Mastering the Tax Code: Your Secret Weapon for Wealth Creation
Nov 06, 2023Episode 20
Michael Notbohm & Andrew Hoek
Ready to take your real estate investment strategies to the next level? We promise that by tuning in to our latest episode, you'll understand how to maximize your tax benefits before the year ends using cost segregation strategies and bonus depreciation. We dissect the inner workings of cost segregation, highlighting how bonus depreciation was at a staggering 100% from 2017 until 2022, before dropping to 80% in 2023, and then plummeting by 20% each year until it disappears. Discover what other investment avenues offer higher initial deductions than single-family homes and how you can deduct as much as 25-30% on an $800,000 structure.
Ever wondered why office buildings and car washes could be your ticket to significant tax savings? We take you through a journey revealing the tax boon these assets can offer. The power of cost segregation and its dwindling bonus depreciation period is explained, underlining the urgency to implement these strategies. We also delve into the essentiality of mastering the use of the tax code, which could be your secret weapon for wealth creation. Throughout the episode, we underline the discipline required for shrewd investing and the importance of leveraging government incentives. Get ready for real-world examples and insights that illuminate the potential tax deductions on structures like an $800,000 office property. This episode is a treasure trove for anyone looking to elevate their tax savings game and real estate investments.
Ready to take your real estate investment strategies to the next level? We promise that by tuning in to our latest episode, you'll understand how to maximize your tax benefits before the year ends using cost segregation strategies and bonus depreciation. We dissect the inner workings of cost segregation, highlighting how bonus depreciation was at a staggering 100% from 2017 until 2022, before dropping to 80% in 2023, and then plummeting by 20% each year until it disappears. Discover what other investment avenues offer higher initial deductions than single-family homes and how you can deduct as much as 25-30% on an $800,000 structure.
Ever wondered why office buildings and car washes could be your ticket to significant tax savings? We take you through a journey revealing the tax boon these assets can offer. The power of cost segregation and its dwindling bonus depreciation period is explained, underlining the urgency to implement these strategies. We also delve into the essentiality of mastering the use of the tax code, which could be your secret weapon for wealth creation. Throughout the episode, we underline the discipline required for shrewd investing and the importance of leveraging government incentives. Get ready for real-world examples and insights that illuminate the potential tax deductions on structures like an $800,000 office property. This episode is a treasure trove for anyone looking to elevate their tax savings game and real estate investments.
This is the Legacy Wealth Code podcast helping you build long-term wealth and Elastic legacy through real estate investing, tax strategies and motivational stories from some of the most successful and influential people out there. Here are your hosts real estate investor and entrepreneur Michael not bomb, and real estate investor and attorney, andrew Hook.
Michael Notbohm:
Hey guys, welcome back to another episode of the Legacy Wealth Code podcast. My name is Michae, no \, here with my partner in c. rim , .
Andrew Hoek:
What's going on, guys?
Michael Notbohm:
good to be back so we are gonna do a little bit of a Deep dive on cost segregation, right. So something that you know, you and I are very passionate about, I think it's definitely changed the way that we invest, the way that we teach other people how to invest, but there's also a phase out. That has started, you know. So this year is 80% and 60, 40, 20, phasing it out On the bonus depreciation portion of it.
Andrew Hoek:
Yes, correct.
Michael Notbohm:
And so I think it's important, you know, we just want to kind of put this episode out there as a reminder that, as we approach the end of the year, if you're interested in doing some investments, taking advantage of the tax strategies, this is the time to do it till it goes down to 60%. But then also, what are some of the investment vehicles that you might look at buying into that give you a higher year one deduction than like, say like a single-family house?
Michael Notbohm:
sure and so I know that you and I. Over the years, I've learned about a variety of different investments that Qualify as that, so I wanted to do this episode for that.
Andrew Hoek:
Yeah, and I think it's. You know, we always get the end of the we're in Q4 now, so we always get the end of the year tax planning crunch, no matter what. But I think if you're, if you're one of those people that is in that end of the year tax planning crunch and you're looking to, you know, hyper accelerate your, your tax savings and are going to cost segregate, you know, really, getting it done between now and December 31st of 2023 is going to become important to maximize that, that acceleration well.
Michael Notbohm:
So let's just kind of put everything into perspective. So take it a step back the. You know the. The initial cost seg with bonus depreciation, started at a hundred percent. Mm-hmm and then it phased out. Last year it was still a hundred percent, this year it's 80. I than 60, 40, and 20. So people that don't know what that means explain that.
