OA 02: How Understanding Preferred Returns Can Help You Avoid Unfavorable Tax Consequences with Kaylyn Deaver, CPA
June 15, 2021
OA 03: Frequently Asked Operating Agreement Tax Questions by GPs & LPs with Kaylyn Deaver, CPA
June 29, 2021

May 23, 2024 | read

147. From SFRs to Multifamily Investing & Development + Tax Tips for Developers w/ Roy Koppelmann

Ben Isley

In this episode, we’re joined by Roy Koppelmann to discuss his real estate journey from SFR investor to multifamily investor and developer, his tax success story, Biden’s proposed changes, as well as tax strategies for real estate developers.

This episode is sponsored by our free Tax Smart Investors Facebook Group.

Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.

Thomas Castelli 0:00
You’re now listening to the real estate CPA podcast.

Brandon Hall 0:05
Your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.

Thomas Castelli 0:30
Hi, everyone, thanks for tuning in. Today we’re joined with Roy Copeland, an experienced real estate developer and investor. In this episode, we discuss his real estate journey from single family investor to multifamily investor and developer his tax success story as well as tax strategies for real estate developers. Before we get started, I know some of our listeners may be wondering where the q&a episode on operating agreements is between the timing of the income questions as well as scheduling conflicts, we were unable to record the episode in time to release this week. However, we do anticipate it coming out within the next handful of weeks, which means there’s still time to submit your questions about opera agreements to contact at the real estate cpa.com. Please use the subject line operating agreement questions, and we’re going to do our best to add as many of the questions we received into that episode as possible. Last thing before we dive right in, if you haven’t already joined the tech smart real estate investor group on Facebook, you can join by visiting wwe.facebook.com/groups/tech smart investors or by searching for tech smart real estate investors on Facebook. There are already a ton of great conversations taking place right now. And with the Biden tax law changes in the pipeline, it’s gonna be something you’re going to want to stay up to date on. So we’ll see you in that group. But for right now, we’ll jump right into today’s episode. Hey, Roy, thanks so much for taking time to come on the show today, would you be able to give our listeners a little information on your background and how you got involved with real estate investing?

Roy Koppelmann 1:50
Yeah, thank you so much for having me. Glad to be here. I’ve been investing in real estate in a more active way for about 11 years. But the first run all I ever had was a condo I had in Chicago. And for various reasons, it wasn’t suiting my purposes anymore. And it was in the downturn. So this is a 2008 timeframe. And rather than sell at a loss, as many of the fellow owners did, in the complex, put it into service as a rental. And unfortunately, fortunately, unfortunately, I guess I had to keep it as a rental for about eight years to get back to a little bit over breakeven, but for eight years paid down. And that was my first foray into the rental market. So I haven’t had that experience. I moved down to Charlotte, North Carolina, in 2011, coming out of the recession, and at that time, there was a lot of good real estate investment opportunity. There’s still as good real estate investment opportunity in Charlotte. But at that time, there were some very good deals, by my standards. And you were able to buy kind of what a lot of folks would probably refer to as a vinyl village house, three bedroom, two bath and $50,000 range, which is seems so kind of unthinkable today. Right that, you know, proximate to Charlotte, North Carolina, you know, approximately downtown, you could buy a three bedroom, two bath house for around 50,000 As you know, over a decade ago now, but I saw those opportunities when I moved to Charlotte, and I jumped on him. So that’s how I started become much more of a active real estate investor. Not to kind of go on and on here. But initially, yeah, I started pursuing those three bedroom, two bath kind of track style houses. And unbeknownst to me at the time, you know, for a while there, there were a lot of those. And then all of a sudden, you couldn’t get an offer accepted on one of those to save your life. And what I now know happened was that was institutional capital coming in and out bidding everybody. So I still had some capital that I wanted to place during that time and I moved into duplexes bought a couple of few duplexes and still had a little bit of capital deployed. And my real estate agent who I’m indebted to, to this day, suggested that I buy an apartment complex, it was a very dilapidated 20 unit apartment complex but proximate very close to Uptown in Charlotte. And she encouraged me that if I was renovating these little houses and renovating these duplexes That surely I could find it in myself to renovate this 20 unit apartment complex. I am proud of that opportunity because it was a big step for me, you know, individually to pursue something that at the time seemed pretty substantial. And we bought that for 17 and a half a door, which is just again, that’s a crazy number by today’s standards, but as a first foray into apartments, and now that’s pretty much the focus.

