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Yonah Weiss Real Estate Background:
-Business Director at a national cost segregation leader, Madison SPECS
-Has assisted clients in saving tens of millions of dollars on taxes through cost segregation
-Generated over 70M in loans in his first year of work at a small financing company.
-Got his broker’s license and went from agent to partner within 6 months
-Based in Lakewood, New Jersey
– Say hi to him at www.yonahweiss.com
– Best Ever Book: As Long As I Live
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Yonah Weiss. How are you doing, Yonah?
Yonah Weiss: I’m doing awesome today, Joe. Thanks for having me
Joe Fairless: My pleasure, and I love that you are doing awesome. A little bit about Yonah – he is the business director at a national cost segregation company called Madison SPECS. He has assisted clients in saving tens of millions of buckaroos on taxes through cost segregation, and we’re going to be talking about that.
Within that conversation, we’ll be talking about how the new tax code has implications with cost segregation. His company is based in Lakewood, New Jersey. With that being said, Yonah, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Yonah Weiss: Absolutely. I have not a long background in cost segregation, however the firm I worked for, which is basically all of my knowledge I have on the subject is from the superstars that work there. They’ve been in business for 12 years, Madison SPECS, and the CEO is a former head of cost segregation at KPMG, as well as Grant Thornton; so two of the biggest accounting firms in the country.
Our executive is awesome, people to work with side by side… I’ve learned from the best. I’ve been in real estate investing for a number of years now. I did a little work with flipping houses; it kind of wore me out… And commercial real estate brokering, hard money loans, and found my way to Madison, which is an amazing commercial real estate company, which they do title agency, 1031 exchange, qualified intermediaries, they do lease abstracting and due diligence – a number of things, but cost segregation is the spec department which I work for, which is incredible. As I’m sure you well know, Joe, it can’t get better than saving taxes, right? Nothing will make you happier.
Joe Fairless: Yes, absolutely. I agree, and we do cost segregation on our properties. We’ve had guests on the show who talk about cost segregation, so we won’t spend a whole lot of time on the nuts and bolts of it; we’ll get more advanced. But just for anyone who’s not familiar with what cost segregation is, what is it and who should use it?
Yonah Weiss: Excellent question, as always. Best Ever listeners, cost segregation, which is the weird name that IRS gave, this wonderful opportunity to save money on taxes, is a way to accelerate depreciation. Depreciation is a normal deduction every investment property owner takes on his taxes, which usually is split up into either a 27-year length for residential properties, or 39-year length process for commercial properties. So Joe, you have apartment buildings, right?
Joe Fairless: Yup.
Yonah Weiss: So you’re depreciating those. If you weren’t doing cost segregation, you’d be depreciating those over 27,5 years. So your normal apartment building that costs ten million dollars, let’s say – that’s small for you, but let’s say you have one that’s 10 million dollars… You’re gonna split that up and take 1.27th and a half, one fraction of that every year on your taxes, which is great, and it’s a great deduction. However, with cost segregation you can go in with an engineer who is well-versed in the tax code and break the assets of the property into three categories, basically. Five-year assets, which means things in the property that actually depreciate over five years instead of 27 years, or 15 years instead of 27 years, so you can actually take those deductions, and that’s called accelerating that, getting it upfront within the first years of the property.
Same holds true with the 39-year, as you said. That’s over 39 years, don’t wait that long! Take it all upfront, so you can have that cashflow. Don’t pay the IRS, rather keep the money in your pocket, and that’s basically what it’s about.
Joe Fairless: And you said three categories – you said 5 and 15 years. What’s the third category?
Yonah Weiss: The third category is really the 27,5 or the 39-year, which is [unintelligible [00:05:20].15]
Joe Fairless: Okay, got it.
Yonah Weiss: There are some things that are 7 years, and there’s some complicated things that someone’s doing in alternative depreciation life, which is totally different numbers, but it’s rare. It’s out there, but if you’re doing that, you’re not listening to this podcast and finding out the basics about cross segregation. [laughs]
Joe Fairless: And what are some of the typical items that would be in each of those three categories? The 5, the 15 and the 27.
Yonah Weiss: So the 5-year property is categorized as personal property, tangible property within the building. The main building structure depreciates over 27.5 or 39 years. Within the property you have stuff like carpeting, light fixtures, shelving, even tiles, wiring, electrical work, plumbings, and there’s really over a dozen categories of these types of things. Within the building, that can be broken out into every little tiny detail with an engineer who’s specialized in it.
All those things appreciate over five years, and it also includes appliances and all kinds of electronic equipment. So when you’re talking about a factory or certain types of industrial properties that have a lot of that stuff, you’re gonna get a whole bunch of extra depreciation deductions through that 5-year property.
