The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 130 - How Much Can I Save from a Cost Segregation Study?
Cost Segregation can save you tens of thousands, or even hundreds of thousands, in taxes. But here's the problem: most investors have no clue how much they're actually leaving on the table.
After personally reviewing hundreds of cost seg studies for our clients at Prosperl CPA, I'm pulling back the curtain and showing you EXACTLY how to estimate your deduction, what drives the numbers up or down, and how much cash this strategy can legitimately save you.
Here's what we're covering:
• The formula I use to estimate Cost Segregation deductions (backed by hundreds of real studies)
• Why short-term rentals (STRs) crush long-term rentals (LTRs) when it comes to cost seg results
• How land value, pools, furnishings, and property improvements drastically impact your write-offs
• How to calculate your ACTUAL tax savings using your effective tax rate (not just the deduction)
• Real client examples and case studies from our practice
• How Cost Seg stacks with QBI deductions, tax credits, bonus depreciation, timing strategies, and more for maximum impact
This is the exact framework we use internally at Prosperl CPA to project savings for our clients. If you've been wondering "how much could I ACTUALLY save?", this video answers that question.
⭐ Want to Know YOUR Exact Tax Savings Potential?
I'm offering free personalized Opportunity Reports where I'll review your tax situation and send you a custom video breakdown showing exactly how much you could save with strategies like:
• Cost Segregation
• Bonus Depreciation
• Short-Term Rental Loopholes
• Entity Structure Optimization
• And more advanced planning methods
👉 Request your free Opportunity Report:
https://ProsperlCPA.com/OpportunityRe...
📘 Grab My Free Tax Planning Checklist + Mini Course
Want to learn the core tax strategies every real estate investor and entrepreneur should be using? Download the checklist that walks you through the fundamentals:
👉 https://TaxPlanningChecklist.com
🕒 Timestamps
00:00 – Why Cost Segregation is a game-changer (and why most people underestimate it)
00:30 – How we estimate deductions after analyzing hundreds of studies
02:25 – STR vs LTR: The massive difference in cost seg results
03:50 – Purchase price vs building basis: Which percentage method to use
06:00 – Land value considerations: beach properties, condos, and what kills your deduction
10:00 – Hidden wins: Pools, improvements, retaining walls, and overlooked depreciation opportunities
12:30 – Calculating your REAL tax savings (not just the dedu
Cost segregation is a procedure that can potentially create life-changing tax savings when you own real estate. And it's we've seen incredible results that have been one of the most powerful things that we can do to reduce your taxes and build wealth. I'm talking about offsetting ordinary income, business income, capital gains income. There are so many ways you can use this as part of your holistic tax plan. Now, here at Prosperal, we've looked at hundreds of cost segregation studies and see the results play through. And we have really seen this. The proof is in the pudding. Cost segregation is absolutely incredible, especially now that we're back to 100% bonus depreciation. Now, you may be wondering how much can I save on a cost segregation study from this property? So, what we're gonna dive into today is how can you start to evaluate the potential tax savings you can create from cost segregation procedures? So, what we're gonna cover is how to estimate the tax deduction from cost segregation. We're gonna talk about how to estimate the savings from that tax deduction. And then once you figure that out, what can you do to make the most of this opportunity? Again, we've looked at this hundreds of times. So I'm gonna share with you some real life insight and what we've used in our calculations to best understand is the cost segregation study necessary and what other strategies or procedures are we gonna do when this cost segregation study takes place? All right, so we're gonna dive deep into this topic, and at the end, you're gonna have a really great understanding of this stuff. But if at any time you feel overwhelmed, you can see some shorter clips on the YouTube page. But also, uh, if you want to get a personalized video from me, I will personally send you a video illustrating what may be possible with cost segregation, not only cost segregation, but all our other advanced tax reduction strategies. You I'll send you what we call a free opportunity report. Go to prosperalcpa.com slash opportunity report. That's prosper with an L CPA.com slash opportunity report. All right, now let's dive into the material here. So when it comes to estimating the tax deduction that we can create, we first want to consider there are different types of rental properties. And long-term and short-term rentals are oftentimes produce different results. So we're gonna be talking about some different methods we've used and how they apply to both those scenarios. So the first and easiest thing that we can do here is we look at the purchase price and we multiply it by a certain percentage. Now, typically with long-term rentals, we'll multiply that percentage by 25%. And if it's a short-term rental, we will multiply it