The Tax Strategy Every Property Owner Needs to Know

Aviva (00:01)
This week's listener of the week is CC14. CC, thank you so much for leaving us a five star review. And for those of you listening, if you leave us a five star review below, you might be next week's listener of the week. This week on Commercial Real Estate Secrets, we have Mr. Joe Viery. Joe is the founder.

of US Tax Advisor Group Inc. Joe, thank you so much for being on the show today.

Joe Viery (00:34)
Thank you Aviva for asking me.

Aviva (00:37)
Joe, let's talk. Who are you? What do you do? And how did we get here today?

Joe Viery (00:43)
Well, I have a very unique story. I've always been an entrepreneur. I'm going to make it quick. I was in the travel business doing incentive travel. If anybody knows what that is, trips for people who sell so many widgets, they get to go to Hawaii or Hong Kong. And then in 2000, I sold the business and I got involved with the California Association of Realtors. And I was involved in helping the Realtor themselves and their clients with tax planning strategies pertaining to real estate.

Then we all know what happened in 2007, 2008, right before that, I had a guy, a friend of mine who kept wanting me to share with me this strategy. And I kept blowing them off because I thought, he probably wants to sell me soap from Amway or something. And finally I said, okay, Mike, let's go have lunch. He explained to me about this concept called cost segregation. I asked him what it was. He told me I had clients that were staring down.

$50,000 income tax bill by the IRS. I saved them the 50,000. The car went over the cliff as far as the depression went and the California Association of Realtors job evaporated. So the company that I worked did these two projects with came to me and they said, hey, why don't you come work in cost segregation? You're really good at it. You know the fundamentals. And I did not take two seconds.

I jumped right into the industry. And then in 2017, I started my own firm, which is US Tax Advisors Group and Corporate.

Aviva (02:15)
Joe, if I were a fifth grader, how would you explain cost segregation?

Joe Viery (02:21)
I think I can do it really, really well. Basically, everybody should understand that you have to pay income taxes. You pay income taxes on your income. If you have no deductions or even if you have deductions, if you have no deductions, it's going to be called your gross taxable income. So let's make the math simple. Let's just say, for example, your gross taxable income is a hundred thousand dollars. And bottom line is your accountant says you're in the 40 % tax bracket.

you're gonna pay 40 % of the 100,000, you're gonna pay $40,000, no questions, that is what you owe. However, if you can reduce your $100,000, guess what? You're gonna pay less income taxes. So what we do in the depreciation world is your depreciation in real estate is an expense against income. So now let's take that same exact scenario. You have $100,000 in gross income.

I give you a $50,000 expense, which is depreciation, accelerated depreciation. So now your gross taxable income is not a hundred, it's 50. I in essence wiped out 50 % of your income taxes due. And if you don't need all of the benefit I give you, it carries forward until you use that bucket all up.

Aviva (03:42)
So you must make a lot of friends in this business.

Joe Viery (03:46)
I do, make a lot of people very, happy. Cause I have so many, I'll give you one real quick story. It's a guy that owned a hotel and bottom line is he did not need me, did not need me. Eight months later, he calls me, he's Joe, I need you. What happened? I got refinanced and now my accountant is telling me I owe 120,000 in income taxes. This was during the depression. This was like 2009, 10 hotels were getting killed. He goes, I can't pay it. I have no income. I can't pay the $120,000.

I did cost segregation, I wiped out $120,000.

Aviva (04:21)
Bingo, you made a friend.

Joe Viery (04:22)
Yeah,

made a friend and then he introduced me into one of the biggest developers of real estate in the United States. Hotels, senior centers, apartments, and I do all of their work. So it worked out to be a very good deal for both myself and for him.

Aviva (04:41)
Isn't it funny how leads take you places you never could have imagined?

Joe Viery (04:47)
My mantra is you never know what's behind the next door. So you can never take it, this little guy owned a little hotel, no big deal. I didn't know his best friend owned a company that owned billions of dollars of real estate.

Aviva (04:59)
Hey, never judge a book by its cover, never judge a lead. I have to remind myself that all the time. So how do you go about cost segregation and depreciating a property?

Joe Viery (05:04)
Words of wisdom.

Now this is where the weeds get a little thicker, but I'm not a weed man anyway. So I'm just going to keep it very simple. Bottom line is all we're doing. And it's very simplistic to explain. The IRS says, we recognize you are using up I'll use a kindergartner's term, you're using up your building as we speak via time. Time erodes everything. I don't care if your building is a hundred years old, it's disintegrating as you're using it.

owning it or living in it. So bottom line is what the IRS says is you can now take that expense every year. Well, you want expenses. I just explained why. So what they said, the easy way of doing it. And I can get a kindergartener in here with a calculator or maybe their cell phone or iPad. And all you do is you take the purchase price of your building. When you bought it, part of that price is land. Land is not depreciable. So somebody's got to take the land off. So let's just use again, simple math.

you buy a $1.2 million building, somebody says $200,000 is the land. Now I have a million dollar building basis. That is what you depreciate. If you do it the easy way, you take that million dollars and if it's residential building, you divide by 27 and a half. If it's a commercial building, you divide by 39 years and you get straight line depreciation for the next 27 and a half or 39 years. However, there is another part of the code

where the IRS agrees that there are many, many hundreds and hundreds of components in the building with shorter lives. So for example, everything on the outside of the building is a land improvement. Those that I can accelerate on the inside of the building is personal property, five-year property. So our job is to peel off all of the short-life assets, five-year, seven-year, 15-year property. You're always gonna have the main building

Aviva (07:01)
Hmm.

