The Tax Expert Who’s Saved Real Estate Investors $2.3B with Wes Mabry – EP 220

Justin Donald: What's up, Wes? Welcome to the show.

Wes Mabry: Hey, Justin. How's things in Austin?

Justin Donald: Well, things are going great, and you and I just spent three days together for the Lifestyle Investor mastermind meet-up here. And we do a big annual retreat every year for our members. It's members only. And it was really fun having you in the room as one of our sponsors and preferred vendors so you got a chance to meet everyone and see the culture, the community. Yeah, I'm curious what you thought of your first Lifestyle Investor event.

Wes Mabry: It was pretty rad, man. It's a good group. It's well-curated. It's not a, you know, I wouldn't call it a conference, but it's great to see like minds talking about things that kind of straddle a wide range of topics from investment to real estate to even personal health care, I think, came up a number of times. And it's a wonderfully curated group you have there. And it's one of those things where you pick up on the vibe in the room and you pick up on it because almost every person in there is an entrepreneur and they just have a different way about them. So, obviously, it was amazing and it's a really good event and the food was awesome.

Justin Donald: Well, I'm so glad that you could join us. One of the things I'd love to do, number one, I don't want to run a conference. Everyone goes to a ton of conferences, so I want to build in like all this quality time, like super long lunches, super long dinners. I want it to feel more like a retreat, like an escape, like getting ready to look back on last year and look forward to the new year. So, I don't want to be in a room all day long speaker after speaker after speaker. So, it's a lot more interactive intentionally. And then number two is I think it's important to have some fun and have some great food and to just do life together. And so, I'm glad you got a chance to see that with our community.

Wes Mabry: It was great. I appreciate it.

Justin Donald: Well, I'm excited to have you on the show because you are a cost segregation expert. And I want to just jump right in. So, what on earth is a cost segregation study to those that have no clue? I've done tons of these over the years, but I think your average Joe has no idea what this is. And it's one of the most beneficial things that anyone can do in real estate.

Wes Mabry: Yeah. So, cost seg is the process of accelerating depreciation on certain building components. And accelerating depreciation allows you to take big losses, particularly early in the year of ownership of the property. And we're taking losses through a non-cash expense here so it's an effective tool for increasing cash flow. Your property should be making you some money, earning some type of return. And then when you can overlay that with paper losses, you really kind of juice that return and avoid what would otherwise be a pretty hefty tax burden. So, tax strategy, just to sum it up, and particularly for real estate investors or folks with real property.

Justin Donald: Yeah. And so, if you think about what was said here, you made a great point that this is not deducting expenses. This has nothing to do with expenses. This is almost like a value stripped out of thin air that you get to reduce off of your total taxable income because there are aspects of the building that over time are going to become less valuable. And instead of doing like a normal cycle where you do a straight-line depreciation every year for, I don't know, 27.5 years for most commercial real estate, I got into mobile home parks early so it was 15 years, but with a cost seg study, what you're doing is you're carving out some of these things that you can actually take full depreciation in year one, right?

Wes Mabry: That's right. So, chipping away at it is a strategy that plenty of folks employ. It's an accounting speak. It's called the straight-line depreciation method. You just take one piece at a time, evenly distributed over either 27.5 years if you're in the multifamily space or the residential space. And then if you're in the commercial space or the nonresidential space, it's a 39-year period. So, it takes a very long time to get that asset depleted, get it off the books, take those losses. And what cost seg does is instead of chipping away, you just take massive chunks out and depreciate them In the first year, usually 30% or so of total basis. And what's really eye-opening to some folks is that it's not related to like your down payment. That's not what you're just committed to running off. It's related to the entire consideration for the property. So, if you do like an 80/20 financing, then you can depreciate the whole ball of wax on something like that.