Andrew Hoek:
So it's a sunset of the law that was passed under the Tax and Wages Act by Trump in 2017. But the overall act was that bonus depreciation, which allows you to accelerate all of your depreciation into year one, would be phased out over a time period. So from 2017 to was that through, 2022, was 100%, yeah, 2023, 80%, and then it drops 20% per year until it goes to zero. And you know, as we've talked about a number of times, who knows what happens with the tax code as we get into the next administration here in the 2024 election cycle. It very well could be something that is revisited, revamped.
Andrew Hoek:
A lot of laws that are set to sunset over time typically get picked up in Congress, and so you know, this may be very well be one of those, and so it's something that we're going to have to watch here, I think, in probably the next you know 12 months as we get it. Well, more than that, if it's January of 2024 or 2025, before the before, either we have the same administration or a new administration takeover. Those things will be important to watch, I think, as we get into that time period.
Michael Notbohm:
Yeah, so you know, along the lines of, like, things getting phased out. How long has it been? Every time 1031 comes up, you know, oh, they're going to phase it out, it gets reviewed. Now, granted, this is somewhat of a new strategy in terms of the bonus depreciation element of it, but, to kind of you know, the 30,000 foot view of this for people who are unfamiliar with our podcast or just unfamiliar with Causing in general, is, essentially, you have. You know, a house is normally depreciated single family home, for example, if it's non-commercial 27 and a half years. So the IRS is okay with you. Taking the structure. For easy math, a million dollar structure, take out 20% for land, you have an $800,000 structure you depreciate over 27 and a half years. Straight line. Just divide 800,000 by 27 and a half. Anybody who's owned real estate or is in the real estate business knows that this carpet is not going to be here in 27 and a half years.
Andrew Hoek:
Hopefully not.
Michael Notbohm:
Yeah, plumbing electrical roof cabinets, blah, blah, blah. So there's a lifespan of that asset that is then broken down through a cost segregation report, saying that the carpet is a five-year asset and essentially, bonus depreciation allows you to accelerate all of that to year one, and then the step down or phase out sunset however you want to call it is 80% of that number is what you can actually take this year. So you know this is going to range, I think, based on the property, but the overall average is somewhere between 25 and 30%. Like, take this office, for example. Right, you did this office a couple of years ago and what was the overall percentage? About 30% somewhere in that neighborhood.
Andrew Hoek:
Yes, yeah, it was right.
Michael Notbohm:
Just shy of 30%, yeah, so I think you know you're safe to somewhere in 25 to 30%. So on an $800,000 structure you're looking at, you know, for around numbers $240,000 of year, one depreciation, and that 80% of that that's a significant tax deduction.
Speaker 1:
Sure.
Michael Notbohm:
And I think you know. Part of this is really, I guess, hitting home the fact that if you do qualify as a real estate professional and you can take $180,000 off your income, that's real money back in your pocket. Huge, you know that's like $65,000 plus in your pocket year one real money that you normally be writing a check to the IRS. Now next year, when that goes down to 60%, yeah, it's still great, but that's a big difference.
Andrew Hoek:
So if you're on the fence about buying something, Now I think that's what we were saying at the beginning, opening up it's. You know, if you're a tax planner in Q4, which a lot of people are this year in particular makes a big difference. And going ahead and doing this now because you're going to start to lose 20% per year and it's funny mentally I have this in my own head like man. It's no longer 100%. It seems like you're almost like man. I'm getting cheated, but the reality is that 80% is still incredibly significant. Even 20% is still significant when you start thinking about the realm of what 20% takes off of something.
Michael Notbohm:
And what items are in that bucket?
Andrew Hoek:
Yeah, so it's still something that we'll be doing over the next three years, without question, but I mean, I think to your point, it starts to beg the question what are the other strategies that we have to start to employ and look at, and do we become maybe a little more tactful about the type of asset we're buying versus what we've been buying for the last few years?
