Tax Advantages of Owning a Fourplex (ft. Mark Barbour)May 28, 2021
For this webinar, FIG invited on a special guest, Mark Barbour with Specialty Tax Advisors. Mark has an extensive background in cost segregation and a pulse on the tax market when it comes to real estate investing. He joined us in 2020 for a similar discussion, but a lot has happened since then! The goal here was to update everyone on the most recent tax changes.
- Reasons to purchase a fourplex
- Qualifying as a real estate professional
- Benefits of cost segregation
- Equity build-up during construction
- Case Studies, Brickyard & Bridgestone Crossing
- Tax Cuts and Jobs Act of 2017
- Bonus depreciation
- 45L tax credits
- (CARES ACT) Coronavirus Aid, Relief, Economic Security Act
- Current tax law vs President Biden's tax plan
- Closing thoughts, Q&A
Intro to the Webinar
I was joking with Mark Barber about how we're going to have a lively Wednesday evening talking about taxes because clearly, you all have nothing better to do! We're glad to have you and have some great information to talk about.
The last time we did a webinar was with Mark, and it was during the depths of the COVID lockdown. Oh, man. If only you had a time machine to go back and tell yourself, "hey, your investments are probably going to be okay." Nobody really knew what was going to happen at that point. It was it's been an interesting time.
First, I want to give everybody a very brief update on the state of FIG and what's been happening around here... before we get into why you really came, which was to hear Mark, talk about these tax advantages and some of the possible changes that may be on the horizon.
Everybody has been impacted by COVID differently on different levels. And the fact that you're here, you're still thinking about investing, we love that.
As far as the performance of the FIG assets across the country. It's largely gone pretty well, I think. From March through May of last year was anybody's guess as to how things were gonna end up things were pretty much frozen across the board.
We were really wondering what would happen with leasing. Initially, when this lockdown began with COVID. We were wondering what would happen with construction, well, that actually went great guns never even stopped. Right now construction is the challenge that we're working our ways to our way through, but beginning about May of last year, the leasing, just heats it up.
People have really been looking for a little bit square bigger square footage getting away from jam-packed apartments in the cities, and the townhome and the stacked product we've been doing in the suburbs has performed pretty well. So we're happy to see that. Right now. It's no secret to all of you that construction is a nightmare for everybody. But materials are pricing is changing all the time. And it's difficult to keep your arms around that.
So we're getting innovative over here and doing our best to keep up with those changes. But so far, we're able to continue marching forward and building, although definitely at an increased cost. So many investors who closed on construction loans with those fixed bid contracts are very happy campers right now. Because the two by four that they paid, for now, cost a lot more, but they already paid for it. So that's always a good thing.
We have multiple new projects that we're working on right now I know many people are frustrated, they want to know when the next project is coming through, we're working on it. We have multiple projects under contract in Utah and Arizona, we've even got some back under contract in Houston. And in Boise right now, it's getting harder to do, you have to push out into the suburbs. And you know, of course, have to make sure if you're going on to the outskirts that that makes sense.
You don't want to buy land, just to buy it, there needs to be genuine organic demand for the rental product there. And then if you're buying more infill within the city, that's great. But at this point in the market with this run that we've been on, the land that's left is the land that has a lot of hair on it. So moving these things through the various cities and the approval processes is a little trickier than we would like. But there's a lot coming. So please continue to stay in touch with us. We anticipate releasing a lot more new products this year.
So I said that things have changed a little bit since we last talked. Right now what's on the top of a lot of people's minds is taxes. As always, it's why people invest in real estate. And Mark Barber has been an invaluable asset for many of our clients when it comes to depreciation cost segregation.
We're going to talk about 45L. And he has his fingers on the pulse of what might come down the pipe with a new administration in office and how does that potentially affect us? And we're going to keep in touch with him. We're going to give you his contact information. So you're welcome to reach out to him whether it's whether you need his services on one of our properties or something else that you own, he can, he can likely help there.
I like Mark because he kind of approached me after doing some cost segregation studies for a client of ours and we got to talking and I thought he does a very good in-depth study. We've since referred buckets and buckets of clients to him that have saved a lot in taxes. And Mark really, it was funny how he approached me to say, Hey Steve, do you have any idea what you have here the way these are built-in and with the end code and the options that are available? I said I guess not. I mean, tell us about it.
