How You Can Benefit from a Cost Segregation Study with Aaron Burks

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Interview Transcription

ADRIENNE: 
Welcome back, and thanks for listening to the Team Lally Real estate show home of the guaranteed sold program a will buy it I’m Adrienne and I’m Attilio. And if you have any questions just give us a call at 7999596 or check us out online at Teamlally.com.

ATTILIO: 
Our guest today excels not only in the field of real estate but also in the world of finance and taxation. He is a real estate broker and certified public accountant based in Texas. He has a Bachelor of Business Administration and Accounting and a Master of Science in Management of Information Systems both from Texas A and M University. Beyond

ADRIENNE: 
his brokerage activities, he passionately engages in consulting work for real estate investors, focusing on tax strategy through his CPA firm Burks, CPL, CPA PLLC. He specializes in preparing Cost Segregation studies, offering his clients a unique blend of real estate insight and tax optimization strategies. Please welcome today’s guest, Aaron Burks

ATTILIO:
He also enjoys a nice glass of red wine long walks on the beach in the moonlight and writing poetry. Just made that last part up

ADRIENNE:
a man of many talents,

AARON: 
are you doing a great introduction? I appreciate it.

ADRIENNE: 
No, we’re very excited to have you on our show. So, so we know, you know, Aaron through a mastermind group that we’re a part of, and he had posted in this group, all of these things that he has been doing for his family, and then has now branched out to, you know, help others. And I was so excited. I was like, Oh my gosh, like, we need to, you know, we need to learn more about this, we need to use it, we have to just spread the word to our clients, team. And just welcome to the

ATTILIO: 
show. Yeah, if you’re an investor in real estate, this information literally could change your life forever. Yes.

ADRIENNE: 
Especially with the kind of taxes or taxes that we are faced here in Hawaii. Like this is a wonderful strategy.

ATTILIO: 
So our listeners are and they’re like, tell us already. So what is it that we want to talk to you about today?

AARON:
To get me on the show and talk to your team, which I appreciate the invite. Thanks for having me. It’s great. Intro. So I don’t want to bore your listeners too much. I try to make tax strategy as exciting as possible, but mostly for real estate investors. You know, we are talking about depreciation, which a lot of people know of depreciation, if you invest in real estate, it’s the deduction you get every year, when you own a rental property. And 99% of people do it the easy way, your CPAs probably telling you to do it the easy way. And the easy way is depreciating that rental property over 27 years. If it’s a as a residential property, 39 years if it’s a commercial property, that’s gonna take awhile to depreciate. So what we’re talking about what my firm does is produced Cost Segregation studies. And that is a strategy to accelerate that depreciation. So you don’t have to wait 27 years.

ATTILIO: 
Yeah. So you hidden nitrous oxide on that.

ADRIENNE:
So extra extra depreciation right up front? Yeah.

AARON: 
Yes. And that’s important to know, it’s accelerated depreciation, it doesn’t add more depreciation. So you know, if you own this property for 27 and a half years, it’s you’re gonna have the same amount appreciation. But the quicker you can get it, the faster you can get to deductions, you always want to accelerate deductions. You know, in fact, it’s an interest free loan from the government, which is always great. So getting it early in the process and hopefully reinvesting those savings into maybe new properties or you know, the other

ADRIENNE: 
investments you do into the new properties and then you do it again, just keep on repeating

ATTILIO: 
what we wanted to do was have you on the show to speak to the investor that we want them to add you know, everybody knows about the 1031 but we want it to add this additional strategy of Accelerated Cost Segregation to the conversation because that that’s when you have the conversation with them right in the beginning when we’re looking at the new property

AARON:
Yeah, so when they’re purchasing the property is when you cost segregated so you’re going to say you buy a rental property, you want to pick a strategy So strategy one easy methods between seven and a half years in how I like to think of it is in the south IRS looks at it is with the regular method. You’re buying one house so say you buy a house I’m gonna use Texas numbers here. This isn’t Hawaii numbers, just

ATTILIO: 
just double them for Hawaii.