Thomas Castelli 5:33
Nice, nice. So it sounds like you kind of you kind of you dip your toe in the water with some single family then kind of gotten some smaller duplexes, things like that smaller multifamily that ultimately took the lead to these larger multifamily projects. And, you know, I know you’re involved in that pretty heavily now. But you also do some development, how’d you how’d you end up going from say, renovating the the the smaller multi families or the large to the large multi families into development now what what was what made you take that that’s that next step there.

Roy Koppelmann 6:05
To be honest with you. It was some inspiration I took from my now partner, Tom Miller, we now partner together, but is a general contractor. You know, I learned a lot by observing how Tom approached the business, and just ultimately encouraged me to get my own license and built a couple of times for myself. And as bought to take the leap to kind of build more of a business around it, personally, individually. But then my partner, time reached out to me and said that he would like to kind of modify the direction of his business and tackle larger projects, because you want to tackle larger projects made sense to bring in a partner. And so now we’re gonna play a little bit more to our strengths. I’m focused on finance acquisitions, and he’s focused on the actual building. So I built a couple of houses, but primarily for myself, please, with those houses, I’m pleased with the quality that I can deliver. But I know that ultimately, Tom, my now partner, Mitch, and I are stronger as a team. So we’re focused on kind of more of a team approach versus just simple. You know, simple standalone infill standalone, single family house infill, you don’t really need a team for that, you could do that as an individual, you know, it’s a lot of work, but you can do it as an individual. But we’re not taking on I would say, modestly sized townhome developments, and there’s enough work and effort to spread around. And ultimately, there’s enough opportunity to spread around such that. So sad, it makes more sense to work in a partnership model.

Thomas Castelli 8:05
That makes a lot of sense. So are you going to be keeping these, these these bigger assets as you’re developing now? Are you going to be keeping them as like long hold by long term buying holds to keep in your portfolio with with with your partner, are you going to be ultimately selling these at the end.

Roy Koppelmann 8:21
So the projects that we have in the pipeline in Charleston, we have a project in North Charleston, which is about 30 townhomes, near the firefight distillery in North Charleston, that project is for sale, Built to Sell, build, sell individually, we have actually already had some kind of quasi institutional interest in in acquiring the whole thing for rental, but the numbers that were advanced weren’t attractive enough. So so at least initially, what we’re building is built to sell. But we’re open as we think about tackling larger and larger projects, what the growth looks like, I for sure, I’m interested in building larger for rent developments, and that’s something that we’re, you know, kind of putting out as a strategic goal. But the partnership wants to put down a couple of W’s couple of wins, with some smaller for sale projects before we tackle the larger for rent developments.

Thomas Castelli 9:42
Makes a lot of sense, you know, and while we’re on the topic of development, you know, it’s not really a secret right now, that lumber prices have increased substantially over the last few months. And how is that it how’s that impacting your development plans, you know, at this point, if at all,

Roy Koppelmann 9:59
well, So they did increase. But we now have a lumber ticker, that we keep up on the screen. So we are pretty familiar with where the lumber pricing is at. And if you don’t pay as close attention as my partner’s and I, you might not know that it’s down almost 50% off the high. So it’s still very high from a historic perspective, but it has come way back down to earth, I think there’s a couple of things that are impacting that. You know, one, the supply chain is strengthening all the time with people returning to work in factories coming back online and things. So there’s a lot of improvement around the supply chain. And two, we know firsthand from both my partner and some couple of projects that he’s yet and other builders in town, that at least anecdotally people are sitting on foundations. And that just means that the foundation’s ready to go, but they’re waiting for lumber prices to come back to Earth in order to proceed with the development, the vertical, vertical construction. You know, with enough people sitting and waiting, you know, obviously price is a function of supply and demand. Demand is down, you know, you know, eventually price is going to respond to that.

Thomas Castelli 11:40
Makes a lot of sense. So it’s kind of sounds like some people because they’re Wait, because like there’s kind of two factors going on. One of them’s that supply chain is is, you know, becoming is coming back online. So there’s more supply, and there’s some people waiting, so the demands a little lower than maybe it wasn’t at the peak of of the lumber prices this year.

Roy Koppelmann 11:57
Yeah, correct. Correct.

Thomas Castelli 12:00
Nice, nice. And before we start getting to the tax side of things, you know, with the developments going on, do you have any lag? Where do you see yourself going in the next few years, in terms of your buy and hold side of things, you continue to do that alongside of this or is is like the development now going to be your primary focus, you know, going over into the next handful of years.

