of people advertising that and saying, okay, now you can go buy all this real estate because your stay at home spouse got their real estate license and now they're a real estate professional. So that's not exactly true, correct?
[00:11:02] Speaker A: Well, there's, there's some merit to it.
I think. What, what is maybe a little misleading is how easy it is to get to that criteria. And, and so, yeah, so the rule is that if, if you or your spouse is considered a real estate professional, this is a different category like you said, and you meet that criteria of, of working 750 hours in real estate that now you can go buy other asset classes like, you know, long term rental properties or commercial properties. Right. And, and as long as you're married, filing, filing jointly. Yeah. You can use the deductions from the properties that you guys own against your other income from your other businesses. Now here's where I think it gets a little bit difficult that people don't realize, I mean, a lot of people hear the strategy like you're talking about. They ask their CPAs and then they realize, you know what this is?
This isn't going to happen. Right. And the reason is, is because it's not just spending 750 hours in real estate. So if you're a real estate agent, for example, then you're showing houses, you can spend 750 hours.
You still don't, you still don't meet the criteria because there's a second layer that's not talked about as much and that's you have to spend 500 of those hours of the 750, 500 of those hours. You have to be managing your own properties, essentially properties that you own. So, so to be able to spend 750 hours on your and then 500 on your own properties, it takes a little bit to get there. Like you can't just buy one property and then tell the IRS that you spent 10 hours a week on that one property with one unit in it. Unless there's like, I don't know, 20 units in there.
Generally you want to get up to about 10 units that you own and are self managing without any, you know, property managers involved before you can, you know, I would say comfortably say that you're spending, you know, that amount of time on your own property. So it's a legit strategy. It just not quite as easy as it is on the short term rental strategy, which is only 100 hours.
[00:13:41] Speaker B: Right, right. So the way that you can still utilize this is by buying a short term rental because then you don't have to have 750 hours to get real estate professional status. You just have to have that 100 and then you can utilize this. So you have some tools, don't you for being, for tracking those hours? Because those are the most important, the most, in my opinion, the most important part of this is tracking and proving your hours in case you get audited.
[00:14:11] Speaker A: Yeah, exactly. So there's two, two tools. I mentioned cost segregation.com, which is that software.
Yeah, we, we launched another tool called Track750Tax. That's the website, Track 750.
And it works for, you know, tracking the 750 hours. That's where the name comes from that. But it also works for short term rental owners that are trying to track the 100 hours that are needed for, for compliance with, with what we talked about earlier. And so yeah, I'm giving that away to your listeners for free and maybe I should. You want me to give the code now or should we wait till later
[00:14:51] Speaker B: or you can go ahead and do it and then we can recap at the end. We'll put it.
[00:14:56] Speaker A: Yeah, sure. Sure. So if you go to that website and you sign up and get in there, it'll take you to the end and ask you to pay.
If you use this code, it'll let you use it for free. So that. That code is track 750 str.
Track 750 str.
So, yeah, that's my gift to your listeners.
[00:15:23] Speaker B: That's a pretty great gift, guys, because that's one of the biggest questions that I get, and I'm not a cpa, about how do I track these hours? How do I keep up with it? And I've heard stories of people being audited, and the few that I've heard that did not make it past the audit, that lost it had more to do with the fact that their log wasn't correct.
And I think because they weren't logging their hours at the time, they waited until, you know, next year, and they get audited and go, oh, crap, let me write my log real quick. And then they had a really hard time being able to actually match up their bank transactions with where they were and what they were doing at the time. So I think these. This tool is really, really helpful for you to be able to track in real time.
So make sure you guys check that out, because you. All of you are always ask me, how do I do this? And it's a really good way to do it.
[00:16:14] Speaker A: Yeah, exactly. It actually coaches you and tells you what qualifies, what kind of time qualifies, what kind of time doesn't.
Measures. Yeah, you can measure other people's time. So it's like you have a cleaning crew that comes in once every few weeks, you know, to make sure that you're working more than anyone else.
[00:16:36] Speaker B: That's awesome, because that's, like, the second question that I get is, well, does this count? Does that count? Like, you got to ask your CPA about that. But there's a lot of things that we want to count that don't necessarily. So that's pretty cool that it tells you what counts and what doesn't.