Joe Viery (07:10)
as 27 and a half or 39 years. What is that? That I mean, the roof, the foundation, I can't touch that. What I'm looking for are the land improvements. And I'm looking for in the interior building items like flooring, window coverings, countertops, cabinets, molding, a crown molding. I mean, it goes on at mirrors. goes on and on and on. And what we do as engineers is we dissect the building and put everything in the short life assets.

as well as again, remaining in the long-term asset. That's nuts and bolts. That's all we do at the end of the day after 27 and a half years, guess what? You're gonna have the same amount of depreciation. All we're doing is we're enabling you to get that depreciation upfront in the year that you bought it instead of waiting and getting an ill-biddy deduction over 27 and a half years. Bought a bing, we're gonna give it to you in the first couple of years you own the property and it's the time value money.

You want those expenses when you first own the property. You don't want your expenses 27 and a half years down the road. That's bad planning. That's why cost seg is so powerful.

Aviva (08:18)
So let me ask you, this is a little bit left field, but what is to stop a bad actor, say who has buddies who own real estate, to go into cost segregation and then lie about what the building actually has inside of it or that it's built of to depreciate? How do we mitigate that?

Joe Viery (08:43)
There's only one way to do that is make sure who you're hiring has got the background and they know what they're doing. Our Bible, my Bible, what we at US Tax Advisors Group, the IRS published a document in 2004 called the Audit Technique Guidelines for Casseg. Well, guess what? That's the Bible that tells their agents

what to look for in a quality cost-seg study. That's what we do. We use everything quality study. We use the IRS's own recipe. So for example, if we're doing a detailed engineering, meaning that the building basis is over a million dollars, we have to go to the property and measure it and document it. If we do a smaller building, which by the way, we're very unique, we're one of the very few that do smaller buildings. We can do single family homes.

and how we can do it and make the math work, meaning the 

is that we can do it without the engineer leaving the office. We can do it analytically, and we are great at doing it. It is not the number one type of study. The number one type of study is you go out there and measure, but it's still approved by the IRS. It's still compliant, and it's still a great study, and it's better to have some depreciation than ignoring it not getting any accelerated depreciation. So.

We're unique when we do the smaller single-family homes, smaller commercial buildings, doctor's offices, anything with the building basis under a million dollars.

Aviva (10:15)
So say I'm an owner and I want to sell my property next year. Should I run a cost segregation study or what's my best line of defense there?

Joe Viery (10:27)
Okay. There's a couple of reasons, very few, why you should not do cost seg. And we tell this to everybody and it's their decision, but we will tell them, I don't think you should do cost seg. Don't do it. One of those is depreciation recapture is what happens when you sell a building and you have to pay back your depreciation. Therefore the way the math works in our minds is if you know, you're going to sell the, sell the building next year, don't do cost seg. If you know you're going to sell the building in two years.

Don't do cost seg. We want people who are planning to own the building at least two years or longer. And that is when the map is the most powerful, all because of depreciation recapture. However, I'm going to give all of your listeners a little, little Joe is among this. I'm not an accountant or I'm not an attorney, but I will tell you something surprising. Those who have long-term hold in real estate, meaning two years or longer, cost segregation.

reduces depreciation recapture. It's a high level process. All of my accountants who are really no cost seg use this so they would have to call me and I could tell them how it reduces depreciation recapture. But most accountants don't know this. And so keep that in the back pocket knowing that if somebody tells you don't do cost segregation for depreciation recapture, it is true if you're not going to hold the building for at least two years.

Aviva (11:42)
Wow.

Joe Viery (11:53)
I will agree, but if you are, no, you want to still move forward and do cost seg

Aviva (11:58)
Super interesting. So let me ask you, if you do cost segregation on your property, are you more likely to get flagged by the IRS?

Joe Viery (12:09)
But this is a great topic because in my first years when I did this, know, what was going on is most people didn't even know how to spell cost segregation. They never heard of it. That goes for accountants too. So what I had to do is I had to allay their fears and go, no, no, no, this is legal. Here's the IRS code. Look it up yourself. It's legal. It's legal. Everybody thought it was a scam. And, and, you know, and it didn't work, but nowadays

The IRS published the audit technique guidelines telling the agents and their customers, me and you who pay taxes, they tell us, yes, cost seg is real. So you are not going to get audited for cost seg. Now, maybe you could get audited for another reason. We stand by our work. We defend our work. If there's ever any questions by the IRS, I've only believe it or not been audited. Well, it wasn't even my fault. It was the client's fault. did some

funny business and I got audited twice, but I've never lost them. I've the two that I was involved in, I didn't lose. So it's possible. Of course, the IRS is hiring a lot of agents out there, but if they do have questions, we will not charge you. We will defend our work. So that's another thing when you're looking for companies, make sure they will defend their work.