New call-to-action

Kaylyn Deaver 12:23
I mean, with with a partnership model. And given that my focus is primarily on finance and acquisitions, the way we structure our partnership is I’m going to finance an acquisitions. Role. Partner, Tom is in a the builder capacity. And then our other partner Mitchell is kind of around an investor relations role. You know, kind of in and out of the business, in a sense, you know, my job is to build a pipeline and find finance workers, finance partners, for opportunities. But, you know, there’s gonna be some times where that’s, that doesn’t occupy me fully. So long story short, I guess the short answer is that I’ll be doing both of these in parallel.

Brandon Hall 13:18
Interesting, see, like, over time, how that changes, because I feel like a lot of our clients that get into development that were previously in like multifamily rentals, they shift more to development. Yeah, I don’t know if it’s just that the profitability is better, larger. I gotta imagine it’s maybe headaches.

Roy Koppelmann 13:44
More headaches? I guess. It’s just depends on what you’re willing to tackle those challenges, right? Yeah. Yeah, I will say that, you know, I think I’m all right size portfolio for guy with no outside equity on the apartments. So for a guy without no outside equity on the apartments, I might, I feel good about the size of the portfolio. But nonetheless, I was not fully occupied. And I was getting to a point where I just felt like I was my life was waiting for rent to come in. I don’t know. Some of my friends and thanks, sort of saw me as semi retired, and really not quite ready for that, you know, not quite ready for retirement. So I’m glad to be kind of a little bit more engaged than I was just focused on the apartments. I mean, there’s things to do, but kind of once you get the model going, you know, because I do a value add strategy. And once you get the model going They’re, you know, there’s not as much for the owner to do on a day to day basis. So, yeah, I’m kind of pleased to have a little bit more on my plate. It’d be interesting to see maybe, you know, to your point, Brandon, maybe, maybe you just find that the challenges are engaging. And, and it makes sense, you know,

Thomas Castelli 15:24
it makes a lot of sense, because, you know, when you speak about the larger apartment buildings, though, so last year, up until last year, we had an apartment complex mean a few partners, and there was like, not much to do. And I was like, ridiculously surprised, honestly, that, like, we had this, this, this this 82 unit apartment complex. And like, we hopped on the call with the property managers, and after the first month or two, after we kind of got things going, and there was just like, it was just not that there was just there wasn’t much to talk about. I mean, it was just like things were going lease, people were leasing units, things were getting renovated. And so yeah, make definitely see on the apartment side a bit after, after you get set up, there’s kind of a lack of engagement, which is a good thing. For some people want that passive income. But I guess if you know, if you, if you’re looking to have a business out of it, there might not be that much for you to do. But kind of shifting gears a little bit, you know, to the tax side of things, you have a pretty good success story in terms of what you’re able to do by piecing together a number of tax strategies, would you be able to kind of take us a little bit through what you were able to achieve and how you were able to do that.

Roy Koppelmann 16:34
Yeah. And with, you know, much gratitude to you guys for helping. I think a lot about, you know, what incentives have, as the government kind of created for me to pursue, to try to encourage individuals and, you know, ultimately, the incentives that the government has created in order for people to pursue certain real estate investments. And, you know, some of the advantages include, of course, the ability to depreciate, and have that offset against your income on the property. And, of course, you know, somewhat recently, you know, you could accelerate some depreciation. So, just put simply, you know, to answer the question more directly, I did a cost segregation study on my most recent acquisition, and that acquisition had some scale. You were able to take the bonus depreciation. So we could depreciate a bunch of that upfront. And then, through the guidance that, that is that Chicago Hall, CPA or the real estate CPA in this context, was a CPA. I either want I guess, we’ll work but the real estate CPA through the the guidance that you guys offer, and ultimately, I was able to carry back some tax losses. And that proved very advantageous to me. So I’m very, very grateful for that. And in fact, it’s interesting, because while the government does offer a lot of incentives, I think, for people to pursue real estate investment apartment investing, this was a challenging year, very challenging your 20 was a very challenging year to be involved in especially the type of multifamily that I do. I have historically focused on kind of more of a deep value add a tenant base that I feel is kind of largely underserved, because you can’t make new apartments for this demographic, on account of just profitability. You know, you can’t you can’t build this workforce housing profitably. It’s, it’s hard to do. Yeah, I mean, there’s a reason why you don’t see it out there very often, without taking government incentives and so forth, you know, by just, you know, building to rent to workforce housing is hard to do. So, I have focused on, you know, kind of, admittedly maybe a little bit on the lower end of the workforce housing spectrum. And unfortunately, my tenants were very heavily impacted by the pandemic by COVID. So as it happens, while on the good side, you know, I had great news come out of out of my taxes because I was able to, you know, do the bonus depreciate, do the cost segue, do the bonus depreciation, carry it back, do the tax cuts and Jobs Act? Is that why I was able to carry back Yes, Yes, do the cat tax cuts and Jobs Act I was able to carry back. But it would have been a much more challenging year, this past year, with the amount of non payment we saw, and the eviction moratorium had not been for that. So, so a very good thing. And I’m very grateful to, to Hall CPA for for helping me because otherwise, it would have been awfully challenging here to be frank.