by 30%. Now, you may be wondering why are we estimating the tax deduction from a cost segregation study differently for short-term and long-term rentals? Well, oftentimes the short-term rentals are gonna come with furniture, and that furniture all qualifies for bonus depreciation. So things like the linens and the beds and the TVs and the couches, that's all personal property. We can write it off right away. So if it comes with furniture, we know we're gonna be able to create additional tax write-offs. Now, the long-term rentals most likely will not come with furniture. So we're gonna estimate 25% of purchase price will be our tax deduction when we do a cost saving from a long-term rental and 30% with a short-term rental. Now, here's another thing to think about. With our clients, even if the furniture doesn't come with it, if we want to evaluate what's the year one savings on a short-term rental, even if it doesn't come with the furniture, and maybe you don't identify that furniture and the cost tag, they're likely gonna have to buy the furniture and then they're gonna write it off anyway. So, in that scenario, we are still gonna estimate 30% by the purchase price to to gather to to start projecting what that tax deduction is going to be. Now, here's so here's a very simple example. We purchase a long-term rental for a million dollars, and we estimate that we will be able to deduct$250,000 of that purchase price, a quarter, 25%. Easy math, right? Very simple. Let's look at another example here. If we can now have a short-term rental and we've applied the percentage of purchase, we are going to say we bought that same million property. If it was a short-term rental, we would have a$300,000 deduction. Three 30% times uh one million dollars. Simple mathematics. And also, when I say purchase price, what I really mean is your purchase price plus plus the whole plus any closing cost or anything else that gets factored into that overall cost basis when we look at your taxes. Now, another way that we can do this is we may consider percentage of building basis. Now, this is a little bit different here because you want to consider the fact that land doesn't pre- does not depreciate. And when you buy real estate, you likely are not going to be depreciated. If it comes with land, you're not gonna be able to write it off at all. So only uh so when we want to identify how much of this building are we gonna turn into five and fifteen year life property or seven life property with the cost segregation study, it's important to know the value of the building. And sometimes you have a really high value of the land and not a lot of building, so not a lot of value that we can assign to these other elements identified in the cost segregation study and other instances where you actually will have a really high value of the building and its improvements and not a low value of the land, and then you have more stuff that you can divide into the five and 15-year-old property and get more of that write-off. So let's talk about if we look at the building value way of looking at it. So for the long-term rental, we would approximate 30% of the building's value. So you would be deductible when we do that cost tag, and 36% from the short-term rental. Again, we're approximating a little more of a deduction from that short-term rental because of all the personal property, additional items that's gonna that we can write off right away, we're gonna find in that short-term rental. So let me share with you an example here, bull here. Let me pull this up to help you understand how that would kind of come together, what that would look like here. So let's say we purchased a long-term rental for a million dollars, and the building's basis came out to eight hundred thousand dollars. In this example, 30% of that building's basis would be$240,000. 30% times$800,000. Simple, right? Not that hard to do here. Don't worry, we're never gonna pass maybe fourth grade level math here. So you should be able to hang on through the end here, but we are gonna introduce lots of variables. Now let's consider another example here. Let's say we got the short-term rental here, and we have a build that same we have a same building basis of$800,000. That gives us a$288,000 deduction or 30% of$800,000. Again, a little more of a deduction from the short-term rental. Now you may be wondering, okay, I get it, but how do I find my building basis? So, one of the things we want to do here is look into the depreciation schedule. If you've purchased this property in the past, you're gonna find it it's kind of gonna look like what you see here in this diagram, and hopefully the value is gonna be greater than this amount here of$50,000 for$55,000 for the basis, because then you're unlikely to see much benefit in the write-off. But here you see the components broken between building and land to understand where this building base is here. So, in that scenario, this number would likely see say eight hundred thousand dollars. Now, um, if the real estate has not yet been uh if you haven't reported it on a prior year return, you're not gonna be able to find this. So, how else can we do this? You can look at the county assessments and look at how they allocate between building and land, or ideally, you'll look at the appraisal and you'll see the