Aviva (13:14)
Sure. Wow.

That's interesting. So what do you think? mean, this might be a little woo, but I love talking about the future. What do think the future of tax segregation holds?

Joe Viery (13:42)
well, there's a couple things going on. But number one, just my opinion again, because we're talking politics and we've got both sides of the fence and we've got the IRS and we've got courts and blah, blah, blah, blah, blah, blah. Bottom line is depreciation has been in the tax code since about the 1920s, I believe. Meaning that it is so baked into the code that if Congress ever tried to get rid of it, holy smoke.

I cannot see it. Do I know the crystal ball? I have no idea, but I would say cost segregation will be here another hundred years. I would not worry about that at all. I would not worry about being audited. I would just worry about getting a quality company to do the work that knows all the rules and regulations. That's what I'd be concerned with.

Aviva (14:25)
Hmm.

It's an interesting day to have this conversation. Today is November 5th, 2024. The presidential election concludes today. And I'm not saying right, left, up or down, but I like to put a little timestamp on things and it's an interesting topic on an interesting day. they talk about the same thing with the 1031 going away. And it's like,

what would happen to our industry if that happened. I don't want to think about it, but hopefully we never have to have these discussions.

Joe Viery (15:07)
Yeah, that's another one too. 1031 exchanges. Again, my world, my prison, I don't think that there's any way Congress could even begin to try and take that away. I think that the taxpayers would cry bloody murder and make their lives so miserable that they wouldn't get it passed.

Aviva (15:27)
Sure. Hey, good. Yeah. Let me ask you one more question. I have some notes here. So say I'm a landlord and I have some, I have incurred some epic losses because of the pandemic or because of a weather event. How can cost segregation help me recoup my losses?

Joe Viery (15:31)
Who knows?

You know what? Here's the situation. I am going to kick the can on this one because I'm not an accountant. And now that is probably going into the weeds of accounting. I can sometimes give my opinion. All I can tell you is that I do have many, many clients and their accountants who are using cost seg to mitigate that, that issue. There are losses. They're, using it to mitigate capital gains taxes because it's not like you, if you don't pay

Aviva (15:59)
sure.

Joe Viery (16:20)
income tax and I give you a bucket of losses, you can use those losses when you sell the building against your capital gain, even if you don't need them against your income. Because don't forget, real estate has a lot of preferential tax treatment. So you may not have a tax loss this year, but I guarantee you if you sell the building for profit, you're going to need cost segregation to reduce the capital gains. So it's very rare that there's a reason why somebody wouldn't do it.

Aviva (16:42)
Sure.

Joe Viery (16:47)
but definitely I would have their account. And one of the great things with us, US tax advisors, is we give you a no cost estimate. So what I always suggest, get the estimate, get the fee, take it to your accountant and say, look, Joe is gonna give me X in losses. What can I do with these? And let him tell you what you can do with them. It could be nothing and I will support the accountant. Or it could be, yeah, you wanna move forward, which is most of the time.

Aviva (17:12)
Yeah.

Joe Viery (17:15)
with our clients. They always want to move forward.

Aviva (17:18)
Amazing. think, you know, we've got a lot of property owners who listened to this show. I'm excited for them to get your information at the end, but before we always ask on commercial real estate secrets, what makes you happy with what you do day to day in commercial real estate?

Joe Viery (17:37)
You just just fed the shark so bottom line is well, you know what it is It's like one of the reasons I was attracted to this industry is what am I giving my clients? I'm giving them incredible cash flow so in other words if you were to pay fifty thousand dollars in income taxes Let's say a hundred thousand because some of my people say the small buildings you save, know anywhere from

Aviva (17:39)
Hahaha

Joe Viery (18:03)
15, 20, 25,000. But my big buildings are saving millions and millions of dollars. And so what's my payoff? I love it when I can tell a client, I just saved you $100,000. You know what you can do? You can go out and either improve your properties or maybe you can buy more property and stay in the game and use that cashflow to buy another whatever, single family home, another duplex. And so that's what gives me joy. I love.

that I don't sell, no offense to washing machine salesman, but I'm glad I don't sell washing machines or copiers because what I give people is money and it really makes them happy. And I love that.

Aviva (18:42)
Hey, I can relate. Joe, for the listeners who may be interested in cost seg and your services, learning more, et cetera, where can they find you, follow you, contact you, et cetera?

Joe Viery (18:56)
Okay, perfect. The company's US Tax Advisors Group incorporated, which is very simple. A lot of our clients call us Ustagi, which is U-S-T-A-G-I. So if they go to USTAGI.COM / C-R-E secrets with an S plural /, they'll be taken to the website and we will ask them for their information and we will run the estimate form.

So again, it's ustagi, U-S-T-A-G-I.com, / C-R-E-S-E-C-R-E-T-S, / and there you go.

Aviva (19:35)
And we will put that in the show notes. Joe, thank you so much for being on the show today. And for everybody listening, we'll see you next week.

Joe Viery (19:40)
thank you. I appreciate you.