Brandon Hall 20:26
Yeah, we’ve actually seen that with quite a few of our clients sort of similar situation where they, they need some sort of cash injection, because their tenants are struggling to pay them. And we’ve actually seen them more on the commercial side than on the residential side. It’s kind of interesting. But yeah, they need some sort of cash injection. So they, you know, I don’t I don’t think the first person you think of is your tax guy. But but it is a good way to, you know, get get an analysis done, right. Like get get an overview, go back and look at the past couple years, see if there’s anything that you can correct now get a refund now. And that can be your cash injection that could carry you through some of this stuff. So yeah, yeah, it’s good. Good experience there. Tom, do you have anything to add to that?

Thomas Castelli 21:11
No, I mean, you just have to thank the tax cuts and Jobs Act for putting bonus depreciation in place, and then the Cares Act for opening up the Nol carry back again, which I think is it serves his intention to help people get through these difficult times that, you know, 2020 brought us

Brandon Hall 21:27
Yeah, and to be clear, but bonus depreciation has been around for a while, the tax cuts and jobs act just jumped into the 100%, which is being phased out. Now. I think it’s 20%, it’s gonna phase down 20% per year, starting in 2023. So 2023, it’ll be 80% 24. It’ll be 60% 25. It’ll be 40%, and so on, and so forth. Unless legislation is enacted to keep it or push off the sunset. So just something to keep in mind. I know that we’ve got clients right now that are asking about that. I think that somebody actually asked me, Tom that recently where it was like, Hey, I’m going to be putting money into a limited partnership. And in the past, I would, I would plan this so that, you know, five years from now, I know that this limited partnership is going to liquidate, and I’ll just put money in the next limited partnership, get bonus depreciation, which will create a tax loss to offset the liquidation value or whatever gain comes from liquidation. But five years from now, bonus depreciation is gonna look different. So what do we do? And that’s been an interesting kind of conversation to start talking through with folks. So, so definitely a good time to, to do what you did. Right.

Roy Koppelmann 22:42
I was thinking about that. Obviously, at some level, you know, I think we all know that we’re faced with changing tax climate, I would be a way I might say it, that I don’t yet know that any new tax policy has been implemented. But the and you guys can correct me if I’m wrong after I finish this thought, though, that maybe these things haven’t been implemented, but the desire has been tout telegraphed the desire to make changes, then clearly telegraphed. So the risk that the changes will be made is at least there is at least there, it does not, I mean, again, correct me if I’m wrong, none of these, none of the none of the tax platform yet, you know, it was kind of articulated during the election, and want to steer clear of politics, which I don’t really feel super strongly about, outside of, you know, with these guys, you get one thing and with these guys, you get something else, you know, and that’s pretty much I want to sum it up, but with this changing tax climate, you know, particular agenda was at least articulated now has been input, like two big things, you know, like the changes to the 1031. And they just talked about what they’d like to do, but they haven’t done those things yet. Right.

Brandon Hall 24:06
Right. Right. Yeah, it’s all on the on the docket to Biden has proposed a number of tax changes, increasing long term capital gain rates, increasing marginal tax rates, putting limitations on 1031 exchanges and stepped up basis rules. A lot of these things are going to greatly impact landlords and how you go about making buy sell decisions. The timing of such decisions so it’ll be really interesting to see how it kind of plays out. I don’t I don’t really everybody always I think we what Tom now daily get get asked what’s your prediction and we don’t we don’t really have predictions. But we we do think that everybody’s going to need to sit down with your with a tax advisor at some point in 2021. One Once we get some clarity on these on these new potential regulations, sit down with your tax advisor in 2021. And really go through things because it’s going to be, it can potentially like, like be a completely different way of doing things than then what we’ve done in the past, in terms of just, you know, thinking about how you sell real estate that you own, or how you transfer it to different assets, and how you manage your portfolio tax efficiently. It’s gonna change that there’s a lot that’s going to change if these things get passed. And I’m not sure that these I’m not sure that all the provisions are going to be passed. I mean, the Democrats have a slim majority, which means that every Democrat essentially has veto power. So you know, if you’re, if you’re a congress, man or woman, and you’re like, No, my state needs the salt cap lifted, for example. And I refuse to sign any proposal that does not have the salt cap lifted, well, then nothing’s getting passed until that salt cap gets lifted. So So it’d be really interesting to see how it works. Just like how they kind of approach the potential infighting within their own party and every party has infighting. But now it’s just, it’s just even more like, like every, like, like I said, every Democrat, Congressman and woman has essentially veto power. So anything that they want to see tax wise, they have a good chance of at least starting the conversations, and having some pretty, pretty solid negotiating clout.

