Interview with Cost Seg Expert Eden Markowitz on Why Mobile Home Parks Are A Known Tax Shelter for the ULTRA WEALTHY!

SHOW NOTES

Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew talks with the highly experienced cost segregation expert Eden Markowitz from Madison Specs, one of the largest cost segregation firms in the country with over 17 years of experience.

In today’s episode Eden and Andrew discuss why Mobile Home Parks are one of the best asset classes in commercial real estate for COST SEGREGATION! They do a deep dive into what cost segregation is, Why it is so important right now for Mobile Home Park investors and what the best ways to use it are in order to maximize your tax savings via accelerated depreciation. Tune in now to learn how you can maximize your tax savings via passive mobile home park investing!

***Andrew Keel and Keel Team Real Estate Investments (Keel Team, LLC) do not endorse any interviewee. This interview is for informational purposes only and should not be depended upon for investment purposes. ***

Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 2,500 lots under management. His team currently manages over 40 manufactured housing communities across more than 10 states. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities. Check out KeelTeam.com to learn more.

Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews:  https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy, Andrew’s team usually moves on location during the first several months of ownership. Find out more about Andrew’s story at AndrewKeel.com.

Are you getting value out of this show? If so, please head over to iTunes and leave the show a quick five-star review. I have a goal of hitting over 500 total 5-star reviews, and it would mean the absolute world to me if you could help contribute to that. Thanks ahead of time for making my day with your five-star review of the show.

Would you like to see mobile home park projects in progress? If so, follow us on Instagram: @passivemhpinvesting for photos and awesome videos from our recent mobile home park acquisitions.

Talking Points:

00:21 – Welcome to the Passive Mobile Home Park Investing Podcast

01:34 – What is a cost segregation report? And when should you order one?

06:00 – Writing off CAPEX expenses

08:13 – Structural versus land improvements

10:50 – Bonus depreciation and the different parts of a mobile home park

14:00 – Tax savings

14:50 – Bonus depreciation phase out, 80% in 2023

16:00 – Flipping mobile home parks and the 25% depreciation recapture tax rate

17:45 – The 1031 Exchange

20:05 – The requirements for getting the real estate professional status (irs perspective)

21:09 – Getting a cost seg on a $200,000 purchase price?

22:06 – Are there additional audit risks with getting a cost seg report?

23:25 – Case Study for a property with a purchase price of a million dollars

27:35 – Goodwill allocation

31:00 – Quick calculation for cost segregation savings

32:00 – The importance of timeliness and documentation

33:22 – Depreciation against capital gains tax

36:34 – Educate yourself and spread the word on cost segregation and saving money on taxes

37:51 – Reaching out to Eden

38:00 – Conclusion

SUBSCRIBE TO PASSIVE MOBILE HOME PARK INVESTING PODCAST YOUTUBE CHANNEL https://www.youtube.com/channel/UCy9uI3KGQmFgABsr9lUtRTQ

Links & Mentions from This Episode:

LinkedIn: https://www.linkedin.com/in/eden-markowitz-11869982

Facebook: https://www.facebook.com/eden.markowitz/

Eden’s email: emarkowitz@medicinspecs.com

Keel Team’s official website: https://www.keelteam.com/ 

Andrew Keel’s official website: https://www.andrewkeel.com/ 

Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel 

Andrew Keel Facebook page: https://www.facebook.com/PassiveMHPinvestingPodcast

Andrew Keel Instagram page: https://www.instagram.com/passivemhpinvesting/

Twitter: @MHPinvestors

---

TRANSCRIPT

Andrew: Welcome to the Passive Mobile Home Park Investing podcast. This is your host, Andrew Keel. Today, we have an amazing guest in Mr. Eden Markowitz from Madison SPECS.

Before we dive in, I wanted to ask a real quick favor. Would you mind please taking an extra 30 seconds to head over to iTunes to rate this podcast with 5 stars? This helps us get more listeners and it means the absolute world to me. I love reading those reviews. This makes my day, so please, if you wouldn’t mind leaving that five-star review, I would really appreciate it. Okay, let’s dive in.

