How the Rich Pay ZERO Taxes w/Real Estate Cost Segregation Studies

Episode #823

What’s the key to paying ZERO taxes? A cost segregation study. Never heard of it? Most real estate investors haven’t, but we’re about to unlock a world of tax-free income earning using this specific tool. If you’ve wondered how the wealthy pay such few taxes while owning million-dollar-producing real estate, this is how. In today’s episode, you’ll learn how to use cost segregation, too, so you can keep more money in your pocket.

Taxes aren’t everyone’s favorite subject, but paying fewer taxes? You can probably get behind that. We’ve brought on CPA and CFP Mitchell Baldridge to explain how he helps real estate investors, large and small, delete their taxable income and build their real estate portfolios faster. Our own Rob Abasolo uses Mitchell’s team to cut his taxes down by more than six figures!

In this episode, we’ll explain what cost segregation is, why so many top real estate investors use it to lower their taxes, when you can (and can’t) use it on your properties, the short-term rental tax “loophole” to take advantage of, AND what happens when you do it wrong.

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00:00 Intro

02:31 Quick Tip

03:56 The Tax-Free Strategy

07:24 Cost Segregation Explained

16:33 Bonus Depreciation

22:07 How to Write Off W2 Income

28:38 The Short-Term Rental "Loophole"

37:07 The Free Down Payment Property

41:04 It's NOT Too Late

43:06 Caveats and Risks

52:07 When is Cost Seg Worth It?

55:08 Connect with Mitchell!

[biggerpockets]

What's your top question about taxes for investors? Let us know in the comments!

[DanKohan]

This video explains how real estate investors can save on taxes using cost segregation. It's like getting a bigger tax refund by breaking down your property into smaller parts and deducting them faster. Bonus depreciation is like a supercharge for these deductions, letting you reduce your taxes even below zero and potentially get money back. This is a must-know for anyone into real estate investing. Thanks for sharing this tax-saving trick!

[Ryanfeaton]

hey David, My question is - can the depreciation you take from a cost seg study reduce your tax liability on a sale of investment property? for example, i’m waiting another year to sell my primary home, which has previously been an investment property, so i can avoid capital gains taxes by it being my primary for two years. I’m a travel nurse and the home is rented currently so i still have the option to designate it as primary or investment property for tax year ending 2023.. not sure which way i want to go. id love to sell it now but my gains would be around $275k. i won’t sell with the capital gains that go with that, but i purchased 2 investment residential homes, one in 2022 and one in 2023 worth about 300-400k each. i was thinking i could do a cost seg on each of those and knock down my tax liability on the sale of my other home. is that how it works? if i could get my capital gains based on a 100k or less i can take that hit but not on 275k. and, please let me know your insight on, ballpark, how much the cost seg on a 300 or 400k home would even be. is it worth it?

long question. thanks for considering an explanation on this.
Ryan from New Orleans and Colorado and other places.

[rajanyoume]

Can you rent your primary property for short term rental and qualify for W2 tax reduction?

[frobinson]

Dave and Rob giving out the good stuff on this episode. I 🖤 accounting and taxes taxes taxes.

[TJ-thhw]

Awesome “Seeing Green” episode as always! Thank you for providing great answers to great questions.

[monto]

If I close on a property 12/29/23 and put it in to service that same day as an STR, can I perform the cost seg study on 12/29/23? The strategy here is to get the 80% (2023) vs. 60% (2024) bonus. GREAT episode!

[calvinb]

How does cost seg work with a STR house hack? For example, I spent money to finish my unfinished basement to make it a separate entry STR. Can you use the expenses of the materials, labor, and furniture to get it up and running towards cost seg? I am asking this because I feel like for investors to get started nowadays, housing hacking/owner occupied situations are a must considering increasing STR restrictions and higher barriers to entry in some areas. Thanks for the great talk!

[thejollyredgiant]

What if you 1031 and do all the tax stuff then at the end you seller finance your portfolio. Does that negate any of that because its debt payback? Or when the term of that seller financing is completed you get slapped with all of those deferred taxes?

[thejollyredgiant]

I plan to go full time in real estate (wholesaling) within the next 16-18 months. If im understanding this correctly i can only get the tax benefits from my rentals against that wholesaling income IF I am a real estate professional because wholesaling produces ACTIVE income. Right?

[jasonbrungardt]

Great episode! As investors we are always looking for some way to extract extra profits out of profits. Taxes... A penny saved is a penny earned. Not stressed enough. Thanks so much. Just to be clear, if you buy properties, take advantage of accelerated depreciation, and never sell the property, does that tax liability go away at your death and your properties are transferred to your family?

[thejollyredgiant]

If I have a 2/1 thats a LTR and an separate ADU that I make an Air BNB can I depreciate the entire house against my active income? Hope that makes sense

[MikeHawk]

Feel like Rob has sold cost segregation in viral videos, as Wiping Out taxes, or Pay No Taxes. He’s figuring the ROI of a lowered tax bill, same as cash in hand, when figuring cash on cash returns. Sorry this seems very wrong. From my understanding cost seg is actually just tax deferring and actually can cost more in taxes in the future when you have to eventually pay them down the road as explained in this video.

[vmrosales]

Am I the only one or is the video not starting

[JohnSmithh]

You guys kept saying it's a defferal you have to pay later, but you never said the situation when you ay it later??!!! So when/how do we have to pay the piper?

[TrevorRiley]

I thoght you were able to use losses to offset your w2 income if you made under $150k or something like that? Maybe I read that wrong somewhere.

[mrwiseman]

Regarding Rob’s property he mentioned he was going for that’s costing 2.3 million... Bro what kind of market does a property cost 2.3 but only yield 30-40k revenue per year lol.

[mike]

Ehh..I own the restaurant. That’s helped me fund real estate purchases. Your example of depreciated assets are a bit off.
There is no actual dollar amount listed by the IRS that says anything over say 5K must be depreciated. The only language is real estate and vehicles. So, yeah. I purchased a 5K dish machine. Funny you brought that up. I expensed it all in the same year. You are not forced to depreciate a 3K computer but not a 1K computer.

[WG]

Tax benefits... if you don't reap it, you keep it!

[SarahMayet]

You left a lot out and could of condensed a lot of this content in a much shorter time.