Roy Koppelmann 26:44
Yeah, I mean, but so far, the more I don’t know, the scarier predictions don’t seem to be manifesting. Just, I mean, that’s what I’m seeing. But, you know, again, I think that everybody, and this is the importance of having the conversation is like, hey, look, we’re all gonna kind of assess risks differently, you know, and based on how impactful those risks are going to be, need to make our own decisions about planning. And I think that’s why it’s more important than ever, to kind of really take a holistic view, like a little if, if then analysis around your around your taxes and say, well, all right, but this scenario were to occur, you know, how, how, how bad, ultimately, is that for me, right. And then given, you know, and then given your own personal assessment, a likelihood? Hopefully, they’re informed likelihoods. You know, you can make some some, you know, thought out decisions around that.

Brandon Hall 27:50
Yeah. And what’s what’s cool about that, this is a first, a lot of this stuff hasn’t really been manifesting to use your words, because right now, they’re just talking about the infrastructure bill, and the Republicans are just pushing back on any sort of tax increase. So I don’t, I don’t think that we’re quite at the time. We’re not we’re too early in the overall timeline for the Democrats to really start, like battling these tax changes out, because what’s going to happen is we’re going to get passed the infrastructure bill. And then we’re going to get to the budget reconciliation process. And that’s where they’re going to try to pass all of these tax changes. So that’s when we’re gonna see a lot more news, probably on a daily basis about where the negotiations are. So it’ll be kind of interesting to, to see how that ultimately all plays out. But to talk about

Roy Koppelmann 28:44
my assessment of risk just

Brandon Hall 28:52
but but

oh, gosh, we’re gonna get off this. Okay, we’re gonna sit down to do some tax plan,

Thomas Castelli 29:04
to kind of schedule.

Brandon Hall 29:09
To echo what Roy was saying, though, where you know, you you sit down with your tax advisor or tax planner, I think what a lot of a lot of people don’t fully realize is that once you prepare your taxes with a firm, they have your data and they can easily export that into a pretty high powered planning tool or solution most, most firms have these high powered planning solutions. And so to to sit down with Roy, for example, and go over here’s how the proposed long term capital gain rates change your tax situation. Here’s how the stepped up basis rules change your tax situation. To do that is all of a sudden, relatively easy, and we can talk about very specific numbers, not just in generalities, so it’s always it’s always hard whenever you’re onboarding a new client cuz you always have to talk like from a tax planning perspective, you, we can do our best to look at prior tax returns, and then talk sort of high level theory based, here’s the moves you should be making. But once you actually get those taxes prepared by that firm, they now have that data that they can just push into the planning tool, which is like another software tool. And now we can have those same conversations, but we can be really granular and specific about it. So highly recommend that everyone do that with your tax advisor. By the end of this year, we’ll have obviously a lot more clarity at that point, and probably new rules and regulations. And you should sit down and pay the three 400 bucks that it cost to get the planning done, and then the three 400 bucks for the call. It’ll probably save you a lot of headache later later on in life.

Roy Koppelmann 30:46
Yeah, I will say that one of the things that I valued working with the whole team was just how specific you guys could get by answering questions that I had that was a guy God, well, if I do this, what is that going to look like? And if I do that, what is it going to look like? To your point about? Will the tools that you have, I can just offer first hand experience that that was very pleased with that just for what it’s worth.