ADRIENNE: 
But you can but but Aaron, you can help anyone anywhere in the United States, your aperture

AARON: 
on my round numbers. Let’s say you buy rent house for $200,000 I’m not sure I’m sure 1000. Our houses there are in Honolulu,

ATTILIO: 
but we got two parking stalls for that.

AARON: 
So let’s say you buy a house for $200,000 You can take that 27 and a half years you’re buying one house for $200,000 Your appreciate over 27 half years. A cost segregation study the I guess more on the other strategy I’ll say aggressive but that almost sounds bad, but it’s not bad. The other strike So what it does is it does an analysis on the property and splits it up into a bunch of different components. So instead of you buying one house for $200,000, you’re buying, you know, a slab Foundation, a wood for the framing, if it has wood framing appliances, flooring, H fac plumbing system electric, you you’re buying all these things that total up to $200,000. Yes. And so it’s doing that analysis to break it up. And then the the reason you can accelerate the depreciation is some of those components have shorter lives between seven half years, a good chunk absolutely has 27 and a half years. So there’s no accelerating that chunk of it. But a good chunk of it like your like your vinyl flooring or appliances, specialty lighting, that sort of thing has five year life.

ATTILIO: 
Well, yeah. All right, I want to know that we’ve been in homes where everything is exactly the same. They got avocado appliances, they got the pink shag carpet, and they’re still watching the Brady Bunch. So I just want to say, and that’s just a joke, but but

ADRIENNE: 
in general, what are you seeing like for like these cost seg studies, that is, you know, the shelf life that we can we can

ATTILIO: 
not be thrown all their people CPAs under the bus. This is the part that you’re talking about right now has should be done by a specialist like you.

ADRIENNE:
Like don’t google it. You have to have a CPA, someone who’s has specialized knowledge and call segregation.

ATTILIO: 
Yes. We’ll continue on continue on how would you describe

AARON:
the CPA? So CPA firms will know what this is you went to your CPA and said, Hey, I want to call segregate this new rental property. They’ve heard of that. They’re familiar generally. They’re typically not quick to recommend it. So that’s what a lot of people have no idea this exists because they’re like, why is my fee paid? I mentioned it and I’m like, Well, don’t get super mad at them. It’s very, very common. If these are not real estate experts, you know, their CPA. Yeah, the IRS has said that he has some CPA firms started doing it, you know, they just kind of like, Oh, you’ll probably I’ll do it. And they just kind of run some numbers, quick numbers kind of throw something together. And the IRS, most CPA firms stopped doing it about four or five years ago, because the IRS released some somewhat strict guidance. And most of it was around Hey, this is less of a CPA thing and more of a real estate and construction, then. So be a part of it. Obviously, no one taxes part of it. But it’s it’s not only CPA, it’s not just knowing tax law. So my from my perspective, I’m a CPA that focuses 100% in real estate. So we do construction, remodeling, property management. And I’m a CPA that works in that industry. So I have both sides. And then using these reports, you personally

ADRIENNE: 
practice this cost segregation as part of your guys strategy. How

ATTILIO: 
many of your family’s wealth portfolio, how many portfolio?

ADRIENNE: 
How many investment properties does your family own?

AARON: 
So we’re, let’s see, we’re at probably, as of now, 150 units Wow. In then, you know, I think last year, we, let’s see, probably 12 to 15 hour catch we, we do an instant offer program, I’m not sure if you all do something similar, but you know, we flipped some we buy. So it’s kind of tough to keep track of but but we can’t segregate them all.

