Talking Depreciation with Kevin Bupp

Real Estate Investing For Cash Flow Podcast

I want to talk a little bit more specifically about real estate. We’re a show that literally interviews for the most part real estate investors. A lot of the people that tune in are real estate investors. From a real estate investment standpoint, give us some of the big benefits of investing in real estate. What are some of the things that maybe even some listeners might not know are some of the big key benefits of actually buying real estate?

Obviously, the asset appreciation, which is a wonderful thing. That could take a few years. Then the other thing is the non-cash expense called depreciation. Most expenses you actually have to lay money out to actually get the benefit of them. Whereas depreciation is the way the government lets you write off assets. A typical rental property is depreciated over 27 and a half years. There’s ways to actually accelerate that depreciation. You get more of an expense up front than you do down the road. That’s a wonderful thing about real estate. You have this non-cash expense.

Can you define depreciation. Again, we’ve got a little bit of everything across the board spectrum as far as experience. Maybe for those who are just getting started, they might know the basics of what that really means. What does it really mean in the bigger picture of investing in real estate?

From a tax perspective, when you buy an asset, let’s just say it’s a residential rental property. You spend one hundred thousand dollars on that piece of property. We’re just saying the building that’s the part that’s depreciable. The government says you can’t expense that one hundred thousand dollars in year one. You have to expense it over 27 and a half years. Every year you get to write off approximately four thousand dollars worth of depreciation expense toward that one hundred thousand dollars. Instead of writing it all off at once. If it’s a seven year asset, maybe the piece of equipment you write it off over seven years. There are different types of bonus depreciation typically not involving real estate. Then there’s something called cost segregation, if we could talk about that.

Sure.

Cost segregation is a way to accelerate that depreciation. You bought that one hundred thousand dollar building. We’re not talking about the land, we’re just talking about the structure. Normally you’d depreciate the whole thing over 27 and a half years. If we have a study done, and there’s studies that can be done very reasonable. They break that building into all different parts. We break it into 3 year property, 5 year property, 7 year property, 15 year property. What you wind up doing is you get more depreciation in the early years and less in the later years. That dollar saved today is worth a lot more down the road than the dollar saved in 15/20 years.

Sure. Sure. Yeah, that’s something that we don’t really take advantage of too much in the niche that we’re in cause there’s really not… What we’re depreciating for the most part is the infrastructure of our mobile home parks. It literally equates to the roads, the water and sewer lines, and it’s already at a 15 year depreciation schedule. There’s not much of cost segregation that we can do. As for as multi-family operators and I’m sure other types of commercial real estate it’s a very important strategy to consider.

Correct. Correct.

I want to talk about deductions. I know that we’re getting kind of the basics here, but I want to talk about some of the less common deductions. I lot of people know they can write off part of their home office. They can write off part of their expense of their automobile, whether it be gas or mileage, air fare hotel, things like that. Are there any other less common deductions that might not be known to those who are tuning in?

Yes. You talk about the home office. What the home office does is opens up a whole other arena for someone that has a legitimate home office. There are certain rules you have to follow to have a legitimate home office. If you have that, you can actually have a home athletic facility. Which can be used for your employees and their family.

Which makes that pool in the back yard now becomes a deductible expense. That home gym a deductible expense. This is all stuff that’s allowed in the code.

If you have employees, though.

You could be an employee.

Yeah, you’re right.

If you’re an LLC, you’re a property manager or something like that. Typically with some planning you can make sure you fit that criteria. The second thing is failing to plan. People don’t take the time to plan. They go to buy a vehicle and they spend a lot more time researching it than researching ways that they could actually save on taxes. They’re concerned about calling their CPA because he’s going to send them a bill. Versus taking a little time and communicating with him. Figuring out, okay well, maybe it’ll cost me a couple dollars, but it’ll save a lot of dollars.

I want to talk more about the pool. This is actually an interesting topic. I’m building a house right now, Craig. I think we’re putting a pool in. I’ve got literally a dedicated home office that I’m building specifically and we have a main office. I’ve got my own LLC that literally is the owner of the different LLCs that we own. That’s one of the members, at least. In that scenario, I could essentially write off a portion or all, I guess, of that pool expense. Is that what you’re saying?

That’s exactly what I’m saying. The code allows for it.

Interesting. I never knew about that one. That’s pretty cool.

That’s a really nice one.

Okay.

That also goes for your gym, if you have a home gym.

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