And we were able to find some more great advantages to investing in new construction fourplexes. So he's going to talk about some of the things that he sees as being an advantage 4plexes. I, you know, they're not a shameless plug of shame. But he's going to talk about why, why the FIG opportunity is good. And then we're going to get specifically into energy credits and real estate professional status cost segregation, which might be a review to some of you then launch into what's on the horizon with potential new tax changes.
Oh, Steve, thank you for the warm introduction and wonderful introduction, I appreciate it, I appreciate you having you're back here to talk to the FIG investors, we're going to go through the slide deck, we're not going to beat any of these slides to death. I'm sure a lot of you folks have seen a lot of what we're talking about, but we'll go through them. And then if anybody, you know, has any questions, I'd like to make it more of a q&a type of forum at the end.
Everyone's situation is very unique. And we can handle those, you know, questions after this, after this slot up to the show, or, you know, later on, folks can reach out to me individually. So just as an introduction, my company is specialty tax advisors, I've been working with folks at FIG for over a year now. And we're going to talk about the tax advantages of owning fourplexes.
We'll go through this disclaimer. And you know, reasons to purchase a fourplex, I would say over a single-family home, you know, you've got the same type of financing the one to four that applies as same for a single-family home as it does for four. And typically, you're limited to 10, loans from from from, you know, local banks and money center bank, so why not have 40 properties instead of 10. You know, the financing is just as easy, it's a great starter property.
And it's a great chance to wet your feet. And, you know, with the folks at FIG, you know, they do a really good job and explaining the process and taking you through the process. You know, you've got with FIG, you've got new construction, you've got you to know, they're they've done the research, they're going into great markets, you know, Utah County, the Boise, MSA, you've got Texas, and you've got Arizona, they've spent a lot of times researching these MSA and submarkets that are super high in population and job growth.
Can I interrupt one thing? I say this because you do cost segregation studies all over the country. So genuinely, what is it that you think that makes you mentioned, you know, Utah County and Boise specifically... In your eyes, doing it all across the country, why are those good markets?
Historically, there's been an excellent job growth vary the localities and the municipalities and the counties are very open. Now, their economic development arms are very pro, you know, job growth and pro companies, they're offering a lot of local incentives for companies to move in. I don't know if anybody watched, it was either this past week or the week before on a Sunday morning show about the explosive growth of Boise and almost, I think it was year over year 30% increase.
It's unbelievable. Obviously, Arizona and Texas are other booming markets. When you have strong underlying economic fundamentals in the market, it really makes for good drivers for rental properties.
Next, we'll talk about the real estate professional. The tax code, as it's currently written, really favors real estate professional status. What does that mean?
You know, you've got to provide more than half of your total time, you know, into what your material participates in real property tracer businesses. So if you're a real estate broker or agent that may not necessarily get you there because you have to perform 750 hours of services in your specific Real Property tracer businesses.
Now, really, that is going to require an action plan to how you can achieve that. You know, if you're a couple let's say I mean if you're a dog And you're working, you know, a W two wage and you've got 40 hours a week pretty much committed to that, can you really are you really going to if you're single Are you really going to be able to convince the IRS that, you know, you're spending over two, you know, 840 hours, 80 hours a week, 40 hours plus on real estate, that's really not gonna pass the sniff test there.
So these are some of the plans, you know, just to outline to your, so you can come, you know, to achieve real estate professional status, you know, it's not an easy status to achieve, you really have to keep track of all of your hours, you know, folks who are acquiring multiple properties in a year, and really putting a lot of rehab into them, I would recommend that you know, on top of, you know, fade properties tend to be the third party manage, so it's kind of hard to get all your hours, just on FIG.
There are other activities that do and do not qualify, and I've got a list of those, you know if you want to reach out to me separately on those. So why don't we get into cost segregation, and you know, what, what is cost segregation, the history of cost segregation, the seminal cases, the Hospital Corporation of America case, where HCA thought the IRS in one and they basically, you know, set a lot of our property in these hospitals, it's not, you know, 39-year property, there's a lot of personal property, and it extends to property that's inside the walls, like gas lines, electrical lines, not just what you can see, which would be floor coverings paint. So they won that case.
That really set the case for breaking property separating what we would call structural assets from nonstructural assets, and the nonstructural assets, we can separate into five, seven, and 15 year lives. Now, why is that so valuable now, so that's sort of the curve of how cost segregation typically looks with your five-year property depreciating quicker, and then your 15-year property, and then so on into your 27.5 and 39-year property.
The gist of it, as you said, anybody who gets a real estate license knows you depreciate residential assets over 27 and a half years and commercial or 39. But when have you ever had a water heater last 27 and a half years? Right? Obviously, many of those components depreciate much faster. Is that a fair summary?
