Birds Eye View of Accelerated Depreciation
“The government understands that it’s in the best interest of private investors, private individuals, entrepreneurs to go through and invest in infrastructure. So by investing in and remodeling buildings, they give you benefits.”
Welcome to the Next Level American Dream Podcast. We have an educational guest for you today, but first please make sure you have subscribed, if you haven't already. We also love getting your feedback through likes, comments, ratings, and reviews. Today, Sean has a conversation with Josh Belk. Josh is the owner of a holistic accounting firm that works to give its clients the best strategies possible for their financial goals. He talks with us about the benefits and impacts of cost segregation, accelerated depreciation, and IRAs. If you found any value from today's episode, then please share it with a friend and help us grow.
Key Topics
Tell us about your background
What are some of the greatest benefits to having an account or tax specialist when doing anything in real estate (syndicator, investor, etc.)?
What are some common mistakes people make when they don't have someone guiding them?
What does the American Dream mean to you?
Connect with Josh:
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Abigail Thomson 00:01
Welcome to the Next Level American Dream podcast brought to you by Thomson multifamily group. Your hosts, Abigail and Sean will discuss how you can take your American dream to the next level through real estate investing, business practices, and personal development. Join us as we share our experiences as a father daughter duo who are trying to accomplish their goal of financial freedom. We hope you learn more about how to define and achieve your American dream. Here's another episode of Next Level American Dream. Welcome to the Next Level American Dream podcast. We have an educational guest for you today. But first, please make sure you have subscribed if you haven't already. We also love getting your feedback do likes, comments, ratings and reviews. Today Sean has a conversation with Josh Belk. Josh is the owner of a holistic accounting firm that works to give its clients the best strategies possible for their financial goals. He talks with us about the benefits and impacts of cost segregation, accelerated depreciation, and IRAs. If you found any value from today's episode, then please share it with a friend and help us grow. For more information on our sponsor, visit thomsonmultifamilygroup.com to start taking your American dream to the next level through passive investing.
Sean Thomson 01:18
Josh, thanks for coming on the show again. How you doing?
Josh Belk 01:21
I'm wonderful, Sean, pleasure to be on it.
Sean Thomson 01:24
Well, I asked you to come back on I want to talk last time you're on we talked about your business and how you help entrepreneurs and things like that with with their success and taxes and, you know, finances and all that stuff. And I wanted to talk more in depth about a specific topic or a couple topics. We'll see how much time we have. But I appreciate you coming back and and we'll dive deeper into some some subjects that are important to me and my business. But let's start with if you don't mind, just tell people your kind of your background and where you came from and what you have going on my name Josh
Josh Belk 01:50
Belk and my firm's lodestar tax and consulting, we're in Northwest Indiana, just outside of Chicago, our firm specialty, most of our clients are in real estate in some form or fashion. So we were pretty much exclusively with business owners and like many of them are in real estate, we have somewhere 800 Plus clients at the firm level and across the country. And they range from, you know, anywhere who, from, from individual companies with a sizable, maybe rental portfolio, all the way to two companies that might own that operate other businesses that may own commercial properties as well. And so to kind of move forward today into addressing, I think you're gonna get into cost segregation here in a moment. And we can talk a little bit as far as how it applied to different types of business owners, how they can utilize that.
Sean Thomson 02:37
Okay, awesome. Yeah, so I do want to definitely, if it's okay with you, let's start with cost segregation. I, I understand what Cost Segregation is, I kind of have a grasp of it. It's, you know, I use it in my business, but it's confusing. And I there's a lot of different ways to look at it. And I think there's, you know, you have to use engineering studies for different things. And you know, I'm in multifamily now use being single family. But the essence of Cost Segregation is pretty simple to understand, you're just you're just appreciating your asset on a schedule that the IRS puts out. But deploying that as it's going to be complicated. So you were saying it's single family, it's a little bit easier and multifamily, it's a little bit more complicated. So let's kind of start with what is the process of, or what is the concept of Cost Segregation studies? And why are they beneficial to someone in real estate.