site value, which is the land, and then you can pull that out, and then you can apportion what the building basis is total. That's probably the fastest way to do it. But you'll look at the appraisal and how the land and building are different, and that'll allow you to uh decide what apply that percentage to the purchase price. So let's say the appraisal has you know shows 20% of the value going to lend, then you multiply 20% times your all in your purchase price and the renovations. Now, I think that's a really good strategy when we have all these X factors here. So obviously, the easiest thing we can do here is we can multiply the uh those the purchase price by those percentages, and it's a pretty simple thing to do paper napkin, just to get a ballpark of what's possible here. However, there are other variables to consider here. Some of these are gonna be uh if there's a high land value, and we see this in particular when there are beach properties, but we have properties on the beach, as you can see in this little photo right here. Think about how much you're gonna spend just to be located near the water. So when you when you look at the assessed value of you're gonna see a smaller portion assigned to the uh to the building here, so that gives us less opportunities for any kind of depreciation here. Now, some other things we can think about here is if you're in a really affluent or exclusive area, again, you're paying for the location, and the location is a land, and the land is not going to give you any depreciation. Now, on the other hand, like so let's say here we are interested in investing into beach properties, and we love short-term rentals, right? Or even long-term rentals on the beach. We really want to be investing in Miami or somewhere by the beach. Here's how you can find a way to still get a decent amount of depreciation. If you invest in a condominium, you don't have to worry about a ton of value going to the land. And the reason why is because you're gonna find that zero value. You you when you invest in a condo, you really don't own any of the land, you just own that unit. So all the walls, anything that's within the walls of the unit is what you assign to the value, so you don't lose out on the depreciation and and not ever depreciating anything uh of that purchase. So that's a really nice opportunity here. Now, another thing where we've seen create really significant results that may skew these investments, would be these estimates would be uh swimming pools. So if you have a swimming pool on your property, that is a really nice source of bonus depreciation. Oftentimes, we can get a six-figure bonus depreciation for the for the swimming pools because those also are gonna qualify for bonus depreciation. It's considered what we call 15-year life land improvement property. You're gonna assess a value to the pool and write the whole thing off. And oftentimes, when our clients have pools, it jacks up the amount that we can write off from the cost segregation studies, and we can get really nice results here. And then five, so you know, certainly again, even if you have a B-tome, and even if it's by the you know, has a really high land value, the pool can offset some of those that loss depreciation by giving you a good chunk of bonus. And then finally, let's talk about here um mobile home parks. We've seen a lot of cost segregation studies where the mobile home parks are gonna give you a really nice tax deduction around oftentimes 40 to 60 percent of purchase price. Now that we're back to 100% bonus depreciation, this is a really nice opportunity, especially if you're looking to passively invest and just get a big write-off. You'd invest passively in a in a mobile home park, and they're gonna give you a good chunk of bonus depreciation on that, mostly attributable to the land improvements that they're renting out. And I obviously these areas are not the most expensive plots of land, so you get a really nice tax deduction. So now that we know all of these different variables to consider, you can see that if you have a property that's unique and has these features, you might want to move to either using the appraised values to see if there's a higher value of those improvements in buildings, or you may even want to press the easy button or get a cost-seg engineer to provide you a prospective estimate. Now, I've seen these all all sorts of different results here. So make sure you work with someone who's gonna actually look at the property and not just plug numbers into an algorithm that doesn't consider these variables because you're not gonna get a very good uh projection here. But certainly if you have these features, you want to look at it. Now, a few more that we want to look at here. Um, if we have improvements to the property here. So, what I mean by that is uh we have qualified improvement property. So if you have non-residential property, which includes short-term rentals, that could be office office, sorry, that could be office uh buildings and it could be you know warehouses, it could be restaurants. If you improve the property after you purchased it, most of the improvements to the interior is what we call qualified improvement property. So even if it wouldn't be classified as that five and 15 year life property normally, let's say it's more structural, as