Eden Markowitz is a cost segregation expert with Madison SPECS. They are one of the largest cost segregation firms in the country with over 17 years of experience.

In today’s episode, we will discuss why mobile home parks are one of the best asset classes in commercial real estate for cost segregation. We are also going to do a deep dive into what cost segregation is and why it is important right now for mobile home park investors. Also, we’re going to touch on the best ways to use it in order to maximize your tax savings.

Eden, thanks for coming on. Welcome to the show.

Eden: Pleasure to be here. Thanks for having me.

Andrew: Eden, would you mind starting out by giving our listeners a brief explanation of what cost segregation is and why it is important in 2023?

Eden: Cost segregation basically is accelerating your depreciation. For all the listeners out there that don’t really know what depreciation is, real quick. Every year if you own an investment property outside of your personal residence, you get tax deductions. On residential properties, a 27½-year depreciation schedule, on commercial properties like retail centers, office buildings, you’re on a 39-year commercial property.

If you do nothing about that, you take the land value and you divide it by 27½ or 39 years, and that’s what your deduction looks like every year. That’s what we call straight line depreciation. If you never did a cost segregation study, that’s what you’re looking at every year.

We all talk about how real estate is great for taxes and tax benefits. Even if you did no cost segregation study, still benefits of owning investment real estate. Now, the better part is cost segregation. There are certain aspects of every property that you own that are on a shorter lifespan than 27½ or 39 years.

In a residential property, we’re talking about flooring, cabinets, light fixtures on the inside, window shades, all these items on the exterior. There is concrete, landscaping, fences, tons of items that are not going to last 27½ or 39 years that can be accelerated.

What cost segregation essentially is doing is breaking down every aspect of any investment property you own, putting it in its proper categories (buckets), and getting you those benefits when you really should be getting them, as opposed to waiting all those years and doing nothing if you didn’t do a cost seg study.

Andrew: That’s awesome. Would you mind telling us what’s the average cost of a cost segregation study on a mobile home park?

Eden: For mobile home parks, I would say somewhere in the $4000–$6000 range, depending on the size and the intricacies. The more structures you have—you have C-stores, you have self storage, and you have laundry facilities—it can get a little bit more complex. Depending on the size and what is on the property, we’ll create in our free proposal (which we’ll talk about later on) the cost for each specific property.

Andrew: Got you. How long does that usually take to do a cost seg study? Because You guys have to actually physically go on site, typically invited, inspect the property to classify and put things in those buckets.

Eden: Depending on the time of year, we’ll get a lot of last minute people, just hey, I need this done in five days or in two weeks. The normal, I would say average, is 2–4 weeks. If I have people reaching out today—we’re three weeks away from the October 16th deadline—that needs stuff done in the next three weeks, we try to make ourselves available for last minute studies.

I always tell people, if you know you’re going to need them—which a lot of people do—be proactive, get it to us earlier on after you close on the property, that way you’re not scrambling at the last minute. But to answer your question, 2–4 weeks is the general time spent to get them done.

Andrew: Is there an ideal time of year to order a cost segregation study?

Eden: Closer to deadlines is a little bit crazier. If there are any revisions that need to be made last minute—you forgot to provide some information and whatnot—as the deadlines come, I’m up until two o’clock in the morning before the deadline doing last minute stuff.

The ideal time is after you close on a property. If you know you’re going to need it, just get it done. My philosophy is to be proactive. Once you close on the property and you know you’re going to need it done for that year, just get it out of the way and submit it beforehand. That way you’re not stressing, we’re not stressing, the study is done and good to go, ready for taxes.

Andrew: One thing that I learned about cost segs is it’s not just about getting it done before the October 15th timeline. We just ordered all of ours for the properties we bought this year, and it’s late September. We have a goal every year of getting our K-1s out by March 15th, so we order them now.

They take a little bit longer because we have so many of them to come in. Tell me if I’m wrong here, but CapEx expenses that we spend from now through the end of the year are all depreciated as well.

