A few years ago, I was introduced to a business owner and real estate investor who had tens of millions of dollars worth of real estate. For the sake of this newsletter, let’s call him Tom.
Tom was in the middle of moving office spaces across town.
He had already purchased the new building and spent several million renovating it. At the same time, he was looking to sell the long time location of his business. That property was also selling for several million.
Tom was in a position most people would love to be in. He was selling some older property that had appreciated substantially, and he was buying a much larger property that would be like new after the renovations.
However, Tom had a HUGE problem.
Selling the business’s long-time location would create a GIGANTIC tax bill.
After learning more about Tom’s situation, I realized that Tom had not performed a Cost Segregation study on the new building.
For those who don’t know, a cost segregation study is where a professional engineer evaluates a building and determines how much costs to allocate to certain building components. They will allocate $X to land, $Y to the building, and $Z to all other components of the building (carpet, HVAC, toilets, etc).
The reason cost segregation is beneficial is that the current IRS code allows you to expense the full amount of $Z in year 1.
For Tom, $Z amounted to nearly $7 million. He was able to fully deduct $7 million of depreciation expenses that year. At the 37% tax bracket, a cash flow benefit of $2.6 million. Tom was able to drastically reduce his tax bill by $2.6 million in the same year he sold the old property.
Needless to say, that was a huge win.
For those reading that are thinking they’ll never be buying or selling a building for tens of millions of dollars, that may be true. (Though, I would encourage you to dream bigger).
But even if you don’t buy multi-million dollar properties, the concepts are the same.
Real estate allows you to make millions while paying very little tax….if you’re aware of the rules.
Without a knowledgeable team around you, you may still be paying too much in taxes.
Tom had done everything right. He bought low, and he sold high. He had a reputable CPA firm advising him. Even with Tom’s resources and CPA help, he was missing an opportunity.
We want to see you take advantage of every opportunity.
That’s why I would encourage you to give us a call. We would love to hear how we can help you achieve your goals.
Maybe you’re a business owner looking to get into real estate. Maybe you’re a full-time professional that wants to diversify your investments. Whatever the case may be, I would love to help in any way that I can.