long as it's to the interior, you're gonna get bonus depreciation for that as well on the first year of the purchase. And then also another thing here that we see as an improvement that creates nice tax deductions is retaining walls. I remember we were doing a cost segregation study on a on like a warehouse, and I was thinking to myself, oh, this is just an empty warehouse. Where's the personal property? Man, I really hope we get something good, but it doesn't really seem like we're gonna get a whole lot here. And then what we found was they had a really big parking lot and had this giant retaining wall, and we created hundreds of thousands of dollars of tax write-offs and what wound up getting a deduction around 40% of the purchase price on this big warehouse because of the retaining wall and the large parking lot. Pretty awesome stuff here. And also, by the way, make sure you you know, if you're doing a cost segregation study where you have these unique features, I want to make sure that you really work with a professional cost seg engineer. You don't want to cut corners on these things all the time. Now, if it's a cheap property, you're spending 250 bucks, you want a couple of write-offs, I get it. But when you have these features and when you're in a high bracket, really make sure you're working with someone who knows your stuff and can factor in these variables and make sure we're getting the deductions we should be getting because of these unique features. So we talked about what we can deduct, right? And there's all these different factors to consider. We can do it the simple way by just 25 or 30 percent of purchase price, or we could find the building value, and that's gonna be really helpful if you think there's a high land value. You can break out that building by either looking at the appraisals or the tax assessments, and then we consider these other unique features. But now you may be thinking to yourself, okay, we know what the tax write-off is, but how much do I actually save here? I'm not just here for the write-off, I'm here for the results of the write-off. I want to create that tax savings, right? That wealth creation in the form of tax savings, which is one of the most effective ways to build your wealth. So the the way that we can look at this is we simply multiply the deduction by the tax rate, right? So, at what amount are you paying taxes on? If 30% of your income is going to Uncle Sam, and you know you get a write-off, you can typically multiply that write-off by 30% to get the tax write-off. However, let's dive into what we can do here. So, you may be wondering, how do I find my tax rate? And let's share with you some illustrations here. So, here is a uh 2024-1040 that you can look at here. Now, to find your tax rate in this example here, what I want you to do is find your taxable income. This is line 15. And by the way, I don't want you to look at to be distracted by line nine. That's your total income. That's the collection of all of your income sources or losses or business profits or cap gains. It's all total there. But then you have all these additional write-offs, such as your standard and itemized deductions that further reduce what you're paying taxes on. So we want to know how much are how much at what rate overall are we paying on our income that is subject to tax? Very important distinguish to item to distinguish here. So, in this example, let's say we have taxable income. And now let's look at line 24. We have our total tax. So, this is where we get the two amounts to determine our blended or effective tax rate. And you know, take some time. You want to take a screen grab of this just to make sure you can use this to, and you know, hopefully your your income has been consistent so you can rely on this to determine a tax rate. And by the way, if it isn't, we'll talk about what else you can do here. And so here's an example of how we'd factor this in. So, in this example where we have$300,000 of tax on a million of taxable income, we we multi we divide the total tax by the taxable income, we get the 30%. So, in in an example here, let's say we have a short-term rental purchase of$750,000, and we have taxable income of$1 million here. So, to determine our deduction here, let's just say we'll use the percent of purchase price here on the short term rental. So$750,000 times 30%, that's gonna give us$225,000 of a write off. How much does that save? The savings would be the two hundred and twenty-five thousand dollars multiplied by our affected tax rate. By the way, this should say thirty percent. Let me fix this really quick so I don't use you guys. So we multiply it by the thirty percent. We have thirty thousand six hundred sixty six hundred sixty-seven thousand dollars, sixty-seven thousand five hundred dollars of tax savings in this example here. Sorry, I'm getting used to this new format here. Eventually it'll be really smooth, but hang in with me here as I incorporate all these different views. So$67,500. Think about how awesome that would be here. Imagine if you get a short-term rental with only 10% down here. So that means you put 10% down onto the short-term rental. So$75,000 into buying a$750,000 property, and then you save$67,500 on the cost side. So that means you get the majority of your down payment back to you in the form