If we spend money rehabbing mobile homes or installing signage, installing new fencing on a new acquisition that happens maybe two weeks from now, you’ll take the financials of what we spend from now until the end of the year and add that into our amount that can be depreciated. Is that right?

Eden: Correct. We’ll usually look at the purchase. When you purchase the facility (the park), we’ll look at it the way it was when it was purchased. That’s one important thing to start looking at. Even if you owned a property for three or four years, if you’re putting in 25 new pads or whatever, landscaping, or putting in new fences or anything, I usually like to say $75,000 or $100,000 and up. If you’re spending $200,000, $300,000, $400,000 in CapEx, that will warrant us to take another look.

Even if you bought the property two or three years ago, you’re talking about a scenario where you bought the property this year and immediately or a few months later, you’re doing significant improvements. Improvements are always great for cost seg studies. It’s a different way because we’re not looking at existing structure. We’re looking at your budget and whatnot.

Andrew: Let’s say we bought a property, so I want to do it on what we’re buying, but I also want to include the CapEx that we’re spending. Because we bought it for a million dollars, we spent $300,000 on infill and on that stuff. I want all that to be included in the 2023—

Eden: It can be done in the same study. A lot of times, we deal with people who are doing it in the next tax year or a couple of years later. They’re waiting to fill up the existing spots and then they’re doing the CapEx a year or two later. Like you said, if you bought it and immediately you’re adding 25 new pads or doing significant improvements, you can do it all together.

Andrew: Got you. Is there a purchase price limit that you recommend? Does it cost segregation study makes sense if you buy just a small nine-lot mobile home park and maybe it costs $250,000. Does it make sense to do a study on that?

Eden: That’s where mobile home parks differ from most asset classes. I think we’ll touch upon this in the episode. Because the numbers are so high for mobile home parks, the percentages that we’re able to get on the cost seg are so high, I would say $200,000 would definitely be of value to do a cost segment study.

Whereas if you brought me an office building or a single family house that was $200,000, it may not make sense because the percentages are so much higher than most asset classes.

Andrew: Why is it higher for mobile home parks?

Eden: We touched on this a little earlier, but basically what we’re doing is breaking down the different components of the property and getting their lifespans in different buckets so that we can accelerate what’s acceleratable.

Mobile home parks, there’s not much structure. If you’re buying multifamily, you’re buying an office building, retail center, a lot of that is made up of the building. You have the foundation, you have the walls, you have the drywall, you have roof. Most of that stuff is what we call structural that cannot be accelerated.

You take a look at a mobile home park and there’s not much structure there. Some people will say, it’s got a laundry facility, a C-store, and all these things. Those are actually bad for cost seg. The more structure and buildings that are on a property at a mobile home park, the less your percentages are going to be in a cost seg study.

The reason why the numbers are so good in general is because there’s not much structure that can’t be accelerated. We’re dealing with—

Andrew: Land improvements, right?

Eden: Correct. Land improvements, the hookups, the actual mobile homes, all of that stuff can be accelerated. That’s why the numbers are 2, 3, 4X of a lot of other asset classes. That’s why people say, I need significant deductions for this year. What should I buy? And mobile homes are on the top of the list because the numbers are so fantastic for cost seg studies.

Andrew: I heard someone else talk about it. He said, the top three asset classes that make sense are mobile home parks, RV parks, and golf courses, because the majority of the purchase price that you’re spending is on land improvements, and all that is 15-year property that can be accelerated in year one. Is that right?

Eden: You got it. That’s correct.

Andrew: That’s awesome. That’s huge. That means a significant amount of your purchase price can be basically written off in the first year.

Would you mind breaking down the different parts of a mobile home park? There’s the land which obviously you can’t depreciate, there are land improvements, there are the buildings which you said is that longer 27½-year property. Then there’s the personal property, which is the fastest, right? That’s the five-year property.