[00:16:50] Speaker A: Yeah, absolutely.
[00:16:53] Speaker B: All right, Gian, now that we've kind of got the nuts and the bolts and the technical things out of the way, I have a couple more personal questions that I want to ask you. So being one of the only experts that have provided expert witness testimony on cost segregation in front of the irs, I would love to hear what that was like. And, you know, what we can learn from your experience doing that.
[00:17:17] Speaker A: Yeah. Okay, so here's what I'll say.
I've been doing this close to 30 years.
And you know, it's, it's like anything else when you're the, the IRS has a limited time on their hands and they tend to choose their, they pick their fights. Right.
They can be a bully if they know that the taxpayer doesn't have great representation. They will bully that taxpayer and you know, make, tell them that none of the deductions are allowable.
So, you know, I guess that's my, my advice there is make sure if you're going to, if you're going to do any of these strategies, just consider who you're using and make sure that they're, you know, they have a great track record that they've been, there's a history of the company that they're going to be there three, four years from now.
But yeah, going through that experience, I think I learned a lot. Just kind of like the movies, like there's negotiation that happens with the irs and generally, you know, when you're going to tax court, they have to look at the risk of, hey, if we lose this case, all of a sudden now we, we can't bully other taxpayers if we lose this case because now there's something on the record that says that we're wrong. Right. So they would rather negotiate right before the case goes to trial and, and you know, get it out of the way, put that away and then, you know, continue doing the work that they do. So, yeah, you know, that's some, just some interesting insight about how the IRS operates. You know, if they, if they don't think they can win a case, they would rather settle it and, and continue, you know, bullying taxpayers on certain issues like cost segregation.
[00:19:25] Speaker B: Well, something you said there really, excuse me, stuck out to me.
Make sure you pay attention to who you're using.
And it's so important. I also get questions every day about, hey, my, my CPA in Tennessee that I normally use doesn't know about this or says it's not doable and, and they're not familiar. So want to make sure you're choosing a CPA and you're calling around because a lot of people don't realize your CPA does not have to live in the state that you're in. They can be anywhere.
So you want to make sure that you're using someone who is very experienced in the short term rental tax strategy in cost segregation and bonus depreciation, because there's a lot of CPAs out there that are very experienced, but that most of their clients aren't acquiring real estate. And so Maybe they're not as experienced with this particular thing. They have, everybody has different expertise. And you want to make sure that you're interviewing them and that they've done a lot of real estate clients.
[00:20:24] Speaker A: 100%. That's really good advice.
A lot of CPAs out there, a lot of them are just generalists and they take any client that comes to them. And what that means is that they have, you know, 300 clients all spread out through different areas of business. And, and so if you understand the, how big the tax code is and how many rules there are to understand, like that CPA basically is a master of none. Right. Jack of all trades. Master of none. You wanna, you want a specialist, you want the guy that lives and breathes what you do.
[00:21:00] Speaker B: Exactly, exactly.
And is there anything about cost segregation that you feel like our listeners need to hear about that I haven't asked you about?
[00:21:16] Speaker A: No, I think we covered it. I mean, I mentioned just making sure that the company you're using, you're comfortable with, that they're going to be around. There's a history there, all of that stuff. I mean that's the most important thing. It's, it's not getting a report, it's feeling comfortable with the support behind it. Right. And so, you know, for your listeners, I think that's probably number one.
[00:21:44] Speaker B: Okay. And we, we talked about track 750 some, but we have kind of glossed over costsegregation.com.
so what do you want our listeners to know about that? I think, you know, we're going to link that in the show notes so you guys can sign up for that.
But how does that work for just everyday investors? Like it sounds a little bit intimidating maybe if you're new, like, oh, I can't do this myself with a website, so how does that work for new investors?
[00:22:13] Speaker A: Yeah, yeah, great question.
So it's actually super simple. We created this 10 years ago, we launched it and we've actually been through IRS audits with it. 100% success rate. We have South.
Yeah, 100% success for 10 years.
So we were the first to launch a self guided cost segregation software ever. And now there's a few others that have done the same thing.
But we made it super easy. Right. So and, and we started it, we actually called it the Residential Cost segregator because it only works for residential properties.
Now we've actually expanded it into commercial properties, but in, but yeah, it takes about 20 minutes if you've never used it.
