The FORT Podcast: Wes Mabry – Cost Segregation Studies in RE and Why They’re a Beautiful Thing
Wesley Mabry is an experienced Cost Segregation Consultant with over 15 years of experience in the industry across a wide range of asset classes. Mr. Mabry founded 1245 Consulting in 2017 and services all of the United States. Wes has performed thousands of Cost Segregation Studies analyzing over 8 billion dollars of real estate improvements throughout the United States. His experience includes working closely with Accountants, CPAs, EAs, REITs, Corporations, Partnerships, and individual investors.
On this episode, Chris and Wes deep dive into cost seg and how they work, why different asset classes offer different depreciation possibilities and the implications of selling a property with accumulated depreciation through the life of ownership. They also discuss pending legislation and impacts on real estate/cost segs and much more.
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(03:59) – What is a Cost Segregation Study?
(05:20) – How is it different from straight-line depreciation?
(06:45) – Is there any reason why someone shouldn’t do a Cost Seg?
(08:42) – Can you do this on your own or do you need to hire a professional?
(09:34) – Can this be done only on investment properties?
(09:57) – Do the rules for Cost Segregation vary from state to state?
(10:48) – What happens from the day I call you to get a Cost Seg to the day you send me the report? What then do I do with what you give me?
(17:01) – An Industrial Deal example for Cost Segregation
(20:13) – Are there any materials or components of a building that fall into gray areas?
(22:26) – What are some asset types that receive the most benefit from Cost Seg?
(26:24) – Do you want to do a Study before you do improvements to the property or after?
(28:23) – What is a recapture tax?
(32:47) – What do owners who are long-term holders do once their depreciable amortization schedule expires?
(34:23) – Is there any ongoing legislation that people should be aware of?
(36:05) – The importance of Land Value
(39:39) – Is everything predicated on the year the Study is done?
(40:51) – Can you do another Cost Seg to an office building that you convert to residential?
(44:03) – Wrap up and final thoughts
Episode Summary
Wes Mabry, renowned for his deep expertise in cost segregation and real estate tax strategies, graced Chris Powers’ podcast for an enlightening discourse on the intricacies of real estate taxation and depreciation. Mabry’s proficiency stems from an extensive background in cost segregation, positioning him as a foremost authority on the subject.
The heart of the dialogue revolved around cost segregation—a tax deferment strategy pivotal to the real estate sector. Mabry elucidated that cost segregation essentially front-loads depreciation expenses, thereby aiding real estate investors in offsetting tax payments and optimizing cash flow. This is achieved through a meticulous analysis of building components, leading to their reorganization into various recovery periods. Distinct from the traditional straight-line depreciation, where industrial buildings, for instance, depreciate over a span of 39 years, cost segregation offers a more aggressive approach, front-loading a significant portion of the depreciation.
Venturing into the nitty-gritty, Mabry shed light on the various asset categories that fall under cost segregation. Five-year assets, predominantly inside the building, encompass elements like furniture—assets that can be easily relocated. Then, there are land improvements, such as parking lots, sidewalks, and external signage, which form a different bucket. Each of these asset classes possesses its own depreciation schedule, a fact Mabry stressed as he offered insights into their precise categorization.
A significant portion of the conversation was dedicated to the optimal timing for conducting a cost segregation study. The linchpin, Mabry expounded, is to discern when a property is “in service”—generally implying its readiness to generate rents. While Mabry advocated for cost segregation studies at acquisition, he highlighted that subsequent capital expenditures can also be incorporated.
The discourse didn’t shy away from the complexities either. Touching upon the controversial terrain of recapture tax, Mabry presented it as an interest-free loan of sorts. He elaborated on its multifaceted nature, emphasizing the three types of recapture tax and their differential rates. Especially noteworthy was his explanation of the 1245 recapture tax—a tax processed at an investor’s ordinary income rate, applied to reclassified five and seven-year assets.
Mabry’s insights also encompassed scenarios of altering a property’s use—converting an office building into residential quarters, for instance. Such transitions involve hefty capital expenditures, all of which can be geared up for depreciation. Diving deeper, Mabry introduced listeners to the qualified improvement property regulations, a carve-out that permits the reclassification of structures internal to a building.
In summation, this episode with Wes Mabry was a veritable goldmine for anyone vested in real estate. From the foundational principles of cost segregation to the nuanced layers of recapture tax, the discussion was rife with invaluable industry insights. Mabry’s profound understanding, paired with Powers’ astute questioning, rendered the episode an indispensable guide for navigating the multifaceted terrains of real estate taxation and depreciation.
The Fort is produced by Johnny Podcasts