It is. This is sort of traditional cost segregation, the way there are charters, but if you think about bonus depreciation, bonus depreciation, actually, the way the tax code is written now, and we know that what's happening now in Washington is basically folks are trying to undo the tax cuts and jobs act of 2017. I mean, that's pretty much what's going on in Washington. Now, we get to fix some of these names to it. I think we all know what's happening.
With bonus depreciation, all of this depreciation in here is basically being front-loaded into your watch. So, you know, you can basically as a rule of thumb, think about 25 to 30% of your cost basis, and your asset can be taken in year one. Now, if you're a passive real estate investor, does it really matter, especially if you only have one property, it may or may not, you know, you really have to take a look at your entire tax status.
Now, if you have multiple properties, what we see people doing and if you've owned real estate for a long time, they're basically buying these what we call them sort of as tax bullets because on a FIG property, let's say you've got about 600,000 to 700,000 basis, you're basically going to have about 180 to $210,000 of immediate write-offs in your first year. Now for passive investor unless they have lots of other passive income doesn't really make probably, it may or may not make a big difference, but if you're an active investor, and you've got you to know w you've got a spouse with large w two-income, it can make all the difference in the world. Because you can then use you can take all your income becomes active as well as your paper losses, which are primarily depreciation losses.
You can actually use a lot of tax planning strategies to eliminate that w big w two or other income on the other side. So, basically, I mean, we can all read through these slides later, but the benefits of cost segregation are primarily the time value of money. You're basically front loading depreciation it's, it's not like you're going to you know, you're gonna it's basically front-loading the depreciation. So you're taking more of And less, later on, you can also do a cost segregation study on a property that says was placed into service 10 years ago.
And what you'll do is all that five and 15-year property that should have been already depreciated most of it, you will catch that up in a single year, you don't have to amend returns, you just simply file a form 3115, which is a change in accounting method, which is fairly automatic. And we can get into the mechanics of that. One of the other great things under the cares act was they snuck in that net operating loss that arises from 2018 to 2020, which can now be carried back five years at 100%.
Previously, they were capped at 80%. So that is a strategy that a lot of folks are now going back and looking at cost-saving properties they had, you know, and 2018 to 2020 period, and then carrying those losses back because under the tax cut and jobs act of 2017. And NOL's I think they were previously two years was done away with so he could not carry back your losses anymore. But the cares act temporarily brought that back. So there are some great tax planning opportunities there. That you could look back five years. And take, you can deduct 100% of your losses over that five years. retroactively.
Let's say you bought a FIG property in 2020, and you generated $180,000 in losses, then you probably didn't have much, you know, FIG income to start within that year. So you've got 180,000 in losses, depending on if you're an active or passive investor, you know, you can carry those losses back versus active or passive income. Okay. So that's, you know, that's a taxpayer by taxpayer situation to be aware of because it's, it's, they're not sending out postcards.
This is a good way to look at different property types from residential rental to assisted living, golf courses, manufacturing restaurants, but typically right in here is a 30% line. That's a good rule of thumb. You know, if you have a warehouse, that's pretty much a shell, you're not gonna have that much might have, might be lucky if you got 20.
Bonus depreciation on new construction, let me just give you a little history on the bonus because this is important. So bonus depreciation has been around in some form or another since 9/11. It only applied historically to new construction. So it was designed, you know, since we know what happened on 911, it was designed to promote economic activity. So some years that was 50%. Some years it was 30%, there were a few years where it lapsed, and some years it was 100%. But always new construction.
Well, and the tax cuts and JOBS Act, they somehow got it to apply to used or already constructed property. So you could buy a building that was 30 years old plan apartment building built-in 1980. And you would still be able to 100% depreciate, you know, about 30% whatever, we could segregate into the five and 15-year property. That's what is subject to 100% bonus depreciation because bonus depreciation applies to property with a 20 or 20-year life or less. And what we're segregating out is the five-year property, which is things you can see like crown molding, and flooring and things you can't see like process wiring and process plumbing in the walls. And that's what we actually get a lot of our yield for.
Now, how is there are elements to equality cost segregation, the IRS actually publishes an audit techniques Guide, which is not law, but it's basically a playbook for their auditors. And there are 13 principal elements in a cost segregation study. And these are some of them right here. There's a narrative report schedule of assets, you know, schedule of direct and indirect costs and on and on your statement of your engineering procedures, statement of assumptions of limiting conditions. And I can, there's a link if you want to email me I can provide you all of the links and support to this. Again, these are site visit is absolutely you know, mandated interviews with appropriate parties use of common nomenclature, and on and on.