And there's videos on there that'll walk you through every step. There's a AI assistant. So the way it works is step one, you enter your property address.
Once you do that, it pulls all the public records that AI can find out there and it starts populating information about your properties, some stuff that you might not even have known, but it's out there.
And then it shows you. It'll say, okay, here's what we found. And then you go through a process of confirming. Okay, yep, it's right. It has three parking spots in the driveway. There's, you know, three bedrooms, two bathrooms. There's laundry in the unit.
But it's going to walk you through several questions and you just have to confirm all those questions. It's going to ask like what kind of flooring is there in the kitchen? Is it? And it's going to give you a pull down menu and there's like six options. It's tile, it's vinyl plank flooring, it's you know, whatever carpet, but it walks you through, you know what, what kind of appliances were there when you purchased it?
Was it fully furnished when you purchase it? These are like little check boxes. Is there landscaping?
And yeah, like I said, it takes 15 to 20 minutes.
If you get stuck on anything, you can invite your cpa. If the last question is like how much is the land versus the building worth?
It actually will go out to the property tax assessor websites for you and figure out what the property tax assessor is, is valuing the land at and it'll tell you that. It'll say, here's what we suggest.
You could use a different number if you want.
If you bought the property in a prior year and your CPA already reported it on your tax return, you can invite them into the software to confirm like what, what you did if you bought the property in a prior year. But all in all, like I said, 20 minutes, you actually don't pay anything until the very end and you get to see what the results are.
So at the end, 20 minutes in, it'll say, okay, after going through this, there's going to be $80,000 of deductions.
If you want to move forward and download the report, go ahead and pay. And the pricing starts at $495 for most short term rental property owners.
[00:25:32] Speaker B: Awesome. And one thing I wanted to ask because you said, did it come furnished when you bought it? I have a question there. So if you buy a property and you are gonna add a whole bunch of stuff to it, so you buy something, let's say it comes fully Furnished, let's just make this a little bit easier. Comes fully furnished, but you're gonna put in nicer furniture and you're gonna add a pool and you're gonna add a putt putt course. And these things.
Do you. Does the cost seg only apply to what was there when you bought it, or does it apply to the things that you then add to it before you place it in service?
[00:26:04] Speaker A: Generally it applies to what you bought beforehand. But our software allows you to, it allows you to add additional costs.
It gets a little more tricky if you're spending a ton of money after you buy it. You might want to call us to have like a full study done. But generally if, let's say you bought a short term rental property for $500,000 and you're putting $50,000 into it, you could use our software. Okay. If you were buying a $300,000 property and putting 500,000 into it, I would say, okay, let's. You probably want to talk to one of our people and have an engineer kind of do the normal full study.
[00:26:55] Speaker B: Gotcha, Gotcha. But the stuff you add to it, renovate or add to it, that can be added into the cost segregation.
[00:27:03] Speaker A: It's not like a wash.
Oh, yeah, for sure.
[00:27:07] Speaker B: Awesome. It's good to know because people ask that a lot and that's a question I'm always like, well, I need to ask somebody that because I don't know.
[00:27:13] Speaker A: Well, let me, let me just, you know, kind of clarify. So if you're, if you're doing anything outside, like you said, putt, putt pool, those things receive the 100% bonus depreciation. So you would do the cost study on what you bought.
And then if you spent money on a pool putt putt stuff outside fencing, that stuff just gets written off. That gets a hundred percent bonus depreciation. So you'd have your caustic study and then you could just either tell your CPA and they would know to write all that stuff off.
[00:27:50] Speaker B: You just write those off as expenses.
Okay, awesome. So we're getting close to the end of the show, close to the last three questions that we ask all of our guests. So before I do that, is there anything related to cost seg, short term rental tax strategy that we need to talk about before we sign off?
[00:28:13] Speaker A: Hey, we pretty much covered everything.
Let me ask you, how's, how's the short term rental kind of business these days?
[00:28:24] Speaker B: So it has been pretty busy this year, surprisingly, because rates have not gone down a whole lot. But we've seen a jump in buyers, which I assume is because of bonus depreciation going back to 100%, you know, second half of last year. So this year's tax people starting in April are like, oh crap, I paid a lot of taxes this year. And so their, their CPAs have kind of started to recommend, hey, you should buy some short term rentals. So it's, I would say it's definitely bounced back quite a bit, but the real estate market as a whole is still pretty tough. Like it's, it's very slow. There's a lot of inventory. So it's a great time to be a buyer because there's so much inventory.