Eden: Correct. A lot of the mobile homes are five-year property. Some of them are 15. If you’re buying a park and you’re actually owning the homes (park-owned homes), those are going to be subject to bonus depreciation.

You think about it—the landscaping, the pads, the hookups, the electrical, the plumbing, all the fencing around the property, if there are any signs like advertising the property, if there is outdoor lighting, cameras—all these things are going to be accelerated.

Almost everything on a mobile home park is subject to bonus depreciation. Like I said before, if there are structures, it’s actually bad. If you have laundry facilities, a store, or an office, those are the things that a good chunk of that won’t be able to be bonused. Those are not great. But still, if you’re buying a good property and it has those things, don’t not buy it for that, but it actually hurts you on the cost seg side.

Andrew: Got you. So the land can’t be depreciated. That may be 20%–25% of the purchase price. Then you have land improvements which is a 15-year property, then you have the personal property which is a 5-year property, and then the buildings, if you have any, would be the 27½. So the bonus depreciation is really a big deal for mobile home parks.

Eden: Huge. It’s unbelievable. I did a study last week on a group that sent me three parks. Whenever I get on a call, a consultation with a group, I want to understand what their needs are. How much are you looking? How much did you and your partner make this year that you need to offset? They personally tell me they made about $600,000 in 2022 and they’re looking to get a study done.

They sent me three properties, and just looking at it right off the bat, I said, you only need to do one study here. They sent me three parks that they had purchased in 2022, and we were able to get them $700,000 out of their $1.3 million purchase in 2022 to offset all of their income for the two of them for 2022. So zero taxes paid for them, and one study.

They sent me three, I’m happy to do three studies and make the money on it, but it wasn’t necessary. They can do those and roll them over. I said, you guys have at least one or two more years of depreciation sitting there, waiting for you guys to pay no taxes for the next couple of years.

Andrew: That’s awesome.

Eden: That’s the power of it.

Andrew: I guess return-wise, I’ve heard that there’s a 10X return. You’re spending $4000 or $5000. If you buy a property for $500,000, you’re going to get a 10 times the return on the $4000 or $5000 cost seg because you’re going to be able to get significant tax savings.

Eden: Yeah, roughly. An easy number to just have out there for everyone is if you buy a park for about a million dollars, you’re looking at somewhere between $400,000 and $600,000. We talk about 2023 and 80% bonus, but just as a rule of thumb, probably somewhere between $400,000 and $600,000 tax deduction for that year if you purchase a park for a million dollars.

Like we said before, depending on how many structures, park-owned homes, facilities, it varies from property to property, but that’s just a ballpark on a million dollar purchase. Less 15%–20% for the land, you’re looking at somewhere in the $400,000–$600,000 range.

Andrew: Let’s talk about the bonus depreciation phase out. In 2023 when we’re recording this, it’s 80%. It was 100% last year. Next year it’s 60%?

Eden: Correct.

Andrew: When will that go through and how will that impact us? Will it make less sense to do a cost seg a couple of years from now?

Eden: Obviously, we’d like it to be 100% forever. Those are between 2017 and 2022 or some good years for us folks that need depreciation, that now down to 80% and going down to 60% in 2024, and like you said, going to be going down 20% every year until phased out.

I’m hoping that with the elections coming up, I doubt it’ll go down to zero. We’ll see 20% for the next few years. We’re hoping it goes to 75% or 80%, or hopefully back to 100%.

Andrew: I don’t want to speculate on what the future will hold, but basically it’s being phased out through 2026?

Eden: Correct.

Andrew: Okay. And it’s dropping 20% every year.

Eden: Yeah.

Andrew: Okay. If an investor plans to flip a mobile home park, say in two or three years, does it still make sense for them to order and pay for a cost segregation study?

Eden: That depends on what you have going on. I have a bunch of clients that know they’re going to be selling in 2–3 years and they need the deductions now, and they’re willing to deal with the 25% recapture on the backend when they’re selling it in 2 or 3 years.

Andrew: Tell me a little bit about that. What is that, the 25% recapture? What does that mean?

