Immense Benefits with Cost Segregation

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One of the key elements that is factored into your K1 that helps keep your net rental income low or at a negative value, strictly for income reporting purposes, is cost segregation.  Cost segregation expert Brian Bigham from Madison Commercial Real Estate Services gives us a quick and thorough explanation of cost segregation and how it can directly benefit you.

What is cost segregation? Cost Segregation is a commonly used strategic tax planning tool that allows owners who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

As the stakeholder(owner) of an apartment complex, the owner can take larger deductions by means of frontloading depreciation in the early years of a property’s life. In 2017 Congress passed a bill called the “Tax Cut and Jobs Act.” that would among other things allow owners of apartment complexes to deduct 100% of the personal property in an apartment the first year of ownership. This will last through 2022, then decrease by 20 points/year until it phases out in 2027.

The maximum allowable cost segregation deduction for 2022 is $1,080,000. Multifamily property that qualifies for a 5-year deduction are carpeting, cabinetry, ceiling fans, and millwork among others. Property that qualifies for a fifteen-year deduction are exterior land improvements such as parking lots, retaining walls, playgrounds, and pools.

So, what does all the above mean to a limited partner (LP) in an apartment syndication?

If the cost of the apartment is $16 million and the cost segregation engineer figures that $4,500,000 of the $16 million can be depreciated the first year, then an LP must use his/her share of ownership in the property to see how much they will get to deduct from their taxes.

Using the formula for figuring your share (amount LP invested divided by the equity raised) multiplied by the equity split is the LP’s share. $100,000/$7,000,000 = .014 x .80 = .0112 is your ownership share. If Cost Seg study states that $4.5 million can be deducted, then multiply that figure by your ownership share. $4,500,000 x .0112 = $50,400 you can wipe off your tax bill. This number can potentially place the owner into a lower tax rate bracket, which could result in paying lower taxes to NO TAXES.

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Lydia Essary

Lydia Essary

As a physician dermatopathologist, Lydia’s focus is to provide accurate diagnosis at the microscope for the care of her patients. As an investor, she is committed to raise awareness of the tremendous tax advantages of apartment investing and to help her colleagues and any investor generate passive income streams.

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Brad Sumrok
Strategic Advisor

Brad Sumrok is a highly successful and experienced apartment investor, having owned 51 apartment buildings totaling more than $1 billion in value. Of those buildings, 21 went through the full cycle of acquisition, renovation, and sale, generating significant profits for his investors.
In addition to his own success as an apartment investor, Brad has also helped over 500 students increase their net worth by over $1,000,000 and quit their jobs through his education and training programs. He is the founder of the Sumrok Apartment Investing Mastery Mentoring Program, which provides in-depth training and resources for those looking to get into the apartment investing space. With his wealth of knowledge and experience, Brad is a valuable resource for anyone looking to succeed in the world of multifamily investing.

Dianne C. Essary
Marketing Manager & Assistant Underwriter

Dianne is responsible for developing marketing strategies, generating new business leads, and analyzing trends. Dianne has earned her BBA in Management from the University of Texas at Arlington. In addition, Dianne has experience conducting analysis and pro forma creation on multifamily real estate investments.

Aaron E. Essary
Director of Acquisitions & Asset Management (Acquisition Team)

Lift Equity welcomed Aaron Essary who joined the team in 2022. Aaron oversees all the deal sourcing, negotiation, acquisition, and portfolio management. Aaron owns his own real estate company and brings contract negotiation and serves as lender liasion. In terms of financing, Aaron has extensive experience in budgeting and expense control. Aaron has served as Accounting Manager in the private sector for the last six years. 

Aaron earned his BBA in Finance from the University of Texas. He is an innate investor and has been investing in real estate since 2015. 

H. Frank Essary MBA
Founder, President

H. Frank Essary is the founder and president of Lift Equity who oversees all aspects of the business operations including property acquisitions, asset management, and accounting.

Frank is a lifelong real estate professional and has owned single-family homes and duplexes in Southern Illinois along with being a successful landman. He relocated to Texas where he was introduced to multifamily investing in 2012 and has since solo-owned and asset-managed a 118-unit property in Texas which he later sold with high capital gains. He later joined the Sumrok Apartment Mastery Personal Mentoring Program in 2019 and is evaluating properties for syndication or joint venturing.