Josh Belk 03:21
So to really kind of at a simplified level, cost segregation, essentially taking a larger component, and breaking it down into a smaller components. So if you think of a piece of real estate, it doesn't matter if it's a single family home, it doesn't matter if it's commercial property. Okay, what you're doing and if you think about what the construction, okay, so you have your you have your land development, you have your land improvements, when you actually start building the the actual structure, of course, you have the foundation, you have the outer walls, and then you have everything that's on the inside of the walls. So normally, when you go through and you purchase a property, you'll just go through and you can think of it's a single family, for example, it's depreciated generally over the non land portion is generally depreciate over 27 and a half years to get in the commercial side is 39 years. And so when you kind of go through it, you realize, okay, if I, if I go through and I spend a million dollars on a property, I'm gonna go through a portion of this and go to the land. So I'm going to say maybe 100,000 of that land is laptop net, depreciate that over, either over 27 and a half years or 39 years. Now, what the when you go through and you do a cost segregation, instead of saying it's all going to be depreciated over this two to three decades or two to four decades, you're going to go through and you're going to break it down into into its components. So you say okay, here are the land improvements, which generally are depreciated over 15 years here is the personal property. So we talked about anything and I'm gonna oversimplify this a little bit, but just for clarity to provide some clarity or at least some some context, anything from the from a wall that can be considered personal property. So it may be carpeting and maybe cabinets, maybe these types of things that can be depreciated over a shorter over over a shorter timeline. So maybe five year property seven year property. Now, now with the IRS, you can utilise bonus depreciation on any asset that has a depreciable timeline of 15 years or less, less. So that's leasehold improvements that can be certain land improvements. That can be any sort of personal property. And so what ends up what you have to do when you when you have a cost segregation study is when you're talking about multifamily or commercial, generally, you're going to need to engage a firm and generally they have an engineering component. A lot of times when we when we work with them, they are they're CPAs, who also have an engineering background as well. And so they'll actually go on site to the property, and they'll go through, they'll take pictures, and what they'll do is they'll determine what qualifies for that shorter depreciation timeline. So an investor can can essentially take all of that depreciation in year one. And so that way, you're not depreciating the entire property over either 727 and a half years or 39 years, you're able to take a portion of it and depreciate it over a shorter timeline. Now, generally, a question we get asked is, well, how much of that property Am I generally able to depreciate in year one. And so it ranges so a lot of it just kind of depends on the condition of the property, the age of the property, and then how much a personal property is it can be actually inside of the inside of the building, as well as what sort of, you know kind of landscaping and and that has worked on might be done on the outside. So generally, on the on the on the single family, for example, we might see, you know, 22 to 24%, on average that you're able to take. So it's, say $100,000 Is your basis in the property. So what you've actually spent on the outside of land that is not considering the land, generally, we'll see, you know, maybe you know, 22,000 to 24,000, or 23 24%, that you're able to kind of take in your one. But now, when it comes to multifamily and commercial that number can can actually creep up to be you know, anywhere 30 to 40%, it kind of really just depends. And so a lot of that just depends on on the on the breakdown of what's actually been done, or what is actually part of that property. So if you think of an apartment complex, for example, if you go in and there are no appliances, it's old carpeting, it's old cabinetry, whatever the case may be, you're gonna see a lot less percentage than if you go in and it's, it's more newly remodeled with with appliances. So one would have a lot higher percentage that you're going to be able to appreciate in your one versus maybe an older property that that essentially the the structure holds most of the value.
Sean Thomson 07:27
Yeah, and so that's like the initial cost basis depreciations, the study that you're doing right, and then there's, there's, I guess the second part of that is, when you do improvements on the property, those have a different you can also depreciate those on an accelerated schedule, right, as well.
Josh Belk 07:44
Yeah. So when you go through and you do a cost segregation, you're going to do it in the year that you put the property in service. So you're now you can go through I mean, if you do a remodel, or whatever the case may be, you can go through and have a cost segregation done. So so you can indeed, you know, have one done subsequent subsequent to the to the property being a service, but you're not going to be doing a segregation on anything, essentially, from the initial purchase price. So most of the time when, when someone goes in, and they're looking for cost segregation, or looking for that front end appreciation, if they're going to be a they're going to be the initial purchaser or the initial investor into into that particular property. That way, they get the full advantage of the cost segregation.
Sean Thomson 08:23
Yeah, so I buy a property, I do the study, that gives me my depreciation levels for essentially from that day forward, or from the purchase time. But you can also you can also take those those levels, at other times in your tax seasons, right?
