Most Accountants Miss These Two Tax Write-Offs And It’s Costing You Thousands
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In this episode, host Toby Mathis, Esq., speaks with returning guest Chris Streit, a cost segregation expert from CSA Partners, about two frequently overlooked tax strategies that can save real estate investors thousands of dollars: Partial Asset Dispositions (PAD) and Qualified Improvement Property (QIP). They discuss how PAD allows investors to immediately expense the remaining value of replaced building components like roofs, rather than continuing to depreciate both the old and new assets simultaneously. Chris explains how QIP enables investors to leverage 100% bonus depreciation on commercial property improvements made after January 19, 2025, including improvements to short-term rentals. The conversation covers the critical timing of converting long-term rentals to short-term rentals before making improvements, the necessity of cost segregation studies for substantiating these deductions, and real-world applications for various commercial properties including hotels, restaurants, and retail spaces. Toby and Chris also address common concerns about IRS audits and emphasize the importance of working with specialized professionals to maximize these often-missed deductions.
Highlights/Topics:
(00:00) Understanding partial asset dispositions and roof replacements
(07:11) Qualified improvement property explained for commercial assets
(11:18) Converting long-term rentals to short-term
(18:31) Bonus depreciation timeline and audit concerns
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[00:00:00] Intro:
[00:00:12] Toby: Hey guys, Toby Mathis and today we’re going to dive into two things, two write-offs that your accountants probably missing and it’s costing you thousands of dollars. This is specifically for real estate investors. I brought in an expert to explain these two things. I’m not going to mess around and beat around the bushes, it’s called PAD and QIP. Chris Streit, this is your bailiwick. Can you explain what these are and why accountants are missing it? What it’s costing those folks when they do miss it?
[00:00:43] Chris: Sure. Thanks Toby. What we’re really looking at with QIP or QIP and PAD partial asset dispositions. These are things that happen post acquisition of a property in most cases. When folks think, cost segregation, they think, I buy the property and I get a benefit and they’re correct. But that’s not the end of the story. The story continues because the property evolves and continues, you add things to that property. You remove things from that property and if you see it as a one and done I bought it, I deducted it now. I’m on my way then all of these things are being missed, pads are just disposed items.
[00:01:18] They get to be expensed permanent tax savings and QIP, qualified improvement property. Those are improvements to commercial property that get to leverage 100% bonus depreciation now we’re in [inaudible:00:01:32] January 20th 2025, world. All those improvements get to be bonus eligible. So major major impact for the taxpayer and they typically occur after the property is acquired.
[00:01:43] Toby: Let’s go into it, make it real. I’m a landlord and you just threw a lot at me and I’m sitting here thinking like but how does this help me? Let’s say that you bought a property in Indianapolis and you got to replace the roof. You’ve had it for six years. Now you tell me I can write off the entire roof that I get rid of by doing a partial asset disposition.
[00:02:03] Chris: You can. What that looks like from a tax standpoint is your accountant has something called a depreciation schedule for you, for your property that they use for their tax return. Whenever you buy that property the cost of that property goes on that depreciation schedule and it’s given a life, 39 years for commercial properties in short-term rentals, 27 and a half for residential.
[00:02:27] When you add things like a new roof, that new roof shows up on there as a roof and whatever you paid for it sitting there. But what you’re sitting there with is your new roof and the old one that’s in that initial purchase price. You have two things sitting on your depreciation schedule to better duplicative of each other. The new roof should be there, the old roof shouldn’t be. That old roof should be valued and completely 100% expensed and taken off the depreciation schedule to give the taxpayer relief.
[00:02:55] Toby: You get to write that off. That’s just like you got rid of it, right? That’s pure deduction.
[00:03:00] Chris: Yes, and that’s why it’s referred to as a PAD or a partial asset disposition because it’s not the entire asset. See, there’s a lot of things that happen with cost seg and typically when we do one, we’re all usually so focused on the tax savings that we get but when you think about what the term stands for it is cost segregation. You are taking what is a single asset and segregating it into multiple assets.