ATTILIO: 
Nice. I

ADRIENNE: 
just I want our listeners to know that you are practicing what you preach. And this is something that you guys have been doing. For

ATTILIO: 
you there. You didn’t get a Holiday Inn last night and get up this morning, we’d like to do some cost segregation. No, no, this

ADRIENNE: 
is something personalized to

AARON: 
and that’s the thing with this, you know, if you if you Google cost segregation, you are going to find some websites that you spend money and use and they spit out some computer generated report. And a lot of times they even have a disclaimer on there that says something like this is an estimate of Cost Segregation not to replace a real asset and, and it’s one of those things that well, you can type it into your tax return and it’s going to work until it doesn’t. And it’s it’s so the IRS has has gotten strict on this is what we do a quality study to be and trying to meet as many of those criteria as we can. And really, that’s the way it works is you get the study done. You’re you give it to your CPA, the CPA typesetting your tax return. You don’t send us IRS, you don’t send it anywhere. If you were to get audited, it would be just like any other support, like a receipt boarding document or a supporting document and give it to them. They’re going to review it and they’re going to evaluate that report for based on their their guidance. So making sure it’s a quality study is very key and making sure that the, the reviewer is competent is is very key. And that’s why, you know, Adrienne, you just asked if if we do commercial and I said, you know, I don’t because I’m not competent in commercial or at least not as competent. to I need is all of my experiences in residential, whether it be construction, remodeling all of the costs, commercialize different cost structures. Yes.

ATTILIO: 
As soon as you run, run out as residential homes, you will move over to commercial which will be never right, not in your lifetime,

ADRIENNE: 
because it’d be tough. I mean, unless unless his family starts investing in commercial because I read the

ATTILIO: 
book called The One Thing, you’ll hire somebody to do that. And he’s think you’ll be even more of an expert with residential. But keep going, keep going, Aaron, because that’s

AARON: 
just why I wouldn’t be, you know, I would never want to do something that jeopardizes Michael, I would never let the IRS look one of my reports and start questioning and be like, Well, what, you know, there’s the experience of commercial deceit and and to question it, and I want to be able to stand on my own. And I’m very confident in the residential construction, the residential remodeling cost type stuff that’s common in the industry, especially for rental homes. So you know, that’s kind of the reasoning. But that’s a big part of the IRS guidance is competency of the making sure the person doing it is knowledgeable enough to where they’re confident that the numbers are reasonable.

ADRIENNE: 
So Aaron, you’re the investors that we’re speaking to, like the word that word like targeting that need to listen Is anyone who bought an investment property in 2023? And maybe even potentially 2022? If they’re willing to amend those returns?

ATTILIO: 
Is that as far back as we can go?

AARON: 
So you can go back further. And a lot of people ask that, can I go back further and complicated. So if I think we’ll give up my contact information, if someone has any questions, feel free to go through that it’s your see if your CPA can do it, there is a method, it’s a form that most CPAs probably haven’t filled out very much, because it’s pretty rare. But there is an avenue to do it. Going back to one year, as long as you haven’t filed the new year. So you mentioned 2022, if you have not filed your 2023 taxes, it would be very easy to amend your 2022. Okay, but once you file a subsequent year, it becomes a little more complicated, because now you got multiple years to deal with. But so anything is going to be 2023. In the big winners in this, and I don’t you know, I don’t think we have time to go into all the different IRS things. But it’s, it’s only going to be able to offset because what this does, the the effective end of this is for these properties you’re buying. Since you’re accelerating all this depreciation, you’re going to take a really big loss on that property you bought in year one. Because you’re you know, you’re not gonna have much income, maybe you bought it in September and rented it out for four months, you have a few rental months, but then you’re gonna take this huge loss or a huge deduction, yes, you’re gonna have a big negative. So it’s important, the IRS has a lot of rules around passive losses. And so the people that will benefit the most and in and get the tax savings immediately are people with other passive income that they can offset. If you don’t have any passive income that you can offset. The IRS has restrictions on if you can use that loss to offset your active income in the IRS by active income. They’re meeting like your day to day stuff. Like if you’re you’re a doctor, your W two income, they don’t let you cross over that. So there’s two kinds of people the first real estate professionals can offset their active income. I call that the Donald Trump tax returns. Your Donald Trump everyone gives everyone gave him a hard time about his taxes. This is what he did. He was just doing it on skyscrapers instead of single family houses. But you can do it on a single family house. So he’s taken the big losses. Well, since he’s a real estate professional, he can offset all of his income with it. That’s why he pays no taxes and a lot of those tax returns he released. Yes, not everybody can do that. So the second group of people that really benefit are people with other passive income, not stocks, we’re talking about really other rentals. And you could even go into other passive income type. Rental, like an oil and gas partnership might not be big and why it’s big in Texas, though. So if someone’s got oil and gas, you know, a passive interest, not active interest in oil gas, but they you know, they invest in cattle and they invest in oil and gas and they invest in real estate. So they have a lot of passive income. Well, you can offset that passive income with these big losses. So a person that would really really be a perfect candidate is someone that has other rentals that maybe they’ve owned for several years. Yes, you know, lot of times those other rentals that you’ve owned for several years, they’re they’re posting big gains, you know, maybe, you know, maybe someone’s got five houses making $5,000 a year, on average. So that’s $25,000 worth buying one house and cost segregating, it’s going to take a lot that wipes away that 25,000 and potentially more,