Justin Donald: So, in just more common speak, you can put 20% down to buy a property that is financed by a bank at 80% and you're able to basically depreciate the entire asset, 100% of that purchase price right out of the gates in year one to offset your income, which for a lot of people if they had a big exit or a big tax year, this is a great tax strategy that is just, I mean, it's underutilized is what it is.

Wes Mabry: I think so. So, back to the other point. You've got to strip out the land value. You can't write off land. So, most of what you buy unless you're just buying land can be depreciated. It's all of the fixed assets. So, everything above and below the ground including like paving and fencing and storm drainage, and then, of course, the building and all the components inside the building. We find these variable class lives, some you can write off really quickly. Some it's just you can't speed it up. There's no justification in the courts to do so.

Justin Donald: So, give some examples. Like, what can we speed up with the cost seg study? And I guess you gave some examples real quick of what you can't with land, but I'd be curious to see what are the things that are being carved off where you say, "Hey, these items right here, we did a whole study and this cost segregation study, it segregates what can and can't be written down." And so, yeah, share some examples.

Wes Mabry: I'll frame that a little better for you. So, let's say you bought a Taco Bell and inside that Taco Bell, you've got some unique signage that's probably got lighting pointed directly at it. We would accelerate depreciation on those. We classify them as personal property unique to the trader business, give them a five-year life. Other things that would get a five-year life would be like window covering. Maybe they have some blinds. Certain types of flooring like vinyl and carpet, you probably find that in Taco Bell, but you get the idea. The counters, the special data systems that you have for point of sale. And then in the kitchen area, you've got a lot of gas lines and ventilation in and plumbing coming in. Reclassification of all those interior components to a five-year asset.

And then outside the building is another kind of we call it a bucket of cost. Five years is one. Fifteen is going to be the other one. And that would be like your landscaping. You've probably got some irrigation out there too. So, that would get re-classed to 15 years. Again, we're moving it away from what traditionally would be a 39-year slow play write-off of the whole thing. The driveway, the light poles that light up the parking area, and stuff like that, reclassify those values. And also, where I live, I'm in Southeast Texas, drainage is a particularly expensive piece of land improvement that we're able to assign a 15-year life to and get that depreciation accelerated. You can then overlay what's called bonus depreciation. So, right now we're in a 60% environment, and bonus depreciation is applied to anything with a class life of 20 years or under.

So, there's some added benefit in identifying something with a five-year value. Instead of writing it off over five years, we'll take 60% in the first year and then the remaining 40% you write that off over a five-year period. So, bonus depreciation has been really just an amazing windfall for real estate investors over the last couple, I mean, since 2017 really when I started the company.

Justin Donald: It really has. And so, think about it this way. The Jobs Act basically outlined this new opportunity to be able to accelerate this depreciation even more. In the earlier years, you could actually do a bonus depreciation of 100%. And then last year it was 80%. This year at 60%. Now, there is some speculation that with Trump in office that this is a bill that he wanted the first time around that this could come back. Are you hearing anything on that? Are you speculating on that, anything with it going back to 100% bonus depreciation?

Wes Mabry: I hope so. It'd be good for business. The administration that's coming in has said repeatedly that they would like to make TCJA, Tax Cuts and Jobs Act, sometimes called the Trump Tax Cuts from 2017, they would like to make them permanent. And that would be awesome for me. I was reading an article the other day that was showing the cost of that piece of legislation and it really is a lot of tax deferments, and those deferments are really expensive. I mean, it's over like $2.5 billion to reset that thing over ten years. And then I hear things about cutting government waste and things like that. And so, right now, cautiously optimistic is my stance. We got a really good look at some congressional maneuvering last year, no, sorry, this year.

H.R. 7024 was a bill that was going to put 100% bonus depreciation back in place retroactive to 2023, which is when the phaseout began. It passed the House overwhelmingly, which is why I was so excited about it. It's like 350-something to 60-something. I mean, just bipartisan all the way. Gets to the Senate. They added some child care tax credit writers and the thing goes absolutely nowhere. And now that session's over and there's no way we're going to see any activity for the rest of 2024. So, maybe they started up again. I don't know. I hope they do. One thing unique about TCJA from 2017 is that it's the first time we see bonus depreciation applied to what's called a used asset, something that has already been constructed, already purchased by another taxpayer, and then sold into the secondary market.