[00:03:24] Therefore as a result you can identify what’s being pulled away and what’s being added. Those things being pulled away are partial from the whole from the start of the building, partial assets that are being disposed once they’re disposed, they’re gone. There’s no recapture. It’s an expense. It’s a total write-off.
[00:03:39] Toby: Now does this require a cost segregation? If the answer is yes, does it require a study? I guess.
[00:03:47] Chris: Yeah, it does require cost segregation. You couldn’t dispose of an asset without having segregated all the assets into all different asset classes and types and having those individual things out there. From what we see from a cost segregation study standpoint to have any type of deduction to start. You need to have that for substantiation of the deduction but most importantly to take the disposition or to dispose of the item.
[00:04:10] You need to have separated those items out and when separating things out what a cost segregation does is it’s measuring everything. If I am measuring a new roof, the way you value assets inside of a cost segregation is through measurement and then applying evaluation, usually something like RS means which is a construction tool. When assessing the value of a roof that’s being disposed, those dimensions need to be understood and known which would occur during the cost segregation process and separation process. Then the same RS means pricing evaluation methodology would be applied to determine the value. And then provided that amount to take the expensed deduction.
[00:04:48] Toby: Interesting. By the way guys Chris heads up a company that does cost segregation CSA partners. I just want to say it. Can I put a link in the show notes for them to do a free analysis.
[00:05:06] Chris: Absolutely. In this link we simply need a, we’ve been working with Anderson for many years. Partnering with their tax team and their specialists over there to, really just get very simple and basic information for individuals and investors out there to give you information well before an engagement so you can see this is the right thing for me. You’re not the right thing to me.
[00:05:26] Toby: Okay, somebody can use that link and by the way, there’s no cost to it.] You don’t have to be an Anderson client either. I’ll just say that, this is for my youtube channel. I don’t know hiding on the ball here guys. It’s free and you can see whether or not it makes sense. But you’ve got to do these studies so that you can get the value right on a deduction.
[00:05:46] Now you don’t necessarily have to do a study if you like building a property and you know exactly what it costs. And Chris, I think you’ve had this conversation before. You don’t have to do a study, it’s just if you get audited you lose you don’t have a study, right? It’s like risk reward. But when you have the study then you can be very aggressive and it tends to save people money and that’s where I come in. I was looking at saying there’s value and there’s cost.
[00:06:12] The cost might be cheaper to do it yourself. But the value is in having somebody knows what they’re doing guiding you so that you get way more than it costs you back. I might actually cost myself money by doing things on the cheap. But you can go in there and get that done and then you can see whether or not you can get some benefit. Maybe it’s a partial asset disposition.
[00:06:32] But more importantly I want to go back to this kid, that the qualified improvement property because I think we’re talking about a 100% deduction here. This is under the One Big Beautiful Bill where they said here’s a huge deduction folks and we’re just giving it to you and nobody’s talking about it. I follow a lot of tax people online and I talked to professionals. This one’s flying under the radar. Can you explain what it is and how it benefits somebody and I just want to be specific. This is non-residential property, right? This is what you would call a commercial property, this is anybody who’s doing improvement on something that’s not a residence
[00:07:12] Chris: Correct. Well, not long-term rental. If it is a residential property, but it’s a short-term rental [inaudible:00:07:19]that dices commercials. For all the other that are watching this, we buy properties and those properties are they might be whole to start they might be tenant ready. But they need improvements as the years ago on and some of them aren’t ready there or they need a massive, massive modernizing of the kitchen or who knows what else?
[00:07:41] Just to start, the QIP element of cost segregation and tax benefit for investors is out there not only to help grow the housing market base for us as a country, which is an incentive that you want. But the QIP piece ensures that we’re maintaining where we’re maintaining modern. If a bull enjoyable marketable assets that people might want to rent. Just to start, we typically associate with buying a rental property and I focus heavily on short-term rentals because the volume of them. But this also applies other commercial properties as well.
[00:08:16] But when you buy it and you segregate it right away you get a tax benefit and that’s super helpful, that’s where most people end up starting. You might use that tax benefit to make this a better property, you might add elements to it. You might change things entirely and change the carpet. But you might also add non structural walls, other elements inside of it to make it a better property. All of those things if QIP didn’t even exist, those can be segregated just like you did on the original purchase of the property. They go into the same buckets five year, seven year, and 15 year.