Josh Belk 08:39
Well, generally, what happens is you go through and say you identify a property, you're gonna go through it, we're not talking new construction, whatever the case may be. So we've identified a property that we're going to purchase, but we need to remodel it before we actually put it in service. Okay, so most of the time, this is what this is what happens. So you're going through and you may be doing a fundraiser, whatever the case may be, but you've actually gone through and you've identified a property that you're going to purchase, you generally are going to wait until that property is remodeled, and you're ready to put it in service for you the cost. So that is generally what the what the timeline looks like. So if you go through, you identify the property and you say, Okay, I need to this property is costing me a million dollars, I'm guessing it's gonna cost me $350,000. And then remodeling cost, before I actually start putting tenants into the property. Okay, and so usually you're gonna go through, you're gonna buy the property, you're going to go ahead and do the remodeling, and then you're going to have the Cost Segregation done, because you can't do any sort of depreciation on a property until it's actually in service. So in service means that it's either it's either rented or available marketed for rent. Before that point, you're not going to be able to utilize that depreciation.
Sean Thomson 09:47
Yes, then you could also do so that's, that's one situation I'm in right now. So we just bought a property and we're doing initial cost sex study. And then we're doing a secondary study on once we're doing our improvements because we were working renting the property. Now it's in service. We're doing value add to it to where we're adding, you know, nicer fixtures and whatever those things are to add value over the next year, year and a half, that we're working on the property. And then we're going to do a second sort of portion where we do that the added value components, and all the things that were removed as well. Is that so that is that that's different than that
Josh Belk 10:25
definitely doable, right? So yeah, so in that scenario, yesterday, the property is already a service, you do a cost tag on the front end, and then you're gonna do a cost like essentially on the improvements on the on the back end or a secondary. So sometimes that may spill over a couple years to where you end up with that front end cost sag, which you're going to get the land improvements and that as well. And then the secondary is simply going to be the the remodeling, that was that was done, or the rehab that was done.
Sean Thomson 10:47
So I know, this is a big thing and multifamily cost six studies. And so why, why is it appealing for, I guess, a sponsor or an investor to go this route for for taxes?
Josh Belk 11:00
Yeah, because they're able to go through and they're actually able to offset other income. So when we saw this last quarter, we went in the end of 2021, we were first having conversation, a lot of year end calls with clients and into for, and so you run into, into business owners into investors that have a lot of just net income, that they're essentially gonna have to pay taxes on it, they don't do something with it. So what a lot of them do is they find ways that they can deploy that capital to be able to be able to ride off or to reduce their taxable income, of course, there are a number of ways that they can do this about one way is investing into into a real estate into into real estate in some form or fashion that they can utilize to depreciation. So generally, what we'll see is we'll see an investor that is looking for for two things, they're looking for that front end depreciation, so that they're able to take that so they go through and they deploy, say they put they they deploy $250,000 into either an asset or into a fund, whatever the case may be, that would allow for them or into a syndication that would allow for them to be able to that they're essentially have an equity participation, if not direct ownership. And then as you were talking about, they go through, and they have a cost segregation done, whatever the case may be, so they have this large front end depreciation that that the investor can go through and they can take and they can use it to offset their net income and other areas.
Sean Thomson 12:24
Yeah, so if you, like you said in your scenario, you put $250,000 in, you get a large cost segregated depreciation value against that investment, that exceeds your return, actually, at that time period, probably for that investment. But if you're an I know, especially for real estate professionals, if you're categorized correctly with the IRS, you can apply that depreciation against other income right so your
Josh Belk 12:47
you can actually end up the writing it out, you can actually end up offsetting it against other and it got back to the income as well provided your real estate professional.
Sean Thomson 12:55
Right. So if you're, I know some people do this, their their spouse may be a realtor, but they're a dentist or doctor and they earn quite a lot of income, they can apply those depreciation values against all the income that comes in the household, right if they're, they're filing jointly. So that's a huge benefit for them if they're if they're high earners, and they have a real estate professional designation in the family or in the in the household, but they can take those depreciation levels across all income right?
Josh Belk 13:22
That is correct. And and this is this is quite common of course a lot of people that go through and they're looking for this there they may not be full time real estate. So just as you said they may be they may be a doctor they may be you know, just working in a professional field in some way someone like myself you know, I have an accounting firm and that type of thing and so we find other ways to deploy capital and so you may have a doctor you may have a dentist and the spouse may or may qualify as a real estate professional maybe they have already have an existing real estate portfolio that the the spouse may manage whatever the case may be so as long as they have that you know that that 1000 hours or whatever for the open seminar putting out an hour during the course of the year they really go through they get the real estate professional designation then yes so the it may be the maybe the husband's income that was earned or the wife's income that may have been earned as a doctor or whatever the case may be but since there's a real estate professional the household yes they can take that excess depreciate over the over the earnings for the year and then they can they can use that to offset the quote unquote their W two income or maybe their practice income and then they can lower if not, and we can many cases to where they can eliminate their their active income altogether and essentially get back everything they paid during the course of the year.