Thomas Castelli 31:19
Thank you. Thank you. And one thing I do want to say on regarding the binding tax plans is I think it’s something important to note is that so far, I’ve not seen anything that’s going to take away 100% bonus depreciation or accelerate the phase out or the sunset period on that side seems to still be intact. Which if these tax plans, excuse me, if these proposed changes do come to fruition. Ultimately, I think that’s going to be a major, the combination of Cost Segregation studies and utilization of 100% bonus depreciation throughout the course that’s still available, is going to be a major planning factor going forward, especially if they increase the capital gains tax rates and potentially eliminate the 1031 exchange or not unlimited, excuse me unlimited, severely. So

Brandon Hall 32:11
yeah, that that 1031 Exchange now, so the proposal is that in the proposals were they’re always gonna change through negotiations. But right now, it’s a $500,000 gain cap, or limit, I should say, $500,000 gain limit per taxpayer. So if you’re married filing joint, a million dollar gain that you can roll forward in its per year. So if you have gained in excess of that, then the planning is going to be one of timing, meaning that if I’ve got a 650k gain that I want to roll forward, I can roll 500, for if I’m single, I can roll 500 forward, and the remaining 150, I’m going to cost segue the new property with the new basis to try to offset as much of that as possible via bonus depreciation. So there’s still going to be a combination, there’s still gonna be a combination of strategies to deploy, but it’s going to be even more important to understand the timing of deploying those different strategies. Like the cross year 1030 ones that’s gonna be that’ll that’ll be interesting, because we get a lot of folks that will like, sell a property in December and not acquire the new one until January, February of the following year. Well, if you’ve only rolled forward a portion of your gain, you’ve got to recognize the portion didn’t roll forward in the in the prior tax year. So now we don’t have the bonus depreciation to from the new property that you acquired next year, we don’t have the bonus depreciation offset the prior gain. So that’ll be interesting to, to kind of see, but it’s the timing of the tax strategies that will be really important.

Roy Koppelmann 33:46
Interesting. One of the things that I think is so fascinating is that yeah, for the longest time, I was doing straight line depreciation. And when I first discovered cost segregation, I broached the guy I was working with at the time for my tax preparation. And that was not something that he was comfortable with. And that was the best guidance I could ever got that I needed to find somebody new to work with. The think all the people who are you know, interested in podcasts, everybody knows Cossack. I just feel like once it’s explained it, I was intimidated, frankly, the first time I heard about it, it just seemed, you know, without seeing it on paper, once I saw cost Ag Report on paper, then things are in the what is it? What’s the first bucket for residential 29 and a half, but depends on how you look at it. You work your way backwards from the you know, the thing with the longest gauge is 29 and a half and then it’s

New call-to-action

Thomas Castelli 34:53
2727 and a half for the building and then it goes yeah, goes down to 15%. That’s going to be even land improvements, things like the sidewalks, the landscaping, and then you know, you have the five year property. That’s the tangible personal property. That’s things like cabinets, appliances, various things you’d find within the building.

Roy Koppelmann 35:13
Yeah, yeah, I just think, I guess on some level, if somebody takes an interest in this, this podcast, that, that presumably they would know what cost segue is, but it’s just very powerful, very impactful, fundamentally, right, per the IRS. And, and just makes a lot of sense for the investors. So if you, if you’re out there watching this, and you don’t know what costs AG is, at least don’t be like me. And early on intimidated, which I was admittedly just was, you know, just reading about it without seeing it on paper, that guy had me, you know, I was curious, but not totally convinced. And then, you know, I came over to haul CPA and, and obviously, you guys have helped me leverage that as a tool. And it’s been very beneficial, very impactful.

Thomas Castelli 36:16
Absolutely. And for anybody who doesn’t know what a cost segregation study is just kind of give you a quick breakdown. So basically, you have a you buy a building, and that building, you have the building the land, and then within that building various components. Typically, without a cost segregation study, you’re just going to break out the land that or you’re going to depreciate the building over 27 and a half years, but with the cost segregation study does is someone comes down, they, they, they take a look at the property, they kind of do a survey, if you will, and they determine the value of each of the components within the building, and they assign that value, and there’s various class lives five, 715 years, traditionally, you’ll see along with the 27, a half year, with residential real estate, and anything under 20 years is able to be depreciated, right now until 2022, with 100% bonus depreciation, which we generally see anywhere between 20 to 30%, you know, on the residential side, just depending on the various factors, the building, where it’s located, so on and so forth. So it can be a very powerful tool, and, you know, like, like, like, like, Excuse me, like Roy said, you know, if you’re able to do use it, get comfortable with it, it can really help you out in a tight spot.