This other category we mentioned, the 15-year – that’s the outside of the building. So we’re talking about land improvements, signage, landscaping, pavements, asphalt… Every property has a pavement; you’ve got a sidewalk, you’ve got a driveway, if it’s commercial you’ve got parking spots – all of that can be depreciated over a faster life.
Joe Fairless: And then the 27,5?
Yonah Weiss: That’s the building. That’s stays to the main building structure.
Joe Fairless: I believe you can do it down to the screws, the nails… You can get it to that level. Where would the screws and the nails be?
Yonah Weiss: So screws and nails – depending on how they’re fastened, but a lot of those can be into the 5-year property. It’s not actually part of the building. If you have wall coverings, but it’s fastened to the wall with screws – all those wall coverings and the screws themselves can actually be depreciated over five years, because it’s not actually attached to the building. It’s not part of the building in its essence.
Joe Fairless: So basically, you’re reverse-engineering the entire building to see what components it’s comprised of, and then identifying depreciation (accelerated level) for each of the items that the building and the land comprises of.
Yonah Weiss: Yeah. You’re reverse engineering it – I like the way you say that – when you buy a property… But Joe, when you and the Best Ever listeners build a new property, or you do major renovations – and this is something a lot of people don’t know – you can double dip with the cost segregation when you do major renovations… Which means you can accelerate depreciation of the property when you buy it, [unintelligible [00:08:10].29] then when you renovate, you write off all that stuff you just accelerated, that falls in that category. When you put in the new stuff, you can go ahead and do it right over again – accelerated depreciation on that new stuff.
So it’s not even reverse engineering. What you can do is you can bring an engineer, like one of ours from Madison SPECS, to actually advise you what types of properties should I use so that I can maximize the depreciation on the building. Should I install this with tacks or should I use glue? It would really make a difference if that’s considered 5-year property or 27,5-year property.
And then just so it doesn’t sound like magical or too good to be true, we’re accelerating depreciation, but what happens whenever we sell the property?
Yonah Weiss: Whenever you sell any property, Joe, what happens?
Joe Fairless: It gets recaptured, doesn’t it?
Yonah Weiss: Anytime you sell a property, when you take depreciation, it gets recaptured. So you’re not really losing out by doing it in the accelerated way, unless you actually sell it right away, immediately after doing accelerated depreciation. Because what happens is after 3-4 years, even if you don’t wait the whole five years, which is your appliances, carpeting and all that stuff, will depreciate over five years; once you wait 3-4 years, when you sell that property, you can say all that stuff has already been depreciated. You don’t take any recapture on that stuff.
Joe Fairless: Oh, yeah, that’s interesting.
Yonah Weiss: You only recapture on the regular depreciation that you would have had had you sold the property without cost segregation.
Joe Fairless: That is a good point, a good distinction. I’m glad you brought that up. So if you hold on to it longer…
Yonah Weiss: A lot of people don’t realize that. They think, “Oh, if I’m taking all these depreciation deductions upfront, I’m gonna get hit really hard when I sell this in 3, 4, 5 years from now”, which is a normal exit strategy for someone like yourself, right? Five years, six years, seven years. But you’re not gonna get hit, because all that stuff has already been depreciated.
Joe Fairless: Yeah, in that case it truly is free money that you’re saving from the depreciation, because if you sell in six years, then through the depreciation if you didn’t accelerate it, then you wouldn’t have got that upfront, especially because the life of that object is over with, from a depreciation standpoint, after five.
Who is your ideal client? And I ask this because I’d love to know what is the range of lowest – I’m sure the highest is whatever the biggest building is, so maybe just the lowest… What’s the threshold for when you should do cost segregation and when you shouldn’t?
Yonah Weiss: So the highest – that’s easy. The more depreciation you have, the more the property is worth, and we’ve done some properties that are literally billion-dollar properties, some skyscrapers in New York. They’re getting huge, massive depreciation deductions.
The low-end, which I assume a lot of the Best Ever listeners who are thinking of investing in real estate, who are already investing in real estate and have invested in properties, really what I say is if you bought it for less than around $500,000, it’s borderline. More than $500,000 – we’re gonna get benefit out of it and it’s gonna be worthwhile, because even the expense of running this study, which is not a lot on a small property (around a few thousand dollars), the benefits are gonna be upwards of $50,000 to $100,000. It’s still gonna be worth it.
Less than $500,000, it depends on a number of factors – how much the land allocation, which we didn’t mention, but land does not depreciate… So whenever you buy a property, you have to deduct whatever percentage was allocated to land; generally, somewhere between 10% and 20%. In other areas it’s more.