ATTILIO:
or you could not do this and just pay Uncle Sam all the taxes on passive income,

AARON: 
you would pay Uncle Sam taxes on the passive income. Exactly. So that would be the alternative that we want to avoid. And if you if you do exceed your passive income, and you’re, you know, I got 30,000 passive income, I’m gonna take this big $50,000 loss, it rolls forward to the future year, we’re gonna get the beneficiary

ADRIENNE:
over.

ATTILIO:
Yeah, so if you don’t use it or not use it or lose it.

AARON: 
Exactly. So you just have to make sure that you take care of the future year’s income. So it’s not it’s not going to last but when we’re talking the big numbers year one, kind of a huge tax benefit, you just wanna make sure you can actually realize it. And then the third category, I’ll say this, and I don’t even think I said this on a yells team meeting that I presented to, but short term rentals, or short term rentals, and I’m not sure if Hawaii is vague with that, or how much he already got a few

ADRIENNE: 
there. But we got a few. There’s quite a few short term rentals scattered throughout the islands. Yeah,

AARON: 
well, short term rentals, if you meet IRS guidelines on what is a short term rental, those are not passive income. They’re active, you know, they’re not considered like a rental property, they’re considered a business as short term. So it’s almost like you own a hotel, not a rental property in the traditional sense. Yes. So those you can offset w two income in year one, because it’s there is considered an active business. So just make sure with your CPA, because again, I don’t prepare the taxes. I don’t give specific tax advice on like someone’s specific return. I’m just doing the Cost Segregation report. So I just want to make sure you don’t get my report, they, they give it to their CPA and type it in and nothing changes, because they don’t they don’t meet the criteria. So yeah, depends on if you have a management company, for your short term rental and a lot of different tests. But you can ask your CPA if you qualify. And if if a cost segregation study would wouldn’t benefit you. With short term goals, if you sell and make sure you spend the amount of time the virus requires you can, you can use that to offset your day to day. So

ADRIENNE:
So Aaron, why don’t a lot of investors follow this strategy? What’s been your experience when you come across new clients?

ATTILIO: 
And the CPA is not mentioned yet? Right?

AARON: 
Well, CPAs aren’t mentioned and real estate agents aren’t mentioned it. It’s kind of like realtors are very quick to say, don’t give tax advice. You know, don’t don’t talk about it. Like why do you can talk about it generally, but one real estate if people don’t know about it, and CPAs don’t bring it up. And it’s relatively new. It’s been around forever, for the Donald Trump’s of the world around forever for commercial new developments. Trump’s tax law in 2017 is what expanded it to non new construction properties, like new to you, but not new construction, just buying or rent house something else? Yeah. So that was just 2017 that it expanded into it. So it’s still relatively new. And his tax law essentially brought it to the everyday investor. This is not just for the commercial, new construction, commercial developments, you know, which are typically kind of your real financial guys are handled now. So they’ve heard of it. And so it’s their kind of secret. But this is for you know, people you if you’re a real estate investor as buying single family or duplexes or any real property, and you’ve got a couple of them, like I mentioned earlier, it’s for people have multiple rentals benefit the most. Yeah, because they can wipe away all their other income. Yeah. So