Eden: Every time you own investment real estate, you’re automatically taking depreciation on it. Whether your cost seging or bonusing is obviously up to you. But there is a recapture every time you sell a property for a profit. If you’re frontloading and taking the bonus and taking a lot more, when you do sell that property, you are going to have to pay a 25% tax on the depreciation taken.

What we like to advise is 1031 exchanges. If you’re going to roll that over into another property, you can defer that depreciation recapture. I don’t advise people that are going to be buying a couple of properties, cost saving them, selling them in a year or two from now and not buying anything else, unless you really, really need the deductions now and you’re willing to deal with what comes in a year or two when you sell the property.

Andrew: You’re basically kicking the tax can down the road. You’re not getting away, you’re not avoiding taxes entirely. You’re just kicking it down the road. That’s what the depreciation recapture is. It’s an additional tax after your capital gains tax when you sell the property. And one way to avoid that would be the 1031 exchange, which a lot of people are familiar with. Are there any other ways outside of the 1031 exchange to kick that can down the road?

Eden: The only other thing we say is this is really best utilized by people that are repeat buyers, if you’re going to keep buying properties. If you’re buying one property and then you’re done, maybe. If you had a great year and you need to offset income that you made this year, it could make sense to do it.

The strategy really works best for people who are going to be buying multiple properties every year. Not to say if you bought one it doesn’t make sense to do it, but it starts making a lot more sense if you’re going to be buying multiple properties every year and this is part of your tax saving strategy.

Those are really the two that I see utilize a lot. We come across a lot of cost seg studies that are coming from properties that were bought with 1031 exchanges, and then investors that are buying multiple properties every year.

Andrew: So the cost seg works best for active real estate investors that are buying and selling, doing deals, ongoing. Then you can use the losses from a cost seg to offset the taxes from another deal, if you’re a real estate professional status.

Eden: Yes, sir. If you’re a real estate professional status, then you can use it to even offset other monies that you’re making. If you’re wholesaling, you’re brokering deals, or you’re doing something else—you’re making chocolates out of your garage—if you’re real estate professional status, the losses that are used from a cost segregation study from your depreciation can offset any active income that you or a spouse have.

I like to call it the golden ticket. If you can gain that real estate professional status, you have unlocked many doors to tax savings. I know a lot of people that their spouse, whether it be the husband or the wife, or doing a part-time job or even full-time, just quit their jobs because they saw the value in, if I’m an investor—

Andrew: I’m invested in that.

Eden: Yeah.

Andrew: One of our investors, his wife was making (I think) $60,000–$70,000 a year, and she actually was going to make more than that for the family if she quit that job and became a real estate professional status, so that they could—

Eden: Just the tax savings.

Andrew: Just the tax savings, yeah. So what is a real estate professional? Can you describe what the requirements are for that?

Eden: I’m not a CPA. Everybody’s got to talk to their own CPA and make sure that they’re comfortable with them gaining that status. The requirements are 750 hours and it has to be more than 50% of your working time.

Andrew: A year, right? It’s 750 hours per year minimum.

Eden: Correct.

Andrew: The majority of your time is spent in the real estate business, and that could be doing property management of your own portfolio or other real estate—

Eden: Brokering, management, collecting rents, visiting the property, if you’re doing CapEx or whatever it is, managing, construction, that kind of stuff.

Andrew: Awesome. I had one other note here. You said it would make sense. I always heard that if the purchase price is $500,000 or more, it makes sense to get a cost seg. But you were saying it could be as low as $200,000, and it would still make sense to get a cost seg study. Is that accurate?

Eden: On a mobile home park, for sure. We do a lot of different asset classes. Like I said, it doesn’t make as much sense on single family or a little office building, but on mobile home parks, $200,000, you could be looking at more than 50% of that.

You can have a $100,000 deduction on your $200,000 purchase price. You’re paying $4000 or $5000 for the study, and you’re getting a $100,000 tax deduction. You could be saving yourself $25,000 in taxes. My math isn’t perfect, but if you’re paying $5000 and you’re saving $25,000, that’s still nets $20,000.