So that’s what I’d like to say, but it actually is a great segue, that question, Joe – I don’t know if you’ve realized it, but it’s a great segue into bonus depreciation, which is something that got a huge bonus or upgrade in the new tax reform just a couple months back.
Joe Fairless: Let’s talk about it. First, a real quick note on the land thing – when I was buying my single-family home starting out, I would only look for homes that ate up the entire lot, so there’s very little backyard because of that, because you can’t depreciate the unimproved land, you can only depreciate the structure… So I wanted to buy a house that had the whole lot, plus on top of that it’s pretty good for maintenance, too. So bonus depreciation, new tax code – hit us with it.
Yonah Weiss: Okay. Everyone loves a bonus, right? Bonus depreciation is not new, but before the new tax reform, if you constructed a new property or you did major renovations of a new property, you could depreciate that as a normal asset over the 27 years, 39 years, or you could accelerate it to 5 and 15 years… But there was something called bonus depreciation, which meant when you built something brand new, in the first year of building that or constructing that, you take 50% of the value of whatever you built, and depreciate 50% of that in the first year, meaning you’d take a huge, big, whopping 50% of the value and deduct that depreciation in year number one. That was what it was before this new tax law.
What happened is they invented a date – September 28th, 2017. What happened on September 28th, 2017 is that if you bought a property, after that point, from 2017, September 28th, and onwards until when it runs out – who knows when that’s gonna be, but they gave a date of 2023; we’ll see what happens until that point… Now you can take something called bonus depreciation on any property that you buy – not just new construction, not just major renovations. If you buy a new building, you can opt for bonus depreciation on that new asset, and I assume Donald Trump or a bunch of the members of Congress bought a bunch of properties after September 28th, because they wanted to get that extra thing, instead of making the law start January 1st, which would be logical. But nevertheless, that’s the law.
Not only 50%, Joe, and Best Ever listeners, 100% bonus depreciation. 100% means if you buy a new house, if you buy a new property, an apartment building, industrial, whatever kind of property you wanna buy, and you go ahead and do accelerated depreciation – we bring an engineer down and get all those five year assets and all those 15 year assets in the property, get all of that and they say “Hey, you know what? We found about 20% of your property’s value can be depreciated at a faster rate – 5 years, 15 years.” That’s great! I’m gonna get those deductions over 5 years, or 15 years; that’s gonna give me a lot more cash in my pocket.
You can say hey, you know what? If you have a ton of taxes you’re being taxed on this year, you can opt to take 100% of what you would have spread out over those 5 and 15 years, take 100% of that in year number one.
Joe Fairless: That’s incredible.
Yonah Weiss: Unbelievable. So you’ve got people who have a huge tax liability, and the deduction from depreciation or even accelerated depreciation is great, but it’s not enough to knock their tax down to zero. But we wanna knock tax down to zero, Joe, and Best Ever listeners. It’s great to pay taxes and be a good citizen, but there’s a reason why they gave the deductions – because they want you to be investing. They want real estate to be happening. It’s good for the economy, it’s good for everyone… So get a bonus! 100% bonus depreciation.
Joe Fairless: Yeah, I’m glad you talked to us about that, because that’s something that we should certainly be aware of with the new tax code, and it could be a huge difference maker.
Taking a step back, before this you were flipping homes, did some commercial real estate brokering and some private lending, and now you’re focused on the business director for cost segregation at Madison SPECS… What is your best real estate investing advice ever?
Yonah Weiss: The best real estate investing advice is if you are not doing it yet, you have to apprentice; you have to hang around people who have been doing it and know what they’re doing, and learn from people who have experience. Don’t try to reinvent the wheel. You can listen to all the podcasts you want, and they’re amazing, but the experience you’re gonna get is being on the floor, on the ground, in the dirt, with people who know what they’re doing.
That’s what I have been blessed with – incredible people in my life that I have learned from and apprenticed under, and I’m incredibly grateful to them for what they’ve given to me and what they’ve taught me, and I learn more every day, from everyone I speak to. It’s just amazing how much you can learn being on the ground, involved, hands-on. That’s the way to do it.
Joe Fairless: Yeah, that is the best way to do it – to be on the ground, hands-on. I completely agree. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Yonah Weiss: Let’s do it!
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Break: [00:17:39].11] to [00:18:20].17]
Joe Fairless: Best ever book you’ve read?
Yonah Weiss: Best ever book I’ve read… You’ve had – how many podcasts? Over 1,800? I bet nobody has ever picked this book before; it’s a book called “As Long as I Live: The Life Story of Ahron Margalit.” It was originally written in Hebrew, translated into English and a number of other languages. Incredible life story, check it out.
Joe Fairless: I will. I definitely will. What is the best ever deal you’ve done, going back to your fix and flip and private lending days?