[00:08:47] What QIP does is it expands that universe of potential deductions to anything that is not structural, anything that is not part of an elevator, or escalator unit, or anything that is not structural. The expansion of the property, or something tied to an elevator, or to an escalator if it is anything other than that it gets to be qualified as QIP. Think paint, think of those walls that are not structural that you might throw up there that if you were just doing a cost segregation you wouldn’t get. They’re really saying please go in and beautify most of these things that are going to be inside the interior the building are going to qualify for QIP and be eligible for 100% bonus.
[00:09:38] Toby: I got a drill in on this then, let’s say that I’m buying a property and I know I’m going to be doing some fix-up and I’m like gosh. I know I’m going to be writing that thing off over 27 and a half years. Maybe I do a cost segregation study on some of it and get about 30% of it to where maybe I can write it off faster. Are you telling me that if I start off and make that property into an Airbnb or VRBO. Then I can use qualified improvement property and write the whole improvement off so long as I meet that criteria?
[00:10:04] Chris: Correct and the only other criteria that you really need to meet with that short terminal is that it was in service before. It was something else prior to you buying it. It was being used before you buy it and then you make these improvements to it.
[00:10:18] Toby: All right. Let’s say somebody bought a property in 2024 and they’ve been using it as a long-term rental and they say, hey I really want to make it into an Airbnb. Could they make it into an Airbnb? Then do a bunch of improvements or could they do the improvements and then make it into an Airbnb? What is the secret sauce here? What advice would you give somebody who’s thinking they’re going to dump $50,000 into a property. How do they write off the most of that?
[00:10:43] Chris: Timing here is important and this also qualifies for partial asset dispositions. You want to have the property in service before making the improvements. Because if you make the improvements prior then those will just be added to the basis. So putting it into service allows for it to be going and then the improvements happen post that. Then they will meet that qualification for QIP as long as the other elements that is primarily, or same thing for partial asset dispositions if you remove them before the properties in service.Then it’s really not disposing of it as the way you would expect post it being in service.
[00:11:18] Toby: But if I’m in service, do I need to be the short-term rental before I do the improvements? Or can I do this as a long-term rental as long as I’m going to make it into a short-term rental and then qualify?
[00:11:28] Chris: For QIP you would need to have it be a short-term rental first. It is a commercial asset if it’s a long you.
[00:11:37] Toby: I want to put a line under this. Guys if you have long-term rentals, you’ve had it for five years and you know, you need to fix it up. Maybe you’ve had it for 10 years or you’re like me,you’ve got these things for 20 years. You’ve already written them off and you know, there’s not a lot of depreciation left. But I need to put a hundred grand into our property, maybe I’m going to do the rough, but I’m also going to fix it up really nice.
[00:11:58] Chris is saying is make it into an Airbnb first, which means seven days or less per unique guest right if or for free. You can go look at some of my other videos when I talk about the Airbnb loophole, short-term rental loophole, and things like that but it’s seven days or less average usage for a year. If you have property you may have to wait a year before you do the improvements make it into an Airbnb or a half year, whatever it is, but you got to qualify for that seven days or less then you do that. Boom. Now I do the improvement Chris. Do I get to write the whole thing off if I do that?
[00:12:37] Chris: The improvements that you’re making once it is that short-term rental. It does go from a residential property to a commercial property, which makes it eligible for QIP. So yes, then you’re able to take those improvements and those all get qualified for bonus. Now if you’re like, well, I don’t want to go into a short-term rental because I don’t like turning things every week and you know it’s still the improvements that you make on that property.
[00:12:58] It’s completely deducted. Can still be segregated and what’s called an improvement study. It doesn’t require a site visits, it’s really just a review of the budget and then taking all the assets that are being bought and qualifying them as five, seven, and 15 year assets.
[00:13:10] Toby: Can your staff guide them? If somebody is looking at doing this on a property could they reach out to you? I’ll put a link in there, but is that something you could help them with?