Roy Koppelmann 37:32
I think. Interestingly, you know, I saw it pretty clearly on the apartments, but I recently acquired a short term rental, where cost segue study made sense. And so is the might want to think broadly about its applicability, you know, there are instances in my mind where it would make sense, you know, you gotta, I mean, might make sense period, you know, if you can get this study done cost effectively. But this particular short term rentals, a larger house and accommodates more of a family reunion style group. So it’s a somewhat larger house, and made a lot of sense, in that context, to do cost segregation, segregation study, even on a single family.

Thomas Castelli 38:33
Yeah, we see those, we see those from time to time on single families to just depending on the size, and you know, of course, you have the desktop, the software studies, which are sometimes an option for this for the properties with a little bit of a lower purchase price or a lower cost basis, if you will. So, you know, it definitely a powerful tool, definitely something you want to talk to your advisors about. If it’s something you’re thinking about doing, see if it makes sense for

Roy Koppelmann 38:55
you. So I have a 30 unit townhome development that I’m partnering on in North Charleston. You know, we recently closed on the land, and we hope to be going do it finishing the horizontal development in the next couple of months, then, you know, within four or five months going vertical, are there things that you could tell somebody who’s about to tackle a project like that, that, you know, might have us thinking about, you know, tax efficiency as we proceed through the development project?

Thomas Castelli 39:35
Yeah, so, you know, there’s definitely a lot of things to kind of break it down with step by step. I think the first thing to consider is the entity structuring. So when you’re developing to sell you’ll typically be classified is what what’s called a dealer by the IRS, which means that the properties you’re developing are considered inventory and not a capital asset. So when you have a capital asset like a buy Hold property, you’re able to depreciate that and when you sell it, it’s gonna be taxed at a capital at the capital gains rate, it’s short term capital gains, of course, if you sell it in less than a year, long term if you hold it for over a year in a day. But with development properties that are built to sell, you’re it’s pretty much considered ordinary income. So that means it’s taxed the ordinary income tax rates. And in addition, it could be subject to the self employment tax, depending on what you what else you have going on, and your tax situation. So really, you really want to start with the end in mind, if you know the complex is going to ultimately be sold, you may decide to put that into an S corp. Because the S corp, when you sell it, you can you can pay yourself a salary through the S corp, and you’re gonna pay the self employment tax on that salary and not on the excess profits are the distributions you’ll get from that S Corp. Now, that being said, it’s important to begin with the end in mind, because if you plan to hold that port, if you plan to hold that asset, then the S Corp is not a good. And I just say it’s for everybody who’s listening, an S Corp is not a good vehicle for rental property, we see it all the time people put rental properties in S corp and get themselves tripped up. But if you’re planning to flip an asset, if you’re planning to develop the asset, and then sell it, the S Corp is generally going to be the appropriate vehicle. In some situations, there might be a C Corp, not many where that would always make sense. But really the S corporations what’s going to make the most sense. So you really want to start with that that in mind. And then kind of move moving moving past that, once you have that settled, you’re going to be looking at, really the timing of the sale, and the magnitude of the sale, and how it’s going to impact your tax situation. Because if you’re in a situation like Roy, where your real estate professional, you acquire other assets to buy and hold, you’re going to be able to use the Cost Segregation studies to generate some losses to help you offset some of that income that you’ll be generating as you offload those properties that you developed. So kind of the first thing on the entity structuring your you’re mitigating your exposure to the self employment tax. But then ultimately, as you sell, you’re going to want to try to see how you can acquire assets, and then use Cost Segregation studies on those assets to help you generate losses that can help will ultimately offset the gains, that you’re the ordinary income that’s going to be generated as a result of selling those assets.

Roy Koppelmann 42:38
That’s very interesting. In the past, I haven’t really seen how it would be advantageous to have the S corp and the in large part because I have apartments, you know, that I hold. So I hadn’t really seen how it would be advantageous to have a S corp, you take a salary, and therefore I have not done it, you know, because as you’re saying, as you’re saying, you wouldn’t guide me to do that. Right? Not in the apartment context, which is long, long term buy and hold asset. But I can’t see how in the build the sale cons sell context, it’d be advantageous. Because frankly, I don’t want to take all of the money out and split it with my partners. And then I don’t even know who do you know, I mean, it’s, but the point is, is that some of its going to be retained in the business and, and utilized for future projects. Right. So I’m only going to take a, you know, relatively modest salary relative to what I anticipate the business bringing in. So I might have to revisit this escort current conversation to see a, given how we intend to, you know, operate this business on a go forward basis. You know, might be S. S. S Corp is the way.