We've seen bonus depreciation for years really since Bush first did it right after 9/11 to spur construction activity. They offered up bonus depreciation, but only for new builds. They just wanted to kind of identify the hammer-swinging sector and pump some deferments into that. And they did it and it worked great. And we saw multiple iterations of it through Bush, even Obama. And then Trump just came in and said, "Look, let's do it for used properties, too." And I think it really gained a lot of popularity because of that.

Justin Donald: Well, I think there's some optimism that it can come back, but for anyone watching or listening, just don't bank on it. Don't make decisions as if it's a done deal.

Wes Mabry: 100%. Yeah.

Justin Donald: Now, I'm curious if there's an example that you could give, and let's just say it's in mobile home parks. I mean, it could be in anything and we can get into specific types of properties. Actually, before we do the example, let's get into specific type of properties that this works on. And then from there, I'd love to do an example of like, "Hey, you bought a property for $1 million. You put down $200,000," something real simple, like what could we write off?

Wes Mabry: Yeah, right on. So, just talking through the various asset classes, there are a couple that just fly in their own lane. I really wish I had a good reason for this. Car wash and lube shops, they treat the entire building as a 15-year property, which would otherwise look to the naked eye as a 39-year structure. It's not. Maybe they have the best lobbyist. I have no idea. They get 15 years and because that 15 is under 20, remember that was the limit for bonus, bonus out the whole thing. I mean, 60% now, but you used to just bonus the entire purchase once you identify the value of land. So, carwash, lube shops, they're on their own deal. Mobile home parks depreciate particularly well because most of what you're buying is a land improvement.

Justin Donald: That's right.

Wes Mabry: Often there are park-owned homes that convey with those types of transactions. And really, those are no different than buying an individual apartment unit. Sure, there are some things in there that you can accelerate depreciation on, but there are also some things that you can't. They tend to work really well simply because the pad, the infrastructure brought out to the pad, the driveway, some common area use building, sure. But most of what you've got in a mobile home park is a land improvement. And then from there, just thinking through top-down properties that perform well to properties that really that you can set the cost seg on, they're just not going to do as well.

So, the ones that do better would include any type of specialized manufacturing or industrial. Sometimes we call this like a purpose-built building. If I built a building just to make cars, so much of the structure inside that building would be supporting my equipment. They'll be trunking in massive amounts of electricity and anybody that's ever built anything knows that that just drives the price way up. There's a lot of opportunities for what's called special purpose or personal property. Once you get away from manufacturing and industrial, you can also think of things like medical buildings, dentist's office, so much extra stuff in there, cabinets, plumbing, that thing that sucks the spit out of your mouth. All that's got to be wired up and plumbed, and again, it's special purpose so you can accelerate it.

And those do phenomenally well under study, cancer treatment centers, those types of things. Once you get out of a specialized asset class, there's a whole lot of stuff in the middle. And this would include like apartments and retail centers, banks, QSRs, quick service, fast food places if you want to call it. It's kind of a lot of - it covers a lot here. It's a lot of stuff in the commercial sector and also in the residential sector. Like, a rent house really doesn't perform that much differently than a bank. That bank would on a percent basis, you'd probably find pretty close to 30% reclass to short life on either one of those. The ones that don't do as well, storage, particularly drive-up storage. It's just a metal shed and it's really not that fancy.