[00:13:20] Chris: Absolutely, and in something like that too. We would like to work with whoever is doing your taxes as well to walk through that to look at what you’ve done as a long-term rental to date and if you’re going to be converting this to a commercial property. But yes, that’d be something we’d be happy to help with but we work in tandem with your tax professional as well.
[00:13:38] Toby: Share this with your tax professional guys. The world is big enough a lot of people think that I’m out here. I’m just trying to steal everybody’s accountants. I’m driving them all to Anderson. That is not what I’m doing as I’m teaching, and I’m sharing, I’m bringing in experts like Chris here. If you have a good accountant, hug them, hold them, kiss them, make sure that you give them presents on the holidays and remember their birthday because it’s hard to find people that get this stuff.
[00:14:04] If you do and they’re willing to put some thought into some things, share this video with them and introduce them to Chris. That’s because having somebody like that on your team isn’t valuable. I can say that because we do about 10,000 returns a year and we do a lot of cost seg studies and you save our clients hundreds of thousands of dollars. Sometimes each individually in a year. I’ve had a few where it was really pushing up there into the and some it’s over seven figures.
[00:14:31] Share this with them. All right, so we have the turn a rental property into a non-residential by becoming an Airbnb or VRBO. Then you just have regular old commercial properties to like, maybe it’s a restaurant. Maybe you’re doing a retail establishment, or your warehouse, or whatnot. Is this something then that they could use too?
[00:14:52] Chris: Those are typically the best candidates not only for QIP and partial asset dispositions. Just because of the sheer expense and the volume of assets that you see. Hotels are another one, hotels typically requires so much turning because I mean people wear hotels out. So yes, and so buying a hotel, making these, I mean you’re in a commercial situation. Those improvements are going to be QIP restaurants.
[00:15:20] One of the biggest things where I know it’s being missed, is we did a review for a portfolio of 30 malls and those malls you could see very easily inside that there was QIP happening. That wasn’t being taken because a cost segregation was done five years before and you knew it was QIP because you saw the vendors that you all know. You saw like Lemon, Journeys, and you saw just a hundred thousand. All those things were improvements for those tenants that the landlord was paying for. They were set.
[00:15:48] They were aging them at a 39-year rate and appreciating them straight line 39 years. Those are all QIP, all bonusable. The thing you see all these new HVACs, huge HVACs, like $150,000 units that are going on these big malls and you never saw any got taken away. So right there, they’re probably sitting on across all those malls, millions of millions over a 30-year period. Millions of dollars in expenses that they should be disposing of. That’s a big example.
[00:16:16] But our Airbnb is our, our hotels, the Starbucks, the McDonald’s, that you might own all of those. They’re happening at the same rate. It’s not the scale.
[00:16:26] Toby: By the way, every dollar that you can write off this year. Just look at your tax bracket and say, this is how much this is worth to me and you’re, you know, I could write it off over 39 years. He’s you’re giving him a tax, you’re giving him an interest-free loan, is what you’re doing. He’s in here government to my money and I’d rather have it now so I can deploy it and use it especially with the inflation it keeps saying it’s 3%.
[00:16:53] Chris: They’re averaging all the things that cause inflation. I think the things that affect me the most, like my health care, and my food, my house, my car. All of those things are like in the double digits. Maybe bookmark inflation is only at one and a half percent. That’s bringing down the average, but everything else is high.
[00:17:14] Chris: Yeah, it’s real life versus what the government tells us. We know that it’s not going down. They’re going to have to print a lot of money over 38 trillion dollars in debt and then it’s not going away. It’s a huge line item on the federal government’s expense, it’s expense report. It’s going to continue to be that way. We’re not going backwards. They’re going to keep printing money.
[00:17:36] Which means inflation is going to keep going and any investor knows that all of the investors are wise to it. Which is why they’re going heavily into assets because the US dollar is just going.
[00:17:46] Chris: Hard assets are where you want to be and I think with bonus appreciation back and all these elements built for investors, everybody watching this video right now. You guys are actually the ones that create a lot of the wealth that helps pick us up out of this because you’re going to buy these properties and immediately generate value when you do it. So it’s exciting.