of tax savings. And then you can reinvest that over and over again. This is how you can use cost segregation study as a tool to really compound your growth of your portfolio and your wealth and your tax savings over and over and over again. You use your tax savings to be reinvested to buy more assets that further reduce your taxes and produce cash flow. This is really how we can have that snowballing effect of building and compounding your wealth in an amazing way here. So I know I get now for some of you tax geeks who are just sitting out there, you may have some additional questions that I'm gonna try to address here. Because there are some other factors to consider here, because the tax law and the the actual results and how they all come together on the taxes rely on so many other variables. So to apply a simple tax rate to that deduction may, in certain circumstances, not really illustrate how much you can save. In fact, you may find you can save a whole lot more when a bunch of other factors come into play here. So some of the things we may want to consider here are credit phasins. So one of the most important credit phasins that we think about here is the child tax credit. So we have multiple children, and you can check this out. I have another video called Use It or Lose It Deductions, but you may you may find that when you reduce your taxes or your taxable income because of that write-off, you can actually phase in additional credits for your child tax credits because they phase out at certain income thresholds. So usually if we want to maximize our child tax credits, we usually target an adjusted gross income of$200,000 if you're single or$400,000 if you're married filing joint. Some other things that we may want to fix consider here is deduction phases, in particular, qualified business income tax deduction. That's gonna be really important if you're a full-time entrepreneur. What you may find here is that you are gonna create an additional write-off that can be around up to 20% of your profits in your business, that QBI deduction. And as it's a weird kind of deduction because as you make more and more, that 20% grows. But then when you pass a certain income threshold, you may find that write-off phases out because you make too much to get the deduction. I hope I didn't overwhelm you there. But what overall I'm saying is if you're a full-time business owner, especially in the professional services, because they treat it a little different, you may find an added bonus, added tax savings, because you'll gain access to additional qualified business income tax deduction. Some other things I want you to think about here is changes in your types of income. So let's say more of your income is attributable to capital gains income, that's gonna come into effect, and also the varying marginal rates here. So what we find is between zero and around$700,000, you see rapid changes in how you're being taxed. So if your deduction brings you to a place where you're in between two different brackets, that can really impact the overall results. For example, let's say I make$700,000, I create a$100,000 write-off. We're chipping away at income being top taxed at that top bracket. Same example, we make$700,000 and we get a$700,000 tax write-off. Some of that income that we're chipping away at may not have even been taxed at all because of our standard and itemized deduction. So here you'll see here we have these different marginal rates here. And when we get to if we're single$626 or$751 in 2025, you're gonna see that income being taxed at 37%. However, as you can see, as your income increases, the rates change differently. So if you're gonna create a write-off that chips away at the income at 37% bracket, 35, 32%, and the 24%, it's gonna be a little tricky to identify what's the blended rate here, because you may find that your income is taxed on the combination of all these different tax brackets. So it's gonna take some additional analysis, and you may want to engage a professional to thoroughly understand what's the actual savings and reduction we're gonna get here because of these varying marginal rates based on where my income is being taxed and how low I can bring it. And again, all these other variables. Now, here's some other things to talk about here. I forgot to mention this, but state taxes. We didn't factor in state taxes yet. And the reason why is every state is a little a little bit different here. Now, if you live in Tennessee, you don't pay income tax, so that's not gonna help you out very much. If you live in California, they don't recognize real estate professional tax status. So that's gonna be out of the question. You're not gonna be able to use any of your write-offs against your federal if you're married, if you have that rep status in California, unless you have positive passive income to offset. Also, some states are gonna they pretty much are gonna look at this cost segregation study. They're not gonna give you 100% bonus, they're gonna give you maybe a chunk of bonus, and they're gonna write off the rest over time. So a lot of the times on the state returns, you're gonna see more of a prolonged effect of the cost segregation study. We've seen it with clients, they get super pumped about the write-offs and the savings and they're gonna get on their