Climate control storage does much better, but storage warehousing, you've been in one. You walk in and you look left, you look right, you see the whole building. There's just not a lot of stuff in there to work with. Perhaps some opportunity outside the building to reclassify paving. That may have been poured thicker to support trucking activity or rail spurs. But warehousing, not as great. Storage, not as great. What are some of the other ones that don't really do it? Condos. You can just buy just the unit inside of a building. And so, you're a little handcuffed there because you can't take advantage of those land improves simply because you don't own them. It's nothing unique to that, condo being a condo. You just don't own the other stuff.

So, that's kind of a rundown of stuff that does really well when we do a cost seg study. When we say really well, meaning like what percent of the total can get reclassed to something shorter than the long life? So, really well is like 40% to 50% reclass. Pedestrian, I'd say 25% to 35%. Anything under 25... Sorry. Excuse me. Anything under 25 would be not as well.

Justin Donald: Okay. And so, let's take an example of one of these 15-year depreciable assets. It could be a car wash. It could be a mobile home park. And let's just say that purchase price is a million. You put $200,000 down, you get a bank loan for $800,000. So, you're all in at this point for just $200,000. Approximately, what amount, and it sounds like about 50% of that can have some sort of accelerated depreciation in maybe like a best-case scenario. Is that accurate?

Wes Mabry: So, let's do car wash.

Justin Donald: Okay.

Wes Mabry: All right. So, you're into this thing for 200 out of pocket because you got to come down to get the loan from your bank and they're going to want you to have some skin in it. So, what you're going to get is a closing statement that shows total consideration for a million. That is the acquisition cost of the property. Then what we do from there is figure out two things. What's the value of the land? What's the value they improved? So, we're going to go and pull your property, car, tax record, if you want to call it. That's been the IRS's guidance since 2017. And in that, they will likely have some percent for land, some percent for improvements. We'll follow that guidance. Let's just say for this million-dollar example, the county calls it 15% for land.

So, we'll take that million and multiply it by 0.85 in consideration for that land valuation there. And that's going to give us what we call an improvement basis. Now, we've stripped land out. We're dealing just with improvements of 850K. And then car wash, the whole thing is 15 years. So, if we were in the old 100% bonus depreciation days, you'd take that 850K, your million less the 150 for land, you take that 850K loss, the entire thing, year one, offset to income. So, if that car wash made you $850,000 by chance that year, you pay absolutely zero income taxes. Maybe it wipes your whole tax liability and you didn't make 850K. So, then you have what's called a suspended loss, carry forward loss. It's not a use it or lose it kind of situation there. But today we're outside that. We've now gone through an 80% bonus depreciation environment.

We're currently in 60% gross appreciation for the next like two weeks, three weeks, or something, end of 2024. So, what we would do is a cost seg study on this thing because we're going to find a chunk of five-year, which can be depreciated more quickly than the 15 so there's a little bit of a delta there. Once we identify the five-year assets, maybe we'll find like, I don't know, 20% of it or so. We're going to put that on a five-year schedule so that's like 170K, but we get 60% of that in year one. So, there's a loss of 100K there and then the remaining portion of that, so that would be 850 minus what I said, 170. You'd have like 680K on a 15-year schedule and you get 60% of that in year one.

So, you got 408 there plus let's say like 100 and some change on the other ones, so you're looking at about half a million and a loss now that we've moved away from that bonus depreciation, 100% bonus depreciation environment into 60. So, you put up 200 to down a property that's worth a million and you got a loss of half a million. What's that worth to you? Applied tax rate. Most of my clients are top federal margins. Just model a few folks playing around in the real estate game. So, you take that loss of half a million and apply your tax rate so 20.37 to represent what you're not paying in income taxes as a result of that loss. And that pulls up to 185. Thinking back to that 200 that we had to borrow to get into the deal, you've almost matched that with tax savings going after this type of asset.

Justin Donald: Yeah, it's incredible. And just for clarity's sake, right now in the environment where we can take 60% on the bonus depreciation, there's 40% remaining. You don't lose the 40%. That just goes back to the regular depreciation schedule for that asset. So, I just want to make sure everyone understands that. So, you still get the full depreciation. It's just not accelerated the way that a portion of it is accelerated in year one.