[00:18:06] Toby: Now, the One Big Beautiful Bill, one of the things that happened with anything. It was January 19th, 2025, that’s when the 100% bonus depreciation kicks in when you acquire, purchase, and put into service a new property, but qualified improvement property. What if I do the remodeling in the latter half of 2025, but I’ve owned the property for three years. Do I get to use 100% on that?
[00:18:36] Chris: You do for those of you that did acquire property before that cutoff date.That’s it’s a sad thing, because you don’t get the 100% bonus, but if you are buying a property that you’re putting back into service and you are making those improvements after that date. Those improvements are eligible for a 100% bonus. That is a great constellation if you will, even though the property to start didn’t get it the improvements will.
[00:18:55] Toby: I think most accountants are missing that one. The vast majority right now are there’s still a lot of confusion around it because it was a huge bill and we don’t have a lot of guidance, but that is one of those things where, yep, if you’re working with folks that do this day in and day out and by the way Chris, how many cost segs have you guys done?
[00:19:14] Chris: Right now, about four or five thousand a year. We had about 85 folks, is all we do. We’re probably nearing the 50,000 mark at this point in time. It’s growing a lot.
[00:19:27] Toby: By the way, just to take some of the fear away when people hear about these things and they see huge tax savings they assume IRS scrutiny is that been your experience?
[00:19:38] Chris: The IRS will go in and take a look at things. What I found it’s less than point one percent of audits happen and when they do as long as you did everything right. Audits are very easy. Because what’s happening inside the IRS is they’re trying to do as much as they can with as little resources as possible and they’re looking for a few specific things. Those are all things that we do right because we follow the laws actually and not a guy does it exactly as it’s laid out. If you didn’t do it that way then yeah, You should be worried because even if you don’t if you win the lottery and are selected.If you don’t have these very basic things done the right way, then you do risk a clawback, which is the last thing anybody would want?
[00:20:17] Toby: Well, Chris, I want to say I appreciate it. We’re right around time. What I will do is put a couple of your other videos at least one of them are two of them where I’ve worked with you so people can understand what cost segregation is. You did a great one on, I think, what is it 1245 exchanges. People don’t know what that is. In the real estate world and investing world there’s a lot of misinformation out there from the folks on Tik-Tok and Instagram and stuff. You really want to listen to people that do it and that are in a niche.
[00:20:48] I don’t do cost segs. I use them and I use them with my clients, but I don’t do them, who does? CSA partners and Chris and his team. I’ll put some links there so people can learn more about you and also get a better understanding so they could see if they can keep more dollars in their pocket. Plus if you have questions, put it in the comments. So Chris you and your team have gone in and answered a lot of the questions from the previous. Are you guys able to get to him? Are you able to make that commitment here?
[00:21:18] Chris: Yeah, absolutely. Will respond if you are filling these form if you’re filling out the form out for the link that Toby provides. Somebody will be reaching out to give you the information that you requested as well. We will be on that and be available.
[00:21:29] Toby: Perfect. Thanks Chris and guys watch the next video that I put a link to to see what Chris talks about for cost segregation.
[00:21:36] Chris: Thank you, Toby.
[00:21:39] Outro:
Toby Mathis, Esq. is the ForbesBooks author of Infinity Investing: How the Rich Get Richer And How You Can Do The Same. Toby is a tax attorney and founded Anderson Business Advisors, one of the most successful law, tax, and estate planning companies in the United States. Toby’s businesses have been featured on the Inc. list of fastest-growing US companies on 5 different occasions, have been voted as national and local “Best Places to Work”, have received numerous awards including business of the year and a “Firm of the Future” by Intuit – makers of QuickBooks. Toby is a US tax expert and successful investor with several hundred individual pieces of real estate located throughout the US.
As a result of Anderson’s tax work with tens of thousands of successful investors including preparing over 100,000 investor tax returns, Toby has seen which strategies stand the test of time and which do not. He bases his opinions on personal experience and that of his clients and does not agree with most of what is taught by the so-called “gurus” of our time. Toby believes investors achieve the greatest success by focusing on tax advantages and purchasing cash-flow assets rather than trying to profit on short-term trends.