We also consider what this was a hot item A few years ago, repair regulation. So not only do we specifically call out the five and 15-year property and we do it to the nth degree and engineering detail, but we also call out all of the elements of the 39-year property. So if there was any type of you know, damage or you know you wanted to move a wall, you would actually have a be able to quantify that and be able to write off that portion, whatever useful life is left un-depreciated life. So, we had a case study. This is one of the Brickyard units, and I believe the basis was about $600,000 for this property (Meridian, Idaho for everybody's information).
The first-year depreciation without the cost segregation would have been $11,711, with the cost saying we got 174,903. So the difference is over $163,000. Now, really, you have to look at, like we talked to everybody's tax situation as you make. And this $163,000 your first year of ownership, you're probably not going to have a lot of rent. So you're going to have, you're going to be able to generate a lot of loss. And then, you know, whether you can use it or not is up to your individual tax situation. And under the Care Act or some options there. Plus the loss.
Here's another thing to think about, you know, with all the efforts that are being, you know, put forth to undo the tax cuts and JOBS Act, you know, you might want to think about just taking that doing the cost act to generate that bonus depreciation, because who knows if it's going to be around, it's actually scheduled to roll off of the next. I think it's four to five years. 2022, it's scheduled for 100%. And then I think it rolls off in 20%, increments, 80% 60% 40%, something like that to 2026. You know, but all these have tremendous costs, you know, on the budget. So I would see that as something the Biden administration might go after, again, tax cuts and jobs act of 2017.
Taxpayers can expense 100% of the cost of qualified property acquired and placed in service. And this is the magic day after 927 of 17. And before January, first of 2023. And then it falls off 20%. So, you know, with tax, what's going to happen with taxes? You know, will they if they make changes this year, will they bring it retroactively? That would be the biggest question in my mind. Generally, when tax changes happened toward the end of the year, they really, they really go into effect the following year. But you know, we have a pretty radical administration in there right now. So we don't know.
And this was the key right here, provision expands property eligible for immediate expensing to include our property. This really doesn't apply to FIG's new construction, but really probably applies to most acquisitions in real estate. Again, the bonus is acquired or used property. And these are just some vague, you know, property between 920 to 17. And 1231 17, has some special rules. And you really don't have to take the 100% bonus in one year, you can actually spread it out over four years.
But again, we've looked at this slide already, it just basically gives rough percentages. And the reason why golf courses have such a high percentage is that it's mostly land improvements, which is 15-year property, which is subject to a 100% bonus for now. Again, these are, you know, just rough sort of percentages of asset reclassification. Now, the 45L tax credit applies to Fourplex Investment Group investors, because the 45L tax credit is the eligible I guess the eligible investor, the investor is the eligible contractor because the investor is the one who takes the economic risks. So that is the person who's eligible for the tax savings because they go on the title, they get a construction loan, that they're not buying a completed unit from a builder who took that risk. Is that a fair summary? They put down a deposit, and they took that risk of the construction loan.
When 45L came into being way back when in 2005 when George Bush was actually the president. Obama gets a lot of credit for this energy efficiency, but actually, the Energy Policy Act of 2005 created 45 elements said if you can be a builder eligible contractor can build units to achieve a 50% energy savings versus a baseline 2006 International Energy Conservation code standard, and 10% of that has to at least come from building envelope improvements, which are primarily insulation in Windows, then they're eligible for a $2,000 per unit tax credit.
That's a $1 for a dollar tax credit against taxes out, it's not a deduction, it's actually a credit. And it depends on how the property is owned, it basically flows through the, if you hold it in your individual name, it flows through directly to the individual, if it's an LLC, it flows through to the members of K1 shareholders depending on if it's an LLC or S Corp. If it's, if it's a Corp, then you take it at the corporate level, but I don't see a lot of real estate held and corpse, just c corpse. And actually, the nice thing about it is you can if you built a unit three years ago, you can actually go back and get it. So if you have if you haven't filed your taxes yet, or even if you had you can, you can amend, you can go back three years for the most recent open tax return.