Wes Mabry: That's right.

Justin Donald: Now, what I'd love to talk about, there's a couple of different things here. So, now that we've kind of set up what a cost seg is and what asset classes it works with, and even given an example, what I'd love to do is kind of do a look back here and say, "Hey, what if people didn't know about this and they own these types of assets," can they do a cost seg on it now if they haven't done that? And then I also want to do a look forward or a recapture if someone sells it. But let's start with the look back and just say, "Hey, someone didn't know this existed. They didn't know that they could do the accelerated depreciation." You and I both know that you can. I'd love for you to just share your thoughts on this because this is a major tool that could be used even end of year for people that are in this situation.

Wes Mabry: Yeah. So, A, this is what we would call like a retroactive analysis or a look-back study. And when we do that, the taxpayer has already established that straight-line method. This would be the 39-year or the 27.5-year depending on which asset class you're in. And they're kind of chipping away slowly. And what we want to do now is go look back in time and say, "Okay. What if we did cost seg when you bought this property in, say, 2020? What will cost seg have looked like at that time?" Let's just say, for example purposes here, you would have taken a $300,000 loss in 2020 had you done cost seg. Budgeted in 2020, maybe you just wrote off like 5,000 or whatever the straight-line amount is and you did that in 2020, 2021, 2022, 2023, and now into 2024.

So, you've got four years, sorry, of $5,000 worth of loss. So, that is $20,000 that you already enjoyed and you could have had 300K had you done the study. So, what we do is net amount. You net amount using a specialized form that the IRS has made kind of specifically for this situation. It's called Form 3115. This is designed to avoid amendments that can be costly and really just a pain to file this 3115 that says, "Look, I've been slow playing this thing for a couple of years. I've taken 20K already. But I should have taken 300 way back when I bought it. So, I'm going to net the two out and I'm going to do 280K for this current timely tax year file." There you go. You take the loss of 280K. The form is a 3115. That process of netting out which is already taken compared to what you could have taken is called a 481(a) adjustment.

And when these types of analyses are necessary, probably these types of documents are necessary, we prepare this for our clients' tax professionals. We don't do taxes here. We don't sign taxes here. But we will have that document in our final report ready for the tax pro to just take a quick look at and sign off on it.

Justin Donald: Yeah. And I think that's important. This is a move that I did because I bought some of my parks before we had the opportunity to do all this bonus depreciation with the Jobs Act. And so, one of the things that we were able to do is and so I didn't use it early on when I could have used it and so we were able to look back and do really an effective job of recapturing what we did not take in a high tax year. That was very strategic and just a really good strategy for us to reduce taxes.

And so, this is one of the most effective tools I think whenever you have a high-income year. Maybe you had a big return, maybe you had a big bonus, maybe you sold your business, this is one of the best strategies that we've found. And by the way, we have a whole tax strategy master class where we go through 28 unique strategies. This is one of 28 strategies that we discuss, but it's one of my favorites and it's one that I've used for years and years.

Wes Mabry: And it's a heads-up tax strategy, too. If you've got some depreciation just kind of hanging out there and you do kind of walk into some income maybe through an exit or whatever, it can really alleviate a burden, whether it's capital gains, short-term, long-term, doesn't really matter. You're going to have some losses here. And as long as you can apply those losses to your situation, I don't think we've talked too much about real estate professional status. You can touch on that.

Justin Donald: Yeah, let's talk about that.

Wes Mabry: As long as you can utilize the loss, you're in a great situation. So, real estate professional status and I have this conversation almost every day with clients. We can find losses, depreciation losses, in any kind of asset. The question is, can you use those losses? Can you take your income, which is going to be considered active income or sometimes passive income, depending on how it's being generated, and can you match a loss with it? Can you match an active loss or a passive loss with it? Real estate professional status is a box you check on a tax return. In order to check that box, you have to be involved in the real estate trade or business. You got to spend 750 hours in the game every year, which really isn't that much if you break it down.