returns, and then they see it, they see a massive refund on their federal tax return. And then they see they may actually wind up owing money from the cash flow on their state tax return because they're not gonna get all of that bonus depreciation deduction off up front. However, on those state tax returns, you're gonna see you're still moving up, you're still accelerating the depreciation, you're still converting some of that real estate from being taxed over 39 or 27.5 years to being taxed at a shorter life of either five or 15 years. So oftentimes they'll find in the later years of the return, they may find that if they don't do cost egg, they're still paying a lot in federal taxes, but then they're getting some nice little state refunds along the way. So those are some other variables. Now, I know I just threw a lot at you here, but at least now you have the ability to look at your real estate and do some paper knack and estimates on what is possible with cost segregation studies, right? How much can this reduce your taxes by and what this could save you? So if you can do this, let's say we know what kind of write-offs we're gonna get and what that's gonna potentially save us. What do we do next here? So, what do we do now that we know we're gonna create a tax reduction? Well, obviously, we could be excited for our return if we're gonna get a refund, or we can reduce our quarterly payments. Some other things that we could think about here is we can think about the timing of these cost segregation studies, or how can we time other items that are gonna that we have control over? How do we time our capital gain events and our income events and our expense items as they relate to the activities on the cost egg to optimize our tax situation and our deductions and our credits? Also, you may want to verify your deductibility and the need to do the cost tag. Make sure that you can either have rep status real estate professional or you can use it as a short-term rental, or maybe you have other passive income that the short-term rental can offset or capital gains from real estate. Just make sure before you invest into this that you're actually going to get your money's worth. I have seen people really make silly decisions by buying unnecessary cost segregation studies. You know, this also factors into doing holistic tax planning because tax planning, even for real estate investors, is not just about cost segregation studies. You may want to consider a strategy stack. If your income taxes are really low this year or your cost stack drives you into almost a negative income amount, maybe we do some Roth conversions, right? Maybe we can do some strategy stacking with selling some stock, some unrealized gains, get them taxed, maybe even at the 0% bracket because your income is so low. And maybe if you're a high W-2, and I know you guys, we got a lot of you W-2 folks listening, a lot of your money is going to the government and being taken out of your paychecks. If we know we are greatly reducing your taxes with the strategy, we can adjust your withholdings. So instead of waiting until April of the next year to see the benefits of the cost segregation study, we can do it right away. We can we say, hey, we've already paid taxes, enough taxes on that paycheck. We don't need to pay anymore. We're gonna reduce how much goes to the federal and state government based on our potential savings. Lots of really cool stuff here when we are proactive and aware of the opportunities that come here. And we may even want to stack this with additional write-off strategies and advanced tax write-off strategies. A lot of our clients listening, uh, we they love short-term rentals and rep status, all those things, but they need more write-offs. So maybe we layer in an additional write-off strategy. Maybe we put in some oil and gas to get qualify for more credits or more tax deductions, so many interesting things that we can do here. And and the answer is really gonna be dependent on your situation, your financial needs, and what's best for you. So let's talk about next steps here. If you want to get a free opportunity report video from me personally, I'll read your situation, I'll look at your survey, you'll interview someone on our team. I will personally send you a video illustrating what is possible and how much we could potentially save you with advanced tax reduction strategies and how cost egg fits into that. Go to prosperalcpa.com slash opportunity report. And if you want to get an introductory course with some case studies and emails and videos and a free tax planning checklist to start thinking about these things, go to taxplanningchecklist.com. All right, I hope you really gained some great insight today and how you can look at this and start evaluating if cost segregation studies are gonna make sense, how much you can deduct from it, and what that's gonna say for you. And also also start thinking about how this fit into the picture of your goals and your wealth building strategies. All right, stay tuned, like, subscribe, all that great stuff. Also, check out we have some really great content on cost segregation. You may want to check out our our introductory YouTube video and podcast on cost segregation or on cost seg timing. Lots of fun stuff here. All right, hope this helped and happy tax ears.