Andrew: Totally. Thanks for doing the math there. I was talking with somebody. Is there any additional risk or audit risk for doing this cost segregation study, or any red flags that this brings up to the IRS? This is obviously a considerable tax savings here.

Eden: Technically, the way you’re supposed to depreciate your property is with cost segregation. If the IRS is telling you your carpet depreciates over five years, you’re really supposed to depreciate it over five years. It’s not like some weird loophole that we’re coming up with. If you have a light fixture, certain types of light fixtures are supposed to be depreciated over five years. Or your land improvements 15 years. That’s the way it’s supposed to be done.

This is all tax code. No funny business, no loopholes. It’s not going to trigger an audit. This is the way the IRS literally told you to do it. Why would it trigger an audit if this is the way they told you to do it? It’s what they like to see.

Andrew: A good friend of mine, Ferd Neimann, who also has the MHP lawyer podcast, he was saying how the cost seg study is basically your evidence. This is your evidence. You’re showing the IRS of why you took these numbers. It supports your case. It’s pretty awesome. It’s a very powerful tool in commercial real estate.

I was wondering if we could do a case study. If we bought a property for a mobile home park, say for a million dollars, and we ordered a cost seg, say it costs $4000, what would that look like? What are the typical savings we would be able to write-off in 2023 given the 80%?

Eden: We mentioned this number before. Take off about 15%–20% of land. You bought the property for a million dollars. You’re down to about $800,000 on your basis.

Just for easy numbers, we probably can get a lot more than this, but to keep it nice and round, let’s say we were able to get 50% of that as a 5- and 15-year property. It’s usually closer to 60% or 70% on a mobile home park, but let’s just use 50% because It’s an easy number.

So we’re looking at $400,000. Out of the $800,000 is going to be a 5- and 15-year property, and then we’re able to get, in 2023, 80% of that.

Andrew: Wow. $400,000 times 0.8, looking at $320,000 that you’re able to write-off in the first year, and you’re spending $4000 to get that. That’s huge. That’s sounds—

Eden: Pretty sweet, huh?

Andrew: Considerable savings. It’s a no-brainer.

Eden: The crazy thing is, in this business, educating people, I come across people that have never heard of this. It’s one thing if they weren’t paying taxes and had some other loopholes and tricks up their sleeves, but I come across people that are paying hundreds of thousands of dollars in taxes and own millions of dollars in real estate.

When I say, I’d like to use the term, who are you using for cost seg, not have you done it, they’re like, cost what? If you’re not using this strategy—and there are ways, like we talked about the golden ticket of real estate professional status—if you can be using this and you’re not, you’re leaving a lot of money on the table.

Andrew: Totally. Also, if you bought a property in December, at the end of the year, you’re still going to get. I know Ferd in one of his podcasts, bought a property on December 21st. He owned the property for 10 days in that year, and he was still able to fully get, in our example, it was $320,000. So if you buy a property this year, on December 21st, you only own the property for 10 days, in 2023, you can still get that $320,000 worth of bonus depreciation.

Eden: That’s the beauty of it. If you buy a property in December and you don’t do any cost seg on it, it’s all prorated. You only own it for 10 days, you’re going to get pennies in depreciation. There’s basically nothing there if you only owned it for a week. If you do cost seg and use the bonus, you get all of that in the first year, even if, like you said, you owned it for one day.

Back when I started a couple of years ago, the first deal that I got was a guy who bought a property that was contracted on December 24th, and he closed on the 29th. Five million dollar property.

I called the guy up and I said, what’s the story here? He said, I don’t know. My tax advisor woke up a little bit late. I sold a business for $4 million this year, and I really needed the deductions. He told me at the last minute, go out and buy a property. He was in San Diego, this property here was in McKinney, Texas. He showed up late, but he still showed up. He was able to get a $2½ million deduction on that $5 million property.

He just got it in there at the last minute, and bought the property on December 29th. But like you said, if you’re using bonus depreciation, you can buy it December 29th and get all the bonus in that tax year.