Michael Notbohm:
And I think, thinking back to when we started the Legacy Wealth Code, it was an easy sell to anyone that invests in real estate. All you have to do is just understand how this works. And our biggest I think I would say our biggest uphill battle with trying to get this out there was just actually telling people your CPA, which is really just a tax preparer, is not. They're not in your corner in terms of telling you all the things available Once they find out about it and understand it. Even our own CPA, like we've discussed many times, goes okay. You guys were right. I mean I wish I would have known about this before, but I think that part of that is like that was our biggest uphill battle, and I think now, at this point it's, the battle is, you know, if you understand how this works, you gotta take advantage of what asset can I buy to maximize it?
Andrew Hoek:
Yeah.
Michael Notbohm:
Because that has definitely changed.
Andrew Hoek:
Well, and I think you know that's where having the connections to be able to get cost segregation estimates done pretty quickly really is a game changer and a due diligence period. I mean we were having that conversation the other day with a gentleman about you know if you're gonna square off two properties that you're considering against each other.
Michael Notbohm:
Right, similar cap rates, similar returns, etc.
Andrew Hoek:
Yeah, you know fire off that property to one of the cost segregation companies and say give me the analysis of what this looks like. You know, and in many instances they'll do that for you without cost.
Michael Notbohm:
Well, I mean so and I'll drop in the show notes below a link. If any of you have properties that you're interested in just getting a free analysis, part of the legacy wealth code stuff that we've negotiated with them, as they offer a free analysis and I know that that's something that you know to your point. If you're comparing two properties, why not? Why?
Speaker 1:
would you not?
Michael Notbohm:
submit it.
Andrew Hoek:
Yeah.
Michael Notbohm:
It's free, and then the full report is. Okay, this looks great. Let's move forward. Now you have the IRS compliant report that you'll get in the back end, but at least knowing ahead of time. What you're going into is extremely important, I think.
Andrew Hoek:
I agree, and I mean, if you're tasked with that information or equipped with that information, I should say then, then you know you. In many instances you may say well, the asset that maybe was didn't look quite as good on paper before is the better buy.
Michael Notbohm:
Yeah, so Well, and so shifting gears or I guess even expounding a little bit on what we're talking about, we have this phase out period. It is what it is 180, 20, 80, 60, 40, 20, gone. The caveat to that is there are certain assets that you can buy. So, like when we talked about this office, typically 25 to 30% year one deduction. There are certain assets that you can buy that are even up to 100%. So you buy something for a million dollars, You're getting a million dollars bonus depreciated at whatever the current phase out percentages, Right? So if you're buying the right asset, technically speaking, you could actually end up with more bonus depreciation next year or this year. Then if you were to buy something like a single family home when it was 100% you see what I'm saying, like say.
Michael Notbohm:
Say like, for example, a car wash. You buy a car wash for a million dollars. Most of the time that's 100% depreciable. So now, even next year, 60%, that's $600,000. You buy a million dollar office building at minus the land value, 800,000 at 30%. 800,000 times 30% 240,000 at 60%. So that is a humongous difference. Just having that knowledge right there.
Andrew Hoek:
Sure, Well, and again that goes. And certainly there are some of those like to car wash some of the mobile home parks that we've talked about with CPAs in the past that have done that, do really well on those. But again, to me that's where that analysis comes in. To say, like we were talking the other day, I got to figure out a 1031 exit option off of a property that I'm selling now and so I'm going to go look at a variety of things. I'm not going to look at one asset, but what was the very first thing I texted you?
Andrew Hoek:
You said car washes, but time to buy car wash. Yeah, I'll add, like the third one in a row down the street. That is absolutely something that I'll do in that and that due diligence is say, if I've got, I've got to go do my identification anyways, but I'll identify and then I'll, and then I will take those and give them to a cost side company and say run this analysis for me, and that'll play a major part in which one I actually move forward on.
Michael Notbohm:
Yeah. So I think it's just like anything in life. I was like think back to the. I don't know if it was on Instagram or Facebook, but it was like the ship that was broken down. No one could figure out how to fix it. And then they finally hired this one guy who came down and he took a hammer and he he tapped one small part of the ship. Boom, the ship came back on right. Obviously, this is a parody, but and the guy said how much do I owe you? And it was some astronomical amount. He said all you did is hit that ship with a hammer. He said no, no, I just knew where to hit it. And I think that there's so much value in the fact that the information information is power. And we, we teach this and we preach this over and over again. Like the richest people in the world, the Uber wealthy, the Uber elite, have gotten in that scenario, not taking nothing away from the amazing businesses that many of them have built, but the tax strategies they're implementing are actually available to everyone.