The thing that gets everybody, well, not everybody, things that get most folks is that it is 750 hours and, not or, and more time in real estate than anything else. And if you're working at W-2, good luck convincing an auditor that you actually spent that 41 hours that week in real estate. The tax code was designed in that length to keep people out. That's all there is to it. And you want to be able to claim that real estate professional status so that the losses that we're talking about here from depreciation are considered non-passive by nature, sometimes active, technically non-passive, and then they can just be applied to anything, including wages that you may be earning from your own practice. A couple of ways around that. There's a short-term rental loophole where you have to materially participate in that short-term rental.

So, basically, you're really involved in running that Airbnb or Vrbo, whatever you want to call it. And then the other one is to have the business absorb the loss. If I was in the business of making widgets, my widget-making business bought a factory, my business could take the depreciation and then that could flow down to me as an owner of the business. Consult your tax team for that one.

Justin Donald: Yeah. And really I want people to understand that generally active income is one bucket and passive income is another bucket. And so, active losses and passive losses kind of have to stay in that same niche or bucket. But this is one unique strategy where you get a little bit of a crossover and you can actually take some of these losses or this depreciation, which will show up as a loss against active income. So, great strategy if you're in the situation to do it. And another thing to consider is if you can't pass the 50% test, the portion of that where you're doing more as a real estate professional than your day job, your spouse may be able to pass it if your spouse isn't working.

And so, that's a very unique strategy that I think a lot of people should consider looking into because that's an easy way to pass the test. If your spouse is not working, if she or he stays at home with the family and is the homemaker, then the bar to get there, I mean, if this is the only thing they do, then it passes that 50% test.

Wes Mabry: Sure. We see this quite often in the white coat space, doctors, dentists, those types of jobs. They invest in real estate. Their spouse maintains a real estate agent license. They are active in their portfolio and they're able to check that box. And it helps wash a ton of that W-2 income simply because the spouse qualifies.

Justin Donald: That's right. That's right. Now, I think an important thing that we need to cover, so we're talking about all the perks and the excitement that you get for writing things off. What happens when you sell? There's something called a recapture. And I'd love for you to explain this because I want everyone to understand what this is from start to finish.

Wes Mabry: Yeah. And so, in explaining that, let's take a second and recognize that this loss we're getting through depreciation can also be viewed as an interest-free loan from Uncle Sam. And there's really no time that the loan is due unless you exit this property or this asset or the strategy and you don't conduct a 1031 exchange. So, you're going to...

Justin Donald: So, by the way, if you're a long-term hold on this and you don't plan to sell it, or if you just continue to keep 1031 exchanging, which we can expand, why don't you expand here in a moment on a 1031 exchange, then you're never going to have to worry about this recapture. It only happens that you need to worry about it if you don't do a 1031 and you have an exit, you sell that asset.

Wes Mabry: So, we're accumulating these losses and we're taking them in this current tax year and we're offsetting our personal tax rate with these losses. So, that's kind of how we're framing it as a loan. We're paying less taxes, are taking a loss, and applying our tax rate to it, shielding some income from the government. And when you go to exit the property, they're going to want this loan back and it's due back at kind of a blended rate. So, all of that five-year property we talked about, personal property, so that's going to be taxed at exit at your ordinary rate in that tax year, which could be the very same rate that you took the loss at acquisition. The 15-year, it's a bit of a blended rate that's between ordinary and capital gains. And then the stuff that you did not take an accelerated depreciation on, taxed at a capital gains rate.

So, it's a bit of a rate arbitrage here and time value of money certainly comes into play. The overriding theme here is that you're going to have some tax savings in year one and let's say your strategy is a five-year-old or whatever. The return on the reinvested savings is to outstrip the penalty. That's kind of what you... That's the goal in mind here if exit is part of the play. So, recapture, now we're going to sink a good deal. But, man, it can make a bad deal way worse. An example is something that I had to walk some clients through recently and they got into some multifamily stuff for about $6 million. And the market's done a number on folks in the last couple of years with rate volatility.