Sean Thomson 14:30
Yeah, I know someone like me, who buys and sells assets all the time we you know, we we make money in lump sums. And so if we have that, that cost segregated depreciation value that we can apply towards those lump sums of capital. That's one of the reasons that real estate investors are able to not pay taxes and because we're if you're continually buying and selling properties, you're benefiting from this cost six study every time you sell something and you can apply those losses against this or the depreciation losses against the you know, the property you just sold and and you're able to kind of get ahead of that the tax burden that way, you know, people always wonder or talk about, I guess, if you don't know these things, how their work, and we'll talk about how like Donald Trump and those guys, they don't pay any taxes. Well, this is one of those, those tools that they use it that are given to us by the IRS, that allow us not to, you know, not to pay as much taxes as earned income someone making earned income. Right.
Josh Belk 15:21
Right. And yeah, got to realize that the tax code is there in a way to get us as taxpayers to act in a certain way. So it's kind of not one of those things that, you know, sometimes people think that taxes are a hammer, or whatever the case may be, of course, there's a lot of reasons for taxation, but but as far as the benefits of big, you know, these types of activities such as, as cost segregation, as essentially the the not gi arrest, but essentially, you know, letting the, essentially the American taxpayer or the the business owner, letting them know that if you do these certain types of activities, were going to reward you. So the government understands that it's in the best interest for, for private investors, private individuals, entrepreneurs to go through and invest in infrastructure. And so by going in investing and remodeling buildings, and doing these types of things, they give you these benefits. And the reason to give you those benefits is because it's in the best interest overall for the economy, for the for private individuals to do this and private company to do this.
Sean Thomson 16:22
Yeah, and this is a conversation I have with our investors all the time, I have some investors that their primary goal is to is to invest and make and have this cost, the tax savings. And a lot of times I talked to people that they're looking at their return on investment, and if they, if they, they're, you know, they tell me what I'm making, I'm making 8% in the stock market, or whatever they're making in the stock market, or 10%, or 20%, whatever they're making the stock market. But, you know, all that income is, is is tax unless it's in an IRA or something like that, if you're just if you're buying day trading stocks you're in, you're making income, that's taxed income, right. But with a real estate investment, you can you can put money in that same amount of money in a real estate investment, that's the same return and you're going to get an additional tax benefit that can increase your return, if you looked at it from an overall income level or tax savings, you can you can increase your your returns, you know, 234 5%, whatever it is, depending on your tax status, and depending on the depreciation levels, but you in real estate, it's an additional, it's not really income. It's not a it's not a return. But it's it's real money in your pocket at the end of the day, right?
Josh Belk 17:27
Right, you're going to deploy if you talk about, you know, the stock market versus into real estate, I mean, you could end up deploying the cash in the same way in one, okay, you're actually investing in a physical asset, you can take the front end depreciation on the other one, you can't. So you may end up with the same ROI over time, but one is definitely has more favorable tax treatment than the other. Right? Yeah, and you can do a 1031 or whatever the case may be on the back end of a multifamily can't do that with stock. Once you sell a stock you have to pay the games. Once you go through and you you sell a used to going through and you sell an asset, piece of real property, if you choose, you can do a 1031 and not pay taxes on it at all, you just end up rolling that into the new property.
Sean Thomson 18:06
You can just keep rolling it into the next the next deal Correct? Yep, let's talk about so some of the some of that let's talk about some of the the hitches I guess in the plan, right. So there's there's recapture and things that are better possibilities as well on this. So if you do a cost sex study, and you get all these wonderful tax benefits, and you don't hold the property, certain periods and times timelines and things like that, you will have to pay a recapture, you know, so let's talk about maybe the recapture versus capital gains. And kind of some of those things that happen after you know that that time period of the cost SEC study,
Josh Belk 18:39
right, so it only makes sense to utilize a cost segregation study and take advantage of it if you do plan on holding a property in the long term. And so generally, you're gonna, you're gonna need to hold that property generally a minimum of three to five years, otherwise, it doesn't make sense. The reason for this is because of the depreciation recapture. So you were like, when you take all the front end depreciation, if you go through once you sell that property, you it is not subject to the same long term capital gains as the other non accelerated depreciation basis on the property. So if you go through and say, in a normal situation you're gonna go through, you don't do a cost segregation. And so you're depreciating this property over 27 and a half years. And then you go through and you decide to sell it after you decide to sell it after a year or two. Okay, but that point the entire capital gains is going to be assuming you did not do a cost segregation is that you're going to pay the capital gains tax rate. So this high right now is capped at 20%. Now, if you and you're only going to pay depreciation recapture on the amount of the smaller amount of depreciation over the over the first few years, now, if you went through needed a cost segregation, you end up depreciating 35% of the property on the front end, you're going to pay an additional 5% tax which is 25% is the depreciation is the tax on the on the depreciation recapture. So didn't end up paying an additional tax on the on that for a higher tax rate on that depreciation recapture. So you want to make sure that if you are if you're investing into something that is this a situation to where it is a longer term hold that you're investing in and not something that's going to be kind of a more of a fix and flip within, within within two to three years.