Michael Notbohm:
And that's the thing that I drive home. I mean probably 10 times every day. Talking to people is like you know, the tax code is a tax code. It's the same for me as it is for Donald Trump, or sure. Bill Gates or, you know, Jeff Bezos, et cetera. They just know how to take advantage of it.
Andrew Hoek:
Yeah.
Michael Notbohm:
And they're using the incentives that are there specifically to help, essentially, build wealth. But really what it is is it's about the government doesn't want to do certain things, and so they incentivize you to do those things. And so a lot of times I, you know I have this conversation where people like well, I'm not trying to avoid paying taxes, I would never tell someone not to pay taxes.
Speaker 1:
Right.
Michael Notbohm:
I'm just saying, if you have a choice to be an active partner or a passive partner with the government, I would much rather do something they're incentivizing me to do. I get to choose where my money is going to go and in this case, real estate. I call it the golden trifecta. You've got cash flow, appreciation and depreciation. You can build wealth on this tax by paying taxes. Essentially, you're building wealth and if you have that mindset where you're realizing, like I'm writing that check for the down payment, that's my tax bill.
Andrew Hoek:
Well and I think again it's a we always go back to discipline, right, like if you're going to take advantage of these things and you're going to save on your taxes, that's fantastic, but the wealth building piece is really let's be disciplined about taking that and putting it back into something else.
Michael Notbohm:
Yeah, it's not necessary. Well, you said I got a 1031 this. Yeah, you're not going to Vegas with that money?
Andrew Hoek:
I mean yeah, and it's funny because I have a partner in that deal and he can't wait to cash himself out and I'm like what's that going to get you? You might be able to live off that money for a few years and then you're back to having to do, or.
Michael Notbohm:
Now I need to find another home run apartment complex in South Carolina.
Andrew Hoek:
Yeah exactly, and so it's like you take, instead of doing that, put it into an asset that's going to make money while you sleep, and I mean that's the piece that. That's the part of the legacy wealth code that I really love is the how do you really not just make money, but how do you build long-term wealth? Yeah, and I'm experiencing this firsthand, not only in what we're doing for ourselves, but I've been working with this guy as a state the last few months and it's been a crazy amount of work, but I'm really seeing. This man did exactly what we preach all the time. He made a lot of money, bought a ton of real estate, cash flowed as real estate and now it's a deal of like, unfortunately passed away, but there's this whole portfolio to manage that is just cranking cash for his wife and kids and yeah, people he cared about, yeah, and that's his legacy.
Andrew Hoek:
And that's what they're taking care of, and it's fun to see when you're like this is what we preach on a large scale, yeah Well and I think the.
Michael Notbohm:
So I was at the hockey game last night and the guy I took to the game as a financial planner and we were talking about legacy wealth code and all the tax stuff that we teach because of course we're at odds right, it's almost like two gangs. You've got the stock trader guy and you've got the real estate investor Like the bloods and the crypts are going to the game together.
Michael Notbohm:
It's crazy. I had my red bandana and I was ready to go, but it was funny talking to him and he's like man, that's such a great thing you're teaching, I said. The thing that's most mind blowing to me is it's so simple. Anyone can do this. You don't have to be from a ton of money. You don't have to have a ton of money to put down. You can start with one property, or you can just be a hustler and go identify properties and prove your value to people that have the money, because there's people that have the money that don't want to put in the effort to go in and find the properties. And so there's so many different angles with this that, at the end of it, it all boils down to the fact that you can easily create long term sustainable wealth through real estate, and it's a proven model. And you don't have to be reinventing some craze. You don't have to come up with the next Facebook or the next Tesla. You can literally just say well, this is what that guy did.
Speaker 1:
And.
Michael Notbohm:
I'm going to follow the exact same strategy and fast forward 10 or 15 years, and now you're a multimillionaire with tons of properties in your portfolio and I love that. That's like. I think the most rewarding thing for me is like I can pretty much teach anyone how to do this.
Andrew Hoek:
Yeah, the blueprints there.
Michael Notbohm:
Yeah, so all right. Well, that's all we got today on the cost segregation step down basis, but hopefully you guys got some value out of it Until next time. Legacy Wealth Code onward.
Speaker 1:
Thank you for joining us for another episode of the Legacy Wealth Code podcast. If you enjoyed this episode, click subscribe now and never miss an episode until next time onward.