So if you haven't filed your taxes for 2020, and your new purchased FIG units back in 2017, you could still go get it if you've already filed 2018. But that requires amending the tax return. Now, it's pretty interesting that this Act was passed under, you know, when Bush was president, but it has been extended and four times. And, you know, some it's not always extended every year like sometimes, you know, the provision will Sunset at the end of this year, in 2021. But there was a similar commercial provision, it's a deduction, it's called 17179, capital D. And it's, it was actually just a permanent under the, under the last final legislation before Trump left office, interestingly enough, and you know, the language around 45L is always every time you read the language, it mentions the word the term climate plan.
We know who's in office, we know some of their hot buttons are. So we have a pretty strong sentiment that this is going to be renewed. And it might be enhanced, it might go up above $2,000 a unit. You know, they haven't increased the baseline standard. In a long time that 2006 standard. We've heard that they might bring it up to a 2018 standard. But then instead of requiring a five 0% savings, they're going to require like a one 515 percent saving. So we're still confident it's going to be very easy to not easy but attainable. It's only available for any dwelling units, 33 stories or less. I think there's only one FIG project that I know about. That's four stories. So almost every big project will qualify for 45L.
Let's say and we already established that when you close on land with a construction loan, you're essentially the builder. You probably qualify for 45L. What if you own a rental property and you decide to renovate it? Can you do a 45L after that? If you oversaw that renovation versus if you bought it completed (obviously you didn't do any of that risk) what do we think about that?
We've done that for several FIG investors, folks who've gone in and really done you know, complete renovation, including h fac hot water heaters, you know, taking the property down to the studs, in most cases, putting in new insulation, those will generally qualify for that $2,000 per unit tax credit. So we've seen a lot of FIG investors renovate fourplexes and duplexes may qualify for that gotcha. They may qualify for, you know, we'd be happy to take a look. Again, so the process involves that we examine the plans and the tech technical documentation.
With those, we dis do sort of a pre-qualification. Once we determine that the property's qualified, we entered into an engagement with the property owner, and we conduct a site visit and we actually run the models. According to the IRS-approved software. We run the simulations and you know if we can determine that the dwelling units were free 80% more efficient than we can actually issue certificates for each unit, per the IRS. The IRS has a way that they want us to issue the certificates.
You know, we have eligible certifiers they have I have quite a bit of education or there's, it's spelled out pretty clearly under the IRS guidelines. And it's an actual certification under penalty of perjury. So it's, you know, it's pretty serious. And we're gonna we're certified or to callus or scratch net Ba, all types of certifications that the IRS likes. So we had a case study the Brickyard again or was this one state this was that's the same one in Meridian, Idaho.
And we're ready. So this unit actually had an 8-plex. And we did the energy modeling. And we looked at the mechanical systems and the building envelopes and LED lighting and we determined that the client was eligible for $16,000 in tax credits. Now, this is something you know, prior to buying a FIG unit that they really didn't even know about, or you know, a year ago, Steve, I would say that most folks didn't even know that they were eligible for this.
So we're just trying to raise where it is. It's kind of like hidden treasures you know, for fake owners. So it's a nice thing and most folks are able to use the credits. Everybody you know, it's a taxpayer by taxpayer situation. And I'm happy to walk anybody who's interested through the process. Okay, so this was the Bridgestone crossing, this one is down in. This is in Spring, Texas.
I think it's almost the same plan as the Brickyard and yeah, you know, again, $1,000 in tax credits, you know, a total of 200 units in the complex times $2,000 a unit, there's $400,000 in tax credits in that complex.
This is the form of the credit. One of the forms that we use, it's pretty simple, the total number of units x 2000. There's your credit. There are some other forms. And you know, this is just one of them. I can walk anybody through. And I usually work pretty much hand in hand with the taxpayers, CPA, you know, we get everybody on the phone to make sure the taxpayer can use it. Because we know we can qualify the units.
Some of the real estate benefits, the big thing about the CARES ACT is it did offer tax cuts. You know, most of Biden's I think he pretty much said all his plans, no tax cuts. So some of the things that the cares act, fixed where there was a provision that folks then this applies to commercial property, there was what's called qualified improvement property, which is typically treated as 15-year property. And then we're subject to a 100% bonus, they left that out of the cap tax cuts and JOBS Act. So they fixed it in the cares act.
Any type of qualified improvement property, which really means that you've owned or you've owned a piece of commercial property, and you've been placed in service for more than two years, and then you're going to go in and make a sort of a tenant improvement, you can really expense that 100% as qualified improvement property.