Sean Thomson 20:20
Yeah, has to be an income producing property that you're going to be hanging on to, I would think, at least three years to make it worthwhile. And like you said, the difference is, you'll pay so and also the differences is on the cost basis versus depreciation. So you may you may pay taxes on capital gains at 20%. And, and pay a recapture on 25. At 25%. on sort of a mixture of those two things, if you're, if you make enough money, right, so if you make enough, that goes beyond your depreciation levels, you'll pay you'll pay 20% on the on the excess of above and beyond your depreciation amount over
Josh Belk 20:53
the over essentially over the land and the the the actual property basis that has not been accelerated. So well. Yeah. So that ends up being mean, so So you're you're gonna pay, essentially, the capital gains amount is going to be broken down into into two sections, the depreciation recapture, which is going to be larger, if you've got a cost segregation, then then if you didn't,
Sean Thomson 21:15
yeah, but it only applies to that amount that extent, that is that you depreciate it for that time period, and that is less than the overall sale price, right? So you have your cost basis, your depreciation amount, that's, that's taxed at 25. And then if you make more money, beyond that, it's taxed at 20%. Right?
Josh Belk 21:34
I think I think a following and that, I think, yes, as far as he answered your questions, but 20% is on the is on the land, and then on the non accelerated appreciate, are basically on the on the so you're right. So your your basis of your your meaning basis of the property after your appreciation. And and essentially what you sell it for, that isn't a portion to the, to the accelerating appreciate just a little bit complicated. So it is kind of one of those one of those scenarios that that you want to make sure that you have a good handle on and understanding that if you are going to go through and you sell the property, how that's going to impact so because we're assuming that most of your you know, most of the investors aren't making, you know, 80 or $100,000 a year, they're actually making, you know, financial out of money to where they're gonna be paying the maximum capital gains rate. And so therefore, they have to be aware of the the depreciation recapture amounts.
Sean Thomson 22:22
Yeah, the downside really is this 5% Worst case scenario, as the difference between the two and it's, it's, it's, it's only it only determines it's only determined if you're when you sell it and things like that, if you keep it beyond the five years, it's not really even an issue, right? It's only if you sell it beyond our prior to the five years.
Josh Belk 22:39
Right? Well, I mean, you're gonna have a depreciation recapture isn't either in either case, but you've held it long enough to where the ROI that you've earned on the property is greater than the additional depreciation recapture tax. So we're getting into into kind of geeking out here a little bit. But if you were to kind of go through and generally when you get a cost segregation study, it kind of shows you on the back end, the impact year over year, and generally they outlaid us out, you know, five to 10 years. So you're kind of able to see the impact on that appreciation over time over the over that timeline. And you got to realize you're making a percent, you know, a year over year on ROI on the property going forward, that ROI has to be high enough to to cover the additional depreciation recapture tax, the additional tax year to pay you're gonna pay on the depreciation recapture to where it so there's kind of this this cut off grade, and generally that ball net three to five year timeframe?
Sean Thomson 23:30
Yeah, the reason I'm kind of targeting this as a, as a flight of conversation is I have people that come to me and say, Well, you know, if you sell the property at the wrong time or something, you're going to pay more taxes. And the point is that that's even if you did that, you're the comparison is 5%, right? It's not like it's a it's not like it's a massive amount of the difference between you know, the cost, segue valuations or your your, your capital gains per taxation. So, the difference between doing it not doing it is, is worst case scenario, you're looking, you're gonna, you're gonna have to pay back 5% that you've had in your pocket for the last five years really,
Josh Belk 24:09
right, it's still it's still less than ordinary income tax. So to that point, it may not be a big issue, it's just that you have to realize you have the cost, the additional costs for the cost segregation on the front end, so you need to recapture that. So you kind of think about and then the additional tax, so you kind of go through and probably your when you talk about your cash flow from a cash flow perspective, that's kind of where that breakdown comes in any additional tax and covering the cost of the cost variation.
