Darrin Gross on the Commercial Real Estate Pro Network

Welcome to Commercial Real Estate Pro Network CREPN Radio, episode 122. This is the podcast focused on commercial real estate investment strategies. We do this through weekly conversations with commercial real estate investors and professional, and provide you their experience and insight to help you grow your real estate portfolio. Thanks for joining us. My name is J Darrin Gross. Today, my guest in Craig Cody, a New York City Police Officer turned CPA. He works with real estate investors and small business owners nationwide to help them reduce their taxes. Today, we talk about the importance of tax planning and regularly communicating with your CPA to take advantage of the opportunities to reduce your tax liability. Also, Craig has a free book for you, The 10 Biggest Mistakes That Cost Business Owners Thousands. You can click on the link in the show notes and get your free copy.

My guest this morning is Craig S. Cody, CPA. He spent 17 years as a New York City Police Officer, and now, he’s no longer chasing bad guys down the streets of New York City, instead, he’s finding ways to legally reduce tax liabilities and help clients keep more in their pockets. He’s also the co-author of the Amazon best seller, Secrets of Tax Free Life. Craig, welcome to CREPN Radio.

Thank you very much for having me. Psyched to be here.

Yeah. I’m glad to have you, and looking forward to talking to you. Before we get into our talk though, if you could do myself and my listeners a favor and tell a little bit more about yourself.

Sure. Sure. I retired about 17 years ago, almost 18 ago from the police department. Somewhere along the way, I got very interested in taxes. I went back to school for my accounting degree. I graduated. When I left the police department I went to work for an international accounting firm. Kind of honed my skill there. I’ve always been into planning, starting with estate planning. They kind of changed the rules maybe about 10, 12 years ago, and just continued doing accounting stuff. Then after getting crushed in the downturn around ’07, we had to remake the practice. Probably around 2010, 2011 we looked at some of the estate plans that we did, and we realized we’re also saving these people a lot of money in income taxes, so we made our way into the tax planning arena, and have been doing that for about six and a half years now. We work with small business owners and real estate investors, predominantly.

Gotcha, gotcha. Now, the saving money on taxes, it’s certainly a topic fresh in the news, and it seems to be omnipresent. There’s always a topic there. We’re nearing tax season when everybody’s much more conscious of it, when you have to go see your tax professional, and pay, right?

Yes. There’s about seven weeks left in what we call tax planning season, so now is the time to talk with your CPA, and figure out how to keep more of what you make.

Yeah. No, no, absolutely. I know from personal experience, if you don’t do it now, it will be too late, and you’ll be doing it for next year, kind of thing.

Right. Yeah, unfortunately, most people, most investors are not communicating with their CPA, and the CPAs aren’t communicating with them. Everybody is kind of being reactive, this sitting down in March and April, instead of throughout the year. They’re putting the right numbers in the right boxes, but they’re not being proactive in looking for ways to really save the client tax money.

Right, right. Well, let’s talk a little bit about real estate investors. What are some problems you see that they’re not doing? And let me backup her one second because I would rather start by saying, a non real estate investor versus a real estate investor, if we could make the case for the benefits of real estate from a tax perspective. Is that something we can talk a little bit about?

Oh, depreciation. Yeah, I mean, depreciation is really the big thing. It’s like that non cash expense where you get to write-off that property, depending on whether it’s residential real estate or commercial real estate, somewhere between 27 and 39 years. That’s a big thing, so it’s kind of like tax free cash, or a non cash expense.

Right, right. No, I think that somebody who’s not in real estate and they’re constantly, I mean, I’ve got friends and colleagues I hear talking all about it. They don’t have a vehicle to capture any kind of depreciation, and lower their tax bills, so it’s a huge concept. For people that aren’t yet real estate, or don’t own a business, and don’t have some sort of capital equipment where they can actually depreciate something, they don’t really fully understand it because it doesn’t, you understand it from a standpoint of you buy something, and you can’t sell it for, like a car. Typically, you can’t sell it for what you bought it for, but with real estate is an appreciating asset. The concept of depreciation, unless you’re in it, and you understand it, and you have a tax professional that’s helped you understand it, it’s not a concept that you’ve experienced. You may have heard the word, but to see the numbers work.

Exactly. Until you actually see the numbers work, because yeah, I’m making money. And I’m like, maybe you’re cashflow positive, you may not be making money, which isn’t a bad thing, okay? When we add in depreciation, it could turn what you think is a positive number into a negative number, but, that’s for tax superposes. That’s not for what’s going into your pocket. When it comes to depreciation, we see a lot of mistakes on depreciation. Not really sure why. We just think people are not taking the time to review the items that are on that tax return.

But, another often missed thing is we see cost segregation. I’ll just kind of go into what cost segregation is. Typically, let’s take a piece of residential property that has depreciated over 27.5 years. So, they buy that property. They separate out the land, and they depreciate what’s left by 27.5 years. When they do a cost segregation study, they break that building out into 5 year, 10 year, 15 year property. Over the 27.5 years, you get the same amount of the depreciation, but you get more upfront. All right. When we go to commercial property, it could be even bigger because now you’re spreading things over 39 years. When you’re moving things to 5 years, and 10 years, and 15 years, you’re getting a lot more depreciation expense upfront. A dollar today, is worth a lot more than a dollar in 39 years.

Sure. And also just in, I think in practice, when you’re buying a property, maybe it’s a value add opportunity where you’re going to have to invest some money in the property, or you’ve got some management issues to change, and so that first year may be kind of lean year from a stand point of implementing these changes, and some costs, but to be able to take advantage of that depreciation, and accelerate that, and offset your income, and really increase your bottom line there, that’s huge. It’s something you don’t necessarily see on just the operating cash in, and expenses out. At the end when you see that, to be able to accelerate that depreciation, that’s huge.

And, that’s why everybody’s doing it.

Yeah, yeah, yeah. No, that’s good.

That’s the big secret.

Yeah, exactly. Exactly. All right. Talk a little bit about the benefits of real estate. What are some of the things, I mean, we’ve talked about depreciation. We’ve talked about cost segregation. What are somethings that you see, or that you would, like for a real estate investor that they’re doing this, maybe they’re not, like you mentioned they’re already not taking advantage of these things, but are there some keys that they should be looking for, or just some ques throughout the year? I mean, we talked about estate planning, or tax planning. It’s not just a once a year event. It’s, like you said, it’s an ongoing conversation you need to be aware of it throughout the year. Are there somethings that you can point to that would be useful for our listeners that are real estate investors to help them throughout the year?

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