The first thing I was taught when I entered the real estate business was to say ‘I don’t know’ when I didn’t. I’ve followed that advice strictly from my first day in the office. I’ll say ‘I’m sorry’ in advance to all the CPA’s out there who say ‘ I don’t know’ when indeed they’re ignorant about some portion of tax law. God knows the average real estate agent wouldn’t admit ignorance to anything. How many of us blithely assume our accountant knows how to file a tax return for a restaurant as well as he does for a mining firm? Does that make any rational sense to you? Of course not. Yet, given the same question about your family doctor, you know in your heart he’d refer you to a specialist immediately if he thought you needed knee surgery.
CPA’s, in my experience, generally won’t say ‘I don’t know’ when it comes to real estate. Some do, but most seem to think all they need is the Internal Revenue Code (IRC) to correctly deal with any ignorance on their part. I found this out the hard way many moons ago.
Let me give you an example of someone I know who just last year discovered her CPA didn’t quite have her covered.
Somebody very close to me (a real estate broker) recently had her most recent corporate return audited by her best friend’s accountant. Her friend had commented on her tax bill. To make a long story short, she just cashed an IRS check for almost $15K. Overpaying your taxes $15K might concern you! This on gross revenues of $500K, not $10Mil. She was not happy her guy had left that much on the table.
I recently opened the phone book and randomly called ten CPA’s. They all said they do many tax returns for taxpayers owning one or more investment properties. They knew all about depreciation.
Four of them new what cost segregation was. Wow!
What about cost segregation? What is it exactly?
Cost Segregation, when boiled down, is a tax saving tool that allows companies and individuals who have built, purchased, added to, or remodeled real estate to increase their cash flow by accelerating depreciation deductions and decreasing their federal and state income taxes. It’s a strategic approach to maximizing your investment’s cash flow.
Engineers visit your property to conduct a Cost Segregation Study. This is to identify, set apart, and reclassify property or project related costs that are now shown as real property, to much shorter depreciable tax schedules (lives) for fed/state income tax purposes. You’re allowed to change accounting methods (with the IRS) in order to fully benefit from the increased amount of depreciation. As a matter of fact, you can go back as far as 1987 to take advantage of this. The cool part? You don’t have to amend tax returns.
Part II will show a real life example of what CS can mean to the average investor.
CPAs. I had a frantic real estate agent from another city contact me regarding bifurcating/segregating depreciation. She said her client’s tax planner told her that she need to talk to her real estate agent to get more information… Thought you might find that amusing.
Chris – That’s priceless.
As you’re aware Chris, some things we see and hear from CPA’s just can’t be made up.
Of course, none of them compare to hearing house agents talk about tax law.
I bet you’ve heard some great ones yourself.
Thanks for the laugh.
We got this concept from Albert Alliello’s tapes a few yrs ago. We asked our CPA about it and it thought it sounded “too complicated”.
So are there really companies you can pay to do the componentizing for you?
Then I guess you would just show up at tax time with the figures and demand that the CPA just plug them in.
Like Albert Alliello says, most CPA are just bean counters. YOU have to do the thinking and stategy for them…the just tell them what to do.
Cher – Unfortunately what you have to say about CPA’s is true most of the time.
Not only are there firms who specialize in CS, but it’s risky NOT to use them. This is because the IRS tends to believe licensed engineers more than you and your account fumbling around.
Also, there are over 300 cases which have rulings in favor of the taxpayer when they’ve used specialists.
In any case, I’ve never heard of either a taxpayer or a CPA who could come close to the amount of depreciation a CS expert can produce credibly.
Most investors and CPAs don’t have a clue what a Cost Segregation Study (CSS) can do for their bottom line.
I am a provider of CSS and I just completed a study for a client who had 3 properties with a cost basis of $4.4 mil. The CSS saved this owner $150,000 CASH on his FY2006 tax return. And this was after owning the buildings for 4 years and paying my fee.
Cost Seg works. Don’t let your CPA tell you otherwise.
Dan – Amen brother.
Please email me your phone number. i’d like to speak with you if that’s ok.
Kudos to Bawldguy for his innovative thinking and great understanding for the benefits of cost segregation studies. I’m a CPA in Indianapolis and own a firm that specializes in cost segregation studies. I just spoke to Bawldguy for nearly an hour. I am yet to talk with any real estate consultants/brokers/agents in the midwest that know more about the subject than Bawldguy. In fact it is rare for me to meet anyone that has even heard of it, including CPAs.
Appreciate the thought Steve. Now all I have to do is let my head shrink back to normal size so I can leave the building.
Well said. I am a Consultant for Cost Segregation and have dealt with too many CPA’s to count. Some are great, but most get very defensive about it. They don’t like to admit they are wrong and they advise their clients to steer away from the Cost Seg. It’s really too bad. I have saved clients millions by doing these Engineering based CS studies. They are a no-brainer!
BTW, if any of you need my services, just drop me a line at jeremy@harrisonci.com, and I’ll take care of you.