Sean Thomson 24:35
Yeah, and I think it's, I think it's, it's worth anybody that's concerned about that additional that additional recapture is, it's it's really kind of nominal in the overall scheme of things and it only comes into play if your timing is wrong and and the timing has to be you know, assess from a business perspective anyway, so, but that's not always going to be a problem. So do you
Josh Belk 24:55
look at the time somewhat not getting into this for you know, for a two year you know, for two returned anyway, they're usually getting into this looking at longer term investment.
Sean Thomson 25:04
Well, yeah multifamily, you're always looking at a five year horizon. But you know, the markets been pretty accelerated lately. I know a lot of people that are selling out in two to three years, I have had some deals that were offered to us to buy, that they've just bought them last year. You know, so they, they're, they're selling pretty rapidly. They've achieved their goal. And now they're exiting already. So which is the I don't think that's common. I think that's kind of an anomaly, but
Josh Belk 25:30
it is right now. But the market is so hot. Over the last few years that we've seen, we've seen a number of clients that kind of had the intent on holding things for longer term, when they're like, you want the market so hot, I'm feeling like we're at the top of the market. So they're trying to play the market, so to speak, they want to go into action, while the while they feel that they can tighten price, and they can
Sean Thomson 25:52
take their chips off the table and move on to the next one. Right. Well, so does that does that kind of do you think we've kind of captured cost segue there in layman's terms? Pretty well?
Josh Belk 26:02
I think so. I mean, it's I think we kind of hit the kind of the highlights were kind of a common question that we hear. And I think that you hear as well.
Sean Thomson 26:10
Yeah, okay, perfect. Yeah, I know cost sag is one of those things. It's very simple, like in its concept, but it's kind of, it's kind of convoluted or complicated in its activation, right. So and then like you said at the recapture and stuff at the backend, it can kind of get a little confusing, but it's really quite simple, you're just you're just, you're using the schedule that the IRS gives you for the various components that are in your property and depreciating on that scale, as opposed to just using a holistic 27 and a half or 39 year. Depreciation Schedule. It's really it's really quite simple. But I think it kind of gets it gets mixed up and complex, over complicated for some reason. But let's talk about if you have some time left, let's talk about using your your IRAs in investing in multifamily. I don't know where to start with that topic. It's such a vast, I guess, different different, there's different types of IRAs and different types of you know, self directed and, and all those types of things are there some that are better than others to invest in real estate,
Josh Belk 27:06
not necessarily, I mean, you're going to go through and it's just a different way of going about investing your retirement funds. So kind of typically, most people think, you know, I have a 401k at work or I have a, you know, I just set up a, you know, I have a sapper a simple or something that I may have set out. And any but you have the opportunity now, if you have a 401k through work, whatever the case may be, you wash the the employer allows for it, generally, you're going to go through and those are going to be invested more in kind of your traditional ways. But if you have a so for example, you may have a lot of doctors or dentists, chiropractors, etc, that and that's what we see that as best in their their retirement funds. So they may have a solo K, they may have a self directed account. And so what they want, they want to try to find alternative ways to invest in so they can go through and they can invest in a multifamily or purchase actually purchase property with their funds. Now, Cost Segregation we just talked about does not benefit. There's no point to do cost segregation, if you're doing if you're investing with with retirement funds. So where so the kind of what you have to look for, so yes, if you if your plan allows it, or if you have a self directed account, it can be any type of approach that you you can go through and you can invest in, in real estate. And you can either take it that position, you could take an equity position, but the only thing you can do is invest in something that that you're, you're hands on and you're self managing, so you're gonna go and invest in somebody else's deal, okay, or you can you can buy the property outright, and then have somebody else manage it as well within the within the IRA. And so, you know, for years you're going through and you're actually assuming it's either structure to some sort of a syndication or maybe investors that come in and to one of those investors can be can be that self directed IRA, and then what you're looking for there as essentially a just try to grow your retirement account, and then you go through it at some point, if the property does sell, then you get those those gains inside of your inside of your IRA or your self directed retirement account.
