🗞️ News & Moves 🏠

The office market’s “survive till ’25” mantra? Turns out it was just wishful thinking.

Delinquencies Spike: Over 10% of office loans are delinquent, with refinancing pushing payments higher than rents can cover.

Values Tank: Office valuations have dropped 23% since 2022—making "extend and pretend" no longer viable.

Lender Pressure Mounts: Banks are shifting from “delay and pray” to “amend and extend,” squeezing borrowers harder.

Opportunities for the Bold: The chaos is creating openings for those ready to scoop up distressed properties.

🚨 The Fed Pulse 🚨

💳 Rate Cut Confirmed: This week, the Fed reduced its benchmark rate by 25 basis points, bringing it to a range of 4.25%-4.5%.

This marks the end of the first phase of rate cuts, as Powell signals a more cautious approach for 2025.

📉 Industrial Production Slump: U.S. industrial production remains in recession, with November hitting a 30-month low.

The decline is exceptionally mild, offering some resilience amid economic weakness.

🛍️ Retail Sales Resilient: Retail sales are growing steadily at 3%, pointing to a stable consumer base and no overheating risks, supporting the Fed's measured policy adjustments.

🏡 Housing Data Mixed: Multifamily housing starts drag the sector down, but existing home sales show early recovery signs—potentially leading broader economic improvement in late 2025.

💼 Corporate Profit Concerns: Non-financial corporate profits hit record highs but rose just 5.6% year-over-year, falling below historical averages. Slow growth is expected in early 2025.

📈 Interest Rate Trends: The 10-year bond yield rose to 4.52%, and mortgage rates sit at 6.72%.

Bond markets signal limited room for further declines, despite Fed cuts.

DEEP DIVE

The ultimate tax plan of all time

Benjamin Franklin once said, “In this world, nothing is certain except death and taxes.”

Both of them are significantly intertwined for real estate people.

And if they played right, they could create the ultimate tax plan of all time.

This isn’t a plan to avoid paying taxes and end up in jail.

It's a straightforward, legal, IRS-approved way to plan your tax events.

You don’t need to know a “guy” in the Cayman Islands, and it’s definitely not shady—quite the opposite.

This plan is squeaky clean and straight out of the IRS playbook.

That said, I’m not a CPA or an attorney, so the risks are yours if you choose to keep reading.

For some of you, after you learn this, life may never be the same regarding how much tax you pay moving forward.

I recommend that you consult your CPA to ensure it applies to you.

The name of the ultimate tax plan... Drumroll, please...

“Hold until death, and let the basis step up to do the rest.”

So, what does this mean?

To minimize taxation, aim for two key things: put off paying built-up taxes until you pass away, and take advantage of a one-time tax forgiveness (Step up in basis) at death.

Let’s break down how this works.

Step Up in Basis:

We all pay various taxes: income, payroll, sales, property taxes, and more.

But for real estate investors, capital gains taxes hit hardest.

It's your profit from the sale, minus your purchase price.

Plus, it's the value you've depreciated over the years.

Let me illustrate.

Say you bought a building for $1M.

Fifteen years later, you sell it for $2M.

That’s a $1M profit.

Now, during those 15 years, the IRS allowed you to depreciate $400K of the property’s value, which you wrote off on your taxes.

So your total taxable gain is $1.4M ($1M profit + $400K depreciation).

If you sell before you die, you owe taxes on that $1.4M.

But here’s where the magic of the step-up in basis comes in.

Upon your death, your property’s tax basis is “stepped up” to its current market value—in this case, $2M.

If the property is sold at this value, there’s no taxable gain.

That’s right: no taxes.

It’s like the IRS presses the reset button on your tax obligations.

Well, there’s just one small rule – you’ve got to kick the bucket to qualify!

And here is a more technical explanation of step up in basis (YouTube). 

_{P.S. There are more ways to optimize your estate tax after death. It's a whole new topic. I'll write about it sometime in the future.}

If You Sell Before You Pass

Now, what happens if you sell before you die and the tax man comes knocking for his cut?

Luckily, there are two powerful tools to defer taxes.

They are the 1031 exchange and cost-segregation.

Let me unpack both.

1031 Exchange:

The 1031 exchange (Wikipedia), from the Revenue Act of 1921, lets you defer taxes.

You must reinvest the proceeds from a property sale into a property of equal or greater value.

It doesn’t eliminate taxes, but it kicks the can down the road.

The idea?

Keep trading up, delay paying taxes, and let the step-up in basis do its thing when the time comes.

Now here is why 1031 isn't my favorite tool.

It has strict deadlines, which sometimes force you to make less profitable decisions.

After selling, you have 45 days to identify a new property and six months to close the deal.

Still, for investors, this is an amazing tool for keeping wealth compounding.

Cost Segregation:

This is my favorite tool.

It has been around for decades and is a game-changer.

Here’s the gist.

When you buy a commercial property, the IRS allows you to depreciate its structure over 39 years.

Let's say you buy a property for $1M.

$800K is for the building, and $200K is for the land, which doesn't depreciate.

Using straight-line depreciation, you would write off about $20K per year over 39 years.

That’s helpful—but there’s a better way.

A cost segregation (Wikipedia) study lets you accelerate depreciation.

It does this by breaking the property into components with shorter lifespans.

For example, the HVAC system might have an 18-year lifespan, and the carpeting just 7 years.

Reclassifying these components will front-load depreciation into the first few years of ownership.

Take one of my self-storage facilities in Clarksville, TN, as an example.

The building structure was worth $788K.

It depreciates $20K per year using standard straight-line depreciation.

But, I was able to claim $157K of depreciation in the first year alone.

I did this with a cost segregation study and bonus depreciation.

That’s a significant offset to taxable income.

Does tax disappear?

No, here's what occurs.

When you sell, the gains are recaptured, but if you defer until you pass away, the basis is stepped up, which takes care of the issue.

This makes cost segregation a killer tool for proactive tax planning as long as you stay in the game.

Also cost segregation is very flexible.

For example, if you had a gainful year, you can go back and do cost seg on buildings bought in prior years.

This would offset the current year's gains.

The 5X Rule:

Here is simple rule I use to plan my tax and I call it 5X rule.

To illustrate, let's say you're selling a building and will end up with a $500K gain that year, which you'll have to pay tax on.

To defer tax on that gain, buy about $2.5M of real estate ($500K x 5) in the same year.

Then, do a cost segregation to offset your taxable income to $0 for that year.

This isn’t a hard-and-fast rule—it’s a ballpark.

It seems like it was almost created for value-add investors.

As long as you buy more than you sell, you can defer your gains forever.

Just create value and stay in the game.

I'll finish with this.

I'm of the opinion that the tax plan is as potent as the compounding effect.

Enjoy and use it wisely.

Takeaways:

📌 The best tax advice I’ve ever received was free: “Hold until death, and let the basis step up do the rest.”

📌 The 1031 exchange and cost segregation are game-changers. The latter is my favorite.

📌 You don't have to make April 15th your tax due date if you know how to use these tools.

And one more thing.

I'd love to hear your thoughts!

Just hit reply to share your feedback or suggest a topic you'd like me to write about.

I read every email and care about your success!