1031 Exchange? Cost Segregation? Doing Things On Purpose
Posted @ 8:22 pm - Filed under 1031 Exchanges, Cost Segregation
“Oh yeah, we had to do a 1031 exchange — didn’t pay a dime in capital gains taxes.” I often wonder how many times that’s said, followed by a short pause, a very wise look at their listener, then another swig of their beer. Just the mention of the numbers 1031 seem to empower some investors to flights of fancy at the neighborhood BBQ. I can’t imagine what the conversation will be when some investor mouths the words ‘cost’ and ’segregation’ together while staring appreciatively into space. 
Can’t you just see the ever loyal wife’s eye’s rolling skyward?
Meanwhile they very possibly may have just executed an absolutely unnecessary exchange. Why? They don’t know. They might never know it could have been done another way. Or, that the other way might have allowed them to pocket a little TAX FREE cash in the process. Really? Honest — I never kid about tax free cash.
In the last few years my clients have, with careful planning, arranged to sell investment properties without paying capital gains taxes. And they DID have significant capital gains. And for the record, we’re not talking here about deferring or delaying taxes to a later date. We’re talking avoiding taxes period and forever on a sale. And most of the time they didn’t even resort to cost segregation.
Cost segregation? What the @%#$& is that? I’ve written posts recently, here and here. The very quick, down & and dirty definition is — a maximizing of depreciation (usually by a factor of 3-7 times what you’re used to) resulting in significantly increased after tax cash flow for real estate investors. A shameful over-simplification, but workable.
Though I’ve had clients make use of ‘CS’ for years, most smaller clients couldn’t afford to pay for a CS study simply because of the costs involved. For example, it’s almost universal these days that Cost Seg companies won’t even talk to you if your property isn’t worth at least $750K-1Mil. This isn’t arbitrary on their part at all - just the reality of their business costs. I’ve made it my Numero Uno goal this year to locate an experienced and geographically unlimited Cost Seg firm to handle all my clients’ CS needs.
This isn’t proving to be an easy assignment. Though I’ve spoken to at least a dozen very professionally competent project engineers, CPA’s, and everything in between, it gets quiet when we talk about smaller properties. However, this week I may have struck gold. I’m not going to jinx it by naming them, but our preliminary conversations have been very encouraging. They can do business anywhere in the country, and will definitely negotiate fair deals for less than huge investors with small clusters of less costly properties. That’s a long way of saying they’ll work with the regular-folk investor.
Applying the principle of ‘doing things on purpose’ to our own endeavors is an every day reality for us. This search could result in some exceptional results. We’re keeping our fingers crossed. If we can negotiate a win-win deal for all concerned, this CS firm could very well be added to the Brown and Brown team.
We’re jazzed at the prospect.
This entry was posted on Thursday, March 22nd, 2007 at 8:22 pm and is filed under 1031 Exchanges, Cost Segregation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.