Were you aware that Cost Segregation isn’t just another form of depreciation?
Transcript: Hi this is Jeff Brown the “Bawld Guy”. On this video today, we are going to be talking about the synergy that can be created with various forms of cost segregation, which is a type of depreciation of which most people aren’t aware. The other thing that most people aren’t aware of are, especially the high earners, are people that earn household income in excess of 150 grand. They are not allowed, by their internal revenue code, to even use depreciation against that income. That usually causes a frown, but what we try to do is use that in their favor and here is how we do it. Since we know they can’t use any of the depreciation we get them into situations where their cash flow is minimal by design and most people think that’s counter-intuitive but stay with me here; what they do is they use a 20 to 30% down strategy in acquiring properties. They are going to be having cash flow but instead of very, very high it’s going to be around the 5 to 10% cash on cash rate. At that point, we are going to institute what’s known as cost segregation. Now, cost segregation in a nutshell, does two things immediately, it brings down the length in terms of years of available annual depreciation from about twenty-seven and a half to maybe five or six. It also increases the depreciation annually by a two to four ratio. So you might be getting say $8,000 or $10,000 using the vanilla approach most people use, but you will get $20,000 to $25,000 using cost segregation. Now, why would you do this if you can’t do it on your own? The reason is this: you might use $5,000 a year out of $25,000 on a duplex, $20,000 is left over but you can’t use it against your ordinary family income. It sits on the shelf gathering dust. Do that for five years. Do that on, maybe, a couple of duplexes. In five years on a couple of duplexes you’ve got somewhere between $150,000 and $200,000 of unused depreciation. What if the property has gone up in value? None of my spreadsheets will ever assume that, nor will they ever assume an increase in rents, but if they did the values going to go up, you will have a capital gain and you can sell it, not pay any capital gains taxes or any of that nasty depreciation tax which is far more than tax rate on capital gains. Because you have $150,000 to $200,000 in offset losses which is just to pay for loss and you don’t pay any taxes which means you don’t have to do a tax differed exchange per IRC code section 1031. Everybody seems to want to worship at that alter, avoid those if you can because the synergy used to your benefit with this approach is that you have now acquired, in this example, a couple of duplexes where you just got $500,000 to $600,000 in tax-free cash when initially you might have only put in $60,000 to $80,000 a duplex. You paid them off, free and clear with the cash flow, some of your own family budget. Remember, now you are making a lot of money, you don’t need that cash flow; you need to grow your capital. It’s five years from now, you’ve got available $500,000 to $600,000 in tax-free cash oh gee, what do I do with all this cash tax-free? The menu is wide open. There is no set thing. Planning for it is foolish because all of our crystal balls are just as screwed up right now but you will be able to either buy, take that $500,000 and buy five or six or eight more properties. You will be able to invest in discounted notes, maybe, and create a different income stream. You will be able to put down $500,000 on a brand new EIUL an insurance policy that we’ll talk about in another video but the bottom line is, in five years you spent a whole lot less than half a million dollars or more to get over a half a million dollars in tax-free cash to do with as you will. I hope you join us next time as we get into some new subjects on our next video.