ADRIENNE: 
Aaron, with all these, all the savings, it sounds like this cost segregation study would be very expensive. And, you know, let’s let’s speak to that, like how attainable is this for your typical real estate investor who do this report? So

AARON: 
for a single family home, I charge $695. And a lot of gifts, and I don’t do it based on how much it cost. I do have some reasonable caps on you know, I’m probably not going to do like a $3 million house but you’re kind of more traditional rentals. Homes, that’s my price multifamily. Like small multifamily has a little bit higher, but still very reasonable. I don’t base my compensation on tax savings. That’s another thing the IRS looks at. Yes. On a quality study, while it’s like are you basically working on contingency, because then it encourages the person that’s making the report to fluff the numbers as much as possible. Yes. So I don’t do that video, I’m trying to be as good as accurate as possible. Make sure my compensation is not tied to specific and then fit CPAs are supposed to do that, in general. You know your CPA if the if your CPA is charging based on how big of a refund that you’re getting? They’re they’re breaking some IRS guidelines. Yeah, sure. But so yeah, very try to be very reasonable. And my goal is just long term, you know, I’m in the stages of the long term, I want to kind of make this a closing cost for real estate investors. Life isn’t just something you do when you buy a rental property, to get some tax benefits up front, and then roll it forward to the to the next one, potentially, and it kind of becomes a snowball.

ATTILIO: 
Well, we’re, we had you on the show, because we want to get you going, you know, this is probably a standard country conversation at the high mucky muck Country Club, but we want to bring it to the neighborhood, neighborhood club house that you rent out for your baby’s first birthday. And maybe you don’t own some 40 unit high rise, but maybe you own a couple investment properties, and you just want to build a little bit of wealth for your family and have a strategy tears have a

ADRIENNE: 
strategy to continue to build that wealth. And by getting this tax savings, you automatically you get that down payment for the next investment property.

ATTILIO: 
Yeah, and reduce that passive income taxes

AARON: 
on, you know, you get this big tax benefit was it a lot of times, if you’re leveraging when you purchase need to get in a loan, a lot of times the tax benefits if you can realize 100% of the deductions. A lot of the times it’s a good chunk of the downpayment that you just put down on the property. Yes. So you know, might not be all of it. But if instead of putting, say you’re putting 20% out on the property, well, if you can get eight to 10%, back as part of the strategy, that you just put half down, you know, half as much as you were planning, and it gets you halfway to the next one. Yeah. And that’s what we’re talking about. We’re just you mentioned snowballing.

ATTILIO: 
Gotcha. Well, awesome strategy. And like you said, I think a lot of people get weary of hearing something and thinking, Well, I’ve never heard of that before, we’ll just be like you said, you’ve never heard about Bata before, because you’re not rubbing elbows, with, you know, the big commercial developers down at the $100,000 apiece, membership Country Club. But

ADRIENNE: 
and this is something that’s newer, as of 2017, making it available to like the everyday kind of investors. So, so

ATTILIO: 
maybe we can maybe with the introduction to Aaron, we can help you deal with Donald Trump on your taxes.

AARON: 
That’s right. That would be great. Probably a lot lower numbers overall. Yeah, you’ll get the same result. Yeah, he

ATTILIO: 
had a couple extra zeros on the end of his tax return. But it’s the same, you know, we had talked about it on our show, Gary Keller had us read the book called unlimited power by Tony Robbins, and And fast forward to today how human beings develop power. And I don’t mean, like Dr. Evil taking over the world, but I mean, just accumulating wealth to pass on and have a succession plan. And this is what he said it was specialized knowledge. And that’s what Aaron has, and is what Aaron has brought to our listeners today is specialized knowledge, I would say, the worst thing that can happen to anybody hearing this information, and you spoke to Aaron, I think the worst thing that could happen is that you would say to yourself, I wish I knew about this sooner, got nothing to lose a conversation.