Justin Donald: It sure has.

Wes Mabry: So, they took this big chunk of depreciation in year one and they were in the 100% window so they got a bunch. So, they took about $1.2 million in a loss. And so, now what you have is called an adjusted basis. It's your original basis minus all this depreciation you've enjoyed and we'll just say for this purpose here, their adjusted basis is now like 400, sorry, $4.8 million, somewhere in that range. And so, if they were to sell at $6 million next year, which they had said is kind of their goal. They really just want to get out of this property. It's not, "I bought at $6 million. I sold at $6 million. I have no gain. I'm out of here." It's, "I bought at $6 million. I took a bunch of depreciation so my adjusted basis is now 4.8."

Now, I'm going to sell at $6 million and you've got $1 million to gain. And that $1 million to gain is going to be bifurcated, trifurcated, however you want to look at it, into different types of assets, sorry, different types of depreciation that was taken. Some of it personal property taxed at 37% top Fed margin for most of these folks. Some of it cap gain, which they would have had anyway. And running the numbers on it, what we learned was, had they just taken straight-line depreciation maybe they would have to come up with... Let me see if I have it. Hang on a sec. Total taxes owed because of bonus depreciation was about 650K. If they would have just done straight-line, total taxes owed about 170K. So, it's about half a million delta there but they enjoy taxes. Unfortunately, for them, the market really turned on them. The play didn't go as planned.

And these guys are phenomenal operators. I've seen their stuff for years. They know what they're doing. They just got caught with a bad bag. And recapture can be a stinger. If you can't hit your numbers, if you can't exit the deal profitably, it's going to punch in the gut when you're down. So, keep that in mind when you're thinking about stripping out this depreciation early in the lifecycle.

Justin Donald: That's right. And the other thing is, again, if you hold for the long-term or if you do a 1031 exchange or a like-kind exchange, so you basically sell an asset and you buy another asset inside of that a similar vertical, then you're able to defer that tax again and kind of kick the can down the road. So, you don't always have to worry about a recapture if you have a good plan, if you have time on your side to make those adjustments.

Wes Mabry: Another couple of things I can think of off the top of my head to avoid that recapture tax. One, make an opportunity zone investment. What you get at the end of that life cycle is a stepped-up basis, no tax due. Two, sometimes called the Poor Man's 1031 so you can exit in like, I don't know, May or June, buy another property, execute another cost segregation analysis then you'll have a loss that you can marry to the gain from exit. 1031's a great tool. It's been around for 100 years, originally implemented to help farmers upgrade their equipment. So, I recommend using it if it fits your investment strategy. But if it doesn't, there are some other ways to kind of duck this whole recapture issue.

Justin Donald: Yeah. Super helpful. And one of the things I want to wrap up with is there are a lot of professionals in this space doing cost segregation studies that are just not great at what they do. They're either too risky or things aren't going to hold up in an audit or they're too conservative and they're not taking what the IRS code already allows. And so, one of the things I'm curious about from your standpoint is how do you vet professionals in this space that do these cost segs? And how do you find someone that actually knows what they're talking about? Because some of the people out there, A, they charge the highest fees out there, their literally highest price point and, B, they're some of the lowest quality work out there. But people don't understand that and recognize that and they don't even see that the cost seg may not even hold up in an audit.

Wes Mabry: Yeah. So, not unlike vetting any other contractor, "How long you've been in the business?" Have been at it just under two decades. "Do you carry any type of certifications?" We do. There's actually a society of nerds to say that kindly. They do cost seg work and there's 200 and something members in the society. And if you've been in the game for seven years I think it is and so many hours, they'll give you a certification. Are they willing to defend it if it's under audit? They're done their time. They should be. It should say that in the service agreement. Some things you want to look for there. And then beyond that, which is really not too different than anyone that you would hire to come into your home to do some work, look at that preliminary analysis, and think about what they're communicating with you there.