Andrew: That’s huge. Let’s talk a little bit about goodwill. From some of the other operators I know, it’s you’re buying a business, you’re buying the systems, you’re not just buying a plot of land when you buy a mobile home park. Allocating your purchase price, I’ve heard 20%–30% to goodwill will help you potentially reduce your property taxes when the property’s reassessed due to the sale.

How does that goodwill work when you do a cost seg? Just shed some light on that.

Eden: Goodwill can’t be accelerated, unfortunately. It’s not something that I tell people not to include in the purchase. It really depends. There can be tax savings, like you said, on the property tax, but it’s not something that can be included in the bonus depreciation.

You can’t bonus that. That’s going to stay on a fixed schedule. Whether or not you do it or you don’t is in the owner’s hands to decide, whether the benefits outweigh the purchase or on the cost seg study.

Andrew: Got you. So the goodwill is depreciated on a 15-year schedule, but it can’t be cost segregated. It can’t be bonused and brought 80% in year one.

Eden: You got it.

Andrew: Each operator needs to decide what works best for them, which is tough because how do you know what’s better? Do you take the property tax reassessment and do you focus on that, or do you focus on taking the cost seg?

I guess if you’re a long-term buy-and-hold owner, and you plan on continually kicking the can down the road, it’s probably best not to do the goodwill allocation, and to allocate it to bonus depreciable parts of the park. Is that what you would recommend if someone’s going to buy a million-dollar property and own it forever? Does it make sense to you?

Eden: I’m not an expert in property taxes, so I can’t advise on how much savings there are upfront with using goodwill in your purchase agreement. I’ve had people try to come up with ways to really keep their property taxes low and allocate as least as they can to the actual building.

But there are going to be tax assessors making appraisals on the property. If you have a 50-home park and down the road is another 50-home park, and you’re saying yours is worth $500,000 and the other one’s worth $2 million, there’s going to come an end to your value being super low. The county is going to come in and re-appraise your property eventually. That can’t last forever, either.

Andrew: If you’re interested, there’s another great podcast interview on this. It’s on the Mobile Home Park Lawyer podcast by Ferd Neimanm. It’s episode 22, which was How to Pay Zero Income Taxes Legally While Making Six to Seven Figures. It’s 24 minutes long. That was a super, super good podcast. I recommend checking that out. I think Ferd recommends, we don’t even allocate anything to goodwill now because of the cost seg. They want the bonus depreciation instead, and they’re less worried about the property tax piece.

Eden: More value there.

Andrew: Exactly. More cost savings.

I think we touched on a lot of stuff here. Is there a quick way that I can estimate my cost segregation savings before a purchase?

Eden: The best way to do it is to reach out to myself or someone on the team. We’ll create a free proposal. If you have just the address, purchase price, and estimated close date, we’ll get a full proposal. It’ll take us a day or two to get it back to you. But it’s free. We all like free things. There’s no harm in doing it.

I have a lot of investors who are doing syndications, and a lot of their investors want to know upfront dollar for dollar, if I invest $100,000 in this deal, what are my bonus depreciation benefits going to be?

So we do a lot of proposals while under due diligence period, and investors are wanting to put it in their pitch deck to show investors if you give $100,000, this is what you’re looking at in bonus depreciation in the first year. I’m always happy to create a free proposal on any property.

Andrew: Awesome. Are there any mistakes that your clients have made that we could learn from so we can avoid those? Any horror stories or things around this that we could make sure to get right?

Eden: I think just being timely is important. Like I said before, not waiting for the last minute so that we’re rushing to do things, is important to know. Then just documentation. If there are surveys, if there are appraisals.

We’re obviously going to come and do an actual tour of the property, but we need to know as much as we can, so that we know what to do when we’re doing the tour. If there’s some building out 10 acres in the back or whatever that we need to know about, we need to know about it beforehand. Just information, documentation, getting everything in.