AARON: 
And I’ll just say, I’m quick to tell people, I’m happy to give up my contact information. A lot of times, I’ve had several people call me and they’re like, here’s my situation, I say, look, you’re really not going to benefit from it. And just what the way your tax situation is, you’re not going to benefit my so I’m not going to sell you something you’re not going to be able to get benefit from that doesn’t help me. No snake oil here.

ADRIENNE: 
That’s right. Yeah. And we wouldn’t have someone like you on our show. And the you know, shouting to the art community about this wonderful strategy. If that was the way

ATTILIO: 
this the awesome reputation of your family having known you guys group for many, many years. The other thing is age, and I will be doing this personally, ourselves. And so we’re

ADRIENNE: 
looking forward to buying a residential property Aaron so that you can cost segregate it for us and

ATTILIO: 
giving you in first in hand Aaron Burke’s testimonial that you can what I’ve heard, I forgot what show it was, and you can take that to the bank. Yeah. All right. Well, thank you, Aaron. Was there any questions that we should have asked or situations or stories that you wanted to share that we didn’t that we didn’t go over? Maybe

ADRIENNE:
a success story? You could you share an example of a success story before we let you go? Yeah.

AARON: 
So the last report, I don’t have the numbers in front of me. You know, the last group reports I did was for a client with a three properties. And the big thing that really helped him was what we talked about a little bit earlier about amending his 2020 tax or 2022. Tax Returns nice. Because what he said was like, oh, man, I bought two properties last year. And I mentioned toleration, my CPA, and he didn’t know anyone that did it. So we didn’t do it. Yeah. And I was like, I would ask him if he can amend you no big deal. And he talked to a CPA CPA was like, yes, definitely. We will men we will. And pay CPA didn’t charge him. I’m not sure if most but well, he’s like, we’ll do it. No, no big deal. Like if you had complications, definitely good idea. So that was just a slam dunk for him. Because it’s when you follow that amended texture, and you get a refund on the tax during the fall last year. So it’s just great. He had two properties. And not big properties, either. I mean, you know, they’re these are multifamily properties, and not like really high end or anything, I think you’re in the 200,000. So it doesn’t have to be big property. That other person just recently asked, you know, what’s too small to make it worth it? And I’m thinking she’s gonna say like, she bought some 70,000 Our house well, she was armature 1000 Our house so definitely, definitely doable at a moderate level. So, you know, amending the 2020 tax turns out was a really good idea that helped him out and you know, it’s glad always glad to be able to help them.

ATTILIO:
Yeah. And in Hawaii, Aaron you know, I mean, condos and sells 500,000 single family homes, about about a million, about a million. So you know, what your what it’s like you’re a doctor, and you know about penicillin. And then I’m a patient as like, everybody, everybody around me dies from infections. What’s this? What’s this penicillin mumbo jumbo? No, you just didn’t know about it. And then you took the shot and you didn’t die? And I don’t think you’ve killed anybody with a cost segregation yet. Right.

ADRIENNE:
I saved them a lot of times. Would

ATTILIO: 
you say them a lot of taxes? Not that

AARON: 
I know. But I haven’t heard from those people. So I’m not sure.

ATTILIO: 
Yeah, maybe they like they tripped on the way to the mailbox with their big tax refund and sprained an ankle. That was the worst. But anyway. All right.

ADRIENNE:
Well, we are coming to the end of our show, Aaron, and we just really appreciate you so much your time and knowledge, your specialized knowledge. And let’s give out your contact info. Yeah. Is

ATTILIO: 
it the 903? Number? Sure, yes,

AARON:
my cell phone I give out my cell phone. It’s 9033161913 is my cell. Okay, my email, if you’d like to email is Aaron aaron@Tylerhousehunters.com.

ATTILIO: 
All right. And we’ll have that on our website also, and we’ll have you on the show for the second date update. That’s right when we buy a property and actually do this. Thank you, Aaron. Thank you. You’re welcome. Thanks for having me. All right.

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