Sean Thomson 28:58
Yeah, so the that's the downside with the IRA investing for some of the accounts, I guess, is that you don't get any additional tax benefits. So the real estate in itself is a very tax friendly investment. But if you're investing through your IRA, because it's a non taxed entity, you don't get that you don't get the cost of the cost sag and depreciation and all those valuations that us as real estate investors look for those don't really benefit you. But you do get the you know, the returns like you said, you know, capital gains returns for your investment. Is there so are there. I know a solo 401k is not susceptible to the the what is it the business tax, or what's it called? Yeah, you bet. Yeah. Isn't the solo the one the one entity, self directed entity that that is kind of exempt from that?
Josh Belk 29:44
Well, you're okay. So you're gonna, you're gonna face you, but if you have if the property is libraries with debt, right, okay, so that that's pretty much categoric a category. So if you end up going through and you're you're going through and you're you're, you're going through and you're trying To buy if you're going to take ownership of the property. So if you're actually taking ownership of the property and then you have a bank or a lender that's landed on that property, then you you may be subject to to use it. If you're going in as a purely just as an equity owner and not owning the owning it outright, whatever the case may be, and you're getting a return that that it does, it's not going to be something to do for like investing in a syndication or something of that effect.
Sean Thomson 30:27
Yeah, so if you just have your normal 401k Ira, self directed 401k invested in a syndication the ubitx not an issue. Correct. Okay. So how do you see how do you see people investing in real estate with their self directed as it is, there are some benefits to it or there's some some direction that you can get people to if someone was interested in doing that,
Josh Belk 30:48
with a different mindset, so when when somebody is talking about investing into into multifamily I'm outside of their outside of their retirement accounts, generally looking for for the short term for that depreciation, but they can they can utilize and then a long term, they, you know, they help to get a residual back, when it comes to investing inside a retirement account, you're looking for the returns. And so, so, generally, what we see is they're going through, and they're investing in somebody else's deal. And it may be they may be taking, they may be lending, okay? So a lot of times, they may just take in the capital, there's gonna be, they're gonna be a lender, or they're going through, and they're actually purchasing a portion of that particular property. And so whether it's actually taking part title to it or or they're investing in a inside of a syndication, where essentially, the the IRA received the k one, at the at the end of the year. Yeah, and I think what they're looking for there, and what they're looking for, there is essentially just the the return and then when the property sells, so you know, so kind of one of those things they go through in their investing. And then when the property sells again, a portion of those gains. So it is a way that you can go through in and increase your retirement fund a lot faster than investing in stocks. Bonds are another ways. And generally, if you're going through and you're holding a your IRA is holding a piece of the asset, you're going to see greater returns, by definition, and you are if you if you're just simply holding a deposition.
Sean Thomson 32:08
Yeah, I always thought a Roth was a great vehicle for for real estate investing in an IRA because you know, you can, you can multiply capital quite a lot with that with with sales, right? You get you get cash flow, if you have a rental property, you get cash flow, and those sorts of things. But when you go to sell the property, you get these big lump sums. And you can you can just you can keep growing, you know, quite a lot. So all those all those gains in that Roth or non taxed events, because you're it's part of the retirement structure, right. So I always thought that was a good way to go. And I think a lot of people don't know, I think fundamentally, just just from a basic standpoint, is I think a lot of people don't know that they can actually take their retirement accounts, and go do these alternative investments, I think that's a mystery to most people. Because most people are in an IRA from a job or a corporate structure where you're just, you're investing in the mutual funds that they offer, through their, their system at the corporate headquarters or whatever, you know, so I think it's interesting to introduce people to this concept of how you can take your, your IRA, make it self directed, and then go buy these alternative investments, like real estate and get some of the additional benefits and, and invest in something that's a more tangible asset, maybe then someone that you know, wants to get out of stock market. It's possible, right? So,
Josh Belk 33:22
right, so you may have like, say, for example, you may have a 401k, from a former former employer. And it's a lot of people, what they do is they go and they start working someplace else, and they roll that 401k into a new 401k. And so they're kind of stuck at whatever that new plan allows. But if you have say a 401k, from a former employer actually had an email this morning from from a client that was accepting their kind of their their day job, and they're going in there go full time as a they're in their business, which happens to be real estate. But they their email to me was Can I can I take that money? What What can I do with it? I'm like, Well, yes, indeed, you can take it and you can roll it, roll it out, held that 401k and roll it and put it into a new retirement account that you can Diigo and you can self directed, it doesn't have to be in stock bonds, mutual funds, whatever the case may be, you can take it and you can invest in real estate, you can lend with it. There are a number of different things that you can do
Sean Thomson 34:13
with it. Yeah, that's awesome. Well, Josh, thanks for covering those things for us. I really appreciate it. I'm gonna have you on as much as I can. You know, I love this tax advice. It's always good. And I think people benefit from you know, the tax stuff is always kind of this mysterious thing, but it's good to hear it all the time. Remind yourself you know, I I'm in this business and I still I learn as much as I can all the time, but I still I always find myself I need to know that bit more about that. Right. So that's good. I appreciate you coming on in teaching me for sure. That's always good.