The one thing that I’ve seen is some people think it’s based on an appraised value. I say, what was the purchase price, and people will send me what they think it’s worth or what the appraised value is. I wish it was like that on some of us who get screaming deals that we buy for 50 cents on the dollar. Unfortunately, it just goes off of what you paid for the property, not what it got appraised from an appraiser.

Andrew: Got you. That’s good to know. I invest passively in some other deals, and it seems like my K-1s are always late. This could be part of the reason you’re saying, is they order the cost segs at the last minute and bump the can down the road.

Eden: It’s possible.

Andrew: One last thing. For passive investors, people investing in a syndication, what do they need to look out for? What type of stuff should they make sure they’re taking into account, and how does cost seg affect them?

Eden: They need to first see how they can use the depreciation against their gains. If they’re passive in the deal and both spouses are W-2 earners, then it can only be used to offset other passive gains that they’re making. They can’t use it to offset their W-2 income or whatnot.

If they have other passive gains, which they might, they could offset those, but obviously they want to make sure that they’re utilizing it to their best ability. Like I said before, it depends what asset class they’re investing in.

Some people may be, I have never invested in a mobile home park before and just don’t know about it. It’s not as popular as multifamily or some of the other big asset classes that syndicators are raising money for. Hopefully, that’s going to be changing because we’re spreading the word on the massive benefits of cost seg in this area.

They should be aware upfront, if they invest a certain amount of dollars, what they’re going to be getting back. Any syndicators that I work with, I tell them, as soon as you go under contract, give me the info on the property. We’ll get the proposal up. That way you can pitch to your investors exactly dollar for dollar what their depreciation is going to be in the first year.

Andrew: Let’s go back to that. You said for passive investors, if they’re both husband and wife or W-2 earners, this K-1 with that negative number on it that they get from this syndication is only going to offset passive gains that they’ve had elsewhere.

That could be the sale of stock, that could be the sale of another investment that they got. I know a lot of apartments have exited and sold in the last couple of years, and maybe they have a big gain from that, that they can utilize this to offset. But if they’re both W-2, it’s only going to offset other passive gains. Is that right?

Eden: Correct. If they’re making money on this property or any other property, any other syndications that they’ve invested in, they’ll save money on those taxes, obviously.

Andrew: Because it carries forward, right?

Eden: Correct.

Andrew: But if, say, one of the partners, the husband or wife is a real estate professional, then it’ll offset the—

Eden: Boom. That’s the golden ticket. Anything.

Andrew: Awesome. Well, good deal. Eden, anything else that we should know about this and the secrets of cost seg?

Eden: Educating people on the basic concept. I myself am a real estate investor and I was investing for a bunch of years. Lo and behold, I called those people not the smartest people out there, but I myself didn’t know about this for about five years investing in real estate. Learned about it, educated myself on it, and I’ve been using it ever since to save a lot of money on taxes.

The point is to spread the word, more people should know about it. If you have any questions, reach out. Everyone on our team are very hands-on. We’ll get on a phone call and talk to you for 30 minutes, see how you can implement the strategies. We’ll spend time with you answering any questions and just seeing if it’s a good fit.

I’m not going to sell you on doing a study if it doesn’t make sense. We talked about somebody who sent me multiple properties, and he didn’t need to do it, so we didn’t do the studies. There are other people that think they can use it and really they’re not going to gain from it. We tell them it doesn’t make sense right now.

Educate yourself, listen to more podcasts, learn more about it. Reach out to me or any other of your cost seg buddies that can help you out, and see if it makes sense for you. You have to at least spend the time to educate yourself and see if it’s a good fit.

Andrew: Eden, how can listeners get a hold of you?

Eden: I’m on LinkedIn, there aren’t too many Eden Markowitz out there. Linkedin, Eden Markowitz; Facebook, Eden Markowitz; and email is emarkowitz@madisonspecs.com.

Andrew: Awesome. Eden, thank you so much for coming on the show.

Eden: My pleasure. Thanks for having me, buddy.

Andrew: That’s it for today, folks. Thank you so much for tuning in.