Not a good time to be a seller.
[00:29:08] Speaker A: Yep. Yeah, I'm hearing the same thing. Yeah, great time to be a buyer.
[00:29:13] Speaker B: Yeah. But then, you know, the Internet doesn't want to believe that either. They're like, you're just trying to sell us stuff. But honestly, you know, when it wasn't a good time to be a buyer was 2021, when there were 1,000 offers on every single property. Yeah, the rates were low, but that's what happens when the rates get lower, the demand goes up. Right now because rates are higher, demand is low. That doesn't make it a bad time to buy it. It means you have a lot more options in terms of getting better deals. If this seller isn't going to deal with you and isn't going to negotiate with you, there are 1,000 other sellers sitting out there with their property having sat on the market for three months waiting to negotiate. Not, not everybody's going to, but you have the choice and the option. So 2021, we were like kicking like looking under every rock, shaking all the bushes, trying to find people, properties that other people didn't know about. So right now, in my opinion.
[00:30:05] Speaker A: Yep.
[00:30:06] Speaker B: Yeah.
All right, Gian, are you ready for the last three questions of the short term show?
[00:30:13] Speaker A: Yes, I'm ready.
[00:30:14] Speaker B: All right, so first question.
What would you tell 20 year old Gian if you knew then what you know now
[00:30:24] Speaker A: I'm gonna tell 20 year old Gian that when you're thinking about your career, try not to try to pick a career where you're not trying to sell your time and find, find a career where you're either building products or investing in real estate.
Because, you know, it's that passive income thing. Right. If you can kind of make money while you sleep, that, that's key.
[00:30:55] Speaker B: Good advice leads into our second question. So what advice would you give a new investor specifically short Term rental investor who's getting started today,
[00:31:09] Speaker A: A new investor. I would say, you know, at some point you got to get in the game and, and it's hard to time the market. But now is a great time.
Like we just talked about.
Don't be afraid of leverage and yeah, just get started early because it's that compounding effect.
[00:31:35] Speaker B: Yeah, totally agree with that. And last question, what's your favorite book that's impacted your mindset?
[00:31:43] Speaker A: Yeah, you know, I don't, I'm not a huge reader, but I will talk about a movie I just saw.
I saw, I saw that movie BlackBerry.
I think it was on Netflix the other day. And that's the one about, about, you know, the company BlackBerry, which basically owned the mobile, mobile phone market right before iPhones, they were the company. And I think the lesson from that movie, from that story really is don't get complacent when you're on top. You know, always be paranoid about your compet. Don't underestimate the competitors because now it's flipped and BlackBerry is pretty much worthless.
[00:32:30] Speaker B: Yep, that is true. So they did. I haven't watched that one, so I assume they did underestimate the competitors and that's why they're worthless now.
[00:32:38] Speaker A: Well, yeah, yeah. I don't know if, you know, you remember back then when BlackBerry, it was before iPhone, iPhone basically iPhone came out and BlackBerry said, oh yeah, we're not scared of them. We like our little people, like our little keyboards and they had these little keyboards on the phones that.
And they thought that was their competitive advantage and that people wouldn't want to surf the Internet, you know, on the devices like iPhones. And they, they missed the mark.
[00:33:06] Speaker B: Yeah, they really did. Yeah. I remember my husband had a BlackBerry when we first started dating back in the day and he thought he was the coolest and made him get it.
All right, Gian, thank you again so much for coming on. If our listeners want to find you, find your platforms that they can use. How can they do that?
[00:33:29] Speaker A: Yeah, So I have three websites, but we talked about costsegregation.com. all right. We talked about track 750 tax. You know, hopefully your users can use that.
Our bigger company, our parent company, kbkg.com is where you could find my contact information.
And yeah, I'm on social media.
Hopefully we can put that in your show notes and if people want to, want to get to me.
[00:33:57] Speaker B: Absolutely, we'll put it all there. And again, thank you so much for coming on. And listeners, we will catch you next week.
[00:34:05] Speaker A: Thank you, Avery.
Bye, now.