Are they saying the land is artificially low to promise you better benefits? Are they giving you like a wide range and saying, "Well, I hope it turns out like this, but it might turn out that." We don't do that. We just kind of give you the average of what we think we're going to find. So, there are ways to just interpret how they're communicating to you at the preliminary stage. And then, of course, there's the old-fashioned call a friend, "Who are you using? What have you got going on?" I've seen a lot of firms pop up over the last several years, particularly because of that bonus depreciation reset to 100 in 2017. It brought a lot of players into the game from both sides. The cost seg providers and also folks that are playing in the sub-million acquisition space now stand to make significant returns if they have pulled the right tax lever. So, a lot of folks in the marketplace, shop around, do your homework.

Justin Donald: Yeah. These are all great diligence strategies here. I highly recommend that you do your homework and find someone that's great or you can just do what I do, which is work with Wes because I've already vetted him and think the world of them and think he does a great job.

Wes Mabry: Appreciate that, Justin.

Justin Donald: Yeah. And on top of it, you guys offer preferred pricing to the Lifestyle Investor community. And when I compare the quality of work to the pricing out there, you guys are just really affordable with the highest quality work. I mean, I price-shopped this last one. I think I did five or six different, I think I did six different cost seg studies with you. And, yeah, I shopped several firms out there and I was so pleased with the work that you did. You provided all the documentation that my CPA wanted. You guys go above and beyond even on that documentation. My CPA was impressed in all these forms. So, some of them then charge more even for the forms that you need to get over. And so, you've just been really good to our community, giving us really good pricing, really fair pricing for high-quality work.

Wes Mabry: I'm glad we can step in and fill that role. The audit defense is another pretty big thing. We've been including it since I opened my doors. If anyone gets audited and they have questions, we'll answer it our time. And let me frame it for you like this. First 17 years of my career, I've maybe done five, been part of like five audits and this is including working with other organizations. This year alone, I've done seven.

Justin Donald: Wow.

Wes Mabry: It's a pain and no one enjoys going through it but if it gets called into audit, loop us in. We know what we're doing. We know what we're talking about. We work in conjunction with the tax teams on these things fairly regularly.

Justin Donald: Yeah, I love it. Well, Wes, this has been a great session. Thanks for taking the time to share all the cost seg knowledge that you have, all the tax strategy knowledge that you have. What's the best way for people to reach you and learn more about what you guys offer?

Wes Mabry: Yeah. Shoot me an email, wes@1245consulting.com. I'm a pretty easy guy to get a hold of.

Justin Donald: Awesome. Do you guys have a website that you can plug here as well?

Wes Mabry: Yeah. 1245Consulting.com.

Justin Donald: Love it. Well, hey, thank you so much for really just taking the time to be with us today and sharing your wisdom. I like ending every episode with a question for our audience. And my question is simple. It's the same question each week, but what is one step that you can take today to move towards financial freedom and move towards living a life that you truly desire on your terms so not by default like most people, but by design? And I would challenge you to pick out one thing that Wes talked about today. If you own real estate, focus on this cost seg strategy. If you're going to buy real estate, keep this in your back pocket because this is a game changer. And I've shared this before when I give keynotes.

I often talk about if you can just figure out how to save $30,000 a year in taxes, which most people can with the right tax strategy, and some people way more than that, but over ten years, at just a 15% return, which is the standard return in alternative investments, it's what we really work hard with our investments inside the Lifestyle Investor community to at least be that since that's the average and often to exceed it, you're talking over $1 million over ten years, but you're talking over $13 million over 30 years. I mean, it is significant life-changing, legacy-changing money. And this is one of those strategies that can help you get there. So, thanks for tuning in and we'll catch you next week.