And that was left out of the tax cuts and JOBS Act. But the hugest thing I think is right here this five-year carryback for NOLS using cost segregation and then getting rid of the loss limitations for taxpayers because they those loss limitations, you didn't take 100% of the loss. You were capped at 80%. But they lifted those. And then there are some of these other programs that I think most people are familiar with, you can actually look to your local state governments for some help as well for rent relief.
So this is just kind of an example. You know, you can go through this, but it basically shows when large depreciation deductions may be taken as a Nol, carry back those losses. So it just runs through an example that shows you what the potential savings could be.
And then so this was, again COVID, the COVID-19 wartime response plan, and additional loans forgivable up to 10 grants. I think we know about the SBA disaster loans, and on and on and on. So let's talk about some of Biden and Trump's tax plan considerations, I'm sorry if some of these slides are a little blurry. But you know, right now, it's current law, we've got 21% of corporate taxes. And the nice thing is that there's this 20% overall deduction that most businesses get.
Now Biden wants to raise taxes to 28% on a corporate level, and then phase out the deduction over 400,000. He wants to put income at the top bracket, raise it back up to 39.6. itemized deductions, he wants to cap that 28%. You know, long-term capital gains and dividends, that's the 20% plus the 3.8%. net investment income tax, you know, he was talking about wanting to double, or 39.6. Now that the top, so that's why you got that point four and there.
Again, Social Security, payroll tax, he wants to take the income caps off. And the step up and basis, that's a huge thing for folks looking at, you know, estate planning. And then here's kind of the same thing written in a different way. We just talked about it. And then here's an income example. And I apologize how blurry the slide is, we have to be like four feet away from that and go through that on your own. And then this is a visualization of the cares act, where the money is going to sources, who are receiving the money.
You know, a lot of it was just handed out in checks. That would be the household. Again, this is part of that another visualization of the 1.9 stimulus package, which is the American rescue plan. This one is I think, was passed just after he took office in March. This one, and Okay. And then this one was, this one was under Trump cares that I gotcha. Okay. And then. So then after this one, I think we have the there's the JOBS Act, and I think he's got infrastructure plan too.
I think we have an infrastructure bill on the table right now. And I think we have the American Jobs Act, which may have I don't know if that's been passed yet, or that might be what they're calling infrastructure plan. I see. I see. So this one here, that's why I was mentioned. You know, there are some folks in Utah who may be looking for some housing assistance or rent relief. There's some, there are some options there.
They gave out a bunch of federal money and some property managers knew how to access it and others didn't. And that's, that's the kind of the conclusion. Really, I want to open it up to questions. And then, you know, folks, feel free to reach out to me and the email or call me at my number.
The bottom line is we're looking at potentially a much higher capital gains rate. And some of those business deductions phasing out. Have you heard any rumblings about cost segregation, which you said was going to start to phase out in 2023? Is that correct?
Cost segregation won't because cost seg is court one cases, you know, hospital Corp of America. What what I'm concerned is, is the bonus depreciation. And that's the ability to take the unusually large first year, deductions now, cost segregation in general, you know, front-loads your five and 15-year deduction. So most of your benefit is really seen over the first five years of cost.
Because typically, you know, the five-year property is going to be sort of between 17 and 22 to 25%. And your five-year property on a duplex, or fourplex, excuse me, it's probably going to be about six to 8%. So that's 15-year property, not a 15-year property, land improvements. So sidewalks, curbs, gutters parking lot. Those are the things you can see underground utilities and other drainage and all that that's what you can't see that's also may or may not be part of it.
Depending, you know, most of the flooring and the cabinets and you're just various things inside an apartment building that you can't see, and we can't see. That's fine. That and bonus depreciation on that it's only been around since you know 927 17. So it's sort of been a bonanza for focus on real estate and cost segregation. Maybe going away. I would try to harvest it as much as I can this year.
Any other big boogeyman that we're thinking about?
People who are looking at doing some estate planning, you know, it doesn't seem like there are any homes out there less than a million dollars now. So folks bought this house way back when and you know, for $100,000. And now it's worth a million. Well, you got an $800,000 game there with the way the tax loss stands now, upon death, that property is stepped up. So there's no game, right?
A $100,000 house has stepped up to a million dollars. So if you sell that million-dollar house, there's no game. So it's very favorable. And also the deduction. The exemption is it's over $10 million. under Obama, it was five something now it's close to 11. They're going to bring that back down to about 5 million.
Have you heard anything credible on 1031 exchanges?
They're looking to eliminate those as well. I think there are just too many Democrats that own real estate so we'll see.