Thomas Castelli 44:02
Yeah, you know, if you’re going to be developing an ongoing basis, there’s some the S corp probably makes sense at some level, how you exactly implement that into your structure, whether it’s the business that you operate totally with, with your partners, and at that point your shareholders but or if we should do the Escort at the individual level, and then invest into a partnership with your with your partners, that that’s ultimately the question that needs that that would be looked at. But pretty much do it. I’m pretty sure what those two combinations of strategies between the mitigation of the of the self employment tax through the S corp and utilizing your buy and hold investments to generate losses, that that would be kind of that’s kind of the that’s kind of usually the strategy that you’d go with in that instance.

Roy Koppelmann 44:48
That’s interesting. That’s interesting. I think. We will not have by the end of the year, we won’t have income at all from The development because you know, it’s gonna take us about a year to be able to bring anything to market. Because we have horizontal work, not just vertical work. So it’d be interesting. So this year, well, we can do some planning around it. And then next year, we’ll see how well we did.

Thomas Castelli 45:20
For sure, for sure. And that’s why, when you when you circle back to what Brandon was saying earlier on the podcast timing becomes an issue with these, with these planning things. I guess that’s why he called planning, right? Because, because some of the, because some of the transactions will take place at different points of the year or in different years. And it’s just important to know kind of ahead of time, you know, the if then analysis of what to do if certain things happen, and when. But kind of, kind of winding down here, Roy, is there anything you would want anything else you’d want to leave our listeners with? Before we kind of ask the final question and wrap it up for today?

Roy Koppelmann 45:58
I just think, you know, working. If you do real estate, you have got to work with somebody who knows the real estate world and the rules around real estate. I used to think I had a good tax guy. It’s funny because I sometimes, as you might know, I’ve referred a couple of people your way. And I used to have a guy who I thought was a real good tax guy. And then you know, is my real estate holdings grew. I didn’t feel so good, that I felt less and less confident in his ability that I started to see that there are things that opportunities that weren’t being seized, and positions that can be taken that made more sense for where I was headed. And long, the short of it is yeah, to make sure you’re working with somebody who, if you’re in real estate, you got to make sure you’re working with somebody who really has the real estate emphasis. This is vital, makes a huge difference in terms of the ultimate outcome. And you know, it’s no easy task to make that change, you know, it’s a doing something new you’re going with somebody new, at least for me is was a bit of a challenge, but just got to make sure that your texts, your the people offering you tax advice, are competent in the area that you’re focused on.

Thomas Castelli 47:38
Makes a lot of sense. They appreciate appreciate that ROI. Now, if our listeners want to get in touch with you, maybe they understand what you have going on. Or perhaps they want to invest maybe in one of your projects at some point in the future, what would be the best way for them to get in contact with you.

Roy Koppelmann 47:51
My email address is RK at a chord, like the car or harmonious agreement, RK at a chord holdings dotnet, you can reach me reach me that way. And I’d be happy to chat with anybody about the projects we have in the pipeline. We’ve got stuff focused in we got two projects in the pipeline in North Charleston. And we expect to be bringing projects online in Charlotte here soon. So we’re looking to really grow what we’re doing and excited about what the future holds there. I try to hold on to the apartments Brandon. I try to do both. I do both. We’ll see. Yeah.

Brandon Hall 48:34
I hope you do. Yeah.

Thomas Castelli 48:36
All right, Roy. Well, we definitely appreciate you coming on today. Having a great conversation. Looking forward to putting this out there.

Roy Koppelmann 48:43
All right. Well, hey, I appreciate you guys having me on and thanks for everything you’ve done for me in the past on the on the tax preparation and tax advice front.

Brandon Hall 48:53
Thanks for listening to today’s show. If you enjoyed the show, please find us on iTunes and leave us a review. You can also email us at contact at the real estate CPA comm with any feedback or topic suggestions, we are always taking on new clients and with the new tax laws in play. You really don’t want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs. To become a client navigate to our client page at the real estate CPA calm and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.

Join the Tax Smart Investors Community:

 Join the Tax Smart Investor Facebook Group
 Subscribe to our YouTube channel
 Check out the Tax Strategy Foundation Course


The Real Estate CPA podcast is for general information purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Information on the podcast may not constitute the most up-to-date legal or other information. No reader, user, or listener of this podcast should act or refrain from acting on the basis of information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Only your individual attorney and tax advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this podcast or any of the links or resources contained or mentioned within the podcast show and show notes do not create a relationship between the reader, user, or listener and podcast hosts, contributors, or guests.

Always consult your own tax, legal, and accounting advisors before engaging in any transaction.