Yonah Weiss: Oh, you know what? I’m gonna change that up and I’m gonna tell you the best ever deal that we did in cost segregation, just because it blows my mind.
Joe Fairless: I saw that coming.
Yonah Weiss: Can I do that?
Joe Fairless: Of course, yes. [laughter]
Yonah Weiss: And if I have time and I do it lightning fast, I’ll even do two. First of all, the biggest property we ever did – I think it was one of the largest properties in the nation, which is the Rochester Tech Park up in Rochester, New York… Over four million square feet of office, industrial warehouse; it took two engineers over a week, every day going down there and analyzing the entire property, and we got them over 8 or 9 million dollars of extra depreciation from that. It was just miles and miles of asphalt. It was incredible. So that’s something incredible, to know what cost segregation can do.
Another amazing story – just blows my mind. You may not have tax liability, you may not be taxable, and you think “Oh, cost segregation is not for me.” We had someone we were prospecting for 3-4 years, trying to get him not taxable. A lot of the stuff that he got was inheritance. He had a step up in depreciation, which we can talk about that after, if you want… And he just was not taxable. We tried to get him, called him up – this was just recently – and he says “You know what, I have 60 properties that just became taxable. [unintelligible [00:20:01].15] until now. Now I do. I’d love you to come here”, and it’s like a few weeks before the tax deadline, and we’re talking about the extensions… And he wants to get it done. He says, “I have 60 properties, walk-ups in the Bronx and Brooklyn. Can you do it?”
We did it, and we found over 30 million dollars of depreciation. This guy’s tax deferred until 2023, he’s not gonna pay any tax.
Joe Fairless: [laughs] It’s incredible. What is the step up that you mentioned?
Yonah Weiss: When you inherit a property, even though the property was depreciated by someone’s father or grandfather or whoever they inherited from and it’s fully depreciated, when you inherit that property, you actually get, depending on who’s the inheritor, either 50% or 100% step up in depreciation, which means depreciation basically starts over, as if you bought it brand new… Which we didn’t mention – another thing is people think depreciation is “Oh, my building was built in 1947, so there’s no more depreciation on it”, right Joe? No, when you buy a property, depreciation starts over from day one for you. It has nothing to do with the actual life of the building.
Joe Fairless: What is a mistake you’ve made on a transaction?
Yonah Weiss: A mistake I’ve made on a transaction was hiring a contractor who I didn’t really know so well. He came from recommendations, but at the end of the day he ended up screwing us, stealing a bunch of money, and I’m still paying it to this day.
Joe Fairless: When presented a similar scenario again, how would you change your approach?
Yonah Weiss: I think I would do a lot more research on who the contractor was, and gotten to know some work beyond [unintelligible [00:21:35].28] from beginning to end, on other projects, as opposed to just hearing good words from him from people I didn’t 100% know.
Joe Fairless: Best ever way you like to give back?
Yonah Weiss: I actually founded a 501(c)(3) charity about ten years ago for a community in Israel, so we have hundreds of poor families we give during the holiday times food, coupons and clothing coupons, so they can go out and take care of their families, and be proud to have new clothes and food for the holiday times.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Yonah Weiss: A great way to get in touch with me is LinkedIn, I’m pretty active on there. You can reach me on my direct line, 732-333-1477, or e-mail yweiss@madisonspecs.com.
Joe Fairless: Thank you so much for being on the show, talking to us about cost segregation; what is it – it’s accelerating the depreciation… Categorizing things in the three different categories – 1) 5 year, 2) 15 year, and 3) either 27,5 or 39 years… Your entire building and all of the improvements on your land will be in those categories; you depreciate them faster than what you would just a blanket 27,5 or 39, therefore you get advantages on your taxes earlier than what you would normally, and in some cases if it’s 5 years (in that category) and you have the property longer than 5 years, then you’re gonna come out ahead even more so.
Plus, talking about the bonus to depreciation code with the new tax code, and how we can benefit from that… So thank you so much for being on the show. I hope you have a Best Ever day, and we’ll talk to you soon.
Yonah Weiss: Thanks, Joe. Joe, can I add a quick question before we sign off?
Joe Fairless: Absolutely.
Yonah Weiss: Just hearing from you, you’ve had a couple cost segregation guys on, but I’d love to hear from you, who yourself is a property investor – tell the Best Ever listeners why you think cost segregation is good, or what it gives for you and your investors.
Joe Fairless: Well, I just mentioned it… It’s saving on taxes early on; it’s accelerating depreciation, so more money in our pocket early on.
Yonah Weiss: Okay, awesome.
Joe Fairless: Sweet. Alright, have a best ever day, and we’ll talk to you soon.
Yonah Weiss: Thanks, Joe.