Here's the thing about 1031. What they're looking to do is any game that's over a million a half, and you're looking at two different numbers, a half a million dollars, and a million dollars. So any game that's over half a million or a million somewhere in there, as the numbers are thrown around will be subject to the tax, and not you cannot defer that
Excess of half a million in excess of a million. That's what I've heard tossed around. So if you had a gain of let's say they do the half a million. If you had a gain of 600,000, you're free and clear on that. 500. But then you're going to pay the tax on them. 100. But you still kind of Do you still have to do 1031. So you've gone through them, you know, that's not an easy process, especially kind of identify a property right? It's in the time constraints. It's very difficult.
If I can't use all cost segregation in year one, can I get a loss carry forward to the following years?
Yes, you absolutely can. And there's, there's no limitation on that. Typically, you couldn't carry it back, but the carryback is something that's very important to examine as well.
How can we become considered active investors versus passive?
I mean, that really is the 750 hours of material participation, and so on and so forth. I didn't want to up there, what qualifies and what doesn't, but I do have a list of some things that I've gathered over the years, working with multiple practitioners, you know, what I think may qualify and doesn't qualify. If you want to reach out to me by email, I'd be happy to send you that list.
I tell people all the time that this is the holy grail of tax planning. And once again, I'm not your accountant, talk to your accountant, but why You've got one spouse who's working and earning w two, but you have another one that doesn't have a full-time job. The key is, is that your spouse can be the one to manage and deal with the real estate frees up your overall tax return to be an active investor. And that's when you can really hammer away at the taxes that are hitting the W2 spouse.
But it has to be done very carefully. And yeah, needs to be highly, highly documented. But yes, I have a lot of clients. So we had a lot of clients who were athletes, and we would encourage their wives to become real estate professionals. And dentists, and you know, it could be you know, it could be their husbands too, right. But either way, their spouse to be a real estate professional. And you know, what, we see a lot of that with the professionals, doctors, dentists, athletes. High W2 earners, make your figure out a pathway to get your spouse to be a real estate professional. Its bottom line.
Isn't there an issue with depreciating early in that if you sell the property, the IRS wants the money back?
There is depreciation recapture. We used to say, that if you're going to sell the property, within five years, it may not be worth the cost segregation. But now with the rent differential, you can create losses, right? It just depends on what tax bracket you're at.
Because the cost seg can bring you down into a different tax bracket. So that has to be examined as well. So it's not as simple as it might seem.
And yes, right now they call that depreciation recapture. So any excess depreciation, you'll have to if you sell it within a certain period of time, you're going to have to pay the recapture that that was taxed at ordinary income, which was 39.6. And now it's 37.
But with the Tax Cuts and Jobs Act, they actually tax it at 25% right now. So it's not as much as you might, but they're probably going to do that. Just think that anything that was done under the Tax Cuts and Jobs Act of 2017.
It could be a case where you know, we're losing some in column A, but you're making it up over in column B. So everybody needs to get with their tax advisor individually on a question like that.
And it's a time value of money calculation. So it depends on the size. But yeah, basically, you know, typically the old under the old rules, if you're going to sell the property within five years, it's probably it's the only property to have is probably not a good idea to do cost segregation. But, those rules are kind of out of whack, you really have to look at a case-by-case basis.
I personally, don't plan on, selling mine, I take the JG Wentworth strategy, it's my money, and I need it now. Right? And, you know, I want those tax breaks today, and I just plan on holding for cash flow. But yeah, if you're, if you're a short-term investor, you might just create a bigger problem by doing that.
If my Fourplex Investment Group units finish in 2021, or 2022, can I take the carryback loss to my tax returns in 2019? Or 2020?
That depends. 2021 now, you're not the carry-backs only Arise for losses generated in years 2018 to 2020. So now that, you know, if you started in 2020, you know, we have to have the conversation with your account. It's not a hard no.
Is there an income limitation to some of these tax credits and write-offs like 45L? Can you make too much money... cost segregation... can you make too much money and not be eligible?
It depends on if you're active or passive with cost segregation. So really if you can generate active losses, that's when it can be really efficient. Somebody needs to be a real estate professional.
You know, if you have plenty of other passive income plus segregations, right, because you can, you can use grouping rules to take the depreciation on a current faith purchase and spread it around your other properties. Okay. So, yes. And you know, the with the there are AMT considerations. alternative minimum tax considerations with the 45 tax credits, but it's not like you're looking at a 200 unit, you know, $400,000 tax credit.
