Episode 45: Self-storage operations, acquisitions, risks and predictions


Mitchell Baldridge is my good friend, mentor, and most importantly CPA. We met on Reddit of all places, and I brought him on to Twitter which has been a huge boost to his business. Similar to my experience with Twitter, it’s given him an audience that’s interested in taxes and grown his base.

I’ve had 5 CPAs in my life, 4 of them acted like they worked for the IRS. They didn’t want me to take deductions, they didn’t want to put in the extra work to save money now, and they thought their job was for me to pay my fair share of taxes. 

Mitchell isn’t afraid of the IRS, he seeks out ways to save me money, and he works for his clients. He follows the law and gives clients an assessment of their risk profile, but sometimes saving tax dollars is more about work than risk. A lot of CPAs aren’t charging enough and aren’t valuing their time, which means they can’t do the extra work they should be for their clients. 

If you want to get in contact with a great CPA, reach out to Mitchell at [email protected].

We talked about a few huge concepts on real estate tax that can save you a ton of money, and then took Q&A from our callers.

Bonus Depreciation

This is the main loophole in real estate tax and can save you tens of thousands of dollars in taxes early on. Let’s say you buy a $1M self-storage facility, under normal rules the government depreciates the value of this facility over 39 years using straight-line depreciation, meaning you can write off ~$25K in income taxes each year.

With bonus depreciation, you can write off a lot more in year one of ownership. Your building is full of different parts like landscaping, lights, appliances, windows, and doors, and with a cost segregation analysis, you can split the price you paid for the property among all these different components. If you want a  great contact for this cost segregation, talk to [email protected]

In my experience, up to 20% of your purchase price may be attributable to asset components that have a lifespan of 15 years or fewer, and you can fully depreciate those assets all in your first year. This means you can write off 20% of the property value in your income taxes.

If you buy property every year, bonus depreciation can consistently outweigh your taxable income. I had a $6M tax loss last year because of the amount of storage we bought and the amount I was able to write off for depreciation. If you’re a real estate professional you can offset ordinary W2 income (including your spouses’) through bonus depreciation as well. 

The downside is recapture tax. If you sell before the depreciation timeline, you pay a higher tax rate, which is 25% for recapture as opposed to 20% for capital gains. If you sell within the first year, the tax hit is your ordinary income tax.

If you buy real estate every year then bonus depreciation can help you build an empire, get paper cash flow, and be in a 0% tax bracket for a long time. The money you save on taxes now can be invested to offset the recapture tax down the road.

1031 Exchange

If you have an income-producing asset such as real estate and decide to sell it, you’ll usually pay taxes on the gains. However, through a 1031 exchange you can roll these gains over to a new investment to prevent it from being counted as a capital event. You can then continue to compound these savings again with another cost segregation study for year 1 benefits.

If you have the capital you can even reverse 1031, which means buying the new property before you sell the old one.

There are rules to this. You have to replace the value of your property (equity and debt), target the new property within 45 days, and close on it within 6 months. The money also needs to stay with a qualified intermediary.

You need a good attorney. You have a short window to hone in on your next target and have to fill out forms clearly identifying the property you’re going to buy. But this keeps your capital in your wallet so you can make the most use out of investing it.

Qualified Opportunity Zone

There are delineated neighborhoods across the country that are classified as Qualified Opportunity Zones, meaning the government will give you tax breaks for investing in these areas and making improvements. If you buy property in these zones, invest in improvements, and hold it for 10 years you can be off the hook for capital gains taxes. But the improvement value for these properties has to be equal to the value of the building (effectively doubling it), and these zones are typically marked as QOZ for a reason.

Q&A with Nick and Mitchell

Q: What is the minimum hold time for a 1031 exchange?

A: You need to own the property for longer than a year

Q: Can you write off 1/39th of the purchase price and all of bonus depreciation in year 1?

A: Purchase price – bonus depreciation = final price. Year 1 depreciation is bonus depreciation + 1/39th of the final price.

Q: Is there any federal legislation proposed that would change accelerated depreciation?

A: The latest tax overhaul allowed used property to be bonus depreciated, whereas it used to be just new property. That’s set to expire in 2025. The laws are always in flux, it’s always a give and take. The past few years have been a perfect storm for real estate from a tax perspective, but it will not always be that way.

Q: Is there still a significant benefit for cost segregation for residentials?

A: It depends on the situation you’re in and the value of hammering through depreciation. There are some simple, inexpensive approaches to cost segregation that don’t make it a huge investment. But if you don’t have a place to put the cash savings like new deals or growing a company, it wouldn’t be worth it.

Q: Mitchell’s words of wisdom for first-time investors?

A: I’m always talking about how important clean accounting and systems is, you need to run your business like a professional. If you’re investing your money and other people’s money you need to set up a new bank account and credit card for your business. Unorganized books are not the way to get started in any business.

Q: I bought a commercial property last year for $2.5M, my husband is a high-income earner and wants passive income. However, our CPA said bonus depreciation is only recommended if we’re holding for fewer than 7 years. What do you think?

A: This CPA is costing you a lot of money. Fire him for someone who will work for you. The case for bonus depreciation gets stronger when you hold for a longer period of time. It would pay to put in the work to become a real estate professional and offset your husband’s high W2 income.

Three Key Takeaways

  1. The cash cycle of real estate is incredible, and it’s one of the most incredible pieces of the investment vehicle. 
  2. It takes work to write off purchases, cost segregate, keep organized, and track your expenses, but it can save you tens of thousands of dollars and allow you to grow your portfolio.
  3. The industry with the most dumb rich people in America is real estate. You can get way ahead with hard work and smart planning.

P.S. If now is the time to start your own journey, the real estate community is for you. I weigh in on almost every post, and there are a lot of people smarter and more accomplished than me.

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Looking for like-minded individuals who are seeking to improve every aspect of their business? Join our Real Estate Community today! Or, subscribe to us on Apple Podcasts or Spotify for more valuable content to help give you that leg up in real estate.

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About Me

I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.