Josh Belk 34:47
Really my pleasure. And it is a topic that isn't always quick people like me, we'd love it. So it's interesting to us, but we're kind of weird anomalies, but I know for a lot of business owners, you know, taxes just as something that they really are audited. About until they have to go and pay the tax bill right? Then all of a sudden, they want to be interested in at that point, it's too late to do anything about, you know, the year has already ended and that type of thing. So the best time to do tax planning is, at the beginning of the year, kind of lay out that plan, what am I project is due this year, and where do I want to deploy my capital. And so in and so if you're, if you're looking to invest in, you know, on the kind of on the outside of your retirement accounts, for example, going to someone like you and wanting to deploy the deploy the capital that way to where they can take that front end depreciation, for example, and this is a good time to, you know, start thinking about that. And then the same thing with your retirement accounts, you go through and say, Okay, well, how can I deploy this and I don't want to tie it up in the market, we're in a pretty fragile, I think economy right now, you know, dealing with some with who knows what's gonna happen, you sometimes just, you know, seem to get a lot more prudent in the long term to invest in a into a real asset versus into into the stock market that can get really material, but to actually get into a fixed asset. And even if there is a dip in the real in the real estate market, historically, it's always come back.
Sean Thomson 35:58
Yeah, for me real estate's the only way to go, because it's just, it's first of all, it's shelter, you know, people have to have shelter. And historically, it's just been way more consistent, the volatility is a non existent compared to the stock market and things like that, but, so real estate's always, always my thing for sure. And you were, to your point earlier, is I had a ton of people call me in the last quarter of the years, you know, trying to deploy capital, you know, and they were kind of, you know, I'm like, Well, you should have, you should have kind of had this plan, you know, much, much more advanced, so getting with someone like you to help plan those things out, I think is critical. That's, you know, we do that ourselves, in our business to make sure we're kind of gonna be on track. If you're worried about your taxes in December, and trying to save taxes, you're, you're in trouble.
Josh Belk 36:44
I think it's very prudent again, and I'm assuming probably most of the people listening this podcast are business owners, or they have capital they that they need to do something with from from attacks. And, and so you really should be having at least quarterly calls with your with your accountant. And as far as where are we at what do we need to do. And this should be a regular conversation that should have hop on, hop on a 30 minute call schedule a call to get in, in his or her office, whatever the case may be, and then have these conversations earlier on in the year, put the plan in place and execute the plan in place. And you know, it is really kind of one of those things that many times you can find a better deal or get into into a better investment. If you do it in June, July, August, versus if you're waiting till November, December. And a lot of times it can be very difficult to try to get deals done before the end of the year. So yeah, start doing start doing that tax planning, you know, and even a q1 q2.
Sean Thomson 37:33
Yeah. And I had some people that were in deals that weren't going to close that they thought were gonna close, then they were just like, they're scrambling to try and find a place to put shelter that capital, you know, so you don't want to you just don't want to do that to yourself at the end of the year. Yeah. Well, thanks again, Josh. I really appreciate you coming on. How can people kind of reach out to you and talk more about taxes if they need some help with that? So
Josh Belk 37:53
my website lodestr.tax. So that's when we can go I also have a podcast, okay, business podcast, if you'd like to listen in and we cover a lot of tax topics, as well as topics.
Sean Thomson 38:05
Okay, awesome. Awesome. Well, I appreciate you coming on and sharing some tax information help with us. And we'll look forward to talking to you on the next one. Sure. Thanks.
Josh Belk 38:13
My pleasure, Sean. Thank you.
Sean Thomson 38:14
I will see you later.
Abigail Thomson 38:15
Thanks for joining us for another episode of Next Level American dream. If you would like to learn more about what we talked about today. Want to contact the team directly or interested in passively investing and being a part of our deal room? Head over to our website at www.thomsonmultifamilygroup.com Before you go, please leave a review your comments help us create more episodes for you to enjoy.