Typically, these are $8,000 at a time. So, you know, I had a client who had 3018 years in your 32,000, tax prep, and they could only use like $23,000 in tax credits in the current year, with a tax credit of a 22-year life, you can actually carry them back one year, use them in the current and carry them forward up to 20 years. So at some time or another point in time, you're gonna be able to use
With a FIG fourplex that is stacked (four stories), can you get the 45L on three of the units?
No. We can get you another additional deduction that you can get. Up to $1.80 a square foot, I just don't know if it will be cost-effective.
What's your best guess on the final negotiated capital gains rate and its timing start?
They're trying to go with that 39.6. I'm thinking maybe 2825 to 28 and will probably start next year.
What's the reasoning to eliminate the 1031 exchange?
More revenue, I guess. To force the real estate market into a grinding halt.
Will the capital gains deferred through an opportunity zone remain at the existing rate? Or would it be paid at the future rate when it comes due?
No, whatever they are in 2016 is what you're gonna have to pay.
The thing with an opportunity zone is you gotta make sure you have, right, a liquidity event or the money to pay the taxes in 2016. Right, which are, I guess, they come doing, those returns will be filed in 2017. But you still got to pay him in 2016. So but those are great. I mean, if you know, if you've got a 10 year hold time horizon, opportunities are great. They really are because you can keep your principal and you only have to invest your capital gain portion.
We probably have time for just a couple more, they just keep counting. It's like none of these people want to pay taxes. I don't know what their problem is.
So you can always reach out to me individually. I know a lot about the opportunity zones as well. I know Vegas, great project projects for opportunity zones as well.
Yes, yeah, we've got a couple of those going. Okay, we'll do a couple more than we're going to have to punch out.
I know 100% bonus depreciation will start to phase out in 2023-2026. But isn't 100% bonus depreciation for new construction still going to be available?
Since I believe that was possible before the tax cuts and jobs act? My understanding is that the tax cut and jobs act unlocked 100% bonus depreciation for existing buildings or acquisitions but new construction was always possible...
You would hope so because that makes 100% sense. In terms of stimulating the economy, construction has a five times multiplier on the economy. I think we've all seen that just in realizing the supply chain shortages that beset us in the last six months.
I would hope, that whoever's, you know, writing this legislation would see the value of construction, and hopefully, it won't affect the properties because of that. We'll all agree to cross our fingers on that one.
Is there or could there be any kind of coordination between FIG owners for the 45L energy tax advantages for under-construction, FIG properties?
Do we all have to pay for the site visit as I know you've kind of knock these out project by project, correct?
You can just reach out to me for, you know, individual pricing. Typically, we set that up and coordinate with Mark for those site visits. That's the price he is part of these studies, oftentimes, is you got to pay somebody to go out there, wherever your real estate is.
The biggest part of it is a contingent liability because we do provide 100% audit defense. So you don't have to worry about us not being there to defend the studies. And, you know, we probably did 1000s and 1000s of studies last year on energy certifications. And, you know, we don't we haven't been audited once.
The only thing that we were audited on once is, because they don't have the technical wherewithal to audit what we do on the energy modeling side, but they do have the ability to look at the place in service state, and when you claim the credits, well, that's, you know, just reach out to me on that, because the credits are supposed to be there's there are criteria on when those credits are supposed to be claimed.
In short, multiple Fourplex Investment Group investors use Mark Barbour in every project for 45L.
Our FIG unit was built in 2020 and completed in 2021. What year would be the first year?
The way the statute is written as the substantial completion so is that a certificate of occupancy? Probably yes. And then they want the units to be leased or sold. So this is what we see, we see units that maybe have the certificate of occupancy at the end of 2020. But you don't actually get them leased until 2021. So that's actually when you would claim the credit in 2021. Now, okay, remember, you can carry that credit back one year, so but you can't do all that until then.
Here's another thing I wanted to throw out there. So we know this, we know these are going to roll off 45L at the end of the year. And you know, I've seen this with bigger projects, because I've been doing this now for over 10 years, going back to 2006. And when this provision sunsets, you know, we see people get, you know, they've got hundreds of units on the chalkboard or the drawing board and they're getting, they're getting ready to complete them, but they're not least and I've seen people, you know, go to companies like Airbnb and just get a master lease for their whole building. So anyway, my point is that there are workarounds.
Mark's contact information is in the video. We really appreciated him joining usNow that the world appears to at least think about normalizing a little bit, we look forward to bringing more multifamily and build-to-rent content out to the world and hopefully will return to some of our in-person networking events soon.
Keep your eyes peeled for that as well.